Limitation of Liability (Part 1)

  1. Overview
    Cruise ShipThis paper will discuss the application of the Shipowner’s Limitation of Liability Act, 46 U.S.C. § 183 et. seq. (“Limitation Act”). The Limitation Act has been used by shipowners as a tool to stay actions, bring claims in concurus before a federal district court as well as exonerate or limit itself from liability stemming from a maritime casualty. Though it has many benefits, the Limitation Act also has many pitfalls for an unwary litigant. Many of these pitfalls are highlighted in this paper.
  2. History of the Limitation Act
    The Limitation Act was enacted in 1851 to promote the development of the American merchant marine and to put American shipowners on a footing equal to shipowners hailing from other commercial seafaring nations, particularly Great Britain.1 With the Limitation Act, shipowners would have the opportunity to limit liability to the post loss value of their vessels for a marine casualty.2 Throughout the past one hundred and fifty years, many shipowners have sought the protection of the Limitation Act. In fact, the sinking of the TITANIC, the 1947 Texas City explosions and the New Orleans River Walk Marketplace allision all spawned Limitation Act cases.3 While the Limitation Act has been criticized in recent years as being outdated, it has not been repealed by Congress, and courts therefore continue to apply it.4
  3. Who is Protected under the Limitation Act
    The Limitation Act applies to an “owner of any vessel, whether American or foreign.”5 The Limitation Act, however, does not define the word “owner”. Judicial interpretation has found the word “owner” to be “untechnical” and should be given broad construction to achieve Congress' purpose of encouraging investment in American shipping.6
    1. Who are and are not “Owners”
      When determining whether a party is an “owner” within the meaning of the Limitation Act, a court must look beyond mere title ownership and assess whether the party exhibited domination or control over the vessel.7 Corporate shareholders, mortgagees, prior vendors, life tenants, trustees and government agencies in wartime have been found to be “owners” entitled to limit their liability. Part owners of a vessel may also limit their liability up to the value of their interest in the vessel.8 Also, owners of the vessel at the time of the subject voyage but who have sold the vessel by the time litigation commences are considered “owners” for the purposes of losses occurring during the time they owned the vessel.9 Though courts are to give broad construction to the word “owner”, mere possession of a vessel does not confer “ownership” for purposes of the Limitation Act.10 As such, agents of the vessel owner, though they may have responsibility for maintenance and operation of the vessel, are not deemed “owners” for purposes of the Limitation Act.11
    2. Charterers who are Protected Under the Limitation Act
      The Limitation Act expressly provides protection for a charterer who actually “mans, victuals, and navigates the vessel at his own expense, or by his own procurement, shall be deemed the owner of such vessel.”12 A charter is a contract between the vessel’s owner and a third party for the use of the vessel. Not every charterer is afforded protection under the Limitation Act. The Act has been interpreted to include demise and bareboat charterers but not time or voyage charterers.13 A demise charterer, however, may only take advantage of the Limitation Act if the charter relinquishes possession, command and navigation of the vessel.14 The charter must also expressly state that the owner grants the charterer the sole and exclusive possession and control of the vessel.15 Furthermore, the charterer, not the owner, must be required under the terms of the charter and actually procure the necessaries and man the vessel. The recent case of In re Am. Milling Co. found that the towboat’s crew’s employer did not enjoy owner or owner pro hac vice status under the Limitation Act because its role under the crewing agreement was limited.16 Further, the employer’s interest was kept in check by the towboat owner’s retention of substantial control over decisions related to the operation and control of the vessel, selection of the crew, and maintenance of the vessel.17
  4. What is a “Vessel” for Purposes of the Limitation Act?
    The Limitation Act applies to “seagoing vessels and… all vessels used on lakes and rivers or in inland navigation, including canal boats, barges, and lighters.”18 Though not specifically defined by the Limitation Act, other federal statutes have defined the word “vessel” to include “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”19 Courts interpreting the Limitation Act have used this definition to assist in their analysis as to whether an object is a “vessel.”20 As such, the term “vessel” has been liberally construed.
