The Limitation of Liability Act By Jeffrey A.  Weiss      This brief article is about a federal maritime statute that remains controversial to this very day, despite being 143 years old. Under the Limitation of Liability Act of 1851, a shipowner can limit its liability, arising out of' a marine casualty,  to the value of the vessel and its pending freight. This amount can be zero. This “limitation fund” becomes available for distribution to claimants, should the vessel's owners become liable for the losses sustained. Under American law, the owner of a vessel or the owner of a vessel pro hac vice (typically a bareboat charterer) may petition for limitation of liability. A time or voyage charterer may not. The Limitation of Liability Act can benefit a vessel's owner when the amount of claims arising out of a casualty or accident exceeds the  limitation fund. While most claims are subject to limitation (collision; cargo loss, personal injuries etc.), the owner of a vessel may not limit its liability with respect to certain types of claims. Most notably, pollution liability pursuant to OPA 90 is not subject to limitation. Neither are outstanding crew wages. Similarly, compulsory wreck removal expenses arising out of the Wreck Act may not be limited by the Act. Other exceptions have been carved out by the courts, given " the prevailing view that limitation of liability is unfair”. An Incentive to Invest The Act was established by Congress to promote investment in American commercial shipping. Ocean transportation is inherently risky. In the middle of the nineteenth century, liability insurance cover, in the nature of present day P and I, was not widespread. Additionally, the protection of an investor's personal assets from business liabilities, by use of the corporate form, was essentially undeveloped. The Act was established to create an incentive to invest in American shipping. In essence, the purpose of the statute is to permit a vessel owner to limit its liability to no more than the extent of the owner's financial interest in the vessel after the casualty. The following is a brief description of the nature of the limitation  proceeding and a summary of the chief arguments that have been made for and against the continued survival of the statute or its repeal. The Limitation Proceeding The owner of a vessel commences the limitation proceeding by the filing of a complaint, usually in the United States District Court, in which the owner requests to be completely exonerated from liability, or in the alternative, to limit its liability to the value of the vessel (fair market value after the casualty or accident) plus her freight, even if the combined sum is zero. The complaint under most circumstances must be filed no later than six months after the vessel's owner receives written notice of a prospective claim. The six month rule is sometimes relaxed. However, owners are advised that it is prudent to commence the limitation proceeding within the six month period.       The Court will subsequently require the owner of the vessel to deposit a bond, or some other form of security, with the Court in the amount of the limitation fund. The Court will then issue a "monition," which is essentially a Court order enjoining the prosecution of civil lawsuits against the owner in other judicial forums. Thus, the limitation proceeding is also a device in which the vessel's owner can have all claims arising out of the disaster consolidated before one court. The Court will then order the vessel's owner to publish notice of the limitation proceedings in the newspaper, usually once a week for four weeks. It will also require the owner to notify all prospective claimants (bill of lading holders, passengers, etc.), in writing, that limitation proceedings have been commenced. Claims will subsequently be made by injured parties against the fund. It will then be determined whether the owner should be exonerated from liability completely or whether the owner is entitled to limitation. Exoneration, of course, will result if the owners were not legally responsible for the casualty. If owners are not exonerated, then the owner's right to limitation will depend upon owner's "privity and knowledge," language in the Act that has become the focus of the statute. Conditions for Granting Limitation Limitation of liability will be granted if the owner did not have "privity and knowledge" of the causes of the casualty. Specifically, the statute provides that an owner can limit its liability with respect to claims by cargo, or for collision or personal injury or death "done . . . or received without the privity and knowledge of such owner." This is a question of fact to be determined on a case﷓by﷓case basis. However, the recent trend has been to enlarge the scope of activity within the shipowner's privity and knowledge. In other words, courts do not liberally allow limitation because of its perceived unfairness. Let us look at some examples. Case Study #1 In the matter of the M.V. TUXPAN (which interested readers may review at 1991 American Maritime Cases [AMC] 2432), the corporate shipowner was denied limitation when the facts concerning the vessel's unseaworthiness were clearly within the knowledge of the corporate shipowner's managing officers and supervising employees. TUXPAN mysteriously disappeared with her $22 million cargo and her 27﷓man crew, while enroute from Bremen to Vera Cruz. The evidence presented at the limitation proceeding indicated that the company's employees had knowledge of the vessel's structural problems, which included defective welds and brackets. Nevertheless, she was allowed to proceed to sea. Case Study #2 Limitation was also denied in the matter of the FERRY A. REGINA (1990 AMC 557). She foundered helplessly after striking a reef near Mona Island because of a navigational error committed by the Master. There