The Limitation of Liability Act of 1851: Recent Court Decisions Highlight Significant Issue for Offshore Energy Industry

King & Spalding

In 1912, a vessel owner by the name of White Star Lines invoked a little understood U.S. maritime law to limit its liability arising out of a maritime disaster.  In 2010, a vessel owner by the name of Transocean invoked the same law.   The respective vessels were the S.S. TITANTIC and the MODU DEEPWATER HORIZON.  And on countless other occasions, shipping and vessel owning energy companies have sought protection under the Limitation of Liability Act of 1851 (46 U.S.C. §30501 et seq.).  Whether a vessel owner can successfully limit its liability is always a hotly contested issue; and current trends in the offshore energy industry may make this more difficult. 

The Limitation Act

The Limitation Act entitles a vessel owner (and its bareboat charterer, if any) to limit its liability for most claims arising out of a maritime casualty to the post-casualty value of the vessel and its pending freight; however, the vessel owner loses this right where the negligence or unseaworthy condition of the vessel giving rise to the loss was within the privity or knowledge of the vessel’s owner or it corporate management.  The claimant, who seeks damages from the vessel owner, bears the initial burden to establish that the vessel’s negligence or unseaworthy condition.  The burden then shifts to the vessel owner to prove that such fault was not within its privity or knowledge.  If the vessel owner cannot carry its burden, the vessel owner cannot limit is liability and remains liable for the full damages.  

The Limitation Act also provides key procedural advantages.  The vessel owner may proactively file a limitation action, potentially, in the district court of its choosing.  In addition, all claims and lawsuits against the vessel are barred except where brought against the vessel owner in its single limitation action.  The ability to marshal all claims in a single federal forum presents one of the most significant procedural advantages of the Limitation Act. 

The Limitation Act is not unique to the U.S. and variations exist in many jurisdictions.  The original purpose of the Limitation Act was to encourage investment in the shipping industry by limiting an owner’s liability for risks beyond its control and protecting its other ventures from financial ruin. As the U.S. Supreme Court once noted, “[t]his limitation serves much the same purpose for maritime ventures that the corporate fiction serves for the landsman's enterprises.” Black Diamond S. S. Corp. v. Robert Stewart & Sons, 336 U.S. 386, 399 (1949).

The Limitation Act’s breadth has significantly expanded since it was enacted more than 150 years ago.   Vessels are no longer used solely for the transportation of people and goods.  They now play an essential role in the energy industry.  Seismic vessels help locate the oil and gas reserves. Drillships and mobile offshore drilling units (MODUs) carry the drill packages used to access these reserves.  Supply vessels transport the personnel, equipment, and supplies necessary to perform the work. Floating production, storage, and offloading vessels (FPSOs) may manage the production and, offload hydrocarbons to shuttle tankers to ferry the product ashore.  Tank barges and tankers of all sizes transport crude and refined product throughout the world.  

The Limitation Act is not without controversy.  Some view it as unduly harsh to claimants and a relic of bygone shipping era.  There was public outcry in the case of the TITANTIC; and, nearly 100 years later, legislators attempted to repeal the Act following the DEEPWATER HORIZON disaster.  While the Act may publicly maligned, it remains the law.  Recently, two U.S. courts addressed a vessel owner’s right to limit its liability under the Act.   These decisions are particularly instructive for the energy industry as new regulations impose both greater training requirements and increased shore-side oversight of offshore well operations—issues that may make it more difficult for vessel owners to carry their burden in proving any negligent conduct was not within their privity or knowledge. 

Holzhauer v. Golden Gate Bridge Hwy. & Transp. District, __ F.Supp. 3d ___, 2016 WL 7242108 (N.D. Cal. 2016) 

On December 15, 2016, a district court in California addressed a common issue in Limitation Actions—the point at which the negligent actions of a captain falls within the privity and knowledge of the owner.  A ferry in San Francisco bay collided with a pleasure boat killing the boat’s driver and seriously injuring another on board.  The parties generally agreed that the cause of the incident was the ferry captain’s use of his personal cell phone in the moments before the collision.  The issue was whether this negligent conduct was within the privity or knowledge of the ferry’s owner. 

Navigational errors of the vessel’s captain are traditionally not within the privity or knowledge of the vessel’s owner.  For example, the negligence of an otherwise competent and licensed captain, who misjudges the sea conditions and causes his supply vessel to allide with a production platform, is generally not within the privity or knowledge of the owner.   However, a captain’s negligence may be attributed to a vessel owner that fails to properly train the captain or crew, or fails to provide the equipment necessary for the safe performance of their work.  As one court noted, “[a]ll that is needed to deny limitation is that the shipowner, by prior action or inaction set[s] into motion a chain of circumstances which may be a contributing cause even though not the immediate or proximate cause of a casualty.” See Matter of Oil Spill by Amoco Cadiz Off Coast of France, on Mar. 16, 1978, 954 F.2d 1279, 1303 (7th Cir. 1992).

