Philippines – No Vessel, No Liability: Delimiting The Limited Liability Rule (2).

The previous article referred to the limited liability rule which essentially means that the liability of the ship owner is co-extensive with his interest in the vessel, equipment and freight earned during the voyage. The total loss of the vessel will result in the extinguishment of maritime claims against the ship owner and ship agent, save for the exemptions provided by law.

An apt illustration of the limited liability rule is the case of Monarch Insurance Co. Inc. vs Court of Appeals (GR 92735, 8 June 2000). The case arose from the loss of cargoes of various shippers when the M/V P. Aboitiz, the subject vessel and a common carrier owned and operated by the ship owner, Aboitiz, sank on her voyage from Hong Kong to Manila. Seeking indemnification for the loss of their cargoes, the shippers filed separate suits against Aboitiz for indemnification, asserting that the vessel did not sink by reason of force majeure but because of its unseaworthiness and the concurrent fault and/or negligence of the ship owner Aboitiz, the captain and its crew. They assert that the ship owner is therefore barred from availing of the benefit of the limited liability rule.

Jurisprudence has clarified that Article 587 only applies if the fault or negligence is committed solely by the captain. Where the ship owner is also at fault, Article 587 cannot apply and the same will be governed by the Civil Code provision on common carriers.

In other words, a finding that a fortuitous event was the sole cause of the loss of the vessel would allow the ship owner to invoke Article 1734(1) of the Civil Code, under which, common carriers are responsible for the loss, destruction, or deterioration of the goods they carry, unless the same is due to flood, storm, earthquake, lightning, or other natural disaster or calamity.

However, if the vessel had sunk by reason of fault and/or negligence of the ship owner, the ship captain and crew, the ship owner would be precluded from invoking the rule on limited liability.

The Supreme Court found that the ship owner, the captain and crew have been concurrently negligent. It took into account the ship owner’s own evidence in the form of the marine protest filed by its Captain showing that the wind velocity was only a moderate breeze, the waves were small, and the ship was 200 miles away from the storm when it sank. Further, the ship owner had failed to prove that it observed the extraordinary diligence required of it as a common carrier.

Under Article 1732 of the Civil Code, a common carrier from the nature of its business and for reasons of public policy is bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by it according to all circumstances of the case. The rule in cases involving the limited liability of shipowners is that the initial burden of proof of negligence or unseaworthiness rests on the claimants. However, as in this case, once the vessel owner or any party asserts the right to limit its liability, the burden of proof as to lack of privity or knowledge on its part with respect to the matter of negligence or unseaworthiness is shifted to it. The ship owner failed to discharge such burden.

In that case, the Supreme Court ruled that the rule on limited liability should be applied in accordance with the ruling in Aboitiz Shipping Corporation vs General Accident Fire and Life Assurance Corporation Ltd. (21 January 1993), that claimants shall be treated as creditors in an insolvent corporation whose assets are not enough to satisfy the totality of claims against it. The procedural guidelines include:

(a) A need to collate all claims preparatory to their satisfaction from the insurance proceeds on the vessel and its pending freightage at the time of its loss.

(b) No claimant can be given precedence over the others by the simple expedience of having completed its action earlier than the rest.

(c) Execution of judgment in earlier completed cases, even those already final and executory must be stayed pending completion of all cases occasioned by the subject sinking.

Then and only then can all such claims be simultaneously settled, either completely or pro rata should the insurance proceeds and freightage be not enough to satisfy all claims.

First published on The Daily Tribune.

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