The Shipping Industry’s View on Unlimited

Liability

Rod Nairn, AM

Chief Executive Officer, Shipping Australia Limited

www.shippingaustralia.com.au

We don’t like it

You can’t afford it

A peak national industry body comprising 36 shipping lines and

shipping agents and 50 corporate associate members

Shipping lines/agents involved with over 70% of Australia’s

container trade and car trade and over 60% of the bulk and

break-bulk trade

Our members employ around 3,000 staff in 250 offices in 41

Australian ports

SAL publishes an industry magazine

and free electronic newsletter eSignal

Shipping Australia Limited – who we are

APL Lines (Australia)

A.P. Moller-Maersk A/S

Asiaworld Shipping Services Pty Ltd

Austral Asia Line Pte Ltd

BBC Chartering Australia Pty Ltd

CMA CGM

Evergreen Marine Australia Pty Ltd

Five Star Shipping & Agency Co Pty

Ltd

Gulf Agency Company (Australia)

Pty Ltd

Hamburg Sud Australia Pty Ltd

Hapag-Lloyd Australia Pty Ltd

Hyundai Merchant Marine

Inchcape Shipping Services

“K” Line (Australia) Pty Ltd

Shipping Australia Limited – full members

Mediterranean Shipping Co (Aust)

Pty Ltd

Mitsui OSK Lines (Australia) Pty Ltd

Monson Agencies Australia Pty Ltd

NYK Line (Australia) Pty Ltd

OOCL (Australia) Pty Ltd

Pacific Asia Express Pty Ltd

PB Towage

Seaway Agencies Pty Ltd

Ship Agency Services Pty Ltd

Sturrock Grindrod Maritime Pty Ltd

Svitzer Australia Pty Ltd

The China Navigation Company

Pte Ltd

Wallenius Wilhelmsen Logistics

Wilhelmsen Ships Service

We monitor and engage in many areas of direct interest to our

members:

Infrastructure

Shipping trade innovation

Environment

Maritime security/piracy

Safety

Regulation

Costs, charges, levies, gst

Border agencies

We help governments develop better shipping policies & regulations

Shipping Australia Limited – what we do

90 per cent of everything goes by sea

Why the world needs shipping

Commercial shipping:

“Puts clothes on your back, gas in your

car and food on your plate”

Rose George

Australia has the fourth largest international sea-freight task in

the world measured in tonnes per kilometre carried

Two largest coal ports in the world – Newcastle and Hay Pt

Largest Iron Ore port – Port Hedland

Two container ports in the top 100

Melb 58 (2.49m), Syd 66 (2.15m)

Coastline spans 35,000 kilometres

2011-12 we imported $186 billion of products and exported $236

billion by sea

4875 cargo ships made 32,405 calls at 79 Australian ports

The Australian Sea-Freight Task

Definition a public good:

a good that is both non-excludable and non-rivalrous in that

individuals cannot be effectively excluded from use and

where use by one individual does not reduce availability to

others (Hal R. Varian, Microeconomic Analysis)

An item whose consumption is not decided by the individual

consumer but by the society as a whole, and which is

financed by taxation. (www.businessdictionary.com)

The application of Government subsidies to encourage sufficient

shipping services support the definition of a public good.

WA Coastal shipping subsidy (discontinued)

Tasmanian Freight Equalisation Scheme

Perhaps unlimited liability could be tolerable if there were

adequate and accessible insurance cover at a reasonable cost,

but…

Is shipping a public good?

Shipping companies can only exist if

they can make a profit

No profit – no ships – no sea freight –

no trade.

Costs rising – revenues flat,

Insurance costs depend on risk and

liability

Increased liability

higher insurance costs –

higher sea freight - user pays

Unlimited liability - insurance

unaffordable or unobtainable -

services withdrawn or high prices

– everyone suffers

Commercial Reality

Exxon Valdez (1989)

- $2bn clean up

- $1bn civil and criminal liability

- $508m punitive damages

- (ICS reports total costs approx $5bn)

Deep Water Horizon (2010)

(OK it’s not a ship)

- $40bn fines and cleanup (Feb13)

- $18bn Clean Water Act damages

(Nov 14)

Costa Concordia (2012)

- Wreck Recovery $1.2bn

- €1m criminal liability

- Compensation costs ??

Unlimited is a big number and is getting bigger

Insurance companies and P&I

Clubs must also remain solvent,

so they consider:

Excluding risks, additional

premiums, additional excess

Limiting coverage, increased

deductibles

Most policies exclude war and

piracy risks, other exclusions?

Identify geographical areas

where the risks exist

Charge additional premiums for

this cover in these zones

Eg Indian Ocean piracy area

(+$50k per voyage)

Insurance company impacts – unlimited liability

Limited liability allows reliable calculation of risk and apply

reasonable premiums

Share risk across a broad base through P&I Clubs and the

International Group / re-insurers

Keep costs reasonable and enables global shipping

Insurance company impacts – limited liability

In practice the “payout” my be limited by:

Bankruptcy

Limited Liability company structures

(that’s why company structures were created)

Unlimited liability does not mean unlimited payout

Limitation Regimes

Convention on Limitation of Liability for Maritime Claims

(LLMC)

The Civil Liability Convention (CLC)

The Bunkers Convention

The Hazardous and Noxious Substances (HNS) Convention (not yet in

force)

The Nairobi Wreck Removal Convention (not yet in force)

Compensation conventions

The Fund Convention

Supplementary Fund

Shipping limitation & compensation conventions

1. The idea of a Joint Venture,

2. Huge cargo values

3. Limited share capital

4. Ruin without fault

5. Attraction of investment in shipping

6. General benefit to users

(Lord Mustill)

Justifications for limiting ship-owner liability

Marine cargo liability rules

Hague rules - limitation per package

Hague Visby Rules – limitation per kg

Hamburg Rules

Rotterdam Rules – yet to enter force – a risk to carriers

Introduces liability increases for ship-owners on cargo claims

Provides coverage of multimodal operations

Volume based contract concept with opt-out provisions

removing liability limitations for carriers

Potential for big shippers to shift all liability on cargo

claims to ship owners

Liability is also often limited by

regulation to protect industries:

The New Zealand limitation

of liability for accident

compensation claims is a key

reason for the amazing

success of the development

of their adventure sports

tourism industry

Limitation of Liability in the

USA aviation construction

industry – saved the industry

Limited liability is not just for shipping

State non-adherence to LLMC

Some argue that the limitation limits are unreasonably low

LLMC limits increase by in 2015

States applying reservations on adopting international protocols

– causing inconsistency

Australia has excluded wreck removal from LLMC

A ship is a visible, valuable asset that is a target for public

outrage and is easy to arrest

The Rotterdam Rules – “Rotten damn Rules!” – biased towards

shippers at greatly increased risk to ship owners

Concerning trends towards Unlimited Liability

Unlimited liability for an incident is disproportionate to the potential

profits of shipping operations - makes shipping unviable

Limiting liability to a known level:

Encourages investment and participation in shipping world wide

It helps level the playing field and supports international

competition

It provides certainty to the insurance industry that catastrophic

exposure will be capped – keeps insurance costs reasonable

It reduces the risk that operators will manipulate their business

structures such that they are protected by insolvency (the $2

company) thus ensures a known level of compensation

Summary - The case for limiting liability

“It is better for a victim to have

a limited claim that he can be

certain that he can be paid than

to have an unlimited claim

against an insolvent party”

David Steel