China: Are shipbuilders of newly built vessels entitled to limit their liability for incidents during sea trials?

As per the 1976 Convention on Limitation of Liability for Maritime Claims (LLMC 76), ship-owners and salvors can limit their liability according to the tonnage, i.e. the size of the vessel. The convention defines "ship-owners" as owners, charterers, managers and operators of seagoing ships. However, there will be no limitation to liability if it can be established that damage was resulted from actual intent to cause this loss or recklessly with the knowledge that such loss would probably result.  Nearly all maritime nations, with the exception of the U.S., have ratified this convention.

The Maritime Code of the Peoples' Republic of China also provides for limitation of liability to "ship-owners" under the conditions similar to the LLMC. However it has never been tested in court whether newly built vessels undergoing sea trials are also subject to the limitation provisions.  This has changed with a judgment on one local vessel under construction and insured under shipbuilder's risk policy.  In that case, the court pronounced that newly built vessel are not eligible to limit their liability. The brief details of the case are as follows:

In 2009, the insured vessel lost power during her trial voyage, hit the wharf and collided with another vessel. This resulted in damage to the insured vessel itself, sinking of the third party vessel, and collapse of the wharf. . The insured (shipbuilder) paid USD 43Mio to settle various losses including loss of use of the wharf.

Later, the insured claimed from the insurer under their insurance cover.  The insurer accepted the claim, as collision is a covered peril under the shipbuilder's policy, but disputed the claim amount because the insured vessel should have been entitled to the limitation of liability for maritime claims. The insurer only agreed to pay USD9Mio calculated as per limitation convention. The insured filed a case at court against the insurer for the full indemnity.

The local Maritime Court held that shipbuilders are not eligible to limit their liability for newly built vessels undergoing sea trial, based on the following reasoning:-

  • "Ship" in a "full sense" means it has already been constructed, registered and obtained official certificates with ship's name. The insured vessel in the case however had neither been registered nor obtained official certificates. The vessel was still in the testing and inspection phase.
  • The losses arising out of the accident shall be "in direct connection with the operation of the ship".  The trial voyage is pertinent to "ship construction" rather than "ship operation.
  • The entities/ persons who can avail the limitation of liability are owners, operators or charters of the vessel. Consequently the shipbuilder should not be regarded as the owner or operator of the vessel and hence not entitled to limit his liability.

This landmark judgment would be quite representative that the shipbuilders of vessel in trial voyage are not entitled to limit of liability. This ruling was also supported by a local counsel with the view that in practice, a vessel in trial voyage not registered or without certificate, is not considered a "ship" under the Maritime Code of the Peoples' Republic of China, and thus does not have such entitlement.

This judgment presents new perspectives to claims managers and underwriters, and obviously increases potential exposure under builder's risk policies in China. In the above case, claim amount increased substantially from initial estimate of USD 9 Million to USD43 mio.

Swiss Re recommends that such additional exposure due to no application of limitation has to be reflected in pricing. The other approach would be to add sublimit for third party claims in accordance with the limit of liability in builder's risk policies. 

Published 20 October 2015