What the Heck Is “Privity”? Is the Limitation of Liability Act Still Relevant?

Mainbrace | September 2016 (No. 4)

Jeffrey S. Moller

In the aftermath of a major shipping disaster, a vessel owner may be expected to exercise its right to file a petition to limit its liability in accordance with the U.S. Shipowner’s Limitation of Liability Act, 46 USC §30501, et seq. This may evoke negative press and social media reaction with a now-familiar refrain: Why should a shipowner escape full liability for a disaster by hiding behind a 19th-century (i.e., outdated, antique, and ancient) statute? One might well ask whether the Limitation Act has outlived its usefulness, but this author’s belief is that the statute need not be repealed. Modern safety management systems, communication systems, and vessel tracking systems have served to make it far more difficult for owners to limit their liability, and the procedural benefits of the statute are helpful to all concerned. It may, however, be time for the United States to become signatory to the existing up-to-date international treaty on a limitation of liability.

What Is the U.S. Limitation of Liability Act?

The U.S. Limitation of Liability Act was passed in 1851, modeled upon an English statute existing since 1734, a time before corporations had come into routine and legally respected use. The modern corporation is now a very common form of limitation of liability. Although under certain circumstances one can “pierce the corporate veil” and impose liability directly upon the shareholders of a corporation, for the most part the corporate form of business organization is well-established and unquestioned today as a means by which investments can be made without imperiling other assets. Essentially, the Limitation of Liability Act provides the same type of protection as does the corporate form. It can serve to protect assets other than the amount of capital invested into a particular ship. It provides a means of “breaking” limitation that is arguably less difficult than piercing the corporate veil, allowing for limitation only if the cause of the disaster was without the “privity and knowledge” (i.e., the direct involvement) of the owner’s shoreside management. The U.S. Limitation of Liability Act is thought to be onerous primarily because, in its basic form, the statute can limit the vessel owners’ liability to the value of the vessel after the incident. There have been infamous cases where after a vessel sinking the only thing recovered is a life raft. Considering the fact that hull insurance proceeds are not a part of the limitation fund and that protection and indemnity (“P&I”) insurance exists universally, allowing the shipowner (and its insurers) to escape scot-free can appear to be grossly inequitable. The U.S. statute was amended after a notable 20th-century passenger vessel disaster to assure some minimal recovery to victimized passengers even in a total loss situation, but has not otherwise been substantially changed since its passage.

Why Was the Act Passed in the First Place?

According to the legislative history, the statute was enacted in order to encourage capital investment in U.S.-flag shipping at a time when, not unlike the present, the amount of capital required to purchase and equip a ship was relatively large and the profit margins relatively thin. As indicated above, it was modeled upon an English statute. U.S. owners had complained that the laws in other countries provided limitation protection for their shipowners, which created a non-level playing field. Encouraging private investment in the shipping industry also had a defense-related purpose that is arguably as important now as ever. In times of war, the movement of men and material to and from theater is most often performed by commercial vessels that are chartered to (or commandeered by) the U.S. government. Unless a sizeable commercial U.S.-flag fleet exists in peacetime, there could be significant problems coping with an outbreak of hostilities.

Most other modern seafaring nations have replaced their domestic statutes and become signatories to an international treaty (or convention) (first formed in 1957 and most recently amended in 1996) that limits shipowners’ liability. Clearly, there remains a global consensus that allowing shipowners to limit their liability in certain circumstances can serve worthwhile purposes. Of course, the amount of the limitation fund under that international convention, as recently amended with effect in 2015, is substantially greater than that under U.S. law. The international convention does not allow the owner to limit its liability to the post-casualty value of the vessel, but instead requires a minimum fund based upon the vessel’s tonnage. The owner of a 50,000 GRT vessel could, under the current convention, be required to pay an amount in excess of $42 million, even if it succeeds in proving an absence of causative privity/knowledge. On the other hand, as discussed more fully below, it is generally considered much more difficult to “break” limitation under the Convention than under the U.S. Limitation Act.

One key procedural benefit of the U.S. Limitation Act is the so-called “concursus” of claims. In order to exercise its right to limit liability, the vessel owner must file a petition and create a fund within six months of the receipt of notice of a claim. The court then issues an injunction order staying any and all other existing litigation and requiring all potential claimants to file their claims in one forum. This “concursus” is a sort of reverse class action that can avoid the expense of multiple litigations and the risk of inconsistent verdicts. It also assures that the limitation fund will be distributed in an equitable way among all claimants.

Privity and Modern Technology

The antiquated language referring to “privity and knowledge” has been roughly translated for modern purposes as “participation and control.” The time-tested legal axiom is that “control is the sine qua non of liability.” In other words, it is only appropriate to blame someone for an outcome if they had substantial control over the precipative events. In the days when the limitation of liability statutes were initially passed, it was understood that an owner had a duty to make its vessel seaworthy, but lacked effective control over the vessel once at sea. It was therefore thought that the owner ought not to be liable beyond the value of its investment in the ship for the independent negligence of the captain and crew. (A similar principle is embedded in the U.S. Carriage of Goods by Sea Act.) In days when communication with a ship at sea was impossible and knowledge of the ship’s whereabouts sketchy, the shipowner very often lacked privity or knowledge with respect to the occurrence of an accident. Today’s shipping world is much different, of course. AIS tracking devices and transponders accessible by a cellphone “app” make it possible to know a vessel’s whereabouts, course, or speed at any time anywhere in the world. Modern voyage planning tools, including weather routing systems, make it difficult to claim that bad weather is unforeseeable from shore. And modern communication devices, including e-mail, cellphones, and satellites, make it difficult for an owner to claim that it had no effective means by which to direct the ship’s master in real time, though, of course, the master remains initially responsible for the navigation of the vessel.

It may therefore be said that a shipowner’s right to limit liability has been so severely circumscribed by recent technological events, that the U.S. statute need not be repealed. The potential for an “inequitable” result is severely limited and the statute’s procedural/judicial benefits are of continuing value. And the owner who can truly prove that it was without any control over the cause of an accident should still be afforded limitation.

There may be good arguments that, given the existence of hull and P&I insurance, it is time for the United States to join with the other leading seafaring nations in signing the existing international convention in order to assure a certain minimum recovery to victims in total loss situations involving onboard negligence. Given our beloved country’s propensity to go its own way with respect to such treaties, however, the author is not inclined to hold his breath.