In two decisions dated 11 December 2012, the French Supreme Court set out the conditions whereby an insurer can validly invoke the limitation fund as set out under the Limitation of Liability for Maritime Claims (LLMC) Convention of 19 November 1976 (the Convention).
France, like the United Kingdom, is party to the Convention. The Convention aims to limit the liability of the owner, charterer, manager or operator of a sea-going vessel for damage occurring on board or in direct connection with the operation of the ship.
The background to the decision
The French Appeal Court was presented with two cases relating to personal injury caused by and occurring on board pleasure crafts. In the first case, a passenger of the “Chrisflo” was struck by the sudden movement of the boom and suffered serious injuries. In the second case, a diving fisherman was fatally injured when run over by the “Dizzy” and the master was convicted of involuntary manslaughter by the criminal court for failing to maintain the proper speed of his craft. Both claimants argued that (i) the limitation of liability provisions in the Convention did not apply to pleasure crafts; (ii) in any case the circumstances of the events were not directly connected to the operation of the ship; and (iii) the insurer could not invoke said limitations.
The Convention was introduced into French law in the Code of Transportation. Under French domestic law, the benefit of limitation of liability was extended to all seagoing vessels, including pleasure crafts. Additionally, the Captain, crew members or onshore representatives can also benefit from a limitation of their liability for any damage caused during the navigation or the general use of the ship (Article L.5121-3 of the Code of Transportation).
The wording of these provisions reflects the desire to limit liability for all instances involving damage caused by a ship, except when the damage results from a personal act or omission committed with the intent to cause the damage or recklessly with the knowledge that the damage would probably result.
The court hence ruled that the provisions of the Convention did extend to matters involving pleasure crafts and that the events occurred during the operation of the ships. The court further recognised that neither were guilty of acts or omissions of a character depriving them of the benefit of limited liability. The insured could therefore validly rely on the limitations of liability.
A debate arose regarding the ability of the insurer to invoke the limitation of liability of his insured in circumstances where the insured had not yet constituted the limitation fund, according to Article 10.1 of the Convention. Logic would dictate that the insurer could take the same benefit of limitation of liability as was available to its insured. French domestic law reflects this principle and the Convention considers that the insurer of liability claims is entitled to benefit from the limitations to the same extent as the insured himself (article I.6 of the Convention).
The insurer rejected the claims on the grounds that (i) the insured was entitled to take the benefit of the limitation of liability under the Convention; and (ii) pursuant to article L. 173-24 of the French Code of Insurance, no action may be brought against the insurer once a limitation fund has been constituted.
Considering that the above provisions only referred to instances where the fund would likely be constituted, the first instance court and the Appeal Court stated that the insurer could invoke the limitation of liability in accordance with the Convention, regardless of whether or not a limitation fund had actually been constituted at the time. The decision was overturned by the French Supreme Court on the grounds that the Appeal Court had deviated from the exact wording of the internal provisions which state that the limitation fund must have been constituted before the insurer can validly seek to limit its liability to the claimants.
The judgment creates a disparity between the rights available to insurers and those available to ship-owners and operators in general. The insured can rely on limitation at any stage of the procedure, but the insurer can only do so after the fund has been constituted. Yet, French law allows a victim to claim directly against the insurer without first having to make a claim against the insured. This was the option chosen by the claimants acting on behalf of the first victim and the second victim’s successors when they proceeded before the first instance courts.
This situation is particularly difficult for insurers: they do not benefit from the same conditions for limitation as their insureds and are denied the right to petition for the establishment of the limitation fund of their own initiative, yet they can be sued directly by the victims without being able to take the benefit of the insured’s right to limit, unless the insured has established a fund. Evidently, this places no incentive on the insured to constitute the limitation fund when only the insurer has potential liability exposure.
To avoid the situation where an insurer is held fully responsible for damages caused by its insured because the insured has failed to constitute a limitation fund, the insurer can either (i) directly constitute the fund himself on behalf of the insured by filing a petition in the name of the insured or (ii) impose on the insured an obligation to constitute a limitation fund by either inserting a clause to this effect in the insurance contract or by stipulating in the insurance contract that the insurer’s liability is limited to the amount equivalent to the amount of the fund under the Convention.