Independent Contractors Facing Unlimited Liability!

JD Irving Ltd v. Siemens Canada Ltd (The SPM 125) 2016 FC 287 (Federal Court of Canada)

 The shipowners, JDI, engaged a firm of marine consultants to prepare stability calculations in respect of the loading of a cargo of large industrial equipment on and off the barge SPM125. During the loading process, the cargo was damaged and the owner of the cargo brought an action against the carrier claiming damages (CAD$45,000,000). The cargo owner also brought an action against the firm of marine consultants and the naval architect (who was the principal of that firm and had carried out the calculations) for the same amount.

The question that arose in this case was whether the firm of consultants had a right to limit their liability under the Convention on Limitation of Liability for Maritime Claims 1976, as amended by the Protocol of 1996, which has been incorporated into Canadian law by Part 3 of the Marine Liability Act.

Article 1(4) of the Convention stipulates:

If any claims set out in Article 2 are made against any person for whose act, neglect or default the shipowner or salvor is responsible, such person shall be entitled to avail himself of the limitation of liability provided for in this Convention.

There is no firm judicial reasoning on this point and differing opinions have been expressed in text books. The Court has subscribed to the view that Article 1(4) would afford limitation to a person if the shipowner or salvor has vicarious liability for the actions of that person. This would be the case when the negligence of a master or crew member gives rise to a claim by a third party against the owner or salvor. The crew or master in that case would accordingly have a right to limit their liability under the Convention. However, the relationship between an employer and an independent contractor would not usually give rise to a claim for vicarious liability and on that basis, such contractors are not afforded a right to limit their liability under Article 1(4) of the Convention. Applying this reasoning, it was held that the marine consultants in the present case could not enjoy the right of limitation.

The decision is a significant one as it adopts a new yardstick in determining whose actions a shipowner and/or salvor is responsible for in the context of the application of Article 1(4) of the Limitation Convention 1976 as amended by 1996 Protocol. The relevant party is able to limit its liability if the shipowner and/or salvor has vicarious liability for the actions of that party. Apart from marine consultants, classification societies, freight forwarders and logistics experts are likely to fall under this category. The judgment is not binding on English courts but obviously its reasoning needs to be considered carefully when the issue does arise, in addition, it sends a strong warning to the liability insurers of independent contractors as lack of the prospect of limitation would mean a huge increase in the exposure that they might face!

 

Farewell to the “Fraudulent Devices” Doctrine!

The recent decision of the Supreme Court in Versloot Dredging BV v. HDI Gerling Industrie Versicherung (The DC Merwestone) [2016] UKSC 45 has hit the insurance market like a bombshell! For more than a decade, it has been assumed that if a fraudulent device (such as a “lie”) is used to promote an honest claim, as long as the device used is material in the sense that it is likely to provide an advantage to the assured in securing a settlement, the claim will be treated as a “fraudulent” one. The Supreme Court ruled with a majority (4:1) that this is not the case!

The facts are relatively straightforward. The assured’s vessel, The DC Merwestone, suffered a flooding incident in January 2010. The incident resulted in irreparable damage to her engine, located at the aft end, even though water ingress was through the bow thruster space at the forward end of the vessel. The assured claimed from its hull insurer for the cost of replacing the damaged engine. The coverage defences put forward by the underwriters were rejected by the first instance judge, Popplewell, J, but he held that the assured had forfeited its otherwise valid claim as he used fraudulent devices in advancing said claim. During the casualty investigation, the underwriters’ solicitors sought the assured’s explanation for the ingress, its spread from the bow thruster room to the engine room and the reason why the crew were unable to control it using the vessel’s pumps. The assured’s General Manager responded in a letter which contained a representation that the crew had reported that they had heard a bilge alarm (which would have alerted the crew to the flooding) at noon on the day of the casualty but had failed to investigate the alarm on the basis that its sounding had been attributed to the rolling of the vessel. The representation was untrue in that the crew had never heard or reported a noon alarm and had never given an explanation for not investigating. This representation was held to be a reckless untruth.