In Holzhauer, there was no dispute that the owner and its shore-side management were unaware that the ferry’s captain was actually using the cellphone just prior to the collision.  Rather, the vessel’s owner constructive knowledge was at issue based on what it could have discovered “if it conducted a reasonable investigation sufficient to apprise itself ‘of conditions likely to produce or contribute to a loss.'”  Hercules Carriers, Inc. v. Claimant State of Fla., Dep't of Transp., 768 F.2d 1558, 1564 (11th Cir. 1985).  The court determined that the vessel owner had no policy barring the use of personal cell phones by its captains; and moreover, the owner was aware that captains carried cell phones while operating the ferry, and permitted their use.  The absence of such a policy was held to create such a condition that was likely to contribute to a collision. Thus, the captain’s negligence was held to be within the privity or knowledge of the vessel’s owner.  

The Holzauer court is not alone in attributing the negligent actions of a captain or crew to the lack of training or policies established by the vessel owner.  The DEEPWATER HORIZON district court cited similar reasons in holding that the negligent acts of the vessel’s drill crew was within the privity or knowledge of the MODU’s owner, Transocean. In re Oil Spill by Oil Rig Deepwater Horizon in Gulf of Mexico, on Apr. 20, 2010, 21 F. Supp. 3d 657, 753 (E.D. La. 2014).  An offshore drilling rig, such as this, has both a marine crew in charge of her navigation and a drill crew in charge of performing the vessel’s work—drilling wells at the direction of her charterer.  A court’s analysis remains the same regardless of the type of vessel and her purpose.  

The DEEPWATER HORIZON district court determined that the drill crew was negligent in several respects and that their negligence was within Transocean’s privity or knowledge.  For example, the drill crew was negligent in not diverting the flow of hydrocarbons overboard to stop the flow from blowing out onto the rig.  The failure to do so was found to be within Transocean’s knowledge because it failed to properly train the crew on the proper use of diverters.  Thus, courts will scrutinize not just the negligent action of the captain and crew, but all events leading up to such negligent actions. 

In the Matter of the complaint of Ingram Barge Company As Owner of the M/V DALE A. HELLER Petitioning for Exoneration from or Limitation of Liability, __ F.Supp. 3d ____, 2016 WL 6962832 (N.D. Ill. 2016)

This is not to say every allegedly negligent act can or will be imputed to the vessel’s owner.  On November 29, 2016, a district court upheld a vessel owners right to exoneration and limitation from liability under the Liability Act.  A tug and tow of barges broke part during a high water event alliding with a dam and lock system and causing the waters to overtop levees and resulting in property damage.  One of several issues was whether the allegedly negligent decisions of the captain were within the privity or knowledge of the owner.  

The claimant alleged that the tow broke apart and sunk because of the captain’s decisions to stay in a particular location too long, to transit the canal during perilous conditions, and to implement a maneuver designed to mitigate the risk of the high water event.  The district could ultimately exonerated the vessel from any negligence, but it nonetheless analyzed whether any of these decisions, even if negligent, were within the privity or knowledge of the vessel’s owner.  The district court examined the role of the captain and the decision making authority granted by the vessel owner to the captain.  The district court determined that each purported negligent decision involved operational decision making by the vessel’s captain—not shore-side management.  The district court further concluded that there was no evidence that the vessel owner failed to properly train the crew or that the vessel owner maintained any company policies, written or unwritten, that violated the inland navigational rules.  Thus, given the right facts, a vessel owner can still limit its liability under the Limitation Act when a captain or crew’s action results in the loss of a vessel.

Shore-Side Control of Vessel Operations Continues to Grow

The line at which vessel negligence can be found to be within the privity or knowledge of an owner certainly has blurred in the more than 150 years since the Limitation Act became law.  A vessel owner previously had no means of communicating with the vessel once it left port.  Today, technology can place the owner and its management in the wheelhouse, on the cargo deck, and on the rig floor.  Nowhere is this more pronounced than in the energy industry.   Shoreside management and engineers now take a greater role in offshore energy operations—partly by company choice and partly because of increased regulations.  The latter is evidenced in the Bureau of Safety and Environmental Enforcement’s (BSEE) recent well control rule.  This rule requires the energy industry to use of real-time monitoring of well pressures and other information during well operations.  A vessel owner with access to this real-time information may find it difficult to distance itself from decisions made by a captain and crew (including the drill crew), when the vessel owner knew of the conditions and could have timely intervened.

The potential benefits of the Limitation Act to vessel owners are significant; however, vessel owners in the energy industry may find it increasingly more difficult to carry their burden in proving any negligence was not within their privity or knowledge given advanced technologies and increased regulation. 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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