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Maritime Cargo Liability Law in Light of Insurance Realities

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Effects of Insurance on Maritime Liability Law

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Abstract

As repeated throughout the book, liability rules may serve two functions: deterrence and compensation. Deterrence from negligence is the main purpose of liability under an economic analysis. Compensation would be important when liability claimants are not insured. This is because compensation only transfers the burden of loss from one party to another, while deterrence reduces possible losses by inducing a liable party to take care.

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Notes

  1. 1.

    See Brown (1978–1979), p. 111.

  2. 2.

    See Shavell (2004), pp. 267–269.

  3. 3.

    For empirical evidence, see infra Sect. 5.5.

  4. 4.

    As compensation served the function of insurance, we will use the words ‘compensation’ and ‘insurance’ interchangeably. We will also use the word ‘compensation’ in a broader sense in that when a liable person does not have to pay at all or pay only partially for the loss generated from his activity, he is compensated at the expense of victim. The principle of limitation of liability is thus designed to compensate ship owners.

  5. 5.

    Convention on Contracts for International Carriage of Goods Wholly or Partly by Sea, Dec. 11, 2008, G.A. Res. 63/122, U.N. Doc. A/RES/63/122 [hereinafter the Rotterdam Rules].

  6. 6.

    They are the Hague-Visby Rules [the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading, Aug. 25, 1924, 51 Stat. 233, 120 L.N.T.S. 155 as amended by its 1968 Protocol, 2 U.N. Register of Texts Ch. 2, at 180], the Hamburg Rules [the United Nations Convention on the Carriage of Goods by Sea, Hamburg, Mar. 31, 1978, U.N. Doc. A/Conf. 89/5, (1978) 17 I.L.M. 608] and the Rotterdam Rules.

  7. 7.

    Although cargo is also carried under charterparties, we will confine our discussion mainly to non-charterparty situations because charterparties are not generally governed by the current cargo liability regimes except when a third party consignee is involved. See article V of the Hague-Visby Rules; article 2.3 of the Hamburg Rules; and articles 6.1 (a) and 7 of the Rotterdam Rules.

  8. 8.

    Canada is not party to any of the cargo liability conventions but incorporated the Hague-Visby Rules in its Marine Liability Act, S.S.2001, c.6, Part 5 and Sch. 3. On the other hand, the United States is party to the Hague Rules and implements the convention with slight modification through its Carriage of Goods by Sea Act of 1936, 49 Stat. 1207, former 46 USCA Appx §§ 1300–1315.

  9. 9.

    It entered into force on Nov 01, 1992. See Force (1995–1996), p. 2053.

  10. 10.

    As of 02 September 2013, only two states, Spain and Togo, ratified the convention. See http://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XI-D-8&chapter=11&lang=en. Accessed 02 September 2013. According to its article 94, 20 ratifications are required for it to come into force.

  11. 11.

    Articles III and IV.1 of the Hague-Visby Rules.

  12. 12.

    See Gilmore and Black (1975), p. 169.

  13. 13.

    See article 5.1 and Annex II of the Hamburg Rules.

  14. 14.

    See article 17 of the Rotterdam Rules.

  15. 15.

    Cf. Gilmore and Black (1975), pp. 183–185.

  16. 16.

    See Gilmore and Black (1975) at p. 141.

  17. 17.

    Article IV.2 (a) excludes the ship owner from liability due to “[a]ct, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or management of the ship.”

  18. 18.

    Article IV.2 (b) gives a ship owner exemption from liability for “[f]ire, unless caused by the actual fault or privity of the carrier.” (Emphasis added).

  19. 19.

    The Hamburg Rules do not contain a ‘laundry list’ of exceptions. Although few of the exceptions are mentioned in its sections, they are mainly based on reasonable care on the part of the ship owner. See Force (1995–1996), pp. 2065–2069.

  20. 20.

    Although the Rotterdam Rules contain a list of exceptions, the list does not include the above two.

  21. 21.

    See Tetley (2003–2004), p. 1.

  22. 22.

    See article IV.5 (a) of the Hague-Visby Rules, article 6.1(a) of the Hamburg Rules, and article 59.1 of the Rotterdam Rules.

