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El Faro: Can the Vessel Owner Limit its Liability?

01.01.16 | INSIGHTS

By Marilyn Raia
Shareholder, San Francisco Office, 415.352.2721

The tragic sinking of the El Faro with the loss of all crewmembers and cargo will bring various aspects of admiralty law into public view. In particular, one federal statutory scheme is likely to play an important role in litigation arising out of the casualty, namely, the Limitation of Liability Act.

The Act’s History and Basics

Congress enacted the Limitation of Liability Act in 1851 to permit a vessel owner to limit its liability for cargo loss or damage as well as personal injury and death under certain circumstances. Traditionally, operating a vessel was considered a known risky venture. It was deemed unfair to impose liability solely on the vessel owner when a casualty occurred without the vessel owner’s fault. Moreover, the imposition of liability on the vessel owner without fault was thought to discourage maritime commerce. In response, the concept of limitation of the vessel owner’s liability was recognized. Under the Act, a vessel owner may be able limit its liability for the consequences of a maritime casualty when the casualty was not the result of the vessel owner’s personal neglect or fault.

46 U.S.C. § 30505 provides: “Except as provided in section 30506…, the liability of the owner of a vessel for any claim, debt, or liability described in subsection (b) shall not exceed the value of the vessel and pending freight…” The claims subject to limitation of liability described in subsection (b) include those arising from any “embezzlement, loss or destruction of any property, goods or merchandise shipped or put on board the vessel, any loss, damage, or injury by collision, or any act, matter or thing, loss, damage or forfeiture, done, occasioned or incurred without the privity [connection to] or knowledge of the owner.” Simply stated, a vessel owner can limit its liability to the “value of its vessel” and the pending freight if the casualty giving rise to the liability occurred without its privity or knowledge.

The “value of the vessel” for limitation of liability purposes is the fair market value of the vessel or what is left of the vessel after the casualty. In the case of the sunken El Faro, that value is likely $0 unless any part of the recovered debris has a value.

The amount to which the vessel owner can limit its liability is known as the “limitation fund.” If limitation of liability is allowed, the limitation fund will be shared proportionately among the parties suffering damages as a result of the casualty.

In the case of personal injury or death arising out of a casualty involving a “seagoing vessel”, the Limitation of Liability Act provides for an additional amount to be added to the limitation fund. A “seagoing vessel” does not include, among others, pleasure yachts, tugs, fishing vessels, and barges. If the portion of the limitation fund available to pay personal injury and death claims in full is less than $420 multiplied by the gross tonnage of the vessel, then it must be increased to an amount equal to $420 for each gross ton of the vessel even if the vessel is a total loss.

Procedure Under the Act

When a vessel owner seeks to limit its liability, it must file an action in a federal district court and deposit the amount of the limitation fund into the court’s registry. The deposit can be cash, a bond, or a guarantee from an insurance company or bank. The limitation action must be filed within six months after written notice of a claim is given to the vessel owner. If there are multiple claimants, the six month time period for filing a limitation action begins after the first claimant gives notice of a claim. The vessel owner may file a limitation action before it receives notice of a claim.

There is no particular format required for a claim. A letter from a claimant advising a vessel owner to contact his insurance company about the incident is likely sufficient notice of a claim to trigger the six-month filing period. The claim does not need to state an amount if the vessel owner could reasonably expect it to exceed the value of the vessel and pending freight. The vessel owner must give notice of the limitation proceeding to all known claimants as well as potential claimants.

As soon as the limitation action is filed, and upon the vessel owner’s request, the district court issues an order stopping all proceedings already filed against the vessel owner for damages arising out of the casualty. The district court also sets a deadline for claimants to file their claims in the limitation proceeding. Claims filed after the deadline are often allowed in the absence of prejudice to the other parties. In a limitation proceeding, a single court decides the rights and obligations of the parties rather than multiple courts making decisions that might be inconsistent.

Burden of Proof

The burden of proof in a limitation proceeding is a two-step process. The claimants have the initial burden of proving negligence or unseaworthiness of the vessel caused the casualty. The proof must be made by a “fair preponderance of the evidence”. To be able to limit its liability, the vessel owner must then prove, also by a fair preponderance of the evidence, that such negligence or unseaworthiness was not within its knowledge or privity.

Privity or Knowledge

Perhaps the most contested aspect of a limitation proceeding is whether the cause of the casualty was within the vessel owner’s privity or knowledge. Unfortunately, the Congress of 1851 chose not to define “privity or knowledge”. The interpretation was left to the courts.

Over the years, the courts have construed privity or knowledge to mean what a vessel owner knew or should have known about an existing condition. It is usually determined by the vessel owner’s personal participation in the negligence or actual knowledge of the unseaworthiness of the vessel. Courts have also held privity or knowledge is “not what the owner knows but what he is charged with finding out.”

When a vessel is owned by a corporation, limitation of liability will not be permitted if the negligent cause of the casualty resulted from the acts of a person who is sufficiently high on the corporate ladder. The requisite privity or knowledge is imputed to the corporate vessel owner when the employee involved is an executive officer, manager, or superintendent whose supervisory duties include the aspect of the business out of which the casualty arose. A corporate vessel owner cannot plead ignorance of a condition to satisfy its burden of proving the cause of the loss was not within its privity or knowledge. That is because it is charged with knowledge of what its managing agents who were involved in the aspect of the business in question knew or should have known.

Several causes of the sinking of the El Faro have appeared in the news. In addition to severe weather conditions, they include the master’s decision when to leave port and where to navigate, as well as the alleged unseaworthiness of the vessel. Whether these were the causes of the sinking and if so, whether they will be held within the privity or knowledge of the vessel’s owner remain to be seen.

As a general rule, a master’s navigational decisions while the vessel is at sea are not attributable to the vessel owner. If the master makes an error at sea, which results in injury, death or property damage, the vessel owner is not necessarily precluded from limiting its liability if the master was competent and had no known history of similar errors. However, if the master is a corporate officer or has corporate managerial responsibilities, the master’s knowledge will likely be attributed to the corporation and may preclude limitation of liability.

Also as a general rule, a vessel owner may not limit its liability if the vessel is found to have been unseaworthy which unseaworthiness could have been discovered through reasonable diligence, and remedied. Accordingly, if a vessel sails with defects in the hull or machinery, or without proper equipment that the vessel owner knows about but chooses not to address, limitation of liability may not be allowed.

Facing signification claims from the survivors of deceased crewmembers as well as the owners/insurers of cargo lost when the El Faro sank, the owner of the El Faro filed a “limitation action”. All claimants must file their claims in the limitation action and may not pursue litigation against the vessel owner in another place. The judge (there is no right to a jury trial in a limitation proceeding) will then decide whether the claimants have met their burden of proving the sinking of the El Faro was caused by negligence or unseaworthiness. If they can do so, the vessel owner must then prove by a fair preponderance of the evidence that such negligence or unseaworthiness was not within its privity or knowledge. If the vessel owner meets its burden of proof, it will be able to limit its liability for the losses arising from the sinking to the amount of the limitation fund.

If the vessel owner does not meet its burden of proof, the district court has discretion to retain jurisdiction over the case and adjudicate the claimants’ claims. Quite often it exercises that discretion. In other cases, the district court will allow the claimants to pursue their claims in separate actions in other jurisdictions.

This article is being republished or posted with permission extended by Pacific Maritime Magazine

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