The majority of the Court – Lord Sumption, Lord Clarke, Lord Hughes and Lord Toulson – appreciating that this is essentially a policy question considered it to be “a step too far” and “disproportionately harsh” to deprive an assured of his claim by reason of his fraudulent conduct if at trial years later it turns out that the fraudulent device used at the claims stage had been unnecessary because the claim was in fact always recoverable. Their Lordships seem to be influenced by the fact that an assured utilising fraudulent devices to advance his claim still has a genuine belief in the accuracy of the claim whilst the same cannot be said for an assured who creates the loss in order to make a claim or who exaggerates the extent of his claim. It is worth noting that Lord Mance delivered a dissenting judgment arguing that “Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.”

This decision means that an insurer will not be able to defend against a claim in a case where the assured uses fraudulent invoices to secure a quick settlement for his claim (see, for example, Sharon’ Bakery (Euorope) Ltd v. AXA Insurance UK plc [2011] EWHC 210 (Comm)) unless, of course, the policy contains an express clause indicating that the claim will be forfeited if promoted by making use of fraudulent devices. Such express terms are common in fire policies but perhaps, in the light of this decision, insurers should consider incorporating them into marine and energy policies as well. Institute Hull Clauses 2003 could lead the way. Clause 45.3 stipulates:

“It shall be a condition precedent to the liability of the Underwriters that the Assured shall not at any stage prior to the commencement of legal proceedings knowingly or recklessly
… mislead or attempt to mislead the Underwriters in the proper consideration of a claim or the settlement thereof by relying on any evidence which is false
… conceal any circumstance or matter from the Underwriters material to the proper consideration of a claim or a defence to such a claim.”

Carriers Be Aware!!!! (Contribution Claims Fall outside the Athens Regime)

All personal injury, loss of life or loss of / damage to luggage claims must be brought against the carrier (contracting or performing) under Art 14 of the Convention Relating to the Carriage of Passengers and their Luggage by Sea (Athens Convention), however, the Convention does not purport to be a complete Code governing all liabilities of sea carriers – for example, it is silent both with regard to claims of passengers against the carrier in cases of cancellation of the scheduled voyage and with rights of recourse as between carriers and other parties.

What about a contribution claim brought by a third party against the carrier? Would such claims be subject to the time bar provisions of the Athens Convention? This was the primary discussion point in Feest v. South Strategic Health Authority and Another [2015] EWCA Civ 708. In August 2008, the claimant sustained a spinal injury while on a boat tour with her work colleagues (as part of a team building exercise) in the Bristol Channel. She sued her employer and sought damages for her injury. Her employer then issued a Part 20 claim against the owner of the boat for contribution under s. 1(1) of the Civil Liability (Contribution) Act 1978. Granting the application of the owner for a summary judgment on the Part 20 claim, the district judge dismissed the claim on the ground that it was time bared (as it was brought later than 2 years, stipulated by Art 16 of the Athens Convention).  The defendant employer’s appeal was dismissed by Judge Havelock-Allan QC, sitting as a judge of the Queen’s Bench of the Bristol Mercantile Court. The defendant then appealed to the Court of Appeal which reversed the said judgment.  It was held that a claim for contribution is autonomous from the Athens Convention and it derives from the English domestic statute entitlement to contribution. On that basis, the time bar provisions of the Athens Convention would not apply to a contribution claim. An alternative argument, developed by the counsel for the carrier to the effect that Art 16 of the Athens Convention extinguishes the right for an action rather than bars the remedy of court proceedings, was also rejected by the Court of Appeal. This might come as a surprise to continental lawyers as, in continental jurisdictions, time bar provisions usually have the effect of extinguishing the right to any claim (including contribution rights). However, unlike Article 29 of the Warsaw Convention, Article 16 of the Athens Convention does not address this issue with any real definitive language and leaves it to national law to determine the effect of the time bar provision. In English law, the effect of time bar provisions is normally to deny the plaintiff a right of action after a certain period has elapsed but the right is not extinguished.

From the perspective of international maritime law, the outcome of the Court of Appeal is disappointing but the fact remains that the UK legal system is dualist in nature and in the absence of clear language used in an international convention, disputes as to interpretation of provisions of a convention will be resolved by the application of the national law, which is, of course, what happened here!