  23. 23.

    Article V of the Hague-Visby Rules; article 24 of the Hamburg Rules; article 84 of the Rotterdam Rules.

  24. 24.

    To be sure, however, legislatures and courts do not always give equal importance to these two functions of liability laws. One function may weigh more than the other in the decisions and public policies. See generally Fleming (1985), pp. 1–18.

  25. 25.

    There is caveat to the statement; that is, transfer of loss from more risk-averse to less risk-averse through liability rules can serve a society’s distributional goal and can increase social welfare or utility. This is because a dollar has more value or utility to a poor person (usually more risk-averse) than to a rich person (less risk-averse) due to ‘diminishing marginal utility’ of wealth with the growth of wealth. Such transfer is, however, done more efficiently through tax law than liability law. See Shavell (2004), pp. 648–649.

  26. 26.

    See the reasons for ‘distributional goal’ of liability rule in the above note. These reasons will be further elaborated infra Sect. 5.4.2.

  27. 27.

    See Shavell (2004), pp. 267–269, 647–649.

  28. 28.

    Strict liability, on the other hand, focuses mainly on compensation. It may or may not produce deterrence depending on the nature of the loss. If certain losses are inevitable regardless of proper precaution, imposing strict liability will not serve the goal of deterrence. Deterrence will result from strict liability only when the loss is preventable with proper precaution. In the latter situation, strict liability may, in fact, produce stronger deterrent effect than negligence-based liability law. See Shavell (1987), pp. 8–9; Shavell (2004), pp. 98–99 and 189.

  29. 29.

    U. S. v. Carroll Towing Co., 159 F.2d 169 at 173 (2d Cir. 1947). See also Posner (2003), p. 168; Shavell (1987), pp. 19–20 note 23.

  30. 30.

    Courts-determined standards of ‘reasonable care’ in negligence settings will usually vary with the cost of care and the risk of harm arising from lack of care. The greater the harm or the higher the likelihood of its occurrence, the higher would be the standard of ‘reasonable care’. For example, in a narrow channel where the probability of accident is higher in the absence of care, the standard of reasonable care is correspondingly higher. Care in such situation includes slowing the speed (slow navigation means more time for the transportation of cargo, which translates into more cost for the ship owner) and employing pilots (thus incurring the pilotage fees). See The Alletta, [1965] 2 Lloyd’s Rep. 479 (where master’s failure to use the service of a pilot caused an accident; the master was held negligent, even though pilotage was not compulsory). See generally, Shavell (2004), pp. 190–192.

  31. 31.

    “If … the ship owner were immune from all liability for loss or damage which could have been avoided by physical precautions taken while the goods were in his custody, he would have no commercial inducement to expend money on precautions to preserve the cargo from loss or damage which were not also required for the safety of the vessel, even if the cost were small in comparison with the resultant reduction in the risk of loss or damage.” Diplock (1970), p. 527 (emphasis added).

  32. 32.

    Article IV.2(a) of the Hague-Visby Rules (emphasis added).

  33. 33.

    Article IV.2(b) of the Hague-Visby Rules (emphasis added) i.e., negligence of master and crew in causing fire is excluded.

  34. 34.

    Care in this context involves mainly employing adequate number of well-trained and certified crew members. As crewing cost is highest operational cost, there is a tendency among ship owners to employ insufficient and under-trained crews in order to save costs.

  35. 35.

    Diplock (1970), p. 528; Gilmore and Black (1975), pp. 143–144.

  36. 36.

    For example, with 10 % probability of $500 worth of damage to ship and $500 worth of cargo loss, ship owner may not take care in the absence of liability when the cost of care is $90 even though such care would completely eliminate the risk. However, with liability for negligent navigation he will take care as the net benefit from care will be $10 [$100 (10 % × $1,000) − $90] instead of net deficit of $40 in no liability situation [$50 (10 % × 500) (damage to ship) − $90 (cost of care)].

  37. 37.

    See Shavell (1987), pp. 51–53.

  38. 38.

