2 The historical background of the limitation regime and the underlying rationale
Although there is some debate as to how far back we can trace rules on limitation of liability for shipowners,(1) Norman A. Martínez Gutiérrez, Limitation of Liability in International Maritime Conventions, London and New York 2011, p. 5. we can safely trace the concept back to the Middle Ages.(2) Gutiérrez 2011 p. 5 and Erling Selvig, “Rederansvaret. § 4 – Del I. Ansvarsbegrensning” MarIus 1977, nr. 25, pp. 1–43, p. 4. As pointed out in section 1.1 above, maritime adventures have always been, and still are, particularly perilous. When combining the perilous nature of maritime adventures with the potential high value of the goods being transported, it is easy to see that a marine casualty could be economically ruinous for a shipowner, thus making the relative risk/reward ratio discouraging for the individual shipowner.(3) Before the introduction of the well-functioning limitation regimes we know today, it was not uncommon for the shipowner to “go down with the ship” (unfortunately in many cases this happened both literally and metaphorically). However, because transport by sea was the backbone of global trade, and global trade was regarded as important for the prospering of individuals and nations, various forms of limitation regimes developed to incentivise shipowners to continue carrying out their business.(4) For a more detailed description of the various older limitation systems see Gutiérrez 2011 pp. 15ff with further references. What we see from this is that societies´ interests in trade as a whole were valued through these various limitation regimes at the expense of the individual “cargo owners” or other interested parties. Somewhat crudely, we can say that the underlying rationale for all of the various systems was a form of economic efficiency-thinking.
As shipping is by nature border-crossing, it is in general unfortunate that the applicable rules vary between different jurisdictions. One issue is that the varying rules make dispute resolution more complicated, another and more unfortunate issue with varying rules, is that it incentivise shipowners to go forum shopping in the jurisdiction with the most favourable law. The first effort to unify the limitation regimes led to the 1924 Brussels Convention,(5) International Convention for the Unification of Certain Rules Relating to the Limitation of the Liability of Owners of Sea-going Vessels 1924. but this received little international support, i.a., because it was based on a compromise between various limitation regimes. Improvement was made with the next international effort in the 1957 Brussels Convention.(6) The International Convention relating to the Limitation of the Liability of Owners of Seagoing Ships 1957. This convention´s approach to limitation of liability formed the basis for the LLMC. The 1957 Brussels Convention, similarly to the 1924 Brussels Convention, set out a list of claims for which liability could be limited by the shipowner, but more importantly, it was based on a system whereby the shipowner´s liability was calculated on the basis of the relevant ship´s gross tonnage, with the calculation being tied to the Franc Poincaré. With the 1957 Brussels Convention the limitation amount increased, and the view on the justification for limitation for shipowners as a concept slightly changed. Whereas the previous systems “protected” the shipowners additionally against minor accidents and marine casualties, the new higher limits only gave protection for the more catastrophic events. The view was that safety at sea had improved and the shipowner could obtain security by insuring his liability. However, as marine casualties´ damage potential is significant, liability for such more catastrophic events should be limited, since this was generally seen to be uninsurable.(7) Sjur Brækhus, “Det begrensede rederansvar”, Norsk Forsikringsjuridisk Forenings Publikasjoner 1947, nr. 22, pp. 1–26, p. 17.
Despite the 1957 Brussels Convention being more successful than its predecessor, increasing inflation ate away at the real value of the limitation amount available for the claimants, and following the Torrey Canyon tanker incident on 18 March 1967, which led to a massive oil spill, the limitation limits were generally regarded as too low.(8) Cf. i.a. NOU 1973: 46 p. 5. Because of oil tankers´ significant damage potential, a separate limitation system for crude oil spill was agreed to in the 1969 Oil Pollution Liability Convention (the “CLC”).(9) The International Convention on Civil Liability for Oil Pollution Damage 1969, “renewed” by The International Convention on Civil Liability for Oil Pollution Damage 1992. However, the significantly higher limitation limits under the CLC only alleviated the situation for those scenarios where shipowners were from member states to that convention and the damage was caused by crude oil spill, with the consequence that shipowners from member states to the 1957 Brussels Convention still enjoyed the lower limits under the latter convention. The result was the LLMC in 1976. Compared to its predecessor, the LLMC entailed much higher limitation limits.
During the discussions that led to the LLMC, it was emphasised that the insurance market had developed, making much higher losses insurable.(10) Cf. i.a. NOU 1980: 55 p. 10. The reasoning in relation to the limitation limits was that these limits should be as high as possible, albeit not so high that shipowners would be unable to bear the insurance premium costs.(11) See e.g. the statements by Netherlands and Canada in Francesco Berlingieri, The Travaux Préparatoires of the LLMC Convention, 1976 and of the Protocol of 1996, p. 22. (The book is available here: https://comitemaritime.org/wp-content/uploads/2018/05/Travaux-Preparatoirse-of-the-LLMC-Convention-1976-and-of-the-Protocol-of-1996.pdf )
Similarly to the 1957 Brussels Convention, the inflation rates increasingly caused the limitation amounts under the LLMC 1976 to be of less real value.(12) Berlingieri p. 480. The result was the 1996 Protocol to the LLMC, which increased the liability limits and contrary to the LLMC, has a procedure making it easier to increase the limitation limits where necessary.(13) As emphasised by Selvig 2022 p. 93, the 1996 Protocol was in reality a completely new convention. The latest increase of the limits entered into force in June 2015.
Even more so than under the 1957 Brussels Convention, the limitation system was seen as being tightly linked to insurance. The reasoning was, and still is, that shipowners should be able to bear the costs of insurance premiums, and the flip side of this coin is that insurers then know their maximum potential liability per casualty. What might at first glance seem somewhat paradoxical is that by having the limitation regime we have today, claimants after a marine casualty are in general put in a better position than they would have been without the limitation regime. Without the regime, shipowners could easily have organised their business so that the only asset available for the claimants was the vessel, and even if the shipowners’ liability were unlimited, this would then be cold comfort in instances where the vessel lay at the bottom at the ocean.(14) With the vessel often mortgaged close to full value, with other creditors making their prioritised claims against the shipowners. With the limitation regime, shipowners are able to obtain insurance and where the relevant shipowner is insolvent, claimants can make direct action claims against the insurer(s).(15) Under Norwegian law, this follows from the Norwegian Insurance Act sections 7-6 and 7-8, but internationally, and related to our issue, one would have to look to CLC 1992 art. 7 no. 8, International Convention on Civil Liability for Bunker Oil Pollution Damage 2001 art. 7 no. 10 and the Nairobi International Convention on the Removal of Wrecks 2007 art. 12 no. 10.
Although it is evident that the view on the underlying justification for allowing shipowners to limit their liability has changed slightly, this brief historical enquiry shows that the regimes have always been based on rationality in the form of economic efficiency. Today, the justification is that limits are necessary in order to make shipowners’ liability insurable. The fact that insurability is the underlying justification for the limitation regime under the LLMC, is important to bear in mind when interpreting the rules, in order to avoid interpretations that negatively affect the insurability. The rules are based on a more or less coherent system on which the insurers once again base their insurance. In addition to being regarded as economically efficient, this also provides security for claimants. Courts and arbitrators should therefore be careful with construing the rules to be “fair” in an individual case, as this might have unintended consequences for other rules under the system. This could make the result in another case “unfair”. This is why judges and arbitrators should refrain from having regard to “individual fairness” when interpreting the limitation rules.