“MSC FLAMINIA”: Supreme Court Clarifies Limitation of Liability for Charterers

A recent decision by the Supreme Court of the United Kingdom in the case of MSC Mediterranean Shipping Company SA v Conti 11 Container Schiffahrts-GmbH & Co KG MS “Msc Flaminia” has provided crucial clarification on the interpretation and application of the 1976 Convention on Limitation of Liability for Maritime Claims, particularly in respect of the extent to which charterers are entitled to limit their liability against shipowners.

Background

In July 2012, a fire broke out following an explosion on board the “MSC FLAMINIA” whilst en route from Charleston, South Carolina, to Antwerp, Belgium. The fire resulted in the death of a number of crew members and caused extensive damage to the vessel and its cargo, leading to substantial financial losses for the Owners and their insurers.

The Owners successfully obtained an arbitration Award stating that the charterer of the vessel, MSC Mediterranean Shipping Company SA (“MSC”), was liable for their losses, with the Tribunal awarding the Owners approximately US$200 million in damages in 2021.  

Faced with this significant liability, MSC constituted a Limitation Fund in 2020, seeking to limit its liability to approximately £28.2 million pursuant to the 1976 Convention.  

This attempt to invoke the limitation regime led to a legal battle that culminated in this recent judgment by the Supreme Court.

The Issues

The Supreme Court’s decision is particularly noteworthy as it addresses two fundamental questions concerning the interpretation of the 1976 Convention in the context of the “MSC FLAMINIA” casualty.

First, whether the 1976 Convention permits a charterer to limit its liability to a shipowner for claims relating to losses sustained by the Owner itself.  

Second, the Court considered the scope of specific provisions within Article 2.1 of the 1976 Convention in relation to the expenses incurred by the Owners as a result of the incident, namely:

1. Article 2.1(a) (claims for loss or damage to property),
2. Article 2.1(e) (claims for the removal, destruction, or rendering harmless of cargo); and
3. Article 2.1(f) (claims for measures taken to avert or minimise loss),

The High Court and Court of Appeal

The High Court and Court of Appeal had previously reached differing conclusions on these two points.

The Owners had argued for an "insider/outsider" distinction regarding the application of the 1976 Convention on Limitation of Liability for Maritime Claims. Essentially, it was the Owners’ position that the right to limit liability under the Convention was primarily intended to protect shipowners (and other "shipowners" as defined in Article 1.2, including charterers) – the “insiders” - against claims from "outsiders", i.e. parties who do not fall within that definition.

As such, as MSC were another party defined as a "shipowner" under the Convention, the Owners argued that MSC should not be entitled to limit its liability against the actual shipowner for losses originally suffered by the owner itself.

Decision of the High Court

The High Court rejected the Owners' "insider/outsider" argument. While ultimately ruling that MSC could not limit its liability, the Court did so based on a different rationale. The Court held that claims made by the Owners were not within the scope of any of the limitable claims listed in Article 2 of the Convention, characterizing them as essentially a single claim for the costs of repairing the ship.

Decision of the Court of Appeal

The Court of Appeal upheld the High Court's decision that MSC could not limit its liability, but they did so primarily based on a refined version of the "insider/outsider" argument advanced by the Owners.

The Court of Appeal agreed that the claims referred to in Article 2 of the Convention should be interpreted to exclude claims by an owner against a charterer to recover losses suffered by the owner itself.  

They reasoned that the purpose of the Convention was not to allow limitation in such scenarios and that it would lead to the illogical result of a shipowner's claim being paid from a fund potentially established by that shipowner primarily for the benefit of third-party claimants (“outsiders”).

First Issue

Regarding the first legal issue, the Supreme Court determined 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 inherent distinction based on whether the claimant is the shipowner or another party defined as a "shipowner" under Article 1.2.

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

The Court considered this exclusion to be sufficient to safeguard against unfair outcomes that could occur if the Owners’ primary losses were included within the Limitation Fund, and held that a charterer could limit its liability for claims by Owners in respect of losses originally suffered by the Owners themselves.

Second Issue

Turning to the second issue concerning the specific claims brought by Owners, the Supreme Court analysed each category of expense against the provisions of Article 2.1 of the 1976 Convention.

1. The Court held that the payments made to national authorities for the purposes of arranging for the Vessel to be allowed to proceed to Wilhelmshaven were not limitable. The rationale was that these costs were directly related to facilitating the repair of the vessel and did not constitute consequential losses arising from damage to the cargo under Article 2.1(a), nor were they costs incurred to avert or minimise loss under Article 2.1(f) of the Convention.
2. Similarly, the costs associated with removing firefighting water from the holds were held to not be limitable as they were incurred to enable the repair of the vessel, rather than to avert or minimise loss or damage in the immediate aftermath of the incident. As such, these were not mitigation costs, but repair costs, and, therefore, fell outside Article 2.1(f).
3. The costs of removing waste from the vessel were also held to be non-limitable, as they were considered part of the expenses necessary for the repair of the vessel and did not fall within any of the limitable categories specified in Article 2.1.
4. The Supreme Court did agree with the Court of Appeal, however, that the costs of discharging sound and damaged cargo and decontaminating the cargo at Wilhelmshaven could properly be described as the “removal” and “rendering harmless” of the cargo. As such, these costs were limitable under Article 2.1(e) as they fell within the ordinary meaning of “removal, destruction or the rendering harmless of the cargo of the ship”.

The Court clarified that the fact these actions were also necessary for the repair of the ship did not preclude limitation under this provision, and rejected MSC’s argument that Article 2.1(e) only applied to claims brought by parties not involved in the operation of the ship.

Comment / Impact

In summary, the Supreme Court judgment resolves a long-standing point of contention and provides a definitive interpretation of the 1976 Convention, establishing that a charterer can limit its liability for claims brought by a shipowner, even for losses originally suffered by the owner.  

The Court’s decision, however, also underscores the narrow interpretation of the specific categories of limitable claims under Article 2.1, whilst the Court’s rejection of the Owners’ "insider/outsider"  argument promotes a more consistent definition of "shipowner" within the context of the 1976 Convention.

This decision also provides additional security to cargo interests. If the Supreme Court had held that charterers were entitled to limit their liability in respect of all claims brought by Owners, this would significantly increase the value of the claims falling within a Fund. This would, in turn, significantly dilute the proportion of the Fund available to other claimants, such as cargo interests.