Vessel Charterers cannot limit their liability against the owners under 1976 Limitation Convention
In a Judgment handed down last week Mr. Justice David Steel (the Admiralty Judge) has confirmed that a charterer of a vessel cannot limit their liability against the Owner of the same vessel under the 1976 Limitation Convention.
The trial of this issue arose out of fire and explosions that occurred on board the container vessel "CMA DJAKARTA" in July 1999. As a result of the fire and explosions the vessel suffered very significant damage to both her hull and cargo. Having been abandoned by her crew, salvage services were rendered to the vessel and her cargo off the Egyptian coast which succeeded in extinguishing the fire and subsequently, discharging sound containers.
The Owners of the "CMA DJAKARTA", together with her hull underwriters and P&I insurers commenced a recovery action under the terms of the time charterparty for their losses against the time charterers of the vessel, CMA CGM S.A. The basis of this claim was that the explosions and fire were attributable to the shipment of two containers containing bleaching powder (a form of calcium hypochlorite). Owners alleged that the shipment of these containers was in breach of the terms of the charterparty relating to the carriage of dangerous cargo. The matter was referred to London arbitration in September 2001 and in January 2002 the Arbitrators found in favour of the Owners' claim in their entirety. The Owners were awarded a principal sum of in excess of US$26 million, together with a right of indemnity for future claims in respect of cargo and general average. The Limitation Fund of the "CMA DJAKARTA" pursuant to the 1976 Convention amounts to just under US$5 million and a Fund was constituted by the charterers in Marseilles, France (a country that has ratified the 1976 Limitation Convention).
The time charterers accepted the arbitrators' finding of breach of charterparty but appealed the award on one legal ground, claiming that they were entitled to limit their liability against the Owners of the vessel pursuant to the Merchant Shipping 1995 and the Convention on Limitation of Liability for Maritime Claims 1976. If CMA CGM were successful the Owners would have to enforce their Award against the Limitation Fund in France, would be reimbursed pro rata in accordance with the terms of the Convention and their recovery of the amount awarded in their favour could be as low as 10% of the amount of their loss.
The 1976 Convention, Article 1, (1) states "Shipowners and salvors, as hereinafter defined, may limit their liability in accordance with the rules of this Convention for claims set out in Article 2". Sub-section (2) defines "shipowner" to mean "owner, charterer, manager or operator of a sea-going ship". Essentially, the charterers argued in the appeal that this Article of the Convention meant that any charterer (whether time, voyage or slot charterer) was entitled to limit their liability, not only against third party claims but also against the Owner of the vessel that is subjected to loss. The Owners of the "CMA DJAKARTA" submitted that the Judgment of Thomas J. in the "AEGEAN SEA" (1998) was correct in that the Convention and the history of limitation only anticipates a right to limit for parties such as charterers, operators and managers when they are facing third party claims and are therefore defending the same "in the shoes" of the shipowner. It does not mean that the parties defined in Article 1, Sub-Section 2 of the Limitation Convention have a right to limit their liability as against each other if they are part of the same adventure.
The Judgment itself goes into some detail as to history of limitation which became the subject ot legislation as long ago as 1783 as well as the various submissions made as to the practical effect of the charterers' argument that they could limit their liability against an Owner. We do not intend to go into all that here although the Judgment is an interesting read on these aspects in particular. Needless to say, however, the Judgment is important confirmation of the findings in the "AEGEAN SEA" in 1998 confirming that, whilst the parties identified as "shipowners" in the Convention have a right to limit against third party claimants, they do not have a right to limit as against other parties defined in Article 1(2) if those parties are in the same adventure. They can, therefore, effectively only limit their liability in their capacity as shipowners. It means that insurers, whether charterers' liability or directors' liability (in respect of operators and managers) now have two clear Judgments which confirm that, whilst their assured may well be able to limit their liability to third party claimants, a charterer, operator or manager may still potentially find that they face unlimited exposure for claims that arise from other owning interests of a vessel, whether those claims be alleged in contract or in tort.
Leave to appeal has been granted and so the matter will now be referred to the Court of Appeal (probably some time next year).
Alistair Johnston is a partner of Holman Fenwick & Willan who act for the Owners, hull underwriters and P&I insurers of "CMA DJAKARTA".
By Alistair Johnston, Partner, Holman Fenwick & Willan, London.
Contact details:
Tel: 020
7488 2300
Dir: 020 7264 8257
Fax:
020 7481 0316
E-mail: alistair.johnston@hfw.co.uk
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