Are classification societies above the law?

THERE is no alternative to classification societies. They play a vital and increasing role in ship safety. Flag states rely almost completely on class. Only class has the depth of knowledge, experience and expertise needed to meet public expectations of ship safety. As the world demands higher standards of ship safety, operation and environmental protection, the burden of making it happen will inevitably fall primarily on class. However, as the scope of class work grows, so do the potential liabilities it exposes itself to. It is very tempting for some to see classification societies as deep pocket defendants to be sued in a claim. If liabilities grow too great and class is sued too often, it could be forced to withdraw or limit some of the services it presently performs in the public interest.

Class has nothing to be defensive about ... Only class has the depth of knowledge, experience and expertise needed to meet public expectations on ship safety.

The Comite Maritime International recognised five years ago that someone should take the lead in providing a legal regime which would permit classification societies to continue to perform their vital role in ship safety. They set about the task of establishing an international contractual regime which would protect class and allow it to do its job. There was no argument then that class should not be able to limit its liability. The original motivation for discussion of the matter was to protect class. Unfortunately, the CMI working group on class is now riven with a dispute over the appropriate level at which liability should be capped. Years of discussion have not only failed to produce a result, but have led to a changed scenario, where class is on the defensive. But class has nothing to be defensive about, and it deserves better. It is quite wrong that a debate has begun which centres on whether class should be limiting its liabilities at all.

There has always been a limited liability regime for classification societies. That must continue if the public interest is to be protected. The CMI has drafted some model contractual clauses and principles of conduct which IACS supports, and which would give class the right regime. But there is a danger that publicity given to the debate over the level of compensation will distort the whole issue, and the good work done to date will be lost.

Why does class need to limit liability?

Firstly, classification work applies to assets of very high value which are exposed to even higher liabilities. But class does not charge fees related to this exposure, it charges for the services performed, and fees are not related to the size or value of the asset. The charges for checking a particular piece of equipment are the same for a small, relatively safe cargo ship as they are for a large chemical or gas carrier.

Secondly, classification services do not contribute to the risk level. Class reduces risk, and class does not take the place of other players. It is true that class is paid by the shipowner, but class does not operate the ship itself, and cannot cause or be responsible for an incident. Class can omit to discover something which should have been discovered, but that is the extent of its potential to contribute to risk.

Thirdly, there is the exposure of class to multiple third parties. The shipowner pays and is the client, but a lot of other bodies rely on class. Underwriters, charterers, vessel purchasers, government authorities and others could not do without it. The number of parties linked with class raises the potential level of failure.

Fourthly, but crucially, there is public interest. If the exposure to liability of serving the public interest gets too high, class will be forced to discontinue this work. Governments with sovereign immunity would be forced to take it on. Unfortunately, most governments have simply not got the necessary expertise or control to replace class. Things would be bound to go wrong, but as governments are immune, the potential liability for any default would be nothing at all, which is a lot less than class is willing to stand behind.

Classification societies have to help the shipping industry to develop. That means they operate at the cutting edge of technology. They must base decisions on original research and cannot always rely on past experience. Everyone expects class to make a definite statement of approval of new concepts, even if the risks are huge, the potential liabilities are huge and information on which to base a decision is scarce. Just think about the explosive development of fragile high-speed craft and the potentially dangerous processing and storage of oil in converted tankers. There is a real case here for a limit on liability if anyone is to take on these risks.

Those seeking to make class accept higher liabilities frequently say that high exposure will concentrate the mind of the society and the individuals within it. In their argument, high exposure will lead to higher quality. They are wrong. The market for classification societies hinges on confidence and trust. Without confidence, class societies don't get business. Underwriters, government authorities and charterers will not deal with ships classed by societies which they do not trust. The drive for quality is inherent in what class supplies. Exposing class to high liabilities will simply mean it has to place limits on services. It cannot lead to higher quality.

These are strong arguments for limitation, but they do not address the problem of fixing an appropriate level. The potential risk and loss is the same for levels of service and fees which can vary from less than $1,000 to over $1m. Almost any potential claim will always be many orders of magnitude higher than the fee. Yet the world community, and the CMI, accepted the fee charged as an acceptable basis for setting liability limits. The major class societies certainly accept this principle. Unfortunately, there has been a recent suggestion that limitation should be a function of the tonnage of the ship. This would be unacceptable to all the major class societies, as ship size has no relevance to the value of a class service.

The market for classification societies hinges on confidence and trust. Without confidence, class societies don't get business.

The limited liability regime for shipowners is linked to tonnage. The Limitation Convention works on that principle. But shipowners and class are in very different positions. Class sees ships at determined intervals, shipowners should be controlling them at all times. Class has no control over the level of maintenance, training, manning, and supervision of the vessel and the areas where it trades, not to forget the cargoes it carries. All that is the privilege and responsibility of the shipowner. It would be quite unjust to expose two parties with such an unequal part of the risk picture to the same level of liability.

There are other issues bound up with this question. For example, in some jurisdictions class can incur liability to third parties. That must be tackled as part of a wider picture. There is also a set of principles of conduct which the CMI has drafted. Major classification societies broadly support the principles of conduct, and would not have a problem in living up to them. But they would insist on any new global model clause on limitation of liability being balanced by a clause which also excludes liability to third partes.

Working together through its representative body, IACS , class has gone a long way towards finding acceptable solutions to the outstanding issues. Shipowners now need to do their part. They cannot get a free lunch, whatever they would like. If the final liability level agreed is set high, it will inevitably translate into an insurance cost. This will have to be passed on to the owners through class fees.

Class wants to continue to serve shipping. Shipping should have the unrestricted benefit of all the resources and experience that class can offer. Class is always there to help everyone in shipping protect themselves, but it deserves some protection itself.