MSC FLAMINIA: Supreme Court clarifies charterers’ right to limit liability

In 2012, during a US-Europe voyage, an explosion and fire occurred on the MSC FLAMINIA due to hazardous cargo, resulting in loss of life of three crew members and substantial damage to the vessel and cargo. 
The owners, Conti, incurred significant expenses on repairs, but also in extinguishing the fire, discharging and destroying the cargo and firefighting water and salvage expenses.

In 2020 the charterers, the container line operator MSC Mediterranean Shipping Company, established a limitation fund under the 1976 Convention, seeking to limit its liability to approx. USD 28.2 million.

In 2021 the owners successfully obtained an ­arbitration award stating that the charterers were liable for their losses, with the Tribunal awarding the owners approx. USD 200 million in damages.  

The High Court held that the charterers could not limit its liability to the owners. The Court of Appeal, for different reasons, upheld this decision.

Key issues for the Supreme Court

The Supreme Court addressed two principal issues: 

1. On its true construction, does the 1976 Convention permit a charterer to limit its liability towards an owner for a claim concerning loss originally suffered by the owner itself?
2. On their true construction, what is the scope of Article 2.1(a), (e) and (f), of the 1976 Convention?

The Supreme Court unanimously allowed the charterers’ appeal on the first issue but dismissed the appeal on the second issue.

First issue – charterers’ right to limit liability

The Supreme Court analysed the first issue in the ­context of limitation generally. It is an established ­feature of international maritime law that ­shipowners and certain others involved in ship operations are entitled to limit their liability for claims arising out of a maritime casualty or incident. In the UK, limitation is governed by the 1976 Convention.

The purpose of limitation of liability for vessel ­owners, charterers, managers and operators was to facilitate international trade through the carriage of goods by sea. The main objective of the 1976 Convention was to provide higher limits than those previously in place, while also making it challenging to “break” the limitation.  

The Supreme Court found that the term “claims”, as used in Articles 1.1 and 2.1 of the 1976 Convention, should be interpreted according to its ordinary meaning, encompassing all types of claims specified in Article 2, and without any specific distinction based on whether the claimant is the shipowner or another party defined as a “shipowner” under Article 1.2. 

The Supreme Court held that the 1976 Convention does not distinguish between claims by “insiders” (those defined as shipowners, including charterers, managers, and operators) and “outsiders.”

Owners argued that this could give rise to a situation whereby a “shipowner” could claim against a fund that they had also constituted, but the Supreme Court rejected this argument, relying on the principle established in the CMA DJAKARTA [2003] EWHC 641 (Comm). This principle states that claims for loss of or damage to the vessel, or consequential loss resulting therefrom, are not subject to limitation under Article 2.1(a) of the 1976 Convention.  

The Supreme Court considered this exclusion to be sufficient to safeguard against unfair outcomes that might arise if the owners’ primary losses were included within the limitation fund. 
In summary, a charterer could limit its liability for claims by an owner, including in respect of losses originally suffered by the owner itself.

Second issue – scope of limitation

The Supreme Court analysed each category of ­expense against the provisions of Article 2.1 of the 1976 Convention, namely:

• Article 2.1(a) – claims for loss or damage to property
• Article 2.1(e) – claims for the removal, destruction, or rendering harmless of cargo
• Article 2.1(f) – claims for measures taken to avert or minimise loss 

The Supreme Court gave a narrow interpretation to Article 2.1. Only those heads of loss which are included in Article 2 are subject to limitation. The Supreme Court considered each of the various heads of loss against the relevant subsection of Article 2.

The majority of owners’ losses, such as costs paid to authorities, removal of firefighting water and waste, were held not to be limitable because they constituted, or were incurred as part of, the repair of the vessel.

The costs specifically relating to discharging and decontaminating cargo fell within Article 2.1(e), i.e. removal, destruction and rendering harmless of the cargo, and were therefore limitable. 

In summary:

1. Payments to authorities for onward passage were not limitable, as these were for vessel repair, and not consequential cargo losses or mitigation.
2. Firefighting water removal costs were not limitable, as these were considered repair costs, and not measures to mitigate or avert loss.
3. Costs for removal/destruction of waste were not limitable, as these were part of the repair process, and do not fall within any limitable category.
4. Cargo handling and decontamination costs were limitable, as costs for discharging, removing, or decontaminating cargo fall within Article 2.1(e) (relating to removal, destruction, or rendering harmless the cargo of the ship).

Charterers were entitled to limit under Article 2.1(e) of the 1976 Convention in respect of the claim for the costs of discharging sound and damaged cargo, and for decontaminating the cargo, but not for other costs.

Comment

This Supreme Court judgment provides a definitive interpretation that charterers may limit their liability to owners under the 1976 Convention, even for losses originally suffered by the owner. 

The decision rejects a restrictive “insider/outsider” interpretation and gives clarity for market participants. It also means that the value of claims included in the limitation fund will not be unnecessarily inflated, thereby protecting the interests of other claimants, such as cargo interests. The full judgment can be found here..

Comparison with Norwegian law

Under Norwegian law the position is somewhat different.

The general view is that pursuant to the 1976 Convention, as incorporated by the Norwegian Maritime Code, a charterer can limit its liability for claims from an owner including in respect of losses originally suffered by the owner itself.

On this point, with the clarifications by the Supreme Court in the MSC FLAMINIA, the position appears to be similar under Norwegian and English law.

However, when it comes to the charterer’s right to limit claims from the owner relating to damage to or loss of the ship, the established view under Norwegian law is that the charterer is entitled to limit liability also for such claims, contrary to the position under the CMA DJAKARTA, as confirmed by the MSC FLAMINIA. Although this view has been criticised, it has clear support in the preparatory works to the Norwegian Maritime Code, which specifically mentions the charterer’s need to limit liability for claims for damage to the chartered ship due to hazardous cargo.

Another difference between English law and Norwegian law is that under Norwegian law the term “charterer” is interpreted so broadly, according to the preparatory works, that it even includes the shipper of the cargo. There is however some disagreement in the legal literature as to whether this interpretation is in accordance with the 1976 Convention.

The differences between English and Norwegian law highlights the importance of considering the applicable law in the available jurisdictions early on in the handling of a casualty case involving large claims.