Admiralty & Maritime Claims

ACI’s 2nd Annual Forum

Limitation of Liability &

Indemnity Issues Post MSC

Flaminia, Costa Concordia

and Deepwater Horizon

February 27, 2013

Houston, Texas

Christopher Nolan

Partner

Holland & Knight LLP

212-513-3307

[email protected]

Who is this tired looking man and what is he

so tired of??

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Shipowner’s Liability Act of 1851

46 U.S.C. §§ 30505 et seq.

Does the Limitation Act Require Tweaking?

• An owner of a vessel can limit liability for all claims arising from an incident

involving the vessel to its postvoyage value and that of its cargo.

• The owner of a vessel may bring a civil action in Federal district court to

limit owner liability with respect to:

− (1) damage done to goods onboard the vessel;

− (2) damage by collision to other vessels and their cargo; and

− (3) any other damage or forfeiture done or incurred without the privity

or knowledge of the owner (including personal injury and death).

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• INITIAL PURPOSE: Encourage the investment of capital in the construction and ultimate

navigation of ships by allowing the owners of American ships to compete on equal footing with

foreign ship owners whose ships were covered by similar limitations regimes (especially

England).

Hartford Accident & Indem. Co. of Hartford v. S. Pac. Co., 273 U.S. 207, 214 (1927); Richardson v. Harmon, 222 U.S.

96, 104-05 (1911).

• TODAY: Shipowners continue to reap the benefit of the Limitation Act as it alters vicarious

liability rules which traditionally allow an injured party to seek the full recoupment for injuries

suffered.

In re City of New York - M/V Andrew J. Barberi, 522 F.3d 279, 283 (2d Cir. 2008).

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Shipowner’s Liability Act of 1851

46 U.S.C. §§ 30505 et seq.

Limitation Act: Deepwater Horizon

• April 20, 2010, approximately 10 PM: MODU

Deepwater Horizon Explosion

• May 13, 2010: Transocean files Limitation of

Liability Proceeding

• Main Benefit: Concursus of claims, ultimately

before Judge Barbier in New Orleans

• Main Detraction: Mere filing resulted in

Congressional calls for repeal.

− ―no longer necessary‖;

− ―serves no legitimate purpose‖ − Sen. Chuck Schumer

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Limitation Act: Deepwater Horizon Fallout

• Repeal Efforts Thwarted

− Industry and trade associations explain ultimate damage to U.S. shipowners

− Impossible to overcome unlimited liability in insurance market

− Limitation devices available in other legal disciplines

− Concursus is more workable then MDL and solves state court issue

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• Efforts to Tweak Limitation Act

−Example 1: Deepwater Horizon Survivors’ Fairness Act

− Legislation introduced January 25, 2011

− Purpose: Address inability for the widows and families of Deepwater

Horizon workers to secure ―fair‖ compensation for their loss. Expand the

remedies available to the families by allowing them to seek nonpecuniary

losses and fair compensation for pain as if accident occurred on land.

− Impact: retroactively removing various limits on the liability that owners and

operators of vessels face as a result of the Deepwater Horizon explosion.

Revisions to Shipowners’ Liability Act of 1851, DOHSA, and the Jones Act.

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• Proposed Legislative Amendments:

• CHAPTER 305. EXONERATION AND LIMITATION OF LIABILITY

§ 30505. General limit of liability

(a) IN GENERAL.—Except as provided in section 30506 of this title, the liability of

the owner of a vessel for any claim, debt, or

− liability described in subsection (b) shall not exceed the value of the vessel and pending

freight. If the vessel has more than one owner,

− the proportionate share of the liability of any one owner shall not exceed that owner’s

proportionate interest in the vessel and pending freight.

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(b) CLAIMS SUBJECT TO LIMITATION.—Unless otherwise excluded by law,

claims, debts, and liabilities subject to limitation under

− subsection (a) are those arising from any embezzlement, loss, or destruction of any

property, goods, or merchandise shipped or put

− on board the vessel, any loss, damage, or injury by collision, or any act, matter, or thing, loss,

damage, or forfeiture, done, occasioned,

− or incurred, without the privity or knowledge of the owner.

c) CLAIMS NOT SUBJECT TO LIMITATION.—Subsection (a) does not apply—

(1) to a claim for wages; or

[NEW] (2) to a claim for personal injury or wrongful death arising from the blowout and

explosion of the mobile offshore drilling unit Deepwater Horizon that occurred on

April 20, 2010.