    The majority of jurisdictions hold that pleasure vessels as well as commercial vessels fall within the province of the Limitation Act.21 In fact, jet skis, a floating boarding house22, a fifteen-foot powerboat,23 a barge24 and a sixteen foot catamaran25 have been held to constitute “vessels” within the meaning of the act. Despite the liberal construction, however, seaplanes,26 oil rigs and fixed towers27 are not vessels for proposes of the Limitation Act. Furthermore, ships being dismantled for scrap metal are no longer vessels and the owners are not protected by the Limitation Act for any claim occurring while the vessel is being dismantled.28
  5. What Claims are Subject to the Limitation Act?
    A wide variety of claims are subject to the Limitation Act. In fact, nearly every claim that can be asserted against a vessel in rem and/or its owner in personam can be limited under the Limitation Act.
    1. Claims that are Limitable
      Claims arising from personal injuries, deaths,29 fire, collisions/allisions,30 sinking, salvage31 and lost cargo32 are all subject to the Limitation Act. Jurisprudence for such a wide effect derives from section 183(a) which allows limitation of any “act, matter or thing, loss, damage, or forfeiture, done, occasioned, or incurred.”33
    2. Claims that are Not Subject to the Limitation Act
      Despite the Limitation Act’s wide scope, some claims cannot be limited. The Limitation Act expressly exempts wages due to seamen.34 Furthermore, a shipowner cannot use the Limitation Act to avoid its obligation to provide injured seamen maintenance and cure benefits.35 Claims for cargo damage caused by improper deviation of the vessel have been deemed outside the Limitation Act’s scope.36 Claims for the return of unearned freight paid in advance are not subject to limitation,37 however, if the contract of affreightment provides that freight is deemed earned when the cargo is shipped it may be a part of the limitation fund.38 Furthermore, environmental claims such as those arising under the Oil Pollution Act of 199039, Clean Water Act40 and the Park System Restoration Act41 are not limitable.
    3. Personal Contract Doctrine
      Another important category of claims which are carved out of the Limitation Act protection, are those arising out of the personal contracts of the shipowner.42 The “Personal Contracts Doctrine” is an equitable doctrine based upon the logic that a shipowner should not be able to promise an undertaking or performance that is within his personal control and then turn around and limit liability when his performance is later deemed faulty. For example, limitation cannot be had for the sinking of a vessel due to an unseaworthy condition when the charter party expressly or impliedly warrants the vessel’s seaworthiness.43 Further, a shipowner may not limit his obligations under towage,44 berthing, ship’s mortgages,45 vessel repairs and supplies contracts. Indemnity contracts have also been held personal contracts thereby excluding the application of the Limitation Act.46
      The test for determining whether a claim falls within the “personal contracts doctrine” is not whether the shipowner made the contract but is whether the shipowner is personally bound to perform. When a vessel is owned by a business, contracts are “personal” if they are executed by managerial employees acting within the scope of their discretion and authority.47 On the other hand, the “personal contracts doctrine,” does not extend to certain contractual obligations entered into by the master employed for the ship.
  6. Invoking the Protection of the Limitation Act
    There are two (2) methods in which a shipowner can seek the protection of the Limitation Act. The first method is by bringing an action in federal district court. The second method is asserting the Limitation Act as an affirmative defense. Each method has its distinctions of which a litigant must be aware.