    Coase (1960), pp. 1–23. For the ‘Coase theorem’ to hold true, the following assumptions have to be made: the parties are rational; transaction cost for each side is zero or less than the net benefit for each side; their negotiation is not affected by their relative wealth. See Coleman (1982), pp. 10–11.

  39. 39.

    Of course, in a real case there will be many aspects of care such as seaworthiness and cargo-worthiness of the ship, proper stowing of the cargo, proper training of the crew etc.

  40. 40.

    Coase (1960), pp. 15–16.

  41. 41.

    Gilmore and Black (1975), pp. 146–147, 198–199; Sturley (2004), pp. 140–143; Sturley (2003–2004), p. 89.

  42. 42.

    Sturley (2004), pp. 140–143.

  43. 43.

    This would be true even if the market is not competitive (absence of freedom of contract) and even if there is ‘inequality of bargaining power’ between a ship owner and a cargo owner. Lack of perfect information may be identified as the root cause of the problems of unequal bargain and the absence of real freedom in contract.

  44. 44.

    Article IV.1 (d) and (c) of the Hague-Visby Rules; article 17.3 (a) and (b) of the Rotterdam Rules.

  45. 45.

    Nugent v. Smith, [1876] 1 C.P.D. 423 at 444; cited in Gilmore and Black (1975), p. 163 note 71. See also Turgel Fur Co. Ltd. v. Northumberland Ferries Ltd. (1966), 59 D.L.R. (2d) 1 (N.S.S.C.); Gold et al. (2003), p. 459 note 271.

  46. 46.

    Per Hough J. in The Rosalia, 264 F. 285 at 288 (2d Cir. 1920); See also The Xantho (1887), 12 App. Cas. 503 at 509 (per Lord Herschell); Charles Goodfellow Lumber Sales Ltd. v. Verreault, [1971] S.C.R. 522 at 535 (per Ritchie, J.); cited in Tetley (2008), pp. 1038–1041; see also Gold et al. (2003), p. 459.

  47. 47.

    Gold et al. (2003), p. 459.

  48. 48.

    Gilmore and Black (1975), pp. 162–163.

  49. 49.

    Shavell (1987), p. 30; Shavell (2004), pp. 197–198.

  50. 50.

    Article IV.2 (e–h), (j) and (k) of the Hague-Visby Rules; see also article 17.3 (c–e) of the Rotterdam Rules. While some of the categories relating to arcane language of the Hague-Visby Rules such as ‘restrain of prince’ were deleted from the Rotterdam Rules, a new category (‘terrorism’) is added to this group; see article 17.3 (c).

  51. 51.

    Crelinsten Fruit Co. v. Mormacsaga (The), [1968] 2 Lloyd’s Rep. 184 (Ex. Ct.). See also United States v. Lykes Bros. Steamship Co, 511 F.2d 218 (5th Cir. 1975); cited in Gold et al. (2003), at p. 460 note 279.

  52. 52.

    Art. IV.2 (i), (m–o) of the Hague-Visby Rules; art. 17.3 (h), (j), and (k) of the Rotterdam Rules.

  53. 53.

    See generally Shavell (1987), pp. 9–20; Shavell (2004), pp. 182–192.

  54. 54.

    An example of inherent vice is that flour shrinks and loses weight during the voyage. See Tetley (2008), pp. 1142–1143.

  55. 55.

    See infra Sect. 5.4.2.

  56. 56.

    Art. IV.2 (l), (p) and (q) of the Hague-Visby Rules; art. 17.3 (g), (l), and (m) of the Rotterdam Rules.

  57. 57.

    See supra Sect. 5.2 the discussion on the basis of cargo liability laws.

  58. 58.

    See article 5(1) and Annex II of the Hamburg Rules; see also Force (1995–1996), pp. 2065–2069.

  59. 59.

    Article 17.3(a–o) of the Rotterdam Rules.

  60. 60.

    Article 17.3(n) of the Rotterdam Rules.

  61. 61.

    The increasing value of the environment is due not only to the decreasing number of such resources but also to the increase of their aesthetic value in the eyes of the public. On the question of valuation of environmental resources, see Grady (1980–1981), p. 397.

  62. 62.

