A Shipowner’s Right to Limit Liability: An Outdated Legal Relic or an Essential Safeguard?
- Felix Clacy
- Mar 6
- 9 min read
A shipowner’s right to limit liability refers to the legal principle that allows a shipowner to cap their financial liability for maritime claims at a certain value, typically calculated based on the vessel’s tonnage. This is presently governed by international conventions such as the Convention on Limitation of Liability for Marine Claims (LLMC) 1976 and its 1996 protocol, alongside national legislation, for example the US Limitation of Liability Act of 1851 and the UK Merchant Shipping Act of 1995 and their subsequent amendments. These laws prevent shipowners from being liable for the full extent of damages caused by their ship, so long as they can demonstrate due diligence in its management and operation.
Historically, the main justification for such a principle has been that it encourages investment in maritime trade and the shipping industry by shielding shipowners from the potential of financial ruin brought by large claims. Recent high-profile cases such as the Dali container ship’s 2024 collision with the Francis Scott Key Bridge in Baltimore have brought renewed attention to the principle, with some claiming it is outdated. In the immediate aftermath of the incident, the owners of the Dali attempted to invoke the Limitation of Liability Act of 1851 to cap their liability at around $43.7 million, a mere fraction of the estimated $2 billion in damages caused.
Historical context
While the concept of limiting a shipowner’s liability is of uncertain origin, it may be linked to the Roman law notion of noxae deditio, which allowed the owner of a guilty property to be absolved of liability for damage by surrendering the guilty property to the affected party or parties. Similarly, under modern-day US and UK maritime law, the financial liability a shipowner incurs from an incident at sea can be capped at the immediate post-incident value of their ship and its pending freight (the amount still owed to the shipowner for carriage of the cargo concerned).
During the 19th century, legal frameworks like the UK Merchant Shipping Act of 1854 and the US Limitation of Liability Act of 1851 (LLA) established this principle in law. After the Titanic’s infamous sinking following a collision with an iceberg in 1912, the LLA was invoked in US courts by the White Star Line, who argued the collision was an “inevitable accident” and that they had no “privity or knowledge” of any negligence that contributed to the disaster. Originally, the maximum value the White Star Line was deemed liable for under the LLA, based on the post-accident value of the ship and its cargo, was just $91,805. But after over 4 years of legal proceedings and negotiations, the company paid a total of $664,000 to be divided amongst the claimants (equivalent to around $19,000,000 today).
While the principle of limited liability served its purpose in this case, protecting the White Star Line from immediate bankruptcy in the wake of the incident, many have since asserted that the initial liability cap was extremely low for such an incident, and that even the settlement the claimants received was inadequate. Arguably, the legal protection available to the company was overly favourable to corporate interests, rather than those of the many victims.
Nevertheless, throughout the 20th century these limited liability protections continued. As maritime trade became increasingly globalised, different countries having different systems for calculating liability caps contributed to the need for a new international framework, particularly for use in cases that occurred in international waters. In response, international conventions such as the Convention on Limitation of Liability for Marine Claims (LLMC) 1976 and its 1996 protocol, were established. These conventions have created a uniform system for liability limitation in the shipping industry, ensuring consistency across separate jurisdictions. Proponents of shipowners’ right to limit their liability argue that they have maintained the economic viability of the industry and encouraged investment in vessel ownership and operation. Opponents claim they have created moral hazard by encouraging negligence in some cases where shipowners know they won’t have to bear the full financial consequences of their actions.
Additionally, some insist that basing liability caps on tonnage, as is the case with the LLMC, is nonsensical. Death by blunt trauma from a 50,000 ton container ship is no different than death by blunt trauma from a 100,000 ton container ship. If both ships cause the same outcome, why should a cap on liability differ between them?
The Dali incident: A Modern Challenge to Shipowners’ Right to Limit Liability
Several scholars believe that shipowners’ right to limit liability has become an unjustifiable exception to the basic legal principle of restitutio in integrum, meaning “restoration to original condition”, which aims to restore a victim to the position they were in prior to a wrongful act occurring. By shielding shipowners from the need to pay full reparation for damages caused by incidents involving their ships, whether through environmental pollution, personal injury or property destruction, this principle is clearly undermined. If claimants can only receive a capped amount, usually based on the ship’s tonnage, fair compensation will likely not occur.