    1. Bringing a Limitation Action in Federal District Court
      1. Pleadings
        The first step in bringing a limitation action is by a Petitioner filing a Complaintin- Limitation. The complaint may be filed anytime with the six month statute of limitations (discussed below). Also of note is the commencement of a limitation proceeding is not subject to an automatic stay under the Bankruptcy Act should a potential claimant file for bankruptcy.48
        The complaint must “set forth the facts on the basis of which the right to limit liability is asserted.”49 It is not enough for the complaint to state only general allegations related to the casualty.50 Rather, the complaint must elaborate on the voyage on which the casualty arose from which the owner seeks limitation or exoneration or liability occurred, and state with particularity the facts or the casualty.51 In the recent case of In re Lauritsen the court dismissed a limitation action for vagueness wherein the complaint merely stated the location of the subject incident occurred on Lake Erie.52
        Besides specifying the location of the underlying incident, the complaint must also set out the date and place of the termination of the voyage on which the casualty occurred, and state with particularity all known outstanding claims related to the voyage and their type.53 Supplemental Rule F(2) requires that the complaint state with particularity the post loss value of the vessel and pending freight, if any, where the vessel currently is located and in whose possession the vessel may be found.54
      2. Subject Matter Jurisdiction
        The Limitation Act does not confer independent admiralty jurisdiction to a federal district court.55 Therefore, in order for subject matter jurisdiction to lie the event for which limitation is sought must have occurred upon navigable waters and have a connection to a traditional maritime activity. The focus of this paper is not on the nuances of admiralty jurisdiction, however; the underlying loss must be subject to admiralty jurisdiction in order for the limitation act to apply. For example, a complaint-in-limitation was dismissed concerning an airboat accident occurring in a non-navigable area of the Florida Everglades.56 Additionally, limitation actions stemming from a vessel fire occurring on land wherein the offending vessel was removed from navigation57 as well as a casualty occurring on a landlocked lake58 were dismissed. In the recent case of M/V Drema G. Woods v. Johnson, the Fourth Circuit affirmed a dismissal of a limitation action for want of jurisdiction wherein the underlying incident concerned a car accident caused by an intoxicated seaman who received permission to leave the vessel to attend to personal matters.59 However, an owner of a vessel floating upon navigable waters but tied to shore may seek the protections of the Limitation Act.60
      3. No Right to a Jury Trial
        As limitation proceedings are considered admiralty proceedings, there is no right to a jury trial.61 The court on motion may allow an advisory jury pursuant to Fed.R.Civ.P. 39(c). However, in situations where a claimant engages in third party practice against a joint tortfeasor and there exists either federal question or diversity jurisdiction, the third party tortfeasor may be entitled to a jury trial as to the claimants claim against it if demanded.
      4. Venue
        Proper venue also has its pitfalls for the unwary litigant. Rule F(9), Supp. Adm. R. is specific as to proper venue for a limitation action. If venue is wrongly laid, the district court shall either dismiss the action or transfer it to a district in which it could have been brought.62 Pursuant to the rule, a complaint-in-limitation shall be filed in any district in which the vessel has been attached or arrested; or, if the vessel has not been attached or arrested, in any district in which the owner has been sued with respect to such claim.63 The word “district” means the geographical area that lies within boundaries of a federal district court.64 Therefore, an owner sued in state court is required to file the limitation action in the federal district court whose jurisdictional boundaries encompass that of the state court in which the action is pending.65
        If the vessel has not been attached or arrested and a suit has not been commenced against the owner, proper venue lies in the district where the vessel can be found; but, if the vessel cannot be found in a district, then the complaint-in-limitation can be filed in any district.66 In situations where the subject vessel was sold, the proceeds of the sale represent the vessel for venue purposes.67
        Though Rule F(9), Supp. Adm. R. requires that a limitation action be commenced in an appropriate district court, the rule further allows the district court to transfer a limitation action. If this limitation action is brought in an incorrect district, the court has the option to dismiss or transfer the case to the appropriate district.68 Should this happen, the preferred and customary practice is to transfer, rather than dismiss.69 Furthermore, transfer of a limitation proceeding where venue is properly laid may occur and is at the discretion of the district court.70 Factors the court should consider when transferring a limitation proceeding include: (1) ease of access to sources of proof; (2) the convenience of parties and witnesses; (3) the cost of obtaining the attendance of witnesses; (4) the availability of compulsory process; (5) possibility of a view; (6) the interest in having local controversies decided at home; and (7) the interests of justice.71
      5. Statute of Limitations
        A Complaint-in-Limitation must be filed within six months after the shipowner receives written notice of a claim.72 At its inception, the Limitation Act did not have a statute of limitations. Without being required to promptly file a limitation proceeding, a practice developed among shipowners of waiting to bring a limitation action until a final adjudication of the merits. As such, a shipowner would wait and see if a party would bring a lawsuit and if the trial exposed the shipowner to liability, he could then petition a federal court for exoneration or limitation of liability and receive a second bite at the apple.73