    Shavell (1987), pp. 167–169; Shavell (2004), pp. 230–236.

  63. 63.

    See generally Shavell (2004), pp. 387–401.

  64. 64.

    Even if the cost of litigation is less than $500, the victim may not sue the injurer if he is not certain to win. For example, if the chance to win is only 50 %, the victim will not sue if his litigation cost is more than $250 (50 % × $500).

  65. 65.

    See Sykes (1984), pp. 1231–1281. See also Posner (2003), pp. 188–189.

  66. 66.

    Article 4.2(q) of the Hague-Visby Rules; article 5.1 of the Hamburg Rules; article 18 of the Rotterdam Rules.

  67. 67.

    Article 4.2(a) and (b) of the Hague-Visby Rules. In the USA, an exception to this negligent navigation exoneration occurs in a both-to-blame collision situation. This happens when a negligently carrying ship has to contribute to the liability paid by the non-carrying ship to the owner of the cargo on the carrying ship. Although the carrying ship would not have to pay to its cargo if sued separately, it pays for such loss indirectly when the cargo owner sues the non-carrying ship. Ship owners insert a ‘both-to-blame clause’ in the bills of lading, under which cargo owner is required to indemnify the carrying ship for that amount. However, the US Supreme Court in United States v. Atlantic Mutual Ins. Co., 343 U.S. 236, 72 S. Ct. 666, 1952 A.M.C. 659 (1952), refused to uphold the validity of such clause. See Gilmore and Black (1975), pp. 173–176. As ‘negligent navigation’ is not an exception in the Hamburg Rules and Rotterdam Rules, the carrying ship would be liable for its negligence whether sued directly or indirectly.

  68. 68.

    See Shavell (1982), pp. 121–122.

  69. 69.

    See Posner (2003), pp. 10–11. See Abraham (1986), pp. 11–12.

  70. 70.

    Shavell (1987), pp. 191–192; see also Abraham (1986), pp. 11–12.

  71. 71.

    See Shavell (2004), p. 258 note 2. Of course, there will be some additional charges to the actuarially fair premium to reflect the insurer’s administrative costs and profits.

  72. 72.

    Common carriers are ships which carry goods of many shippers, while private carriers are chartered ships and carry only the goods of the charterers. See Chiang (1973), pp. 299–330. For a historical evolution of the common carrier liability, see Holmes (1949), pp. 180–205.

  73. 73.

    See Propeller Niagara v. Cordes, 62 U.S. (21 How.) 7, 23 (1859); The Willdomino, 300 F. 5, 9, 1924 A.M.C. 889 (3d Cir. 1924), affirmed 272 U.S. 718, 47 S.Ct. 261 (1927); cited in Gilmore and Black (1975), p. 140 note 2.

  74. 74.

    Per Holt C.J. in Coggs v. Bernard, (1672) 93 Eng. Rep. 107 at 112 (K.B.), “The law charges this person thus entrusted to carry goods, against all events but acts of God, and of the enemies of the King. For though the force be never so great, as if an irresistible multitude of people should rob him, nevertheless he is chargeable. And this is a politick establishment, contrived by the policy of the law, for the safety of all persons, the necessity of whose affairs oblige them to trust these sorts of persons, that they may be safe in their ways of dealing; for else these ship owners might have an opportunity of undoing all persons that had any dealings with them, by combining with thieves, &c. and yet doing it in such a clandestine manner, as would not be possible to be discovered. And this is the reason the law is founded upon in that point”; cited in Chiang (1973), p. 304.

  75. 75.

    See Articles 4.1, 4.2(q) of the Hague-Visby Rules; article 5.1 of the Hamburg Rules; article 17.1 of the Rotterdam Rules.

  76. 76.

    See Chiang (1973), pp. 326–327. See also The Wildenfels, 161 F. 864 at 866 (2d Cir. 1908), cert. denied, 215 U.S. 597 (1909); Continental Ins. Co. v. Anchor Line Ltd., 53 F.2d 1032 at 1033 (E.D.N.Y.1931); cited in Chiang (1973), pp. 326–327.

  77. 77.

