MSC Flaminia: UK Supreme Court takes the opportunity to clarify how limitation works between owners and charterers

Christopher Garley
Holman, Fenwick & Willan, London
christopher.garley@hfw.com  

On 14 July 2012, while en route from Charleston, South Carolina to Antwerp, Belgium, an explosion and subsequent fire occurred in cargo hold number 4 of the container ship 'MSC Flaminia' (the 'Vessel'). This tragic incident resulted in loss of life and substantial financial losses for the owners and their insurers. Following an arbitration award of approximately US$200m in favour of the owners, MSC (the 'Charterers') sought to limit their liability under the 1976 Convention on Limitation of Liability for Maritime Claims ('LLMC 1976').

While the Charterers acknowledged that some losses were not limitable, they aimed to limit liability for:

• the costs of discharging and decontaminating the cargo;
• the costs of removing firefighting water from the Vessel's holds;
• payments made to national authorities for pollution prevention measures; and
• the costs of removing burnt waste material from the Vessel.

The owners argued that none of these claims were limitable as they did not fall within the scope of Article 2.1 of LLMC 1976.

'Single claim' analysis

The High Court rejected the owners' argument that LLMC 1976 implied a distinction between 'insiders' (those within the definition of 'shipowner' in Article 1.2 of LLMC 1976) and 'outsiders' (any other person bringing a claim), which would prevent the Charterers from limiting their claims. However, the court held that the owners' claims could be characterised as a 'single claim' for damage to the Vessel and consequential loss, and therefore not a limitable loss under Article 2.1 (applying CMA Djakarta). The admiralty judge found that the expenses in question were incurred to repair the Vessel, as all material on board had to be removed and disposed of to allow for repairs.

The Charterers appealed the decision and the owners cross-appealed. The 'insider/outsider' argument was refined, contending that a charterer can limit its liability against a shipowner only for liabilities originating outside the group of entities defined as 'shipowners' in Article 1.2. The Court of Appeal accepted the owners' submission, holding that LLMC 1976 was not intended to extend a charterer's right to limit liability beyond what was already granted, which did not include claims by an owner for losses suffered by the owner itself.

Supreme Court

Given the importance of the issues raised, the United Kingdom Supreme Court gave permission to appeal. Between the filing of the appeal and the appeal being heard, the commercial disputes between the parties were settled. Given the importance of the issues raised, the Charterers wished for the Supreme Court to hear the appeal. The two central issues were:

• whether a charterer can limit its liability for claims by an owner for losses originally suffered by the owner itself ('Issue 1'); and
• whether any of the owners' claims fall within Article 2.1 of LLMC 1976 and, if so, whether the fact that they result from damage to the Vessel means there is no right to limit ('Issue 2').

The Supreme Court, with Lord Justice Hamblen giving the leading judgment, found no justification for distinguishing between 'insiders' and 'outsiders' within the language of LLMC 1976. The Court held that such a distinction would require an unstated bar on limitation, giving the word 'claims' an unmerited gloss. The Court also addressed the issue of whether a charterer claiming the benefit of limitation through a fund intended to cover both the owner and charterer would lead to the absurd result of a party constituting a fund potentially paying out its own claim. The Court referenced the earlier CMA Djakarta decision, holding that claims for loss or damage to the ship and consequential losses are not limitable under Article 2.1(a).

The Court rejected the Charterers' argument that the losses were consequential on cargo damage and therefore limitable under Article 2.1(a). It clarified that the claim related to damage to the Vessel and the resulting losses, not to the cargo itself. As such, these losses did not fall within the scope of Article 2.1(a), reaffirming the position taken in CMA Djakarta

Under Article 2.1(f), the court dismissed the Charterers' submission that payments made to national authorities and the costs of removing firefighting water were limitable. These expenses were deemed necessary for repairing the Vessel and thus not subject to limitation. However, the Court acknowledged that where a cost is incurred to mitigate both vessel and cargo loss, it may be limitable if its primary purpose is to mitigate loss to the cargo.

Regarding Article 2.1(e), the Supreme Court upheld the Court of Appeal's (obiter) view that costs incurred in removing contaminated cargo could be limitable. It clarified that where LLMC 1976 permits limitation for a specific category of loss, the exclusion of that loss from Article 2.1(a) does not preclude its limitation under another provision, such as Article 2.1(e).

There will no doubt be debate in future cases regarding when property on board is so damaged and mixed with other things (eg, ship structures and firefighting water) that it can no longer be reasonably called 'cargo'. In that case, it may be that the CMA Djakarta principles will again come into play when Article 2.1 (e) is not so obviously applicable. How the decision would be applied in those cases is a matter for another day, and another set of facts. 