        To discourage this practice, in 1936, Congress amended the Limitation Act to add a time bar provision that requires a vessel owner to file its petition in federal court within six months of receiving “written notice of claim.” This amendment reads:
        The vessel owner, within six months after a claimant shall have given to or filed with such owner written notice of claim, may petition a district court of the United States of competent jurisdiction for limitation of liability within the provisions of this chapter…74
        The six month statute of limitation was added to avoid undue delay caused by shipowners waiting to file limitation actions until after a trial on the merits.75
        1. Written Notice
          The Limitation Act is silent as to what constitutes proper notice of claim other than that it must be written. Courts have formulated two (2) tests as to what a writing must contain to give a shipowner notice of a potential claim. Under one test, notice is sufficient if it:
          1. informs the vessel owner of an actual or potential claim;
          2. which may exceed the value of the vessel; and,
          3. the claim is subject to limitation.76
          Under this test, the notice must reveal a reasonable possibility that the claim made is one subject to limitation.77
          The second test requires that the writing:
          1. demands a right or supposed right;
          2. blames the vessel owner for any damage or loss; and
          3. calls upon the vessel owner for anything due to the claimant.78
          The elements in the above tests need not be in a single writing but can be demonstrated in a series of writings.79 When faced with a series of letters, the shipowner must read each writing in their entirety and given their “whole tenor” determine whether sufficient notice was given.80
          At its inception, courts gave greater deference to the shipowner in determining whether a writing triggered the statute of limitations.81 However, the current temperament of the courts is to resolve any ambiguity in favor of permitting full recoveries and requiring strict adherence to the statutory requisites for limited liability.82
          Though courts now give claimants deference in assessing whether a writing or series of writings provide sufficient notice to trigger the six-month statute of limitations, claimants are still required to make their position to bring a claim against the shipowner clear. This concern is echoed by the Seventh Circuit in In re: McCarthy Brothers, Co., wherein it stated, “[t]he real danger in failing to hold claimants to a fairly high level of specificity in letters is that the claimants may nullify a shipowner’s right to file a limitation action by sending a cryptic letter and then waiting more than six months to file a claim.”83
          This issue also concerned Judge Learned Hand where he, in a concurring opinion in the case of In re Petition of Allen N. Spooner & Sons, Inc., formulated an equitable tolling measure to ensure that, on the one hand, six-month statute of limitation would be respected, and on the other hand, the vessel owner would not have to run to the court and file a limitation action each time he receives a letter mentioning an incident.84 Under this principle, if a claimant delivers a vague or ambiguous letter, the duty would shift to the shipowner to compel the claimant to make his position clear as to whether he seeks to bring a claim and the statute of limitations would not be triggered until such time the claimant clarifies his position.85 This equitable tolling measure has been applied to extend the statue of limitations for shipowners beyond that of the initial writing.86
        2. How is Written Notice Delivered to or Filed with an Owner
          As with the writing requirement, the Limitation Act is silent as to a proper procedure of delivering or filing the writing with an owner. Judicial interpretation of the requirement holds that the writing need not be served upon the shipowner within the service of process requirements of the Federal Rules of Civil Procedure.87 In fact, delivering the written notice via certified mail to the shipowner’s business address has been held appropriate under the Limitation Act.88 Additionally, at least one court has found that delivery of the writing to a shipowner’s attorney is appropriate even if the attorney never communicated the notice to the shipowner.89
          Courts have also held that delivering the written notice to the shipowner’s agent will satisfy the delivery requirement. In the case of Diamond v. Beutel the shipowner referred claims to his insurance agent. A claimant then filed a written notice of claim with the aforementioned insurance agent. The shipowner later argued that the notice was never “given to or filed with" him as required by the statute.” The Fifth Circuit Court of Appeals noted that there is “nothing preventing a shipowner from appointing an agent to receive the notice, as he might do for the service of process.” The Court then held that “the written notice of claim given to or filed with the agent designated by the owner established the time from which the six months’ limitation period started to run.”
          In the 2005 case of In re Waterfront License Corp., written notice was mailed to the shipowner’s principal place of business and opened by an employee of the shipowner.90 The shipowner argued that such delivery was insufficient as the writing was not delivered directly to the shipowner or a designated registered agent. This argument was rejected by the court which held that delivery of the notice to the shipowner’s principal place of business satisfied the delivery requirement even though the notice was opened by the shipowner’s employee.
