Principles of Liability Limitation

Shipowners are generally entitled to limit their liability in respect of claims arising from damage caused by their ships. This means that if a ship is involved in an incident which causes damage to persons, property or the environment, there is a limit on the maximum amount of compensation that a court can order the shipowner to pay. The maximum liability of a shipowner is usually calculated based on the size of the ship involved in the incident and has no relationship to the amount of damage caused by the incident.

The rationale for allowing shipowners to limit their liability in respect of ship-sourced damage is to encourage shipping and trade. This involves balancing the competing objectives of compensating anybody who suffers loss or damage caused by shipowners or their representatives, while ensuring that shipping remains a profitable venture. There have been laws limiting liability of shipowners since at least the early 18th century, with the first such English laws being introduced in 1733. Traditionally these laws have favoured the shipowner, to the detriment of claimants.

Limitation of liability is now governed by a number of Conventions adopted by the International Maritime Organization (IMO). There has been a trend in the more recent Conventions to establish systems of determining liability to pay compensation for damage, in addition to providing a limit on the shipowners liability. This represents an attempt to address the imbalance between protecting shipowners and providing compensation to persons suffering loss caused by shipping.

Many of these Conventions now impose strict liability to pay compensation to persons suffering damage or loss involving ships on the shipowner. This means that shipowners will be required to pay compensation for damage caused by their ships, without the need for the claimant to prove that the damage was caused by recklessness, negligence or acts committed by the shipowner with intention to cause damage. This development allows persons suffering loss to claim compensation without having to resort to lengthy litigation to prove fault or negligence on the part of the shipowner. These Conventions also require shipowners to be insured to cover their liabilities and provide for “direct action” that is, allow claimants to claim damages directly from the shipowner’s insurer.

Liability limits in IMO Conventions are expressed in Special Drawing Rights (SDR). The SDR is an artificial currency unit. The value of the SDR is calculated by the International Monetary Fund (IMF) on the basis of a weighted basket of four currencies: US dollar, euro, Japanese yen, and UK pound. The four currencies and their relative weightings are revised by the IMF every five years.