A note about the limitation fund

Much of the discussion in the Supreme Court dealt with the mechanics of administering a limitation fund in the context of a claim between owners and charterers who both benefit from limitation (and the same fund) as 'shipowners' for the purposes of Article 1. 

The Court also considered whether it would be absurd for a charterer to benefit from limitation via a fund intended to cover both the owner and charterer, particularly where the owner brings a claim against the charterer. Referring to the CMA Djakarta, the Court held that such a scenario does not lead to an absurd result, as claims for loss or damage to the ship and consequential losses arising from it are not limitable under Article 2.1(a). Therefore, owners are already protected from manifestly absurd or unreasonable outcomes.

Two main concerns were raised regarding the operation of Articles 9 and 11; first, that an owner claiming against the fund might effectively be paying its own claim; and second, that such claims could deplete the fund available to other claimants; the so-called 'pay your own claim' problem. The court dismissed these concerns, reasoning that if the owner claims against the fund, it is effectively recovering its proportionate share, which would otherwise be distributed to others.

Charterers also argued that the 'pay your own claim' issue does not arise, as a separate claim could be made by owners for the cost of establishing and distributing the fund. Although various examples were presented to support this point, the Court declined to rule on the matter further, stating it would only address it when a case involving such a claim is properly brought before it.

A consistent international limitation framework? Reconciling the decision in the Flaminia with the decisions in the Goliath and Star Centurion

The Supreme Court's analysis, and in particular the desire to stick as closely as possible to the language of LLMC 1976 without imposing any 'gloss' or special interpretation, may in part be explained by a desire to seek consistent interpretation of an international convention across all state parties to that convention. With that said, there is clearly scope for differing approaches when applying any convention. 

In Tasmanian Ports Corporation v CSL, the Full Federal Court of Australia considered whether CSL could limit its liability under LLMC 1976 for costs arising from the wreck removal of two sunken tugs following a collision involving the MV Goliath. Australia had exercised a reservation under Article 18 of the Convention to exclude Article 2(1)(d), which covers claims for wreck removal, from its domestic law. CSL argued that, even if Article 2(1)(d) were excluded, the claims could still be limited under Article 2(1)(a), which covers property damage and consequential loss.

The Court rejected this argument, holding that allowing limitation under Article 2(1)(a) would undermine the purpose of Australia's reservation. It endorsed the reasoning in Star Centurion (Hong Kong), confirming that claims falling within Article 2(1)(d) cannot be re-characterised under another head of claim to circumvent a reservation. The decision ensures that wreck removal claims in Australia are not subject to limitation, even if they might also fall within the scope of Article 2(1)(a).

Similarly, in the Star Centurion, the Hong Kong Court of Final Appeal (CFA) confirmed that an owner cannot limit liability for wreck removal costs under LLMC 1976, where doing so would undermine the effectiveness of Article 18(1) reservations. The CFA held that Article 2(1)(d) applies broadly to all wreck removal claims, regardless of the claimant's identity or legal basis. The key consideration is the factual link between the claim and the wreck removal. Although such claims might also fall within Article 2(1)(a), the CFA emphasised that Article 18(1) presumes the identifiability of Article 2(1)(d) claims, and its purpose is only fulfilled if such claims are excluded in full when a state makes a reservation.

The decision by the UK Supreme Court in the Flaminia presents an interesting contrast. There, the Charterers were permitted to limit liability for the costs of removing contaminated cargo under Article 2(1)(e), even though such costs were not limitable under Article 2(1)(a). In such a case, the 'general' exclusion from limitation (based on CMA Djakarta principles) was overridden by the 'specific' provision of a right to limit in respect of removing and rendering harmless cargo. The court clarified that exclusion from one head of claim does not preclude limitation under another, provided the claim fits within the scope of the alternative article. In fact, it also held that where a cost is incurred to mitigate both vessel and cargo loss, such cost will be limitable under LLMC 1976 if its primary purpose is to mitigate loss to cargo.
This approach might be seen as contrasting the Star Centurion and Goliath decisions, where the courts refused to allow the Shipowners to reframe wreck removal claims under Article 2(1)(a) to bypass the exclusion of Article 2(1)(d). 
The potentially divergent thinking in these decisions highlights a key tension in the interpretation of LLMC 1976; while the UK approach in the Flaminia allows for flexibility in categorising claims across different heads of limitation, the approach coming from Hong Kong and Australia might be seen as prioritising the integrity of reservations made under Article 18.