Another problem is that when shipowners’ liability is limited, governments often must step in to cover costs, incurring a significant bill to the taxpayer, while shipowners are effectively protected from the financial burden of their own ship’s activities.
The 2024 collapse of the Francis Scott Key Bridge has reignited debate around shipowners’ right to limit their liability, as damages have been estimated to have exceeded $2 billion, while the shipowner filed to limit their liability to just $43.7 million in the aftermath of the incident. The city of Baltimore responded by asking the court to refuse this request. It also filed a claim against the shipowner, Grace Ocean, and the ship management company, Synergy Marine, accusing them of having an “incompetent crew” aboard the ship at the time of the incident. This could be interpreted as an implication that the shipowner did not “exercise due diligence” in managing the vessel, which is a key factor in the Limitation of Liability Act of 1851 for determining eligibility for limited liability protections.
To refute this, shipowners must prove they lacked “privity or knowledge” of any negligence or fault that caused the accident. However, some courts have previously claimed the meaning of “privity or knowledge” concerning a shipowner’s direct involvement with or awareness of the negligence that caused an incident is “somewhat elusive” and “difficult to apply”.
Further complicating matters, the so-called “Justice for Victims of Foreign Vessel Accidents Act” was introduced to congress in August 2024 by representatives John Garamendi (D-CA) and Hank Johnson (D-GA). Its main aim is to increase maritime liability limits for foreign shipowners to up to 10 times the dollar value of the vessel and its cargo. This would be applied retroactively to the night before the Francis Scott Key Bridge’s collapse, meaning the Singapore-based owners of the Dali would be required to pay up to $854 million in damages. In response, the Dali’s owners have enlisted the help of Blank Rome Government Relations, a lobbying firm, to ensure the Limitation of Liability act remains unchanged.
Because of all this, the likely outcome of the case is as yet unclear. The courts will first need to determine whether the shipowner can limit their liability under existing laws, while it is up to congress to decide on the proposed changes to maritime liability limits, which would force the owners of the Dali to pay up anyway if it is passed.
The Debate
Proponents of shipowners’ right to limit liability argue that it remains vital in a world where maritime trade is still paramount for transporting goods between countries. Indeed, over 80% of goods by volume are still transported by sea, and in 2019, the total value of the shipping industry accounted for over 14 trillion dollars, equivalent to over 15% of world GDP. Without this protection, the ensuing decrease in the risk-reward ratio for shipowners would likely result in a drastic reduction in investment in the capital-intensive shipping industry, which would severely harm international trade and have crippling impacts on the global economy. This would likely also disproportionately affect developing nations, who account for around 55% of seaborne exports and 61% of imports.
Additionally, without liability caps, insurance providers would be forced to cover unlimited claims in the face of large-scale maritime accidents, which would greatly increase the cost of underwriting policies. These higher insurance premiums would be passed on to shipowners, raising their operating expenses and potentially forcing smaller players out of the market – leading to a scenario where only the wealthiest companies can afford to operate, reducing competition and consolidating market share among a few dominant players. Given the shipping industry’s critical role in global trade and the heavy reliance placed upon it by all other industries, these antitrust concerns could trigger widespread economic repercussions, both by disrupting supply chains and provoking price-setting cartel behaviour, ultimately driving up the cost of living worldwide.
That being said, other industries that are equally critical to the global economy, that do not possess the same right to limit their liability, continue to operate successfully. For example, in the aviation industry, companies do not have a broad right to limit their liability for damages caused by accidents. While the Montreal Convention of 1999 limits liability for passenger injuries and deaths in certain situations in the aviation industry, it does not offer the same broad limitations that shipping companies benefit from under various specifically maritime-based limitation of liability acts. Both the aviation and shipping industries are involved in international trade and global travel, and both operate across different jurisdictions. The aviation industry is probably the closest analogue to the shipping industry in this sense, and despite the lack of a broad framework for limiting liability, like that which exists in the shipping industry, it continues to thrive.
However, it could be argued that in some cases maritime accidents are caused by factors completely outside of a shipowner’s control, such as natural disasters. The right to limit their liability protects shipowners in these circumstances by ensuring they don’t face an unjust financial burden from incidents in which they have zero involvement. The absence of liability limitation in other industries, like the aviation industry, does not necessarily make such limits unjustifiable in maritime law.
