Key takeaways
Charterers can limit liability under maritime law
Supreme Court confirms their status as ‘shipowners’ under the Convention.
Not all claims qualify for limitation
It’s the type of claim, not the cause that determines eligibility.
Clearer rules help manage shipping risks
The decision offers useful guidance for future marine claims.
The Supreme Court has handed down judgment in the long-running and important case of the MSC Flaminia. The significance of this decision for the marine sector is highlighted by the fact that the appeal proceeded notwithstanding that the parties settled their claims before the Supreme Court heard the matter so that there could be a definitive ruling on the issues raised in the litigation.
The judgment demonstrates and re-emphasises the long-established principle of maritime limitation and who can benefit from it under the Convention on Limitation of Liability for Maritime Claims 1976 (as amended) (the Convention). It reaffirms the right of a charterer to claim limitation as a “shipowner”, whilst also defining the scope of the application of such limitation.
Upholding the Court of Appeal judgment with regards to Article 2.1(e) of the Convention (‘claims in respect of the removal, destruction or the rendering harmless of the cargo of the ship’), the application of limitation for the Charterers has been permitted against the claims relating to costs of discharge of sound and damaged cargo, plus decontamination of cargo. However, other claims made by the Owners against the Charterers have been deemed as not falling within the terms of Article 2 of the Convention, and therefore not subject to limitation.
Factual history and background
In July 2012, while operating under a time charter, the Vessel suffered a fire and explosion in the North Atlantic Ocean. The cause of the fire was found to be the result of the autopolymerisation of a cargo of divinylbenzene (DVB), carried in several ‘tanktainers’. The incident led to the unfortunate loss of the lives of three crew members. A long, complex, costly and successful salvage service followed, with the Vessel being redelivered in the port of Wilhelmshaven, Germany on 09 September 2012.
As a result of the extensive fire and initial explosions, the Vessel suffered significant damage, and in addition to the costs for repair, the Owners incurred considerable costs including those related to the discharge and disposal of cargo, and firefighting water amongst others.
Following proceedings in the USA where the cause of the fire and explosion was determined, the Owners actively proceeded with arbitration proceedings against the Charterers for breach of time charter and an indemnity for damages arising from other losses. The Charterers were held by the arbitrators to be liable for all claimed losses and awarded damages in excess of USD200 million.
Shortly following that award, in October 2021, the Charterers established a limitation fund with a view to incorporating the Owners’ claims as awarded in the arbitration within the fund and limiting the Charterers liability accordingly.
The limitation fund was established under the terms of the Convention. Article 2 of the Convention sets out the claims that are subject to limitation.
The Admiralty Court decision
The Charterers contended that the damage caused to the Vessel arose out of the explosion of the DVB, and that their liability arising from the arbitration award fell to be limited under Article 2.1. as consequential losses resulting from damage to property on board the Vessel.
The Admiralty Court rejected the Owners’ contention that limitation only applies to claims brought by persons who are not within the extended definition of a “shipowner” as per Article 1.2 (“outsiders” vs “insiders”). To accept this argument would mean that an owner could not limit its liability for damage to cargo which was owned by a charterer.
Nonetheless, the Admiralty Court held that the Charterers could not limit their liability. The Owners’ claims did not fall within the scope of Article 2. The causal contribution of cargo, in this case the explosion and subsequent fire from the DVB tanktainers, to the damage sustained to the Vessel cannot convert a claim for damage to the Vessel into a cargo claim.
The focus of Article 2 was the nature of the claim brought and not the cause of the damage. In the Court’s view, the Owners’ claims were in fact a single claim for damage to the Vessel and consequential loss arising therefrom and were not therefore limitable under Article 2.1.
The Court of Appeal decision
The Charterers appealed and the Owners cross-appealed, the latter contending that a charterer could only limit its liability in respect of liabilities which originate from “outsiders” under Article 1.2 of the Convention.
