Sailing on troubled waters - antiquated U.S. maritime liability limits for death and injuries of ship passengers: options for reform.

• Author: Zaman, Riaz

On April 15, 1912, the British luxury liner Titanic sank in the North Atlantic off Newfoundland, less than three hours after striking an iceberg. About 1,500 people died. Far from the glamour of films now associated with the tragedy, the lives of family members of those who died were shattered, in part due to maritime liability limits offering lean compensation at best. Under the U.S. Limitation of Liability Act of 1851, Titanic's shipowner could limit liability to the value of the ship, passenger tickets, and cargo. (1) Many survivors and families of those who died received no compensation at all. (2) Four years after the tragic sinking, Titanic's owner, White Star, agreed to pay about $430 per each life lost, an exceedingly modest amount even in 1912. (3)

The reason for such a low amount was due to legal thinking at the time that shielded shipowners from liability, except where the shipowner had "'privity' or 'knowledge'" that the accident could occur. (4) Even in 1912, this approach to compensation was an outdated throwback to 1851, when shipowners were shielded from liability in order to promote development of a strong maritime industry. (5) Oddly, more than 150 years later, shipowners' liability is still limited by equally arcane laws codified at 46 U.S.C. [section][section] 30501-30512, Limitation of Shipowners' Liability Act and Fire Statute--the descendent statute of the Limitation of Liability Act of 1851. (6) Under the modern version, total compensation for all claims of personal injury or death arising out of one incident is limited to "$420 times the tonnage of the vessel" where the owner had no "privity or knowledge" of circumstances resulting in the accident. (7)

Although increasingly high shipping standards have substantially reduced the risk of fatal accidents, the limitation laws have not been updated to reflect current realities. This article explores the potential impact of outdated U.S. liability limits and options to reform the law. The author considers the London Convention on Limitation of Liability of Maritime Claims ('76 and '96) and the Athens Convention Relating to the Carriage of Passengers and their Luggage by Sea, 2002 as alternatives to the current U.S. law, but ultimately concludes that liability for death and personal injury claims is best left to private insurers without statutorily defined limits. This article also considers forum non conveniens as a method of reducing litigation by foreign plaintiffs in U.S. courts--in order to address concerns that repeal of U.S. liability limits will result in even more suits in U.S. courts filed by foreign plaintiffs.

The article concludes that compensation is best left to private insurance due to the flaws of international regimes of liability and the capacity of maritime insurance clubs to competently compensate claims. More importantly, the need for limits that existed in prior centuries no longer exists. In effect, the limits of liability serve as little more than a subsidy to foreign flagged vessels, since only one major passenger vessel today is flagged as a U.S. passenger ship. This subsidy could be at the expense of U.S. claimants and others who file lawsuits in U.S. courts.

Critics of the 1984 Limitation of Shipowners' Liability Act (hereinafter "Liability Act" or "LOLA," where 1984 is the most current revised version) point to many reasons why the act should be repealed. First and foremost, policy considerations that motivated the passage of the original act in 1851 as a means of protecting an infant shipping industry no longer exist. Critics have also noted that modern legal avenues exist that carefully protect both the corporate entity (i.e. shipowners) and claimants--primarily through insurance policies. (8) In this modern context, the subsidy provided to shipowners has no justification, and unjustly weighs against a claimant, inhibiting a claimant's ability to obtain just compensation.

1. DEVELOPMENT OF THE MODERN LIMITATION OF LIABILITY ACT

   The foundation of the current Limited Liability Act was created in the mid 19th century to ensure that the United States' shipping industry could compete with its European counterparts. This limited liability has been reformed over the years, usually in response to tragedies; however, the attempts to completely repeal this limited liability have yet to be successful.

