31 articles
Classification Societies play an important role in many respects of maritime business. They supervise For all intents and purposes, it is nearly impossible for a vessel to operate and trade without being classed and certified by a Classification Society. Both port and flag states rely on classi- fication and in some respects statutory certification has been delegated to these societies.
The work of Classification Societies can be separated into two general categories.
(1) Contractual work such as delivery and redelivery surveys, periodic inspections, or supervision of ship construction.
(2) Surveys under formal authorization by flag states. By performing these surveys, Classification Societies discharge obligations of the state. This makes for an important part of their work as flag states rely almost entirely on Classification Societies.
This article will briefly illustrate the major liabilities Classification Societies can face under the prevalent English law and to what extent, if at all, they can limit their liability.
Contractual liability
Classification Societies may be sued under their contract by the shipowner where they are negligent and the negligence has caused damage. However, such cases are difficult because the fault of the vessel which may lead to unseaworthiness, whether detected by a survey or not, should, in most cases, be known to the shipowner who has the responsibility for the everyday running and maintenance of the vessel. To protect themselves further, Classification Societies regularly incorporate clauses excluding their liability entirely or limiting it to, for example, a multiple of their fee charged for the particular service.
Third party liability
Claims can also be brought against Classification Societies in tort where no contractual relationship exists. In tort the claimant generally needs to prove loss/damage, negligence, and that the loss or damage was caused by the negligent act. The two main categories of third party claims against Classification Societies are (1) claims brought by the purchaser of a ship who relied on a sub-standard ship that was negligently issued a class certificate, and (2) claims in the aftermath of a shipping accident.
The courts of England tend to turn down the liability of Classification Societies towards purchasers of negligently classed vessels for the reason that the primary purpose of the classification system is to enhance the safety of life and property at sea, rather than to protect the economic interests involved in shipping. After all, the Classification Society has no control over the vessel. Its contact with the vessel is usually very brief, and it is the seller’s non-delegable duty to deliver a seaworthy vessel.
In most cases, third parties who suffered a loss because of a shipping accident would claim against the shipowner first as compulsory insurance and direct action against the insurer provide for a speedy and certain recovery. However, liability under the major conventions is limited and the shipowner is in any case entitled to limit his liability under the LLMC. Further, the ship may be owned by a one ship company without the possibility of recourse against the mother company. Here, Classification Societies become a promising target because their liability is not limited under international regimes.
Courts have held that subjecting Classification Societies to this type of claim was considered to not be just, fair, and reasonable. If such a duty were to exist, Classification Societies would be exposed to a large amount of claims and forced to increase their fees and thereby pass the costs of those claims on to the shipowners. As a consequence, the balance struck in the internationally agreed and widely accepted Hague-Visby Rules might be jeopardized. Furthermore, Classification Societies as non-profit organisations act for the collective welfare and would not have the benefit of any limitation provisions.
It becomes apparent that under English law third party claims can be said to have very limited chance of success. This might, however, be different if the Classification Society executes statutory obligations delegated to it by the flag state.
Liability for the execu- tion of flag state obliga- tions
Where the Classification Society is working under delegated duties from a state as a Recognised Organisation (RO), any negligence by the Classification Society may lead to claims against the state or the relevant Maritime Authority. In such a case the liability of the state or Maritime Authority to third parties and its limitation would be of paramount importance.
Where a Classification Society is designated as a RO then under the agreement or the relevant instrument authorising the operation of the RO there is a right of recovery. This follows from EU law applicable in England which provides for compensation to the state when the state is held liable for an act or omission of the Classification Society. This liability is generally
unlimited, but allows the authorities to limit liability for negligently caused loss of life or personal injury to minimum EUR 4 million, and for negligently caused loss of or damage to property to EUR 2 million.
A number of countries have implemented the law in a way that exposes the ROs authorised in those countries to unlimited liability in respect of claims for ordinary negligence. As a result, a number of classification societies refuse to operate in some of these states, fearing for their financial destruction and arguing that it is unfair that shipowners, being the primary investors and beneficiaries of the vessel, enjoy a limitation of liability, while the ROs do not.
Class has nothing to be defensive about ... Only class has the depth of knowledge, experience and expertise needed to meet public expectations on ship safety.
The Comite Maritime International recognised five years ago that someone should take the lead in providing a legal regime which would permit classification societies to continue to perform their vital role in ship safety. They set about the task of establishing an international contractual regime which would protect class and allow it to do its job. There was no argument then that class should not be able to limit its liability. The original motivation for discussion of the matter was to protect class. Unfortunately, the CMI working group on class is now riven with a dispute over the appropriate level at which liability should be capped. Years of discussion have not only failed to produce a result, but have led to a changed scenario, where class is on the defensive. But class has nothing to be defensive about, and it deserves better. It is quite wrong that a debate has begun which centres on whether class should be limiting its liabilities at all.
