In April 2021, the ro-ro passenger ship mv ZHONG HUA FU QIANG exploded when she was mooring in Weihai, as a result the vehicles and cargos onboard were severely damaged.  Fortunately, there was no personal injury.  In May, the shipowner applied to the maritime court to set up limitation fund for the potential maritime claims, whereby limited their liability to a range of RMB 28 million (SDR 3,039,437.5).  After noticing the court announcement many cargo owners raised a common question: whether and how shipowner can limit its liability? 

It can be easily detected that usually the claimants raised this issue were the cargo owners and car owners but without any or sufficient insurance coverage.  If they were properly insured, they could get compensation from their insurer under the policies and assigned the right of suit to the subrogated insurers. However, as they did not have insurance coverage, they had to by themselves participate in the court procedure of registration of claims and repayment of debts.  The time span would be very long.  It is even unlikely they could be fully compensated because the shipowner already applied for limitation of liability for maritime claims.

Question I: Why confers on shipowner with limitation? Whether it is a good excuse to eliminate or escape responsibility?

Answer:  For example, where a pedestrian was injured or even killed in a traffic incident, can he/she seek a compensation in enormous figure?  The answer appears negative as the law does in fact lay down certain standard.

The regime of limitation of liability for maritime claims in China is derived from the 1976 Convention, which has been modified and incorporated into Chinese Maritime Code.  The rules on one hand impose on a ship the responsibility for loss of and damage to, such as goods, ships, docks, etc. by incident; on the other endow the ship with limitation of liability, which is called a restrictive claim.  Such limitation can prevent the shipowner from becoming liquidated or the ship from being detained by various claimants.  Accordingly Chinese Maritime Code allows shipowners to put up a limitation fund before a competent maritime court.  After providing sufficient deposit or guarantee, the ships may sail freely. 

Chinese Maritime Code also enumerates certain non-restrictive claims, for which shipowner may not limit its liability, such as salvage remuneration, neither for other claims like oil pollution.  Apparently, the claims against mv ZHONG HUA FU QIANG did not belong to the non-restrictive claims in nature.

Question II: How is the limitation amount calculated?

Answer:  According to Chinese Maritime Code, the shipowner is entitled to different limitation of liability for property damage and for personal injury respectively.  The scale of limitation is calculated by SDR based on the gross tonnage of the ship.  The incident of mv ZHONG HUA FU QIANG resulted in property damage only, so the limitation of liability for property would apply.  Given that the ship engaged in coastal transport, the calculation shall refer to the “Provisions Concerning the Limitation of Liability for Maritime Claims for Ships With a Gross Tonnage Not Exceeding 300 Tons and Those Engaging in Coastal Transport Services As Well As Those for Other Coastal Operations”.  Based on to the ship’s gross tonnage, the limitation was around RMB 28 million after calculation and conversion.

Question III:  Despite the shipowner indicated that its insurer was to make a full indemnity at an early stage of negotiation, could the insurer rely on the limitation fund to limit its liability as well?

Answer:  Under some circumstances, the insurer of the shipowner might take over the claims arising from the incident however in the ambit laid down by the laws.  Especially where the shipowner enjoys limitation for particular claims the insurer would heir this entitlement.  It is well known it is usually the insurer who put up cash deposit or guaranty as the limitation fund in favor of the shipowner.

Question IV: After making a registration of claim, how to apportionment the fund?

Answer:  It could not be answered for the time being.  Although shipowner’s maximum liability is known, the losses onboard need to be investigated and adjusted, which were unknown on scene.  The compensation ratio is a proportion by bearing the total loss to the gross limitation of liability.  If the loss is huge and exceeds the total limitation, the compensation ratio will decrease.  It is noteworthy that not only cargo interest but also the subrogated insurers will take part in the procedure of claim registration and repayment of debts if they completed indemnification to their assured and therefore pursued recovery from the shipowner.  This will be another element affecting compensation ratio.   

Question V: Is there any chance to break through the shipowner’s limitation?

Answer:  Yes, it could be but turned out rare, as it must prove that the loss resulted from shipowner’s act or omission with intent to cause such loss or recklessly and with knowledge that such loss would probably result.  Similar stipulation in Chinese Maritime Code is set to punish shipowner who was intentional or recklessly.  In the present case, the preliminary investigation contributed the accident to the spontaneous combustion of silicon mud carried by a truck onboard, not involving in shipowner’s fault intentional or recklessly.  In practice, the cargo owners would endeavor to break the limitation by proving the unseaworthiness of the ship, particularly in respect of manning of crew.  It was reported that the cargo owner’s attempt to break shipowner’s limitation of liability in the circumstance where the shipowner failed to effectively monitor the ship's crew manning and ignored the ship's safety issues resulting in only three out of twelve crew being onboard.  The court found that the shipowner recklessly caused the accident and therefore was not allowed the limitation of liability.

Putting in the present case, it depends on whether the cargo owner can prove the shipowner recklessly allowed dangerous goods to board the ship disregarding the ship safety, or whether the shipowner recklessly or deliberately makes the ship unseaworthy.