Limitation of liability. To be in the business of carrying goods by sea can cause a person to become liable to pay compensation to the owners of cargo if the cargo is lost or damaged during carriage.
Naturally, businessmen will wish to reduce this risk and do so by exempting themselves from liability or by limiting liability. In shipping, the owner has for long been able to limit his liability. This allows him to calculate his risk and, if appropriate, obtain adequate insurance cover. If he could not, the risk of high financial losses may prevent many persons from becoming shipowners. Limitation of liability has also been permitted by domestic law (for example, Section 503 of the old Merchant Shipping Act 1894 of the U.K.) and, more recently, internationally (the International Convention on Limitation of Liability for Maritime Claims 1976). Even for oil pollution, liability can be limited by international conventions.
(However, legislation passed by the United States in June, 1990, after serious tanker casualties and consequent pollution, may cause the shipowner to face unlimited and uninsurable legal liability for pollution damage and clean-up costs. The effect of this on the import of oil into the U.S.A. will be very high and oil companies have declared that they would rather not use their own ships (which would cause them to become liable) but may operate into the U.S.A. with chartered-in tonnage.)
In addition to the above methods of limiting liability, other international conventions on the carriage of goods by sea provide for limitation. For example, the Hague Rules (1924) or Hague-Visby Rules (1968) or Hamburg Rules (1978) can limit the liability of the carrier (that is, including the shipowner) to a financial rate per package or per unit of weight. These rules can be incorporated in a contract of carriage evidenced in a bill of lading or in a charterparty, by an appropriate clause.
There are other methods apart from statutory limitation in which a shipowner can limit his liability. In the contract of carriage or charterparty a clause may permit him to do this. Such a clause will apply only between the charterer or shipper and the shipowner.
The shipowner will attempt to use whichever method provides him with the largest protection from having to pay compensation. Until the 1970s the shipowner was not allowed to limit his liability if he was guilty of “actual fault or privity”. Now the bar to his limiting liability is based on his “personal act or omission committed with the intent to cause” loss, or “recklessly and with knowledge that such loss would probably result”. The amount of limitation varies in three main ways; one related to the value of the ship together with the freight it is in the process of earning (for example, in the United States) and the other related to the ship’s tonnage (for example, in the U.K. and in the International Convention). The third way is related to value of the cargo itself, which is lost or damaged (for example, in the Hague- Visby Rules.) There may be yet another way, related to the freight, if we consider indemnity for nonperformance of the charter. For example, in the GENCON charterparty it is stated that indemnity for nonperformance of the charterparty is to be proven damages limited to the estimated amount of freight.