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LIMITATION OF LIABILITY
The Limitation of Liability Act, 46 U.S.C. §183, allows vessel owners to limit their liability for accidents to the value of their vessel under certain circumstances. The Act applies to commercial ships and pleasure craft alike. The value of the vessel is determined at the end of the voyage, and may be zero if the vessel is a total loss.
To seek protection under the Act, a vessel owner must petition a federal court within six months of the first written notice of claim. An attorney lien letter will usually trigger the six month prescription period, but other notices can start the clock running also. A prudent ship owner will not delay in seeking protection under the Act.
Federal rules dictate where a ship owner can initiate a limitation action. Once suit is filed against the ship owner, a limitation petition must be filed in the federal district where that suit against the ship owner is filed or where the ship has been arrested. If suit has not been filed against the ship owner, a limitation petition can be commenced in any suit where the vessel can be found.
Along with the limitation petition, the ship owner must deposit a sum equal to the value of the vessel plus interest and costs. Alternatively, the ship owner can post a bond for that amount. Courts have also been willing to accept a letter of undertaking from insurers in lieu of a deposit or bond. Once the petition is filed with appropriate security, the federal court issues a stay against all potential claimants precluding them from filing or pursuing claims against the vessel owner arising during that voyage in any other court.
Claimants seeking to hold the vessel or its owner liable must file their claims with the federal court in which the limitation proceeding is pending. If multiple claims are filed which together exceed the limitation fund, the case will be tried by the judge before whom the limitation action is proceeding. If only a single claim is filed, or if multiple claims are filed which aggregate less than the limitation fund, federal courts will usually, and often must, lift that stay against other suits, and allow claimants to proceed against the vessel owner in the forum of their choice. Stipulations by the claimants may be required, and the federal court will often hold the limitation action in abeyance to ensure that vessel owners are not held liable for any claims in excess of the limitation fund without a determination by the federal court regarding the right to limitation.
To limit one’s liability, a vessel owner must show that the fault on the part of the vessel or its crew contributing to the accident was not within the privity or knowledge of the ship owner’s managing agents. Navigation errors are the typical acts for which vessel owners are entitled to limit liability, but even those can be within the privity and knowledge of management if the crew’s competency is questionable and was known by management before the voyage.
While the Limitation of Liability Act provides significant benefits, both procedurally and substantively, for ship owners in various situations, it is rife with pitfalls for the unwary. If a claim arises that may be worth limiting, a vessel owner serves its interests well – and that of its insurers -- by seeking legal advice promptly.
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