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Can you contract out of the Limitation of Liability Convention? A cautionary tale

The English Supreme Court recently dealt with whether parties to a contract involving the use of a vessel can, and did, exclude the application of the Convention on Limitation of Liability for Maritime Claims 1976 (the "Convention").

This case, BORCO v The Cape Bari [2016] UKPC 20, is of wide application, especially in countries such as Canada, which has chosen to extend the application of the Convention to vessels under 300 GT on any navigable water (see the Canadian Marine Liability Act which incorporates the Convention as a schedule).

Most of Canada's domestic fleet of small commercial vessels and pleasurecraft is under 300 GT. Under the Convention, as it is applied in Canada, the maximum liability for a vessel under 300 GT is $500,000 for property damage and $1 million for personal injury/death. Each limitation amount is distributed pro rata amongst the claimants. For vessels more than 300 gross tonnage, the limits are set out in the Convention.

The effect of the Convention is that even if a vessel causes millions of dollars in property damages to another vessel, to cargo, a bridge or a dock, the property owner may be left without recourse against the vessel owner beyond its limitation amount based on its tonnage. The Court in the Cape Bari decision considered whether a contract provision could be used to avoid this extreme result.

In the course of a berthing operation in Grand Bahama, the deep sea vessel Cape Bari collided with Sea Berth number 10. As a result of the allision, the property owner, BORCO, claimed damages of approximately US$22 million. Under the Convention, which is incorporated into Bahamian law, the owners of the vessel claimed a limit of liability, if any, to approximately US$16.9 million based on the gross tonnage of the Cape Bari. BORCO claimed that the vessel owners had signed BORCO's Conditions of Use for the Sea Berth in which they agreed to provide a full indemnity against all and any loss, damages, costs or expenses incurred as a result of the berthing operation, and had therefore waived their right to claim limitation of liability. The particular clause in the Conditions of Use at issue was as follows:

If in connection with, or by reason of, the use or intended use by any vessel of the terminal facilities or any part thereof, any damage is caused to the terminal facilities or any part thereof from whatsoever cause such damage may arise, and irrespective of weather [sic] or not such damage has been caused or contributed to by the negligence of BORCO or its servants, and irrespective of whether there has been any neglect or default on the part of the vessel or the Owner, in any such event the vessel and the Owner shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection therewith. Further, the vessel and her Owner shall hold BORCO harmless and indemnified against all and any claims, damages, cost and expenses arising out of an loss, damage or delay caused to any third party arising directly or indirectly from the use of the terminal facilities or of any part thereof by the vessel…

The Court held that it is possible under the Convention for vessel owners to contract out of, or waive, their right to claim limitation of liability; however, to do so the contract must make it clear that that is the parties' intention. Here, the Conditions of Use did not make any reference to the Convention (or the equivalent provision in Bahamian law). Therefore it was not clear that the owners had waived their claim to limitation. While the Court accepted that it might be possible in other circumstances to exclude the right to limit without express reference to the statute, the Court concluded that the right must be clearly excluded, whether expressly or by necessary implication.

Some customers have the commercial clout to demand full indemnification by the vessel owning party should an accident or breach of contract occur arising from the use of the vessel. Careful attention to language will be required to enforce such indemnification clauses when claims arise which exceed the limitation of liability. At the same time, enforcing contractual terms which permit recovery of sums exceeding limitation under the Convention is not without peril. Some liability insurance policies are limited to the Convention limits, meaning that if the vessel owner agrees in a contract to pay more than limitation should a loss occur, liability for any amounts over the limitation amount may not be insured and losses exceeding limitation may be characterized as solely arising from contractual breach.

The lesson to be learned? The value of seeking advice from a maritime lawyer who understands the nuances of the application of limitation of liability in shipping matters.