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• Status: Bill died at end of 112 Congress.

• Future: December 5, 2012 report issued by Senator Rockefeller

IV analyzing impact of the bill and need for its passage. Likely

to reintroduce before retirement.

• Good idea?

− 1851 Act remarkably durable.

− Few tweaks over the decades.

− Potential Retroactive efforts add uncertainty to shipowner viability post

incident and could impact insurance premiums.

− Indications bill will be introduced by Sen. Rockefeller (retiring)

For Copy of Report, email me at [email protected]

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• Efforts to Tweak Limitation Act

− Example 2: MLA committee recommendation to consider adopting

Convention on Limitation of Liability for Maritime Claims, 1976

(ratified by over 70 nations (but not the U.S.)) with 1996 Protocol

Amendments

− Differences between 1851 Act and Convention:

(a) broader scope for those who may limit (charterer, insurer, salvor);

(b) types of vessels (drilling floating platforms);

(c) harder to escape limitation;

(d) set statutory type limits

− Likelihood: Though size of the fund would be larger with 1996

Protocols to Convention, breaking limitations is harder and makes wide

congressional and some industry approval unlikely.

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Limitation Act: Costa Concordia

• Tragic shipwreck of the cruise ship

Costa Concordia on January 13, 2012.

• Random suits filed around the U.S., most

significantly the Giglio Sub S.N.C. in

S.D. Fla. U.S. Limitation Act

Proceeding? No.

• September 26, 2012 ruling in S.D. Fla.

granting forum non conveniens motion

per five conditions concerning primarily

jurisdiction issues. − Giglio Sub s.n.c. v. Carnival Corp., 2012 WL

4477504 (S.D.Fla.)

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http://www.demotix.com/photo/1718398/one-year-anniversay-resurfacing-costa-concordia

Limitation Act: MSC Flaminia

• July 14, 2012 container vessel MSC Flaminia suffers fire and explosions while sailing

from the Port of Charleston to Antwerp, Belgium.

• Towed to Germany where cargo remained; General Average claimed.

• U.S. Limitation Act Proceeding?

− Yes – Filed in S.D.N.Y. December 7, 2012

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Limitation Act: MSC Flaminia Fallout

• Purpose for Limitation Petition

− Take advantage of concursus: at the timing of filing the limitation petition, two other civil

suits had been filed in the S.D.N.Y. arising out of damage to cargo

− Bond posted: None.

− Why? Ad Interim Stipulation for Value = $0

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Reminder: Limitation fund equals the value of the vessel after casualty plus

freight pending

Value of vessel pre-casualty: $26 million

Value of pending freight: $737,000

Estimated cost to repair: $23 million

Estimated owner general

average contribution: between $5 and $35 million

January 18, 20-13: Court approves order restraining suits and Petitioner’s ―security‖

Limitation Act: MSC Flaminia Fallout

• Case Status: Cargo interests file OSC to release cargo in Germany upon posting of

appropriate security; owners oppose as issue should be determined by GA adjuster in

London; likely result? Court will deny motion; end around GA adjuster’s powers.

• Will Incident Result in Limitation Act Tweaking?

Unlikely

(1) No public outcry (3 seamen killed but no Americans; happened

1000 miles from shore)

(2) general average fills the gap – GA adjuster will require security to

cover expenses and sacrifices from all parties to the adventure.

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Indemnity Agreements v. Public Policy

General Maritime Law After Deepwater Horizon

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• In re Deepwater Horizon, 841 F. Supp. 2d 988 (E.D. La. 2012)

• Course Correction For The General Maritime Law Of Indemnity

Contracts?

− Yes. New Framework Suggested for Interpreting Maritime Indemnity Clauses

− Judge Barbier ruled on January 26, 2012 BP required to indemnify Transocean for

pollution claims asserted by third parties, even if claims were caused by

Transocean's gross negligence.

