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Limitation of Liability Actions: what are they and why do vessel owners file them?


Congress passed the Limitation of Shipowners’ Liability Act in 1851 to encourage U.S. shipping. Most agree the societal aims of the Limitation of Liability Act are outdated but the legislation remains in effect and must be dealt with by maritime lawyers, maritime workers and vessel owners.


This article describes the basic framework of a limitation of liability action filed under the Limitation of Liability Act of 1851.


What are limitation of liability actions and why do vessel owners file them?


Vessel owners file limitation of liability actions in federal court when faced with potential liability after their vessel(s) is involved in a marine casualty such as a collision, allision, personal injury, wrongful death, capsizing, wave wash and fire. The most famous use of limitation of liability actions after a marine casualty were filed by the vessel owners involved in the DEEPWATER HORIZON casualty and its aftermath.


A limitation of liability action is a procedural device which allows vessel owners to:


(1) stop/enjoin lawsuits and compel them to be filed in a special federal limitation proceeding so that liability may be determined by one federal court; and


(2) argue that liability for a marine casualty should be limited to the value of the vessel plus pending freight.


Number one (stopping/enjoining lawsuits) is the most useful benefit for vessel owners because it forces multiple people/companies with potential claims to assert them all in one federal forum. This gives vessel owners the opportunity to deal with the significant and complex liabilities that can flow from a marine incident in one federal court instead of multiple courts across the country. Further, a limitation of liability action allows a vessel owner to post a single determinate security number instead of potentially having to post multiple security for indeterminate amounts. In sum, a limitation action gives vessel owners a powerful procedural mechanism to contain its legal problems into one federal forum after a marine casualty.


Number two potentially allows a vessel owner to limit its liability to the value of the vessel plus pending freight. But this objective can be difficult to accomplish because a vessel owner can only do so if it can prove that it lacked privity and knowledge of whatever condition/negligence caused the marine casualty in question. This can be and often is an uphill battle for vessel owners which can only be won after a trial on the merits.

Who can file a limitation of liability action?


American and foreign vessel owners can file limitation actions if the value of potential claims exceed the value of the involved vessel plus pending freight. In some circumstances, demise and bareboat charterers can file limitation actions but time or voyage charterers cannot.


When must a limitation action be filed?


A limitation action must be filed within six months after the vessel owner received written notice of a claim. The six months notice requirement is strictly construed and a vessel owner can potentially have its limitation action dismissed if it does not comply with the requirement.


Where must a limitation action be filed?


Admiralty Rule F(9) provides a specific pecking order on where a limitation action can be filed. Here it is:


A limitation action must be filed in a federal court in which the vessel has been attached or arrested. If the vessel has not been attached or arrested, the limitation action must be filed in any district in which the vessel owner has been sued. If no suit is filed, then the limitation action must be filed in the district where the vessel is located. If the vessel is not located in a federal district, then the limitation action may be filed in any district.


How is the limitation fund calculated?

The limitation fund is the fair market value of the vessel at the end of the voyage in question plus pending freight. With respect to towing, the value of the vessels being towed are not accounted for in the limitation fund except in a few limited circumstances where there is a pre-incident contractual relationship between the claimant and vessel owner. Further, if a vessel is damaged during the voyage from the incident (i.e. collision/fire) than the cost of the physical repairs will reduce the value of the limitation fund. It is possible for a limitation fund to be zero if a vessel sinks or is damaged to such an extent that it has no residual value at the end of the voyage.


The value of the limitation fund can be a hotly contested factual issue in limitation actions. Parties must present evidence and expert opinions as to why the limitation fund should be increased or decreased and then the court resolves the issue at a hearing or trial as the fact finder.


Please feel free to contact me at (985) 705-1028 or ad@adamdavislawfirm if you have any questions or would like to discuss.


Thanks,


Adam Davis


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