    See supra note 25 about the connection between wealth and risk-aversion. In general, the wealthier a person the less risk-averse he or she is.

  78. 78.

    “As a “common” carrier, entitled to make a reasonable charge for carriage, he could distribute the total cost of precautions that were economically productive among all his customers, and his charges in effect included an insurance premium against the risks…” Diplock (1970), p. 526 (emphasis added).

  79. 79.

    Per Lord Mansfield in Forward v. Pittard, (1785) 1 T. R. 27, “A carrier is in the nature of an insurer.” Cited in Beale (1897–1898), p. 168. Per Lord Wright in Paterson Steamship Ltd. v. Canadian Cooperative Wheat Producers Ltd., “At common law, he [ship owner] was called an insurer, that he was absolutely responsible for delivering in like order and condition at the destination the goods bailed to him for carriage.” [1934] A.C. 538 at 544 (PC) (emphasis added); cited in Gold et al. (2003), p. 363. See also Gilmore and Black (1975), pp. 176–182.

  80. 80.

    Davis v. Garrett (1830), 6 Bing. 716 at 724, 130 E.R. 1456 at 1459; Edwards v. Newland, [1950] All E.R. 1072 at 1081; cited in Tetley (2008), p. 1828 note 86.

  81. 81.

    See Gilmore and Black (1975), pp. 176–177.

  82. 82.

    Ellis v. Turner (1800), 8 T.R. 531, 101 E.R. 1529; cited in Tetley (2008), p. 1827 note 84. See generally Morgan (1978), p. 481.

  83. 83.

    Paterson S.S. Ltd. v. Canadian Co-operative Wheat Producers, [1934] A.C.538 at 544–545 (P.C.); S.S. Willdomino v. Citro Chemical Co., 272 U.S. 718 at 725, 1927 AMC 129 at 130 (1927); cited in Tetley (2008), p. 1827 note 85.

  84. 84.

    Tate & Lyle Ltd. v. Hain S.S. Co. Ltd. (1936), 55 Ll. L. Rep. 159 at 177 (per Lord Wright); see Tetley, Cargo Claims (2008 ed.), Tetley (2008) at p. 1882 note 88. These defences were acceptable in non-deviation cases. See F. Kanematsu & Co. Ltd. v. The Shahzada (1956), 96 C.L.R. 477 at 487, 30 A.L.J. 478; Paterson S.S. Ltd. v. Canadian Co-operative Wheat Producers, [1934] A.C.538 at 545 (P.C.); cited in Tetley (2008), p. 1828 note 89.

  85. 85.

    For the consequence of deviation in marine insurance policy, see s.43 of CMIA and s.46 of MIA. See also Green v. Young (1702), 2 Salk 444; Elliott v. Wilson (1776), 4 Bro PC 470; David v. Garrett (1830), 6 Bing 716.

  86. 86.

    Article 4.4. Although there is no direct provision in Hamburg Rules and the Rotterdam Rules on this issue, ship owner would not be liable for reasonable deviation under these Conventions because there has to be some ‘fault’ on the part of a ship owner to be liable and there can be no fault when deviation is reasonable. See article 5.1 of the Hamburg Rules and article 17(2) and 17(3)(l) and (m) of the Rotterdam Rules. See also Force (1995–1996), pp. 2065–2069.

  87. 87.

    See Gilmore and Black (1975), pp. 176–177.

  88. 88.

    General Electric v. Nancy Lykes, 706 F.2d 80, 1983 AMC 1947 (2d cir. 1983); Thiess Bros Ltd. v. Australian Steamships Ltd., [1955] 1 Lloyd’s Rep. 459 (Supreme Court of N.S.W); Drew Brown Ltd. v. The Orient Trader, [1974] S.C.R. 1286 (S.C.C); cases cited in Tetley (2008), p. 1840 note 141.

  89. 89.

    Unless that part of the sea where the ship deviated to happened to be under more unusual weather pattern. See Shavell (2004), pp. 249–256.

  90. 90.