− Surprise to maritime industry: well-settled maritime law concept that public

policy prohibits and invalidates a contractual indemnity that purports to include

gross negligence or intentional misconduct

Photo of BP Lawyer Inside Litigation Bunker When

Reading Judge Barbier’s Indemnity Decision

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In re Deepwater Horizon,

841 F. Supp. 2d 988 (E.D. La. 2012)

• How was a new framework articulated?

− The court distinguished a contract that acts as a "release" from an

"indemnity" for damages owed a third party:

" As distinguished from a [exculpatory clause] release, a true

indemnity agreement determines which party to a contract

ultimately bears the risk of injury to a third party."

(bold in original) (citations omitted).*

________

*Judge Barbier's distinction between a release and a pure indemnity situation had not

previously been relied upon in any reported maritime cases analyzing public policy

limits on gross negligence in indemnity provisions.

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841 F. Supp. 2d 988 (E.D. La. 2012)

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Expansion of Indemnity Under Maritime Law to

Include Gross Negligence:

1. Found contract explicitly contemplated TO gross negligent conduct

covered by indemnity;

2. No limiting Fifth Circuit authority on gross negligence issue

a. Recent Becker decision – gross negligence dicta

b. Earlier decisions (Houston Exploration & Todd Shipyards

were ―release‖ cases


841 F. Supp. 2d 988 (E.D. La. 2012)

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3. Two competing principles underlying extension of indemnity to include

grossly negligent conduct: "the issue creates tension between two policies:

freedom of contract, which weighs in favor of enforcing the indemnity,

and a reluctance to encourage grossly negligent behavior, which weights

against enforcing the indemnity."

a. Freedom of contract issues: TO and BP roughly equal bargaining power

both being sophisticated entities engaged in a "potentially lucrative and

obviously risky endeavor. "

b. Drilling contract reflects the parties' attempts to "allocate risk ahead of time

in order that a certain degree of certainty may be brought to the risks

inherent in that undertaking. "

c. The court also noted that with a true indemnity, the injured third party

typically is not restrained from seeking compensation; rather, the source of

the compensation is shifted to the indemnitor.


841 F. Supp. 2d 988 (E.D. La. 2012)

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Why does new framework matter?

• Limits commonly accepted principles

• Royal Insur. Co. of Am. v. S.W. Marine, 194 F.3d 1009, 1014

(9th Cir. 1999)

―We are persuaded, however, that a party to a maritime contract should not be permitted to

shield itself contractually from liability for gross negligence.‖


841 F. Supp. 2d 988 (E.D. La. 2012)

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Indemnity clause from company to contractor covering contractor’s

gross negligence could in fact be struck down as unenforceable

Public policy: Restatement (2d) Contracts:

"A term exempting a party from tort liability for harm caused

intentionally or recklessly is unenforceable on grounds of public

policy.... The law of torts imposes standards of conduct for the

protection of others against unreasonable risk of harm. One cannot

exempt himself from such liability for harm that is caused either

intentionally or recklessly.)"

Corbin on Contracts:

"It is generally held that [a party] may properly bargain against liability for harm

caused by their ordinary negligence; but such an exemption is always invalid if it

applies to harm willfully inflicted or caused by gross or wanton negligence "

Williston on Contracts:

"An attempted exemption from liability for ... a future willful or grossly negligent act is

generally held void....");

Prosser & Keeton, Torts:

"such agreements generally are not construed to cover the more extreme forms of

negligence, described as willful, wanton, reckless or gross‖.

Holding in Royal:

May now simply be limited to ―release‖ type reasoning

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Well-settled common law contract principles:


841 F. Supp. 2d 988 (E.D. La. 2012)

Fallout?

23

Still Too Soon To Tell

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Judicial – No reported decisions yet analyzing gross negligence in

indemnity in the ―release‖ v. true indemnity context

• In re Aramark Sports & Enter. Svcs., 2012 WL 3776859 (D. Utah Aug.

29, 2012)

• Limitation action

• Powerboat accident on Lake Powell

• Decedent signed rental agreement with indemnity clause

(release/exculpatory clause scenario)

• Court: clause consistent with public policy; own negligence can be

absolved, not gross negligence.

• Cites Royal Insurance, not In re Deepwater Horizon

Business – owners/operators; brokers; banks; shipowners

Thank You.

Christopher Nolan

Partner

Holland & Knight LLP

212-513-3307

[email protected]

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Admiralty & Maritime Claims