Under the United States Limitation of Liability Act, a shipowner may commence an action for exoneration from or limitation of liability with respect to all claims arising on a particular voyage. The main advantages of such an action are:

1. Owner is entitled to limit its liability for all such claims to the value of the vessel after the collision and its "pending freight" if Owner can prove that the cause of the loss was outside its "privity or Knowledge." Owner must establish a limitation of liability fund based on these amounts. "Pending freight" includes any earned freight for the voyage.

2. Owner is entitled to obtain an injunction against all claimants which compels them to file their claims in the limitation action. The injunction is binding on all United States claimants and any foreign claimants who want to sue Owner in the United States. This has the result of creating a "concursus" of all claims brought in the United States so that Owner may defend against them in a single proceeding. A limitation action must be commenced no later than six months after receiving first written notice of a claim.

The concept of "privity or knowledge" requires that Owner have actual or constructive knowledge of the condition or act causing the loss. In the case of a corporate owner, "privity of knowledge" must be that of an employee with management-level responsibility. It bears emphasis that the "privity or knowledge" required to preclude an owner from limiting liability must be causally related to the loss.

Limitation of liability actions involve a two-stage process. The first stage concerns the question of whether Owner has any liability for the claimed losses. If not, Owner is exonerated from liability and that ends the matter. If Owner is liable for the claimed losses or damages, however, the court then considers whether Owner is entitled to limitation of liability.

In the case of a collision, to limit its liability, Owner has the burden of proving that the cause of the collision was outside its "privity or knowledge." Thus, Owner has the burden of proving the cause of the collision and that the cause was outside its "privity or knowledge." As a general proposition, if a collision is caused by errors in navigation and the claims at issue involve only property damage, the shipowner should be entitled to limit its liability.

As a general rule, limitation of liability has not been allowed in cases where the court found that the collision resulted from an unseaworthy condition which the vessel owner should have corrected. This would include the case where a collision was caused by the incompetence of the master or crew. See, e.g., Complaint of Tug Ocean Prince, Inc., 584 F.2d 1151, 1159 (2d Cir. 1978) where the Court noted: In order to limit the owner's liability, the injury must occur without his privity or knowledge. This phrase is often defined as "complicity in the fault that caused the accident." Where the owner's negligent act caused the alleged injury as found by the trial court, clearly all of the requirements of "privity" are satisfied.

More recently, the Second Circuit has held that the owner's belief that the master is competent must be based on evidence that renders the belief objectively reasonable. Complaint of Gugliemo, 897 F. 2d 58 (2d Cir. 1990).

Where a collision results from errors in navigation or management of the vessel committed by a competent, licensed and trained crew, on the other hand, limitation of liability should be granted. In Complaint of DFDS Seaways (Bahamas) Ltd., 1989 AMC 945 (S.D.N.Y. 1988), the Court granted the shipowner's petition to limit liability, holding: The failure to secure adequately on oil line and the propping open of two doors were the prime causes of the fire and its consequences. Neither of these events nor any of the inadequacies in the crew's response to the fire were matters within the knowledge or privity of the owners or managers of the vessel. There is no evidence of any wanton or willful disregard of the passengers' safety. There was adequate conduct of drills, and the vessel had an emergency plan. Accordingly, we conclude that petitioners have established a prima facie case of entitlement to limitation and claimants have not rebutted it. We hold that petitioners are entitled to limitation of liability.

In Complaint of Seiriki Kisen Kaisha, 629 F. Supp. 1374 (S.D.N.Y. 1986), the Court upheld limitation of liability for one of two vessels involved in a collision but denied limitation to the other vessel owner: This Court concludes that the Stena interests have sustained their burden of proof with respect to their own limitation of liability. No mechanical or structural defect or deficiency in the Stena contributed to the collision. Moreover, its Master and the crew had the requisite educational and experiential credentials for their respective positions.