    Frederick H. Cone & Co. Inc. v. The Tai Shan, 111 F. Supp. 638, 1953 AMC 887 (S.D.N.Y.1953), aff’d 218 F.2d 822, 1955 AMC 420 (2d Cir. 1955); cited in Tetley (2008), pp. 1841–1842 and in Gilmore and Black (1975), p. 141.

  91. 91.

    Under the US Fire Statute, 46 U.S.C. §182, the liability for fire damage is exonerated if the fire is not caused by the actual fault or privity of the ship owner.

  92. 92.

    111 F. Supp. 638 at 647, 1953 AMC 887 at 899.

  93. 93.

    In Putnam v. Wood, 3 Mass. 481 (1807) the court held, “If the goods are lost by reason of any defect in the vessel, whether latent or visible, known or unknown, the owner is answerable to the freighter, upon the principle that he tacitly contracts that his vessel shall be fit for the use, for which he thus employs her.” (Italics added); cited in Chamlee (1974), pp. 523–524. See also Work v. Leathers, 97 U.S.379 (1878); The Caledonia, 157 U.S. 124 (1895).

  94. 94.

    See Propeller Niagara v. Cordes, 62 U.S. (21 How.) 7 at 23 (1859); The Xantho, [1887] 12 A.C. 503 at 515; Lockett Co. v. Cunard S.S. Co., 21 F. 2d 191, 1927 A.M.C. 1057 (E.D.N.Y. 1927); cited in Gilmore and Black (1975), p. 140 note 4.

  95. 95.

    Articles 3 (1) and 4 (1) of the Hague-Visby Rules; article 5.1 of the Hamburg Rules; article 14 of the Rotterdam Rules. Under the Hague-Visby Rules and Rotterdam Rules this duty is specifically assigned at the beginning of the voyage, while under the Hamburg Rules this falls under the ‘presumptive fault’ principle and extends throughout the voyage.

  96. 96.

    Tetley (2008), pp. 878–880.

  97. 97.

    Latent defect is expressly excluded by article 4.2(p) of the Hague-Visby Rules and article 17.3 (g) of the Rotterdam Rules. As such defect cannot be attributed to ‘fault’ of the ship owner, it would also be excused under the Hamburg Rules. See article 5.1 of the Hamburg Rules.

  98. 98.

    See Shavell (2004), pp. 267–269 and 635–638. See also Shavell (1987), p. 208.

  99. 99.

    See Gilmore and Black (1975), pp. 154–155. See also cl 5 of the Institute Cargo Clauses (A)–(C); cl 4 of the Institute War Clauses (Cargo) and Strikes Clauses (Cargo).

  100. 100.

    See Chap. 2. For example, the ancient practice of Chinese merchants on the Yangtze River of sending their cargoes on more than one vessel so as to spread the risk of loss. This practice goes back as far as 3000 bc. Another practice was bottomry and respondentia under which the risk of adventure was shared by financiers as they would receive their money with interests back only if the ship and/or cargo arrived safely. It can be traced back to the Code of Hammurabi in 2050 bc. See Dover (1975), pp. 3, 5; see also Vance (1908), pp. 1–17.

  101. 101.

    It existed in Rhodian law (916–700 bc), from which it was adopted in Justinian Digest. The Rhodian Law explained the principle, “Let that which has been jettisoned on behalf of all be restored by the contribution of all.”; Dover (1975), p. 6; see also Gilmore and Black (1975), pp. 3–4 and 244.

  102. 102.

    For its classical definition, see Birkley v. Presgrave, (1801), 1 East. 220 at 228, 102 E.R. 86 at 89; The Star of Hope, 76 U.S. 203 at 228 (1869); see also s.65 of the Canadian Marine Insurance Act, S.C.1993, c22.

  103. 103.

    Of course, general average is not limited to the sacrifice of cargo. On average cargo sacrifice accounts for only 6.7 % of total general average. In fact, today it is the ship owners who claim general average contribution more often from cargo owners for expenditures incurred for the ships. See UNCTAD (1994), p. 28; see also Gilmore and Black (1975), p. 262 and Selmer (1958), p. 180.

  104. 104.

    Broadly defined, utility is the satisfaction a person derives from an activity. As it is almost impossible to measure how much satisfaction a person would derive from an activity (e.g., driving a car or buying a product), it is roughly measured by a person’s willingness to pay for the activity. See Shavell (2004), pp. 1–4.

