Limitation of liability in contracts of carriage by sea
Limitation of liability is a concept that allows a carrier to limit their liability for maritime claims up to a limited sum regardless of the actual monetary value of the claim..
In short, there is a limit on the maximum amount of compensation that a carrier may need to pay..
Despite the varying forms, the main characteristic of the limitation of liability is that, while in principal the carrier may be liable for damages, the extent of their liability is reduced by this limitation..
Limitation of liability is governed by a number of Conventions adopted by the International Maritime Organization (IMO) and is expressed as a unit of account called the Special Drawing Rights (SDR) as defined by the International Monetary Fund..
The SDR is simply an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves, and its value is based on a basket of five currencies—the U.S. Dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound Sterling..
The SDR value in terms of the U.S. dollar is determined daily based on the spot exchange rates observed at around noon London time, and posted on the IMF website..
A Contract of Carriage is a contract entered into between the Carrier and the Merchant for the movement of goods from point A to point B using an agreed mode of transport at an agreed price.. This contract maybe verbal or written..
There are a few popularly used conventions and rules covering the Carriage of Goods by Sea and this article by Ali Shami compares the limitation of liability in the various contracts of carriage by sea..
Hague Rules (1924)
The first important regulation issued in 20th century originated from Common Law is Hague Rules. Hague rules applies exemption of liability for ship and carrier for loss or damage raised from fault of master, pilot or the servants of the carrier in the navigation or in the management of ship.
Limit of liability has been determined as 100 pounds sterling per package or unit, or the equivalent of that sum in other currency unless the nature and value of such goods has been inserted in the bill of lading.
Hence some of the shipping lines are loath to show commercial information on the bill of lading.
Hague-Visby Rules (1968)
It is an amendment to Hague Rules. Limitation of liability for loss or damage in Hague-Visby Rules changed to 666.67 units of account per package or unit or 2 units of account per kilogram of gross weight of the goods lost or damaged, whichever is the higher. However exemption of liability for ship and carrier was kept same as it was in Hague Rules.
The Hague Visby rules are seen as the dominating standard terms and conditions generally incorporated into charter parties and bills of lading worldwide.
Hamburg Rules (1978)
The contract of carriage by sea published by United Nations in 1978. In Hamburg Rules, carrier and its servants are responsible for loss, damage and delay in delivery at port of loading, during the carriage and at port of discharge.
The limit of liability increased to 835 units of account per package or other shipping unit or 2.5 units of account per kilogram of gross weight of the goods lost or damaged, whichever is the higher.
If there is any delay in delivery, the carriers liability for this is limited to an amount equivalent to 2.5 times the freight payable for the goods delayed, but not exceeding the total freight payable under the contract of carriage of goods by sea.
Rotterdam Rules (2008)
In December 2008, a new UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea called the Rotterdam Rules was adopted and was designed to replace the above mentioned conventions.
Under the Rotterdam Rules, the limit of liability is 875 units of account per package or unit, or 3 units of account per kilogram of the gross weight of the goods, whichever amount is the higher, except when the value of the goods has been declared by the shipper and included in the contract particulars, or when a higher amount than the amount of limitation of liability as above has been agreed between the carrier and the shipper.
The Carriage of Goods by Sea Act (COGSA)
Under US COGSA, the limitation of liability on the carrier or the ship does not exceed USD500 per package or unit or the equivalent of that sum in other currency, unless the nature and value of such goods have been inserted in the bill of lading.
What does “Limitation of Liability” mean for the ocean carrier’s role in logistics handling?
Over 90% of cargoes all over the world are shipped by sea since development of international trade and demands of shippers in logistics has directly affected ocean carriers. The impact of market changes has also been reflected in regulations dealing with sea carriage.
Although “Limitation of Liability” defines responsibility of carriers in legal procedures against claims it is in direct connection with ocean carrier’s performance on logistics handling. Responsibility limit indicates that to what extent a carrier is involved in carriage process and related services shipper may require while transportation.
From this aspect in Hague Rules carriers are apart from shippers. They are performing sole carriage with restricted responsibility in cargo matters and even incidents that may occur during sea passage.
Although Hague-Visby Rules shows increase in liability limit, ship and carrier are not responsible for the faults of master, pilot or servants of the carrier in navigation or ship management incidents therefore still carriers are not involved with concerns of cargo owners.
The sign of carriers moving towards shipper’s concerns appears with the publication of Hamburg Rules (1978) by United Nations. Period of liability extends from port of loading up to port of discharge. Carriers and their servants are liable for failures and incidents may take place while sea transport.
Carriers are responsible not only on loss or damage but also on delay in delivery. For the first time the contract defines liability for delay in delivery. Now the carriers begin to care more about cargo and shipper’s requirements become important to them.
A few years after issuance of Hamburg Rules for sea carriages, United Nations regulation for Multimodal Transport was published based on which freight forwarders, issued FIATA bill of lading, and presented combined mode of transport under unique contract to customers.
As this changed the concept of services in logistics sector and transport companies were responding to market demands, ocean carriers had to adapt themselves with new market changes too.
The aim of the Rotterdam Rules was that it will replace The Hague Rules, The Hague-Visby Rules and the Hamburg Rules and achieve uniformity of law in the field of maritime carriage as its liability limit is the highest among all contracts of carriage by sea.
Unlike these conventions, the Rotterdam Rules applies also to multimodal transport involving an international sea-leg and covers whole or partial carriage by sea.
The Rotterdam Rules were signed by 25 countries in September 2009, representing 25% of the world’s trade but only 4 countries Spain, Togo, Cameroon and Congo have ratified the Rotterdam Rules.
The Rotterdam Rules will come into force only a year after it has been ratified by 20 UN Member states and as it has already been 10 years since its adoption many are not holding their breath in anticipation.
Nowadays shipping and freight businesses including carriers are experiencing rapid changes in internal and external environments.
Ocean carriers are also expanding their businesses to logistics services, providing multimodal transportation, implementing solutions on cargo handling based on shipper demands and they are looking at customer-oriented methods in supply chain seriously.
Carriers are also dealing with complicated matters in connection with their customers, their services, environmental issues and development of new technologies in shipping industry so new demands will lead to new regulations.
The future is ahead and the important question is “what will be the next stage for ocean carriers”?
This article has considered just one item in the current regulations for ocean carriers, so stay tuned for more points that we will look at in other articles.