   1. Shipowners' Limitation of Liability Act of 1851

      Passage of the Shipowners' Limitation of Liability Act of 1851 (hereinafter "the 1851 Act" or "1851 LOLA") is related to the early development of the ocean cargo industry of the 1840s. The California Gold Rush that started in 1850 provided an additional stimulant to an already growing shipping industry. Congress' passage of the 1851 Act was also motivated in part by the Supreme Courts' decision in New Jersey Steam Navigation Co. v. Merchants Bank of Boston 9 The Supreme Court held that a contract shielding the shipowner from liability was invalid. (9) The case arose out of an incident occurring on the night of January 13, 1840, involving consignment of goods through a business owner, Mr. Hemden. (11) Mr. Hemden ran a business transporting consigned goods. (12) He neither owned nor operated ships, but would contract for carriage of one wooden crate carrying goods under his custody aboard the steamship Lexington, travelling between New York and Boston. (13) Owners of the Lexington, N.J. Steam, negotiated a contract with Mr. Hemden absolving N.J. Steam from liability for loss or damage to Mr. Hemden's crate. (14)

      On the night of January 13, 1840, the Lexington and its cargo caught fire in the Long Island Sound. Merchants Bank had consigned cargo with Mr. Herndon that was destroyed in the fire, and sued N.J. Steam for damages. (15) The Supreme Court determined that N.J. Steam's contract with Mr. Hemden did not shield it from liability and awarded a sum of $22,224, a windfall at the time. (16) The decision would eventually motivate Congress to set statutory liability limits.

      In 1848, the same year as the Supreme Court's decision in Merchant's Bank, gold was discovered in California, stimulating commerce and transport. As a result, California became a state in 1850, and transport by land and sea continued to grow. United States transatlantic shipping also saw a boost, with shipping lines travelling from New York to Liverpool. The U.S. Collins Line was in direct competition with the British Cunard Line, but the British vessels had the advantage of protection from liability. (17)

      With the rallying cry of "Remember the Lexington," Senator Hannibal Hamlin of Maine introduced the bill that became the 1851 Limitation Act. (18) The key provision of the act limits liability as follows: "That the liability of the owner or owners of any ship or vessel ... shall in no case exceed the amount or value of the interest of such owner or owners respectively, in such ship or vessel, and her freight then pending" unless a loss is occasioned with his privity or knowledge. (19)

      Interpreting the statute, the concept of limitation was further defined in Supreme Court cases from 1871: Norwich Co. v. Wright ("Norwich F), (20) and Place v. Norwich & New York Transport Co. ("Norwich IF). (21) In Norwich I, the Court determined that limitation is derived from the value of the vessel after the collision. (22) Hence, where a ship sinks or is completely destroyed, injured passengers receive no compensation at all. In Norwich II, the Court not only confirmed that claimants would receive no compensation when a ship sinks, but more importantly, that insurance proceeds paid to the shipowner are not part of the compensation fund because insurance proceeds are not part of the shipowners' "value of his interest in the vessel" as required under LOLA. (23) The result of the Court's logic produced a strange paradox--where the most serious and damaging accidents result in the lowest compensation fund. (24)

      In holding that an owner is limited to the value of the vessel and cargo after the accident the Supreme Court explained: "The great object of the law was to encourage ship-building and to induce capitalists to invest money in this branch of industry. Unless they can be induced to do so, the shipping interests of the country must flag and decline." (25) This concept of protecting shipowners as described by the Supreme Court in 1871 continues to drive modern maritime limits. Indeed the Maritime Law Association ("MLA") (26) used the same arguments as recently as 2010 to justify its recommendations for continuing maritime limits. (27) The MLA is a non-governmental organization that states as its purpose to promote uniformity of U.S. maritime law. (28) On the issue of liability, the MLA promotes policies that have been advocated by shipowners for more than a century. Like shipowners, the MLA stands steadfast against repeal of the limit. (29)

   2. Amendments to the 1851 Limitation of Liability Act of 1936 and 1984

      Following its tendency to reform maritime laws only in response to tragic events, rather than proactive reform, Congress first amended the 1851 Liability Act in 1936 in response to the burning of the passenger line, Morrow Castle, on September 8, 1934, which caused 135 deaths off the shore of New Jersey. Invoking the 1851 Liability Act, owners of the Morrow Castle were limited in their liability to the meager sum of $20,000 for all claims for loss of cargo and death. (30) As a result of public outrage, Congress amended the Act's provisions relating to personal injury and death by requiring shipowners to establish a compensation fund amounting to $60 per gross ton of the vessel. (31) The law retained an exemption from the limit in cases where the master, superintendent, or managing agent had "privity or knowledge" of conditions leading to the accident. (32)

      Congress amended the Limitation Act again in 1984 to raise the liability limit to $420 per gross ton of the vessel, (33) again where the incident...