Limitation of liability under United States law

IN 1851, the United States Congress enacted the Limitation of Liability Act. The purpose of the act was to promote and encourage the growth of American shipping and the American merchant fleet. Under the terms of the act, if certain factual prerequisites are met, a shipowner can limit its liability for a casualty to the value of the vessel and the freight then pending, if any. Specifically, shipowners are entitled to limit their liability if the negligence or unseaworthy condition which caused the loss occurred without the privity and knowledge of the owner.

Whether filing a limitation proceeding is appropriate depends on the facts of each case. In the appropriate case, it can reduce the shipowner's exposure and defence costs greatly.

For unseaworthiness, the owner is required to use due diligence to ensure that its vessel is seaworthy at the outset of the voyage. The privity and knowledge of the owner has typically been held to include the privity and knowledge of shore-based management. For personal injury and death claims, the knowledge of the master of a seagoing vessel at or prior to the commencement of a voyage is deemed to be the knowledge of the owner.

While, historically, much of the daily shipboard activity occurred outside the knowledge of the shipowner, communication technology has advanced to the point where this often is not the case. The development of, first, telex, then satellite telephone and facsimile technology has resulted in far more hands-on management and ownership of today's merchant fleet. Now, operations are a far cry from the days when shipowners were often out of contact with their vessels for the duration of the voyage.

Who can limit?

Under the act, any commercial shipowner may claim limitation of liability. Owners of pleasure vessels may be entitled to limitation of liability; however, pleasure craft are excluded from certain parts of the act. The act applies to foreign as well as American shipowners. Also, under certain circumstances, charterers may seek limitation of liability, provided they "man, victual and supply" the vessel.

Often, the shipowner's underwriters are able to benefit directly from the act, provided the policy in effect contains the language necessary to extend the benefits of the act to them. While there are no "magic words," to claim the benefit of limitation the policy must specify that, where the insured is entitled to limit its liability, the insurer's liability shall not exceed that limited liability.

It is not sufficient merely to provide that the insurer's liability is linked to those sums which the assured has become liable to pay and has paid. (Crown Zellerbach Corp v Ingram Industries Inc 783 F 2d 1296, 5th Cir 1986). This can be of great assistance, particularly when claimants reside in a forum, such as Louisiana, which permits a claimant to bring a direct action against the insurer of a tortfeasor.

When to seek limitation

Obviously, there are some marine casualties, such as a collision involving extensive damage to both vessels and a large number of personal injuries, in which seeking limitation is the only course of action. Other, smaller casualties may require more thought. But if a number of claimants are expected to bring claims, filing a limitation action is normally the prudent thing to do, since the act also provides for a concursus in a single forum for all claims against the shipowner arising out of a casualty.
The Federal Rules of Civil Procedure provide for an injunction against the prosecution of any other actions against the shipowner arising out of the casualty, once the owner has filed a limitation complaint and furnished security. This can be a tremendous benefit to shipowners and their underwriters, as the defence can proceed in one forum, and on one schedule. The savings in defence costs alone often justify seeking limitation in a multiple claimant casualty. Repetitive discovery and the possibility of inconsistent testimony by the same witnesses can be avoided as well.

Of course, the claimants to a limitation proceeding may, and, frequently do, file motions to lift the limitation stay, so their claims may be pursued in state court prior to the actual determination of the petitioner's right to exoneration from or limitation of liability.

Requirements for stay and stipulations to lift stay

The Limitation of Liability Act grants federal courts exclusive jurisdiction over all proceedings for exoneration from or limitation of liability and gives the federal court power to stay all other proceedings against the petitioners in limitation. In essence, the vessel owner's right to determination of exoneration of limitation issues by a federal court "take precedence over the claimant's right to proceed in the forum of their choice." (Odeco Oil & Gas Co Drilling Div v Bonnett, 74 F 3d 671, 675, 5th Cir 1996, cert denied, 117 S Ct 79, 1996).

