08.05.2023

The IMO Unified Interpretation on the Test to Break a Shipowner’s Right to Limit Liability

A central feature of the maritime limitation regime is a shipowner’s right to limit liability for maritime claims based on the tonnage of the vessel, granted in exchange for the acceptance of strict liability for such claims.

However, recent decisions have threatened to undermine this bargain, necessitating the development of the Unified Interpretation on the Test for Breaking the Shipowner’s Right to Limit Liability (UI), affirmed at the thirty-second session of the IMO General Assembly on 15 December 2021.

The UI clarifies that the test to break a shipowner’s right to limitation is (1) “virtually unbreakable”, (2) assessed at a level of culpability above gross negligence, and (3) that the conduct of persons other than the Shipowner are irrelevant to the assessment.

Context 

A shipowner’s right to limitation is principally established under two conventions: the Convention on Limitation of Liability for Maritime Claims 1976 (LLMC), and the International Convention on Civil Liability for Oil Pollution Damage 1992 (CLC), both of which are subject to the near identical exclusion below: 

“A person shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss / damage, or recklessly and with knowledge that such loss would probably result”, 

(Test) 

When first adopted, the Test was deliberately configured to ensure a shipowner’s right to limitation could only be broken only in exceptional circumstances. However, recent decisions indicate an increased willingness to break a shipowner’s right to limitation in circumstances arguably not intended by member states at the time of the Test’s adoption.

The most notable example is the 2016 decision in the Prestige STS 11/2016, which involved a catastrophic oil spill off the coast of Spain. The Spanish Supreme Court found the shipowner acted with negligence sufficiently serious to support the conclusion it had acted recklessly and with knowledge that the damage would probably result, thus breaking its right to limitation under the CLC. Additionally, the shipowner’s P&I Club was held directly liable for amounts above the CLC limit (which capped liability at €22,777,986) by application of Spain’s domestic laws, warranting a finding of liability up to the policy limit of US$1 billion.

The decision is criticised as a misapplication of the Test, with “serious” negligence considered a standard of culpability short of the “virtually unbreakable” threshold required to break a shipowner’s right to limitation. In respect of the P&I Club, the judgment appears to contradict the express wording of article 7.8 of the CLC which entitles an insurer to avail itself of limitation even if its insured is not so permitted, as well as seemingly circumventing the limits set out in the CLC in preference of Spain’s own domestic legislation. 

The UI 

The UI was developed in response to the Prestige and decisions of a similar nature, which appear to move away from the fundamental principles underpinning the LLMC / CLC.

The UI clarifies that in respect of the LLMC, CLC, and LLMC Protocol of 1996, the Test is to be interpreted:

  1. As virtually unbreakable in nature;
  2. To mean a level of culpability analogous to willful misconduct, namely:
    1. A level higher than the concept of gross negligence, since that concept was rejected by the 1976 Conference on the LLMC;
    2. A level that would deprive the shipowner of the right to be indemnified under the marine insurance policy; and
    3. A level that provides that a loss of entitlement to limit liability should begin where the level of culpability is such that insurability ends.
  3. That the term “recklessly” is to be accompanied by “knowledge” and that these terms establish a level of culpability that must be met in their combined totality; and
  4. That the conduct of parties other than the shipowner (e.g., master and crew among others) is irrelevant and should not be factored.

Importantly, the UI has been designed to reflect the intention of member states at the time the Test was first adopted, as opposed to imposing a new interpretation on member states. Accordingly, it is said to be a “subsequent agreement” under article 31 of the Vienna Convention on the Law of Treaties 1969, affording it binding affect. 

Our Comment

The UI having been adopted under the auspices of the IMO is a highly persuasive interpretive instrument. However, perhaps ironically, it appears to have limitations of its own. 

For example, the UI cannot influence how a state will approach its international obligations where a conflict arises between the relevant convention and its domestic law. All the UI can do is advise on matters within the LLMC / CLC; it cannot influence conflicts of law that exist externally.

Additionally, the meaning of the phrase “recklessly and with knowledge” could remain a topic of contention. While the UI makes clear that the Test is to be interpreted at a level above gross negligence, it does little to establish what this might look like for member states (often in civil law jurisdictions) that do not have an equivalent standard for “reckless” in their domestic law.  

Finally, with not all member states to the LLMC / CLC in attendance at the IMO General Assembly at which the UI was adopted, it is unclear the degree in which it can be classed as a “subsequent agreement”, leaving the door open for member states to argue that the UI is not binding unto them.

If you have any questions about the UI or the test to break a shipowner’s right to limit liability, please get in touch with our Trade & Transport Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

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Kerry
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