Introduction
Facts
Background
Decision
Comment


Introduction

The right to limit liability for claims is a cornerstone and unique feature of maritime law. Limitation issues are a particularly important consideration in the aftermath of large-scale casualties as the ability to limit liability may significantly reduce the financial exposure for a party and its insurers.

The recent decision from the English High Court in MSC Flaminia (No.2) provides useful guidance on which claims are capable of being subject to limitation and which are not.

Facts

In MSC Flaminia (No.2),(1) Conti (the owners) had chartered the 6750 TEU container ship "MSC Flaminia" (the vessel) to MSC (the charterers) on a long-term time charterparty (the charterparty).

In July 2012, three tank containers laden with the chemical divinylbenzene (DVB) were loaded onboard the vessel in the United States for carriage to Europe. Unfortunately, between 1 and 14 July 2012, the DVB underwent ­"auto-polymerisation", which is a process involving many small unsaturated monomers combining to form one large polymer. This not only impaired the ­quality and value of the DVB, but also caused a build-up of heat and pressure inside the containers carrying it. On 14 July 2012, when the vessel was in the middle of the Atlantic Ocean, some of the DVB escaped from the containers and formed an aerosol, which ignited. This led to an ­explosion and a large fire in the vessel's cargo hold. Consequently, the ­vessel and its cargo were extensively damaged and required a large-scale response to the casualty. Tragically, three members of the crew lost their lives in the initial explosion.

Cargo claims were commenced in the United States, but the claims between the owners and the charterers were subject to London arbitration as per the terms of the charterparty. Pursuant to awards of the London tribunal, the charterers were held liable to the owners in respect of the casualty and were ordered to pay damages of around $200 million.

The charterers therefore commenced a limitation claim in the Admiralty Division of the English High Court to limit their liability under the 1976 Convention on Limitation of Liability for Maritime Claims (LLMC) (as amended by the Amending Protocol of 1996). If the limitation claim had been successful, the charterers would have been able to limit their liability to around £28 million, based on the tonnage of the vessel.

Background

Under the LLMC (which is given enacted under English Law by the Merchant Shipping Act 1976), a shipowner (which, for the purpose of the LLMC, includes a charterer) can limit its liability for claims listed in article 2.1 of the LLMC. The most common limitable claims are:

(a) claims in respect . . . loss of or damage to property . . . occurring on board or in direct connection with the operation of the ship or with salvage operations, and consequential loss resulting therefrom

However, in the CMA Djakarta case,(2) which also concerned a large ­container ship fire, the English Court of Appeal held that article 2.1(a) covers only claims in respect of loss of or damage to property other than the ship itself.

In light of that decision, the charterers attempted to limit their liability to the owners under article 2.1(a) of the LLMC on the basis that the damage to the ship was a "consequential loss" resulting from "loss of or damage to property" (the DVB) for the purpose of article 2.1(a).

Decision

Ultimately, the English High Court held that the owners' claim against the charterers was a claim for damage to the ship and consequential losses arising from that damage. The owners' claim was not a claim for loss of or damage to property (other than the ship itself) or consequential losses resulting therefrom. Under the LLMC, and as per CMA Djakarta, the owners' claim was therefore not one for which the charterers could limit their liability.

The admiralty judge, Mr Justice Andrew Baker, considered that for the charterers to succeed, they would need to show that the CMA Djakarta had been wrongly decided and that was not an argument available to it in the High Court. However, even if it was possible to consider that argument, he would reject it for the following reason.

Justice Andrew Baker considered that article 2 of the LLMC was concerned with "claims categorisation" and not with the more complex matter of factual causation. During the hearing, the charterers had accepted that if cargo is damaged or lost because of damage to the ship, a claim by that cargo owner is not a claim in respect of "damage to the ship". Accordingly, by the same logic, if the ship is damaged or lost because of damage to the cargo, a claim by the shipowner is not a claim in respect of "damage to cargo". In other words, as per Justice Andrew Baker: "The causal contribution of cargo damage in the damage to the ship does not turn a claim for damaging the ship into a cargo claim."

In setting out his decision, Justice Andrew Baker also gave helpful guidance on the meaning of "consequential loss" in article 2.1(a), and whether a charterer can ever limit its liability to an owner under article 2.1 or vice versa.

With respect to the meaning of "consequential loss", Justice Andrew Baker opined that "consequential loss" is not limited to losses caused to the owner of the property but is instead wider and covers losses ­suffered by a party other than the owner (or party entitled to ­possession) of the property lost or damaged.

As for whether an owner or charterer can ever limit its liability to the other under article 2.1, the Justice Andrew Baker held that they can, although they would need to own property onboard the ­vessel other than the vessel itself. In this respect, Justice Andrew Baker provided examples such as:

  • a charterer's ownership of cargo onboard;
  • an owner owning some of the containers being carried; or
  • either party owning the vessel's bunkers.

Comment

Despite the importance that limitation issues play in the aftermath of a large casualty, decisions relating to limitation of liability are rare. Indeed, as noted by Justice Andrew Baker, this was the first judgment since the early 2000s in which an English court has had to consider a claim by a charterer that it is entitled to limit its liability to an owner under the LLMC for anything other than cargo claims.

Ultimately, this decision should provide comfort to owners and insurers of vessels that are involved in large and destructive casualties. In such casualties, the owners' losses will often far exceed the limit of liability. The decision in MSC Flaminia (No.2) means that, if a breach of the relevant charterparty can be established and damages are awarded arising from loss of or damage to their vessels, owners and their insurers can be more confident of making a substantial recovery without having to defend limitation actions.

For further information on this topic please contact Chris Grieveson, Matt Berry or Matthew Alker at Wikborg Rein by telephone (+44 20 7367 0300) or email ([email protected], [email protected] or [email protected]). The Wikborg Rein website can be accessed at www.wr.no.

Endnotes

(1) [2022] EWHC 2746 (Admlty).

(2) [2004] EWCA Civ 114.