      6. The Limitation Fund
        A condition to maintaining a limitation action is that the shipowner has the option to deposit a sum equal to the amount or value of the owner’s interest in the vessel and pending freight for the benefit of the claimants or, transfer his interest and pending freight in the vessel to a court designated trustee.91 Posting of this security creates a fund in which successful claimants may later be paid pro rata.92 If the owner elects to give security, as opposed to transfer his interest to a trustee, and then he must provide interest at six percent per annum from the date of the security.93 The owner must also give security for taxable court costs.94 It is within the district court’s discretion as to which form the security must be made.95 Courts have approved cash,96 bonds,97 letters of undertaking issued by a vessel owner98 as well as its insurers99 and the vessel itself as security.100 Though providing security is a condition to maintaining a limitation action, courts have determined that such a requirement is not jurisdictional.101 Therefore, the failure to provide security at the onset of the limitation action does not divest a district court of jurisdiction nor have effect upon the six month statute of limitations.102
        A person who files a claim in the limitation proceeding can move the court for an increase and an appraisal of the value of the owner’s interest in the vessel. The shipowner may also move the court to reduce the limitation fund if it is found to be in excess of post-loss value of the vessel.103 The district court must then order an appraisal and may order an increase or reduction in the security.104
        1. The Value of the Vessel
          First and foremost, the limitation fund must consist of the value of the offending vessel at the end of the voyage. The value of the vessel at the end of its voyage is the vessel’s reasonable market value.105 In cases where the underlying casualty renders the vessel a total loss, the limitation fund would be zero dollars.106 Only one limitation fund is created regardless of the number of incidents per voyage.107 On the other hand, if the vessel suffers casualties on multiple voyages, a limitation fund must be established for each voyage.
        2. Flotilla Doctrine
          In certain circumstances, there has been an exception to the “one vessel, one limitation fund” rule. The “flotilla doctrine” provides that “when vessels are engaged in a common transportation enterprise they should often be considered one vessel for limitation purposes.”108 This doctrine applies mostly in tug and barge as well as dredge and supply boat casualties. Therefore, if two vessels are contractually engaged in an operation and either vessel injures a person (or causes damage to another vessel or property) who has some contractual relationship with the enterprise, the value of the vessel for purposes of establishing a limitation fund will be both the post loss value of the tug and barge. For example, the values of a dredging vessel and its supply vessel which are under common control will constitute the limitation fund for a case involving an injury to a crewmember on a dredger. It must be remembered that the flotilla doctrine only applies when there is some contractual relationship between the vessel owners and the injured party.109 Only claimants actually in privity of contract, including employment contracts, are allowed to enlarge the limitation fund under the flotilla doctrine.110 In a situation where the injury is to a third person to whom the shipowner owes no contractual obligation, only the actively responsible vessel will be the vessel for limitation purposes.111 This is commonly referred to as the “pure tort” rule.
        3. Insurance Proceeds
          The vessel’s hull insurance proceeds are not included in establishing the limitation fund.112 Though hull insurance does not factor into setting the limitation fund, some courts have ordered protection and indemnity (“P&I”) insurance proceeds to be included in the limitation fund.113 These cases have been widely criticized and the majority of jurisdictions hold that P&I insurance proceeds should not be factored into the limitation fund.114
        4. Shipowner’s Right to Damages from Third Parties
          The petitioning shipowner’s rights under tort law to damages against third parties for damage to the subject vessel arising out of the casualty are also to be included into the limitation fund.115
        5. Seagoing Vessels
          In situations where the claim is for personal injuries or death, section 183(b) provides for an increase of the limitation fund of $420 per gross ton. This additional $420 per ton only applies to “seagoing” vessels. A seagoing vessel for purposes of the limitation act does not include “pleasure yachts, tugs, towboats, towing vessels, tank vessels, fishing vessels, canal boat, scows, car floats, barges, lighters, or non-descript non-self-propelled vessels…”116 When faced with the inquiry to determine whether a particular vessel is "seagoing" under section 183(b) and not exempted by section 183(f) the court must determine whether the vessel does, or is intended to, navigate in the seas beyond the Boundary Line in the regular course of its operations.117 These operations may in fact proceed on either side of the Boundary Line;118 but the court must find that, considering the design, function, purpose, and capabilities of the vessel, it will be normally expected to engage in substantial operations beyond the nautical boundary.119
        6. Pending Freight