While there is no question that the Seiryu interests provided a structurally adequate vessel, they have failed to sustain their burden of proving the competency of the vessel's crew. This failure relates to the licensure of certain officers and the processes by which they were hired as well as the inspection and follow-up procedures utilized to ensure that the vessel was complying with relevant safety and navigational provisions. The cumulative effect of these factors indicates 'prior action or inaction' on the Seiryu's interests' part that 'set into motion a chain of circumstances' that contributed to the casualty.

In Seiriki, Stena's practice of permitting a helmsman-lookout on a fully automated ship to go below to call the next watch was held not improper under ordinary conditions, but it was a fault to follow the practice when another vessel was close by. While management was aware of the practice under ordinary conditions, they were not privy to the watch officer's permitting the helmsman-lookout to go below with another vessel close by, and limitation was therefore granted.

Complaint of Gwynedd Corp., 1979 AMC 531 (S.D.N.Y 1978) is also noteworthy. There, a dredge sank while being towed offshore. The captain of the tug held licenses to operate in lakes, bays and rivers, but did not obtain his license to operate uninspected towing vessels on an ocean voyage until shortly after the casualty. Prior to the voyage, neither the captain nor any member of the crew had ever been on an offshore tow, and the captain testified that he had never towed a tow as large as the dredge and barge. Notwithstanding the foregoing, the Court found the owner entitled to limit its liability, holding as follows: In this case, the rule which required reporting of the stranding incident was an obligation placed on the captain of the tug and the failure to perform that obligation cannot be said to have been within the privity or knowledge of the owners. Further, there is no proof that the tug owners knew that the captain did not have the proper license for the particular route. In fact, the tug owners argue that the failure to have a license was a mere oversight and not a proximate cause of the sinking since an oceangoing license was obtained 13 days after the sinking. Accordingly, the Court concludes that Gwynedd and ACA are entitled to limitation of liability.

In re Kristie Leigh, 72 F.3d 479 (5th Cir. 1996) involved a collision between the tow of the tug Kristie Leigh and two outboard pleasure fishing vessels. The owner of the tug petitioned for limitation of liability in the District Court in the Southern District of Texas, which application was denied by the district court following trial. The district court ruled that the accident was caused by the negligence of the tug captain, although the court did not find him to have been incompetent. The lower court nevertheless denied the application for limitation of liability, charging the company with the constructive knowledge of the captain's negligence in finding that the company was not properly equipped to evaluate the competence of crew members or to evaluate how tows should be configured and was negligent for failing to hold safety meetings, enact safety policies or make routine inquiry into their captain's operational decisions.

On appeal, the sole question before the court was "whether the district court erred in concluding that [owner] could not limit because it failed to exercise reasonable diligence in discovering similar navigational errors [the captain] had made earlier and because it did not provide better training and supervision." Id. at 481. The Fifth Circuit reversed the district court's holding, noting as follows: The district court did not find that Captain Rogers was an incompetent master, and the record would not support such a finding. Captain Rogers was a properly licensed tug captain with over thirty years of experience. . . . Without knowledge that its captain was inadequate or unsafe the record does not support a conclusion that Captain Rogers was incompetent and needed additional training or instruction in performing his duties.

Id. at 482

The holding in Kristie Leigh was addressed in a more recent decision by the Fifth Circuit in which the Court noted: [Owner] contends that all it is guilty of is having a "hands-off" approach to management, which it claims is permissible under this court's decision in Kristie Leigh. [Owner] is mistaken. Though this court did recognize that a vessel owner could not be denied limitation of liability based merely on errors in navigation errors. . . Diamond B knew, or should have known, that the MISS BERNICE was unseaworthy and that its captain was improperly trained.

Complaint of Trico Marine Assets, Inc.,2003 U.S. App. LEXIS 10645 (5th Cir. 2003).

To see the Appendix of the US Code on Limitation of Liability go to:

http://www.law.cornell.edu/uscode/html/uscode46a/usc_sup_05_46_10_8.html