The Court of Appeal accepted the Owners’ argument and dismissed the appeal on all grounds. The Court of Appeal also stated that even if it were wrong on this point, all the claims apart from the claim for discharging sound and damaged cargo and the claim for decontaminating that cargo were not limitable in any event.
The Supreme Court decision
The two issues that the Supreme Court had to determine were as follows:
Whether, on its true construction, the Convention permits a charterer to limit its liability to an owner for a claim concerning loss originally suffered by the owner itself; and
What, on their true construction, is the scope of Article 2.1, sub-sections (a), (e) and (f) of the Convention?
The Supreme Court unanimously allowed the Charterers’ appeal on Issue (1) but dismissed the appeal on Issue (2).
Issue 1
The Supreme Court analysed this issue in the context of limitation generally. The purpose of permitting vessel owners, charterers, managers and operators to limit their liability was to facilitate international trade through the carriage of goods by sea. The main objective and purpose of the Convention was to provide for limits that were higher than those previously in place, but to make it harder to “break” limitation.
“Claims” was a defined term under the Convention and meant claims that were specified under Article 2 as being claims that could be limited. None of the listed claims differentiated between “insider” and “outsider” claims and there was no basis, nor was it in fact permissible, to qualify the words expressly used in the Convention.
The Court rejected the argument that the word “claims” should have different meanings in different contexts. It was implausible to think that this might have been the intention of those who drafted the Convention. Nor was there any indication that it had been intended for there to be differential treatment between different types of “owner” or that the Convention existed primarily for the benefit of owners rather than the collective group defined as “shipowners” in the Convention. Article 2.1 used the term “shipowner” to cover owners, charterers, managers and operators without distinction and, indeed, the role of charterers, managers and operators was integral to the operation of a vessel.
At the same time, the Supreme Court did not agree, as Charterers had argued, that Article 2 should be given as wide an application as possible. Neither an overly narrow, nor an excessively wide, interpretation was appropriate. The wording used in the Convention should be given its ordinary meaning.
In conclusion, a charterer could limit its liability for claims by an owner, including in respect of losses originally suffered by the owner itself.
Issue 2
Only those heads of loss which are included in Article 2 are subject to limitation. The Supreme Court considered each of the various heads of loss against the relevant subsection of Article 2. These claims were categorised as:
Payments to national authorities for the purpose of arranging for the Vessel to be allowed to be move to Wilhelmshaven;
the costs of discharging sound and damaged cargo, and of decontaminating the cargo, at Wilhelmshaven;
the costs of removing firefighting water from the holds; and
the costs of removing waste from the Vessel.
The Charterers maintained that all of the above claims arose from the initial loss or damage to the DVB and therefore fell within Article 2(1)(a). The Supreme Court rejected this argument, which was contrary to the Court of Appeal decision in the CMA CGM Djakarta [2004] EWCA Civ 114, in which it was held that it was the nature of the damage and not the initial cause of losses arising that was relevant. In that case, the losses did not fall within Article 2.1(a) due to being incurred in relation to the damage to the vessel.
The Supreme Court considered payments to authorities and the costs of removing firefighting water under Article 2(1)(f) – mitigation costs. However, it disagreed with the argument that those claims constituted mitigation costs, incurred to avert or minimise loss. Rather, it found that they were to remedy a loss that had already occurred.
The Charterers were successful, however, in respect of the right to limit under Article 2.1(e) in respect of the claim for the costs of discharging sound and damaged cargo, and of decontaminating the cargo at Wilhelmshaven. This aspect of the decision upheld the findings of the Court of Appeal.
Comment
This decision provides clear and important guidance on the application of the Convention. It confirms the rights of charterers as a “shipowner” under the Convention and their subsequent rights to establish a limitation fund and limit applicable claims against the fund accordingly.
The decision additionally confirms that claims that are in principle limitable are not excluded from limitation merely because they are from “insiders.”
