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Limitation of Liability

CMA CGM S.A. -v- Classica Shipping Co Ltd

February 2004

In July 1999 an explosion took place on board the container vessel "CMA Djakarta" which was attributable to two containers containing bleaching powder. Although salvage services were successful the vessel and her cargo suffered considerable damage. At the time of the incident the vessel, which was owned by Classica Shipping Co Ltd ("the Owners"), was on hire to CMA CGM S.A. ("the Charterers") under a time charter on the NYPE form. This prohibited the shipment of "any goods of a dangerous injurious flammable or corrosive nature". In proceedings brought pursuant to the charterparty, arbitrators decided that the Charterers had breached the contract and that they were liable to the Owners in damages totalling US$26,624,022.

As the Charterers had issued the bills of lading, substantial claims were also made against them on behalf of bill of lading holders who had suffered loss or damage. The Charterers had, therefore, established a limitation fund calculated by reference to the tonnage of "CMA Djakarta" in compliance with the 1976 Limitation Convention ("the Convention").

The Charterers claimed that the Convention gave them the right to limit their liability because, although Article 1 of the Convention restricts the entitlement to limit liability to shipowners and salvors, the term "shipowner" is defined in Article 1(2) as meaning "the owner, charterer, manager or operator of a seagoing ship". At first instance, however, David Steel J. held that the Charterers were not entitled to limit their liability to the Owners. In so holding he followed the decision of Thomas J. in The "Aegean Sea" [1998] 2 Lloyd's Rep.39, and found that limitation was only available to charterers when they were acting as if they were shipowners or, in other words, if they were acting in the management or operation of the vessel. Failure to prevent the loading of a dangerous cargo was not an act of managing or operating a vessel under time charter; it was an act done by the Charterers in their capacity as charterers and the right to limit could not, therefore, arise. However, in view of the importance of the matter, the Charterers were given permission to appeal.

In the Court of Appeal, Longmore L.J., who delivered the judgment of the court, was critical of the approach adopted to the construction of the word "charterer" by Thomas J. in The "Aegean Sea" and followed by David Steel J. The correct approach was to construe the Convention as it stands without any English law preconceptions and, for that purpose, it was necessary to ascertain the ordinary meaning of the words used, not just in their context but also in the light of the object and purpose of the Convention.

Adopting that approach Longmore L.J. concluded that the ordinary meaning of the word "charterer" connotes a charterer acting in his capacity as such, not a charterer acting in some other capacity. In his view, to say that a charterer must be acting as if he were the shipowner imposed a gloss on the wording of the Convention and gave it a meaning other than its ordinary meaning. Moreover, it had been conceded that, when sued by cargo owners in respect of lost or damaged cargo, a charterer was entitled to the benefit of limited liability to the same extent as a shipowner. Longmore L.J. did not consider that the meaning to be given to the word "charterer" should be affected by whether the claimant was a cargo owner or the shipowner.

However, it was also necessary to consider whether loss of or damage to a vessel by reference to which a charterer seeks to limit his liability fell within Article 2 of the Convention. This describes the types of claim in respect of which limitation may be invoked. It includes:

"1(a) Claims in respect of loss of life or personal injury or loss of or damage to property occurring on board or in direct connection with the operation of the ship or with salvage operations, and consequential loss resulting therefrom".

Longmore L.J. came to the conclusion that this was not apt to limit liability in connection with claims for loss or damage to the very vessel in respect of which the limitation fund was to be calculated. It followed, therefore, that the Charterers could not invoke limitation of liability in respect of the Owners' claim for the cost of repairing "CMA Djakarta".

However, the damages that had been awarded to the Owners by the arbitrators included other items of loss in respect of which the Charterers contended that they were entitled to limit. First, there was a claim for almost US$5 million representing sums paid by the Owners to the salvors. Second, the Owners claimed reimbursement of their contributions to general average. Third, the Owners sought an indemnity from the Charterers in respect of any liability the Owners might have to cargo interests. The Court held:

1. that the Charterers were not entitled to limit in respect of the Owners' claims to recover payments made to satisfy salvage liabilities or by way of general average contribution. Such claims were not claims in respect of loss or damage to property within Article 2(1); but
2. that the charterers were entitled to limit their liability to indemnify the Owners against liability to cargo owners. Such a claim was a result of "loss of or damage to property occurring on board the ship" and was, therefore, within Article 2(1)(a).

Comment: This decision will mean that a charterer's ability to limit liability will depend on the type of claim that is brought against him rather than the capacity in which he was acting when his liability was incurred. However, in relation to claims by owners against charterers, Longmore L.J. confessed that he was unable to think of any type of claim by an owner to which a charterer would be entitled to limit - other than claims to indemnify owners in respect of liability for cargo claims.

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