Vol. 149, No. 10 — May 20, 2015

Registration

SOR/2015-98 May 1, 2015

MARINE LIABILITY ACT

Regulations Amending Schedule 1 to the Marine Liability Act

P.C. 2015-471 April 30, 2015

His Excellency the Governor General in Council, on the recommendation of the Minister of Transport, pursuant to subsection 31(1) (see footnote a) of the Marine Liability Act (see footnote b), makes the annexed Regulations Amending Schedule 1 to the Marine Liability Act.

REGULATIONS AMENDING SCHEDULE 1 TO THE MARINE LIABILITY ACT

AMENDMENT

1. Paragraph 1 of Article 6 of Schedule 1 to the Marine Liability Act (see footnote 1) is replaced by the following:

1. The limits of liability for claims other than those mentioned in article 7, arising on any distinct occasion, shall be calculated as follows:

COMING INTO FORCE

2. These Regulations come into force on June 8, 2015, but if they are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

Canada is a party to the International Maritime Organization’s (IMO) Convention on Limitation of Liability for Maritime Claims, 1976, as amended by the Protocol of 1996 (LLMC) (see footnote 2). This international treaty provides shipowners and their insurers the right to limit their liability for a range of maritime claims. The LLMC’s general limits have remained the same since the Protocol was opened for signature on October 1, 1996. Article 8 of the Protocol provides for “tacit amendment” of the limits of liability where they can be amended without having to reopen the Convention or negotiate a new protocol.

Inflation has eroded the value of the shipowner’s maximum level of liability since 1996 by over 50% in real dollar terms. This may affect a claimant’s recovery of losses incurred, particularly in cases involving multiple claims or extensive pollution. The IMO Legal Committee therefore adopted a resolution under Article 8, to increase the general limits by 51%. The amended limits of liability will enter into force on June 8, 2015.

Background

The Marine Liability Act of 2001 (the Act) is a comprehensive Act dealing with the liability of marine operators in relation to passengers and other third parties, cargo, pollution and property damage. Part 3 of the Act gives effect to the LLMC. Article 6 of the Convention, which is incorporated as Schedule 1 of the Act, limits the shipowners’ liability for two classes of maritime claims: (1) claims for loss of life and personal injury; (2) claims for damage to property, such as other ships, terminals and cargo, excluding damages that are subject to other conventions (e.g. pollution related to spills from oil tankers).

The principle of the shipowners’ limitation of liability as a means to attract risk capital to the shipping industry predates by several centuries (see footnote 3) the current business practice of incorporating a company that is able to limit liability to the amount of its shareholders’ capital. The principle recognized the inability of shipowners to control the actions of the master and crew of a ship that may be an ocean away. Early international conventions on this subject (1924 and 1957) therefore allowed shipowners to limit liability if the fault for the loss was due to the action or omission of the master or crew with no involvement of the shipowner or his shore-based executives or managerial staff.

The first international convention on this subject in 1924 (see footnote 4) essentially based the limitation amount on the salvage value of the ship post-casualty, which while protecting the interests of shipowners and their insurers resulted in variable limits that often created financial hardships for claimants (e.g. passengers, owners of goods on board, other vessels damaged by collision, owners of docks or other property damaged by a ship). A subsequent international convention in 1957 (see footnote 5) was the first to introduce fixed limits based on the tonnage of the ship, though the limits remained quite low and the limitation continued to apply to actions or omissions of the master and crew done without the knowledge or involvement of the shipowner.

The 1976 LLMC continued the practice of fixing the limits based on the ship’s tonnage with a substantial increase (300%) in the limits to reduce the financial hardships on claimants. In exchange for this increase, the right to limit responsibility was expanded to include salvors and losses where the shipowner was at fault, provided they were not “committed with intent to cause the loss or recklessly and with knowledge that the loss would probably result.” This almost unbreakable limit of liability facilitated the expansion of insurance coverage for the shipowners’ liability to third parties in the event of a maritime claim.

However, relatively high rates of inflation throughout the 1980s and 1990s significantly decreased the value of the limits introduced in 1976. The 1996 Protocol to amend the 1976 LLMC more than doubled the limits of shipowners’ liability. The Protocol also introduced the concept of “tacit amendment,” where a proposal to increase the limits would be considered if it was supported by 50% of states that are party to the LLMC Protocol. In considering such increases, the IMO’s Legal Committee is to consider the experience with the maritime claims, the impact of inflation on the monetary value of those claims and the impact of any increase in the limits on the availability of insurance. The new limits would then be adopted if supported by a two-thirds majority of states that are party to the LLMC Protocol.