were numerous personal injury claims brought against her owners. Owners petitioned for limitation of liability because it was readily apparent that the value of the vessel was far less than the outstanding claims. Limitation was denied. The owners of that vessel had insisted that the Master work a relentless schedule, with little vacation time and almost no rest whatsoever prior to her last voyage. The Court found that the Master's fatigue was causally connected to the stranding. The Court ruled that the owners, having been privy to the Master's weakened condition, should not be able to limit liability. As stated in one case, the purpose of the Limitation of Liability Act is to protect the "physically remote owner who, after the ship breaks ground, has no effective control over his waterbome servants." In this age of modern telecommunications and transportation, in which an owner can remain in constant communication with a vessel, and dispatch representatives, if necessary, to every port of call, the demand for such a statute seems tenuous at best. However, the statute remains on the books and limitation, although difficult to obtain, is possible. Case Study #3 One recent example involved the TUG CAPTAIN TAKE (1991 AMC 2875). This vessel had an allision with a railroad bridge causing some $800,000 worth of damage to the bridge. The vessel and her freight were valued at around $500,000. Owners petitioned the federal court for limitation of liability. The evidence indicated that the allision was due to the Master's failure to acquaint himself with local currents and tidal conditions before attempting the transit. However, the Master was in all other respects competent and the vessel was in no respect unseaworthy. The Court ruled that the owners had no privity and knowledge of the casualty's cause and limitation was granted. Courts have somewhat consistently held that the Act applies to pleasure vessels. The inclusion of pleasure vessels seems rather alien to the original legislative purpose of cultivating investment in shipping. In fact, one commentator states that it is unlikely that Congress, in 1851, could "have envisioned the widespread ownership and use of recreational vessels in this century, just as it could not have foreseen other fundamental changes such as corporate ownership of commercial vessels or the availability of marine liability insurance." Thus, many favor exclusion of pleasure boats from the Act. Nevertheless, limitation is available to pleasure boat owners and should be considered when it becomes apparent that claims arising out of a casualty may exceed the vessel's value. Case Study #4 For example, let us examine the matter of the SLOOP LOVE MACHINE (1975 AMC 2071), which was a noncommercial pleasure vessel that suffered an engine flash fire, causing burn injuries to her passengers. The vessel was valued at around $20,000 (obviously no freight was involved), far less than the outstanding injury claims. The fire was caused by a defect in the installation of a fuel tank. The vessel's owner had obtained reports from surveyors indicating that the tank was defect free. Limitation was granted by the Court, which ruled that the owner of the sloop had no privity and knowledge of the defect. Assuming owners are liable and limitation is granted, then the claimants will recover on a pro rata basis, from the limitation fund and cannot recover more. Courts will not necessarily follow the distribution approach used when disbursing the sales proceeds from 'a maritime lien foreclosure. At times, for equitable reasons, a Court will distribute the fund so that one or more parties are remunerated in full. If limitation is not granted, claimants may recover from the fund and then seek additional recovery from the owner's personal assets, up to the full value of their respective claims. Criticism of the Act The Limitation of Liability Act is routinely criticized as unfair and anachronistic. It is argued that while perhaps it initially served its purpose - that is, to make nineteenth century American shipping more competitive, it has since lost its attraction. The wide spread use of P and I cover and the corporate form has offered shipowners layers of protection unknown in 1851. In fact, since P and I cover operates on a “pay to be paid" basis (meaning it is pure indemnity), the real benefits of the Act inure to the Clubs, and only indirectly to its members. This has resulted in bitter protests. As a result, strict interpretation of the statute is a rule. Courts appear to bend over backwards to deny limitation. Yet, despite its almost universal condemnation by commentators and the Courts, the Act has not been repealed by Congress. Others argue that limitation is fair given the unusual risks associated with sea passages and the peripatetic nature of vessels. Marine casualties can be catastrophic. The limitation regime continues to promote investment in shipping, which is necessary for a robust economy. Therefore, some method of diminishing liability is necessary when the vessel owner's personal neglect or default was not a cause of the casualty. It is noteworthy that limitation is not a uniquely American maritime legal concept. An international convention exists (U.S. not a party) which provides for an owner's right to limitation under certain circumstances. In this convention, the fund available for distribution to claimants is not tied to the owner's financial interest in the vessel but is based upon a formula, (certain sum per ton of vessel). Generally, the limitation fund will be greater under the international convention. There is significantly more to the statute that cannot be covered in this brief article. However, you should be aware that limitation of liability remains alive and well in the United States, under certain circumstances, whether you own a commercial or pleasure vessel.