But opponents point to the suffering that many victims face from maritime incidents as a reason why shipowners should not have the right to limit their liability at all. The Dali incident caused the deaths of six construction workers, causing immense emotional distress to their families. Why should they not be entitled to full compensation from the shipowners, considering if an incident involving a vehicle other than a container ship had killed them, they would be? Prior to the incident, the Dali was only valued at up to $90 million. With this in mind, along with the estimated total damages reaching above $2 billion, how can it possibly be fair for the owners’ liability to be limited to just $43.7 million?
Grace Ocean and Synergy Marine have since reached a civil settlement with the US department of Justice for $102 million, which will be used to cover the costs incurred by federal agencies in their response to the incident. There are still other claims worth billions ongoing, but this does beg the question – if the shipowners are allowed to limit their liability in this case, where will the money come from for the families of the victims? While personal injury and wrongful death claims do tend to have a higher priority in the distribution of proceeds compared to property damage claims under the LLA, if the shipowners’ liability is successfully limited to just $43.7 million in the Dali case, there almost certainly won’t be enough money to fully compensate all affected parties.
Ultimately, the question arises: how can fairness to victims be balanced with fairness to shipowners in such cases?
Conclusion
The principle of shipowners’ right to limit liability may have once been a necessary safeguard to support maritime commerce, but it is now facing increased scrutiny due to its fraught potential for causing injustice. It is clear there have been many historic cases where this principle has raised ethical, economic and environmental concerns. Where the money should come from to pay the full cost of claims, if not from the shipowners involved, is a key question.
In the past, some maritime incidents have incurred significant costs to the taxpayer. In the aftermath of the 1989 Exxon Valdez spill off the coast of Alaska for example, total costs exceeded $7 billion dollars, of which the company only covered around $3.8 billion. While they did pay some additional funds later, the US taxpayer footed a large proportion of the bill, something which have argued was unjustifiable. On a more positive note, this disaster did play a major role in shaping the polluter pays principle, which became a constituent part of the 1992 Rio Declaration on Environment and Development, signed by over 175 countries. In practice, this has meant that shipowners can no longer limit their liability in cases involving large oil spills in the national jurisdictions of these countries. Pollution in international waters, however, remains difficult to regulate under this principle.
As previously mentioned, maritime trade is so vital to the global economy that covering liability for some incidents may be a necessary burden for the taxpayer to bear to ensure that shipowners continue to buy and operate vessels in the future. Without some form of limited liability, they could be deterred from entering into or staying in the industry, which would likely devastate the global economy and jeopardise global supply chains.
Reforms to current laws may address the shortcomings of the current system, while maintaining the incentive for shipowners to operate in the maritime industry. International conventions such as LLMC 1976 and its 1996 protocol could be amended to increase liability caps, ensuring compensation reflects modern-day costs. While Article 8 of the 1996 Protocol allows liability limits to be reviewed every 5 years to account for inflation, this is clearly not in the interests of shipowners. It took 16 years for them to be increased, when the 2012 amendment to the LLMC 1996 protocol finally raised compensation limits by 51%. A yearly review and adjustment to take inflation and severity of individual cases into account could be an improvement to the law, ensuring that claimants are entitled to compensation that more accurately reflects the current cost of living.
Before this policy can be implemented, economists would first need to investigate what the impact of this would be on global trade. In addition, getting all 62 countries that have ratified the 1996 protocol to agree to these changes may be extremely difficult in practice, as some countries may be adamantly against them - especially if they are big maritime players.
Alternatively, while a shipowner’s right to limit their liability already rests on their ability to prove they had no privity or knowledge of any negligence that contributed to an incident (e.g. by failing to provide proper training, maintenance or safety measures), amending the law to enhance the chance of a shipowner being found liable for this would dramatically reduce the likelihood of certain incidents occurring and prevent them from knowingly allowing their ships to continue operating in an unprofessional manner. Given the Dali incident having been blamed on its crewmembers lacking proper training, failing to follow safety protocols and poorly maintaining the vessel, amending the law in this way could ensure that shipowners invest sufficiently in improving the quality of their crew onboard and their adherence to safety protocols, preventing a repeat of another similar incident in the future.