In cases where there are multiple claimants and an insufficient fund, the courts currently allow the automatic stay to be lifted only if every claimant makes the following stipulations:

• (1.) All claimants must stipulate that the federal court retains exclusive jurisdiction to determine all issues related to the shipowner's right to exoneration from or limitation of liability and all claimants must waive any claim of res judicata relative to the issue of exoneration from or limitation of liability;
• ( 2.) All claimants must stipulate that no judgment will be asserted against the shipowner to the extent it exceeds the value of the limitation fund; and
• ( 3.) All claimants must stipulate the priority in which their claims will be paid from the limitation fund. (Texaco Inc v Williams, 47 F 3d 765, 767-768, 5th Cir, cert denied, 516 US 907, 116 S Ct. 275, 1995).

Any motion to lift the stay must be denied if the stipulations are inadequate to protect the court's exclusive jurisdiction over exoneration and/or limitation issues. Similarly, if the stipulations do not join all claimants, do not establish the priority of claims, or do not protect petitioner's rights to try exoneration issues in a federal forum, the motion to lift the stay must be denied. It is well settled that the tension between the vessel owner's right to a federal forum under the limitation action and a claimant's right to a state forum under the Savings to Suitors clause is resolved in favour of the vessel owner's having all issues related to its limitation action decided in a single federal forum. The only narrow exception to this right occurs when all claimants execute a complete and adequate stipulation.

How to limit

The procedures for filing a limitation action are contained in Rule F of the Federal Rules of Civil Procedure, Supplemental Rules for Certain Admiralty and Maritime Claims. Rule F also contains venue provisions which govern in which court the action may be commenced. These venue provisions are given in descending order.

If the vessel has been attached or arrested as a result of the incident, then venue is only appropriate in the district in which the vessel has been seized. If the vessel has not been attached, but suit has been filed against the owner, then venue is appropriate in any district in which the owner has been sued. If the vessel has not been attached and no suit has been filed, then venue is appropriate in the district in which the vessel is located at the time of filing.

If the vessel is not within any district, such as on the high seas or in a foreign port, then venue is appropriate in any district. It is possible for a shipowner to choose the venue for litigation arising out of a casualty, if the limitation proceeding is filed before any claimants filed suit.

If the vessel has not been seized and no suit has been filed, an owner can "create" venue for the limitation action by bringing the vessel to the district of its choosing.

In connection with the limitation complaint, the parties seeking limitation must file a bond in the amount of their interest in the vessel and its pending freight, if any. Claimants are free to challenge the sufficiency of the amount of the bond. If the vessel is a total loss, such that there is no residual value, and personal injury claims are known or anticipated, a bond is required in the amount of $420.00 per ton of the vessel's tonnage.

The limitation action must be commenced within six months of the date on which the shipowner receives written notice of a claim arising out of the incident. This period is jurisdictional, and the action will be dismissed if it is not filed timely. In addition to filing a limitation action, a shipowner can plead limitation of liability under the act as an affirmative defence to a suit brought in a federal district court. But if the claimant chooses to file its suit in state court, rather than in the federal system, the limitation defence is not available. (Vatican Shrimp Co Inc v Solis, 820 F 2d 674, reh en banc denied, 5th Cir, cert denied, 484 US 953, 108 S Ct 345, 1987). But see, Howell v American Casualty Company of Redding, Pennsylvania, 96-0604, La App 4th Cir 3/19/97, 691 So 2d 715, reh denied, April 30, 1997).

Additionally, asserting the act as a defence does not provoke a concursus of all claims, which is often the major benefit the shipowner receives under the act. Also, if multiple claims are filed in federal court, there will be multiple limitation funds if the act is pleaded as an affirmative defence.

Effect of limitation

If the court determines that the shipowner is entitled to limit its liability under the act, the claimants split the fund amongst themselves. Under Supplemental Rule F, the division is pro-rata in proportion to the amounts of the respective claims. (In re Kristie Leigh Enterprises Inc, 1999 US App LEXIS 2663, No 97-41414, 5th Cir 2/22/99). For example, if a claimant's provable damages comprise one-fifth of the total damages sustained in the casualty, it can recover one-fifth of the limitation fund.

Conclusion

The benefits to the owner of seeking limitation of liability should be readily apparent. Whether filing a limitation proceeding is appropriate depends on the facts of each case. In the appropriate case, it can greatly reduce the shipowner's exposure and defence costs.