Increased LLMC limits were initially proposed by Australia following the “Pacific Adventurer” accident in Queensland that resulted in damages exceeding the 1996 LLMC limits due to a large bunker oil spill (i.e. the ship’s fuel oil). Australia proposed an increase of 127% or the maximum permissible under the tacit amendment procedure. The 51% increase was adopted by the IMO Legal Committee at its 99th session in April 2012 based mainly on the experience with maritime claims that was reported by the International Group of Protection and Indemnity Clubs (IGPANDI), which together underwrite the liability insurance for 90% of the world’s ocean-going fleet.

Objectives

The objectives of the Regulations Amending Schedule 1 to the Marine Liability Act (the Regulations) are to

Description

The Regulations increases the limits of liability that appear in Article 6 of Schedule 1 of the Act by 51%. Those limits are expressed in terms of Units of Account that are Special Drawing Rights (SDR) of the International Monetary Fund. (see footnote 6) Over the latest 10-year period, an SDR has ranged in value from $1.45 to $2.02 in Canadian dollars with average value of $1.67. The limits are based on the size of the vessel with amounts varied according to the vessels within specific ranges of size or tranches. The following table shows the current and amended rates, which are fixed for vessels under 2 000 tons gross tonnage and increase per ton thereafter up to the size of the vessel.

  Loss of Life or Personal Injury Other Claims (i.e. property damage)

Tranche

Current rate

Amended rate

Current rate

Amended rate
0–2 000 tons 2 000 000 SDRs 3 020 000 SDRs 1 000 000 SDRs 1 510 000 SDRs
2 001–30 000 tons 800 SDRs/ton 1 208 SDRs/ton 400 SDRs/ton 604 SDRs/ton
30 001–70 000 tons 600 SDRs/ton 906 SDRs/ton 300 SDRs/ton 453 SDRs/ton
Above 70 000 tons 400 SDRs/ton 604 SDRs/ton 200 SDRs/ton 302 SDRs/ton

The tables below provide an example of the calculations of the limits of liability for a ship of 40 000 tons gross tonnage under the current and amended limits based on the 10-year average exchange rate (1 SDR = $1.67):

Example of limits for personal injury for a ship of 40 000 tons

    Current Amended

Tranche

Unit tons

Rate

SDR

Rate

SDR
0–2 000 t 2 000 Fixed 2 000 000 Fixed 3 020 000
2 001–30 000 t 28 000 800 22 400 000 1 208 33 824 000
30 001–70 000 t 10 000 600 6 000 000 906 9 060 000
Over 70 001 t 0 400 0 604 0
TOTAL SDR     30 400 000   45 904 000
TOTAL $CAN     $50,768,000   $76,659,680

Example of limits for other claims for a ship of 40 000 tons

    Current Amended

Tranche

Unit tons

Rate

SDR

Rate

SDR
0–2 000 t 2 000 Fixed 1 000 000 Fixed 1 510 000
2 001–30 000 t 28 000 400 11 200 000 604 16 912 000
30 001–70 000 t 10 000 300 3 000 000 453 4 530 000
Over 70 001 t 0 200 0 302 0
TOTAL SDR     15 200 000   22 952 000
TOTAL $CAN     $25 384 000   $38 329 840

Following the implementation of the new limits, the owner of a ship of 40 000 tons gross tonnage would therefore see the limits of his or her liability for the aggregated claims related to personal injury or death arising from an accident increase from $50.8 million to $76.7 million and for all other claims from $25.4 million to $38.3 million based on the 10-year average exchange rate.

The increase in limits applies only to ships of 300 tons gross tonnage and above. Ships under the 300 tons gross tonnage threshold remain subject to limits of liability currently specified in sections 28 and 29 of the Act.

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business. The Regulations amend existing legislation and do not introduce any new regulatory requirements.

Small business lens

The small business lens does not apply to this proposal, as there are insignificant costs on small business. Limits of liability for vessels under the 300 ton gross tonnage threshold, which are more likely to be owned by small business, remain unchanged. Most owners of ships of 300 tons gross tonnage and above are likely to maintain insurance in amounts sufficient to cover their liability at the levels proscribed by the LLMC. The increase in limits of liability will have no immediate effect of the cost of insurance. The increase in LLMC limits would only be reflected in long-term insurance rates if there is a significant increase in the numbers of claims exceeding the current limits, which is not expected.

Consultation

Canadian stakeholders expressed their views to Transport Canada while the amendments were being discussed at the IMO Legal Committee. Two opposing views emerged at those negotiations: either an increase of 45%; or an increase of 127%. Associations representing Canada’s domestic and international shipping sectors supported the lower level of increase, which is based on global inflation rates and experience with maritime claims under the current limits. The 51% increase represents the lower level adjusted for the inflation that occurred during the negotiations.

Rationale

The Regulations amend the limits of liability for maritime claims in accordance with the resolution adopted by the IMO, thus enabling Canada to meet its obligations under the LLMC.

