Spanish decision bucks liability limit rights

By Stacey Fraser*

A shipowner’s right to limit liability is a well-known feature of international maritime conventions.

The right to limit liability exists unless it can be proved the loss resulted from the shipowner’s “personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”.

The limitation amount is determined according to the ship’s tonnage. The test, as first set out in the 1976 Convention on Limitation of Liability for Maritime Claims (LLMC), changed the previous position on the right to limit which required shipowners to first prove the loss did not arise from the shipowners’ “fault or privity”.

Actions against insurers

The right to limit liability under the LLMC, often referred to as “almost unbreakable”, was effectively adopted in all IMO conventions dealing with liability and compensation, including oil pollution claims from tankers (Civil Liability Convention); bunker spills (Bunker Convention); hazardous and noxious substances (HNS Convention); wreck removal liabilities (Nairobi Convention); and passenger claims (Athens Convention).

The conventions all:

• impose strict liability (with limited exceptions)
• require shipowners to hold mandatory financial security or insurance for the relevant liability up to the relevant limit
• enable claims to be brought directly against insurers, thus avoiding the “pay to be paid” clauses in P&I Club rules.

Protections for insurers

Each convention contains express protection for insurers. Each is clear that an insurer’s liability will always be limited, according to the limitation provisions, even when an owner is not entitled. The principle has been described as essential to the effective operation of the liability and compensation regimes and the availability of insurance.

However, its application in practice came under scrutiny after a Spanish Supreme Court decision on the ship Prestige. About 63,272 tonnes of heavy fuel oil was spilled when Prestige broke in two off the coast of Spain in 2002.

The oil had a significant impact on fisheries, aquaculture and tourism businesses in Spain and France. Extensive clean-up and preventive measures were conducted in both countries.

In January 2016, the Supreme Court overturned earlier decisions and found the master criminally liable. It determined the shipowner had lost the right to limit liability and held the insurer directly liable to the full insurance policy amount of US$1 billion, rather than the limits provided under the CLC Convention.

Unsurprisingly, the decision caused disquiet in insurance circles. Discussions on the need for consistent application of the convention requirements, the relevance to the availability of insurance, and for certainty in the insurance market have been on-going since.

The problem in New Zealand

New Zealand has not properly implemented the convention requirements to protect insurers of oil tankers subject to the CLC regime.

Domestic legislation is ambiguous (at best) on the right of an insurer of a “regulated ship” to limit liability where the shipowner has lost the right of limitation, but does not provide any right to limit liability for insurers of most oil tankers at all, exposing them to the risk of liability beyond the CLC Convention limits.

That also means New Zealand is in breach of its obligations at international law to properly implement an international convention to which it is a party.

There are some signals the NZ Ministry of Transport may remedy this in the future, however the opportunity to achieve that under the Maritime Offshore Amendment Act that came into force on 1 January 2020 was missed.

* Stacey Fraser is an associate with McElroys in Auckland. This is an edited version of an article that appeared on McElroys’ website.