  105. 105.

    See Myerson (1995), pp. 465–466.

  106. 106.

    See supra Sect. 4.3.2 on the discussion of justifications for general average.

  107. 107.

    See Rule Paramount in the YAR 1994 in Documents of the Conference in the CMI Yearbook 1992–1994, Part II, 146 (1994). This Rule has been inserted in response to the English decision of Corfu Navigation Co. v. Mobil Shipping Co. (The Alpha), [1991] 2 Lloyd’s Rep.515 (CA), where negligence in subsequent activities of the master (i.e., unreasonable attempt to refloat the stranded ship) was held not to bar general average because reasonableness was not specifically mentioned in the relevant numbered Rule (Rule VII) even though it was required under Rule A. Cooke and Cornah (2008), pp. 75–76; UNCTAD (1995), p. 6. Reasonableness or the absence of negligence in subsequent actions has always been required by Canadian courts even before the insertion of Rule Paramount. See Federal Commerce and Navigation Co. v. Eisenerz-G.m.b.H. (The Oak Hill), [1974] S.C.R.1225, 1235–1236.

  108. 108.

    Wessels v. The Asturias, 126 F.2d 999 at 1000 (2d Cir. 1942): “…although the loss occurs by a peril of the sea, the ship owner would be liable if the loss might have been avoided by skill and diligence at the time.”

  109. 109.

    General average now invariably involves the contributions between the insurers of ship owners and cargo owners. See UNCTAD (1994), p. 7; also Gilmore and Black (1975), p. 250.

  110. 110.

    Such cost can be enormous if a ship is a carrying cargo for many cargo owners. In one instant, the ship was carrying 920 containers under 900 bills of lading with general average claim of more than $1 million. See Myerson (1995), p. 472.

  111. 111.

    It may take several years for the final settlement. See Gold et al. (2003), p. 651. In some rare cases it took up to 10 years just to complete the statement and another 10–12 years to settle all claims. UNCTAD (1994), pp. 33–34.

  112. 112.

    See Article V of the Hague-Visby Rules, article 24 of the Hamburg Rules and article 84 of the Rotterdam Rules. It is noteworthy here that some hull policies include an “absorption clause” which eliminates the need to seek general average contribution from cargo interest when the contribution owed from cargo falls below the specific threshold provided in the absorption clause. See UNCTAD (1994), pp. 9–13.

  113. 113.

    UNCTAD (1994), p. 17.

  114. 114.

    See supra Sect. 4.4.1.2.

  115. 115.

    Article IV.2(a) of the Hague-Visby Rules.

  116. 116.

    See Louis Dreyfus & Co. v. Tempus Shipping Co., [1931] A.C. 726; Drew Brown Ltd. v. The Orient Trader, [1974] S.C.R. 1286 at 1333 (S.C.C). Although this was not so in the US [see The Irrawaddy, 171 U.S.187 (1898)], the ship owners’ insertion of a clause (‘Jason clause’) in the bill of lading to exclude liability in such case was upheld by the US Supreme Court. See The Jason, 225 U.S. 32, 32 S.Ct. 560 (1912); Gilmore and Black (1975), pp. 266–267. As the Hamburg Rules and the Rotterdam Rules do not contain this negligent navigation exception, the ‘Jason clause’ will not have this effect under these regimes.

  117. 117.

    UNCTAD (1994), pp. 24–25.

  118. 118.

    To be sure, however, this was not the reason ascribed to the origin of the limitation of liability by earlier writers. Justice Oliver Holmes attributed it to the early Roman law principle of ‘noxae deditio’ i.e., the liability of the offending thing or the instrument of injury (deodand) itself. Other reasons include (1) the personification of ship as debtor and (2) the encouragement of investment to shipping. See Holmes (1949), pp. 6–7.

  119. 119.

    See Holmes (1949), pp. 19–21.

  120. 120.