          The Limitation Act requires that the value of the vessel’s pending freight be included in the limitation fund.120 Pending freight has been interpreted to mean the “freight for the voyage” on which the casualty for which limitation is sought.121 “Freight,” in the context of the limitation act, refers to the compensation paid to the vessel owner for the carriage or cargo or other service performed by the vessel.122
          With respect to vessels engaged in contracts of carriage and towing, this is limited to freight that can be earned only by the vessel or vessels completing the voyage. This includes freight prepaid if, under the terms of the contract of carriage, the freight is not to be returned even if the voyage is not completed.123 In the case of other vessels employed in a contractual enterprise, courts have held that freight may include the entire value of the contract for the voyage at issue.124
      7. Stay, Monition Period and Concursus
        One of the most attractive benefits of bringing a limitation proceeding is the stay of all pending proceedings and monition to bring all claims arising from the underlying casualty in concursus before the federal district court. Once a limitation action is filed and security is deposited, the Federal District Court must enter an injunction on the further prosecution of claims brought against the shipowner arising from the subject casualty.125 The court will also establish a “monition” period during which all claimants must file their respective claims in the limitation action under penalty of default. This “concursus” of claims allows all actions rising out of a marine casualty to be adjudicated in a single proceeding. Such a concursus provides a great benefit to the shipowner by requiring all potential litigants in a singular federal forum as opposed to defending multiple claims in several jurisdictions.
        1. Claims Subject to the Stay and Concursus
          Claims subject to the concursus include all claims brought by individuals as well as claims brought by state governments which are limitable under the Act.126 Though the stay and concursus order will stay any pending actions within the United States and require the filing of a claim in the limitation proceedings, it does not have effect outside the United States.127 Further, claims subject to arbitration have been found to fall outside the concursus order. In Mediterranean Shipping Co. v. POL-Atlantic, the Second Circuit reversed a trial court’s order that the Limitation Act required concursus of call claims against the vessel owner and demise charterer, including indemnity claims for breach of a vessel sharing agreement between the demise and slot charterer which provided for arbitration of any dispute arising from the contract. 128
        2. Shipowner’s Obligation to Provide Notice of the Monition Period
          Once the stay and monition period have been ordered, the shipowner must provide notice of the stay and monition to all potential claimants of the casualty.129 Notification is accomplished by publishing the stay and monition order in a newspaper of general circulation in the area where the action was filed.130 The notice must appear in the publication once a week for four (4) consecutive weeks prior to the date fixed for the filing of the claims in the limitation proceedings.131 Further, the notice must be mailed to each person known to have made a claim against the vessel or owner arising from the subject voyage no later than the day of second publication.132 In the case of death, notice must be mailed to the decedent at the decedent’s last known address and also to any person who is known to have made any claim on account of such death.133
          The practitioner should obtain an affidavit of publication from the newspaper and file a notice of publication with the court. Further, it is good practice to mail the notice via certified return receipt mail in order to maintain a record that the notice was mailed. The court may require these documents to support motions for default and judgment on default against all claimants who failed to join the limitation proceedings.
        3. Claims Filed After the Monition Period
          Courts have wide discretion in prolonging the monition period in order to allow late claims. The test for whether the court should allow a late claim is whether the limitation action is still pending and undetermined and the interests of the parties will not be adversely affected by the late filing.134 The lack of actual notice of the proceedings may also be sufficient for a claimant filing a late claim.135 Furthermore, evidence that the claimant did not speak English or that they lived outside the area of publication will most likely provide cause for the district court to allow a late filing.136 Even satisfactory notice could be grounds for leave to file a late claim if the district court, upon receiving an affidavit stating the reasons for the late filing, concludes that the balance of the equities favors the late claimant.137 A motion to file a late claim should set out the reasons why the Claimant was not able to comply with the monition period and be supported by affidavit. 138 Should the late filing claimant fail to establish sufficient cause to enlarge the monition period, the claim will be defaulted without an adjudication on the merits.139
        4. Shipowner’s Obligation to Provide Notice of all Claims
          Within thirty (30) days after the expiration of the monition period the shipowner must mail a notice to each claimant who filed claims in the limitation proceedings advising them of: (1) the name of each claimant, (2) the name and address of the claimant’s attorney (if the claimant has an attorney), (3) the nature of each claim brought in the proceedings, and (4) the amount of each claim.140

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