The maximum liability of shipowners becomes a concern mainly when an incident involves a substantial number of claimants or significant property damage occurs, for example when there is a large bunker spill. The shipowners’ limit of liability applies to the aggregate of all claims received from a single incident. When the aggregate amount of those claims exceeds the maximum limit of liability, the amounts paid for verifiable claims are apportioned in accordance with their share of the aggregate claim. This means that some claimants may suffer substantial losses that would be only partially compensated. Increasing the limits of liability will not necessarily ensure that all claims are fully satisfied, but would help to restore the level of compensation that claimants might expect in relation to their losses to the levels intended when the LLMC Protocol was opened for signature in October 1996, and thus help to protect the financial interests of Canadians.

The increase in LLMC limits will impact other elements of the Act’s marine liability framework, particularly

The increase in LLMC limits could also have a positive impact on Canada’s Ship-source Oil Pollution Fund (SOPF) when a spill involves a known ship other than a tanker. The higher limits could allow the SOPF to recover more of the cost to remediate spills of bunker fuel or other oils in the rare cases when such incidents exceed the current LLMC limits.

Nonetheless, the costs to shipowners are not expected to be significant. Shipowners are generally insured up to the limits of their liability established by the LLMC through mutual insurance associations referred to as protection and indemnity (P and I) clubs. The P and I clubs collect premiums to maintain capital reserves and buy re-insurance based on claims history. The cost to shipowners of the additional premium to provide cover for the increased limits of liability would depend on the claims experienced by the insurers.

The IGPANDI indicated that the proposed increases should have no immediate effect on insurance rates which are influenced by a wide variety of variables including “severity and frequency of claims in one year, types of claims, cost and capacity of market re-insurance, which will often depend on non-marine factors, such as hurricane, floods and earthquakes.”

During the IMO Legal Committee negotiations, the IGPANDI reported on the frequency of such claims. The IGPANDI recorded 20 cases from May 13, 2004, when the 1996 LLMC entered into force until March 2012 where the total claims exceeded the shipowners’ limit of liability under LLMC. Ten of those cases involved pollution damage due to bunker fuel spills, while the remaining cases involved mainly damage to cargo or to other property, including underwater electric cables and pipelines. None of these cases occurred in Canadian waters. The data does not include claims recorded by non-IGPANDI clubs nor those involving out of court commercial settlements. While refusing to speculate on the additional premium cost that could arise from the increase in limits, the IGPANDI reassured the IMO Legal Committee that the capacity existed to cover it.

While it is not possible to estimate costs and benefits, it is likely that these Regulations will result in a net benefit to Canada given that the claimants will mainly be Canadians while the respondents will include both domestic and international shipowners. On the domestic side, there are 1 678 ships of 300 tons gross tonnage and above on the Canadian ship registry, owned by 542 entities, including corporations, government agencies and individuals. On the international side, 3 619 foreign-registered ships of 300 tons gross tonnage and above made 22 387 calls at Canadian ports in 2011 according to data produced by Statistics Canada (2011 was the final year for this data series). As the following table shows, the foreign-registered ships, which are predominantly owned by non-Canadians, are generally much larger than the Canadian registered fleet. While it must be emphasized that major marine casualties where the current LLMC limits are exceeded are rare, there is a greater likelihood that such events would involve larger ships which in Canada’s case are most likely to be foreign registered and owned.

Distribution of Canadian and foreign-flag ships by gross tonnage (GT)

  Canadian Registered Foreign Registered
Range of GT Number of Ships % Number of Ships %
300 to 2 000 GT 1 271 76% 81 2%
2 001 to 30 000 GT 397 24% 1 627 45%
30 001 to 70 000 GT 4 0% 1 401 39%
above 70 000 GT 6 0% 510 14%
Total number of ships 1 678   3 619  

Implementation, enforcement and service standards

The Regulations amending the limits of liability that appear in Article 6 of Schedule 1 of the Act comes into effect on June 8, 2015, the same date that the modifications come into force internationally.

Limitation of liability is normally invoked through court proceedings, particularly following the arrest of a domestic or foreign-registered ship at the request of a claimant to ensure the payment of damages related to a maritime claim. The LLMC includes provisions for the constitution, by the shipowner or any other liable party, of a fund up to the limit of liability that can be made available for the payment of claims that are subject to the limitation of liability. This fund can be used as security for the release of a ship that has been arrested.

The Federal Court (known as the Admiralty Court of Canada for the purposes of this Act) has exclusive jurisdiction on any matter with respect to the constitution and distribution of a limitation fund under the LLMC and can decide whether a ship is to be released following the constitution of such a fund. Increasing the limitation of liability under the LLMC will not affect the current powers of the Admiralty Court with respect to such maritime claims.

Contact

Doug O’Keefe
Chief
International Marine Policy
Place de Ville, Tower C, 25th Floor
Ottawa, Ontario
K1A 0N5
Telephone: 613-991-6526
Fax: 613-998-1845
Email: doug.okeefe@tc.gc.ca