    The intention of the government was clearly stated in the preamble of first English legislation on limitation of ship owners’ liability, “Whereas it is of the greatest consequence and importance to this Kingdom, to promote the increase of the number of ships and vessels, and to prevent any discouragement to merchants and others from being interested and concerned therein….” Preamble to Responsibility of Shipowners Act of 1733; cited in Griggs (1997), p. 370. Similar concern was behind the American Limitation of Liability Act. For example, in Moore v. American Transportation Co., (1860), 65 U.S. 1 at 39, the Supreme Court held that the Act was adopted “to promote the building of ships, and to encourage persons engaged in the business of navigation.”

  121. 121.

    See Chap. 3.

  122. 122.

    Ship owners would be deprived of limitation only if they caused the cargo loss or damage intentionally or “recklessly and with knowledge that damage would probably result.” See article IV.5 (e) of the Hague-Visby Rules; art.8 of the Hamburg Rules; article 61 of the Rotterdam Rules.

  123. 123.

    Under the Hague-Visby Rules the limit is either SDR 666.67 per package or unit or SDR 2 per kg, whichever is higher [article IV.5(a)], and under the Hamburg Rules it is SDR 835 per package or unit or SDR 2.5 per kg, whichever is higher [article 6.1(a)]. It is SDR 875 per package or shipping unit or SDR 3 per kg, which is greater [article 59(1)].

  124. 124.

    Article IV.5 (a) and (g) of the Hague-Visby Rules, article 6.4 of the Hamburg Rules, and article 59.1 of the Rotterdam Rules.

  125. 125.

    Griggs et al. (2005), p. 154.

  126. 126.

    See Diplock (1970), p. 529 (“The option to declare a higher value is practically never exercised.”). Although we used the fact observed by Lord Diplock (and many of his other observations throughout the chapter), we disagree, with respect, to his reasoning regarding the fact that cargo owners would rather pay extra cargo insurance than the additional freight rate. He suggested that it was probably cheaper for the cargo owner to do so. He also used this fact to infer that the ship owner’s insurance cost for unlimited liability through the P&I coverage would probably be higher than the extra premium for cargo insurance. See Diplock (1970), pp. 529–530, 532. The real reason of cargo owners’ reluctance to declare higher value could be explained by the concept of ‘moral hazard’ of an insured. Even though an insured will ultimately save more in the form of reduced premium rate by taking care (or paying others such as ship owners to take care), the insured may not do so once he purchased insurance. This is because reduction of premium rate may take some time, while the cost of care is immediate. See Shavell (2004), p. 262; Priest (1986–1987), pp. 1521–1590.

  127. 127.

    There are opposing arguments whether the cost of cargo insurance or liability insurance is higher. These arguments are not really based on empirical evidence. See Sturley (1993), p. 145.

  128. 128.

    “In competitive freight and insurance markets … the cost of the precautions will be reflected in the charge for freight, but will be more than compensated for by the reduction in risk which will be reflected in the insurance premium.” Diplock (1970), p. 527.

  129. 129.

    See the ‘Hand Formula,’ supra Chap. 1 note 22 with the accompanying text.

  130. 130.

    Gilmore and Black (1975), pp. 17–18.

  131. 131.

    However, ship owner’s hull policy also covers some liability aspects through ‘running-down clause’ in a collision situation. See Bennett (2006), pp. 400–401.

  132. 132.

    See the group’s website at http://www.igpandi.org/. Accessed 01 September 2013.

  133. 133.

    Rosaeg (2001), pp. 10–11.

  134. 134.

    This is based on only five major general average adjustments done by a firm. See Myerson (1995), p. 467. This is also supported by the 400 cases surveyed by the UNCITRAL, where it found that less than 5 % of total cargo (value wise) on the vessels involve in general average situations was not insured. The uninsured cargoes are mainly cargoes en route to developing countries. See UNCTAD (1994), p. 7.

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  1. College of Law, Sultan Qaboos University, Al-Khod, Muscat, Oman, Arab

    Muhammad Masum Billah

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Billah, M.M. (2014). Maritime Cargo Liability Law in Light of Insurance Realities. In: Effects of Insurance on Maritime Liability Law. Springer, Cham. https://doi.org/10.1007/978-3-319-03488-1_5

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