There has always been a limited liability regime for classification societies. That must continue if the public interest is to be protected. The CMI has drafted some model contractual clauses and principles of conduct which IACS supports, and which would give class the right regime. But there is a danger that publicity given to the debate over the level of compensation will distort the whole issue, and the good work done to date will be lost.
Why does class need to limit liability?
Firstly, classification work applies to assets of very high value which are exposed to even higher liabilities. But class does not charge fees related to this exposure, it charges for the services performed, and fees are not related to the size or value of the asset. The charges for checking a particular piece of equipment are the same for a small, relatively safe cargo ship as they are for a large chemical or gas carrier.
Secondly, classification services do not contribute to the risk level. Class reduces risk, and class does not take the place of other players. It is true that class is paid by the shipowner, but class does not operate the ship itself, and cannot cause or be responsible for an incident. Class can omit to discover something which should have been discovered, but that is the extent of its potential to contribute to risk.
Thirdly, there is the exposure of class to multiple third parties. The shipowner pays and is the client, but a lot of other bodies rely on class. Underwriters, charterers, vessel purchasers, government authorities and others could not do without it. The number of parties linked with class raises the potential level of failure.
Fourthly, but crucially, there is public interest. If the exposure to liability of serving the public interest gets too high, class will be forced to discontinue this work. Governments with sovereign immunity would be forced to take it on. Unfortunately, most governments have simply not got the necessary expertise or control to replace class. Things would be bound to go wrong, but as governments are immune, the potential liability for any default would be nothing at all, which is a lot less than class is willing to stand behind.
Classification societies have to help the shipping industry to develop. That means they operate at the cutting edge of technology. They must base decisions on original research and cannot always rely on past experience. Everyone expects class to make a definite statement of approval of new concepts, even if the risks are huge, the potential liabilities are huge and information on which to base a decision is scarce. Just think about the explosive development of fragile high-speed craft and the potentially dangerous processing and storage of oil in converted tankers. There is a real case here for a limit on liability if anyone is to take on these risks.
Those seeking to make class accept higher liabilities frequently say that high exposure will concentrate the mind of the society and the individuals within it. In their argument, high exposure will lead to higher quality. They are wrong. The market for classification societies hinges on confidence and trust. Without confidence, class societies don't get business. Underwriters, government authorities and charterers will not deal with ships classed by societies which they do not trust. The drive for quality is inherent in what class supplies. Exposing class to high liabilities will simply mean it has to place limits on services. It cannot lead to higher quality.
These are strong arguments for limitation, but they do not address the problem of fixing an appropriate level. The potential risk and loss is the same for levels of service and fees which can vary from less than $1,000 to over $1m. Almost any potential claim will always be many orders of magnitude higher than the fee. Yet the world community, and the CMI, accepted the fee charged as an acceptable basis for setting liability limits. The major class societies certainly accept this principle. Unfortunately, there has been a recent suggestion that limitation should be a function of the tonnage of the ship. This would be unacceptable to all the major class societies, as ship size has no relevance to the value of a class service.
The market for classification societies hinges on confidence and trust. Without confidence, class societies don't get business.
The limited liability regime for shipowners is linked to tonnage. The Limitation Convention works on that principle. But shipowners and class are in very different positions. Class sees ships at determined intervals, shipowners should be controlling them at all times. Class has no control over the level of maintenance, training, manning, and supervision of the vessel and the areas where it trades, not to forget the cargoes it carries. All that is the privilege and responsibility of the shipowner. It would be quite unjust to expose two parties with such an unequal part of the risk picture to the same level of liability.
There are other issues bound up with this question. For example, in some jurisdictions class can incur liability to third parties. That must be tackled as part of a wider picture. There is also a set of principles of conduct which the CMI has drafted. Major classification societies broadly support the principles of conduct, and would not have a problem in living up to them. But they would insist on any new global model clause on limitation of liability being balanced by a clause which also excludes liability to third partes.
Working together through its representative body, IACS , class has gone a long way towards finding acceptable solutions to the outstanding issues. Shipowners now need to do their part. They cannot get a free lunch, whatever they would like. If the final liability level agreed is set high, it will inevitably translate into an insurance cost. This will have to be passed on to the owners through class fees.
Class wants to continue to serve shipping. Shipping should have the unrestricted benefit of all the resources and experience that class can offer. Class is always there to help everyone in shipping protect themselves, but it deserves some protection itself.
Conclusion
THERE is no alternative to classification societies. They play a vital and increasing role in ship safety. Flag states rely almost completely on class. Only class has the depth of knowledge, experience and expertise needed to meet public expectations of ship safety. As the world demands higher standards of ship safety, operation and environmental protection, the burden of making it happen will inevitably fall primarily on class. However, as the scope of class work grows, so do the potential liabilities it exposes itself to. It is very tempting for some to see classification societies as deep pocket defendants to be sued in a claim. If liabilities grow too great and class is sued too often, it could be forced to withdraw or limit some of the services it presently performs in the public interest. But monopoly and restrictive trade practices can kill any fact or phenomenon in life.
