Contracting out of right to limit liability

The right of ship owners to limit their liability for maritime claims is established in the Convention on Limitation of Liability for Maritime Claims…

The "Cape Bari": Bahamas Oil Refining Company International Ltd v. Owners of the Cape Bari Tankschiffahrts GmbH & Co KG [2016] UKPC 20 (Lords Neuberger, Mance, Clarke, Sumption and Toulson)

Issue

The right of ship owners and others to limit their liability for maritime claims is well established and is contained in the Convention on Limitation of Liability for Maritime Claims 1976 (“the 1976 Convention”), and the amending 1996 Protocol to the Convention (“the 1996 Protocol”) that increased the limits of liability for various claims with effect from June 2015. Section 185 of the Merchant Shipping Act 1995 (“the 1995 Act”) incorporates the 1976 Convention into the law of the United Kingdom. In the Bahamas, the implementing statute is the Merchant Shipping (Maritime Claims Limitation of Liability) Act 1989 (“the 1989 Act”).

The Privy Council has recently delivered this decision on whether a clause in a berthing agreement for a ship visiting Freeport in the Bahamas was effective to contract out of the owner’s right to limit liability under the 1989 Act and the 1976 Convention.

Facts

In May 2012, the vessel “Cape Bari” arrived at Freeport to load a cargo of crude oil at the Bahamas Oil Refining Co (“BORCO”) terminal. Two pilots boarded the vessel and after an exchange of information the master, as agent for the owners, signed two agreements as presented to him. One was for the provision of pilotage and towage services. The other related to the owner’s use of the BORCO facilities and was headed “Conditions of Use of Jetties, Sea Berth and Inner Harbour Berth at Freeport, Grand Bahama” (“the Conditions of Use”). Subsequently, while under tow to Sea Berth no 10, the vessel collided with the berth causing substantial damage. BORCO brought a claim against the owners for US$22 million.

Clause 4 of the Conditions of Use required the owners to indemnify BORCO in full for any claims or losses arising out of the use of their facilities. BORCO contended this provision was effective to contract out of the owner’s right to limit liability. The owner’s contended they were entitled to limit their liability under the 1989 Act to about US$16.9 million plus interest, and successfully applied to the Bahamas Court for an order for the constitution of a limitation fund on this basis. BORCO then applied for an order setting this aside.

Bahamas Court decisions

The Court at first instance held that the owners had contracted out of their right to limit their liability under the Conditions of Use. The Court of Appeal reversed this decision on a quite separate ground that, under articles 2.1 and/or 2.2 of the 1976 Convention, it was not permissible to contract out of the right to limit. This issue had not been raised by either party or addressed in argument before the Court of Appeal.

BORCO appealed to the Privy Council, on the basis that under the 1989 Act and 1976 Convention it was permissible for the owners to contract out of the right to limit and that by virtue of the Conditions of Use they had done so.

Privy Council decision

The Privy Council found in favour of the owners, deciding as follows:

  • It was permissible for the owners to contract out of or to waive their statutory right of limitation under the 1989 Act and 1976 Convention. The interpretation of international conventions should not be controlled by domestic principles but by reference to broad and generally acceptable principles of construction, as set out in articles 31-32 of the 1969 Vienna Convention on the Law of Treaties. Simply as a matter of language, there was nothing in the Act or Convention prohibiting the owners from contracting out. They have a right to limit, which they can choose to exercise, or not, as they please.

  • The Court was unlikely to be satisfied that a party had abandoned rights under a contract unless the terms of the contract made it clear that was the parties’ intention. The more valuable a right abandoned by a party to a contract, the clearer the language needed to be. BORCO sought to argue that Clause 4 excluded the application of the Act and Convention. However there was no mention at all of either instrument in the clause. On its true construction, the effect of the clause was merely to impose a duty on the owner to hold harmless and indemnify the terminal operator, but without removing the right to limit liability.

  • BORCO’s case had in large part relied on the decision of the House of Lords in The “Satanita” [1897] AC 59.  In that case, owners of yachts taking part in a race had signed letters agreeing to be bound by the rules of the Yacht Club Association, which provided that any owner infringing the rules would be liable for, and pay, all damages arising as a consequence. The Privy Council distinguished this case on the basis that it was only concerned with the proper construction of a yacht racing contract and, moreover, was decided at a time when principles of construction of contracts were much less developed than they are today. The case should therefore not be treated as an authority of general application.

Comment

This decision provides useful confirmation that it is possible to contractually exclude the significant right to limit liability for substantial claims under the 1976 Convention (which has been adopted into the law of many maritime nations). Helpful clarification and guidance is also provided on the circumstances where this may apply. Parties will have to show that the right to limit has been very clearly excluded, in particular by express clear terms of the contract.

While the decision shows that the valuable right to limit liability should not easily be lost, it will remain important for ship owners as well as charterers, managers and operators of vessels to carefully consider the terms of any contracts relevant to this area before the contracts are agreed.

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