DO THE ADMIRALTY RULES ON LIMITATION ACTIONS NEED CLARIFICATION?
Last 01 January 2020, Administrative Matter No. 19-08-14-SC, otherwise known as “The Rules of Procedure for Admiralty Cases” (the “Admiralty Rules”), took effect. The Admiralty Rules is the Philippines’ first procedural issuance specifically relating to maritime and admiralty matters such as, inter alia, vessel arrest and limitation action.
Being the first legitimate procedural issuance relating to maritime and admiralty cases, it is expected that there might be provisions thereof that are unclear or need further explanation. The reason for this is due to the fact that the Admiralty Rules are still untested and have not yet been subjected to judicial interpretation involving actual maritime and admiralty cases.
One of the provisions that may need clarification is the Limitation Action under Part IV, Rule 8 of the Admiralty Rules. As will be discussed hereunder, said procedure appears to be inconsistent with the historical definition and purpose of, as well as past jurisprudence on, limitation.
THE LIMITED LIABILITY RULE
A Limitation Action is based on the limited liability rule in maritime and admiralty cases. Limitation of liability in maritime cases is found in the Code of Commerce, which was copied from the Spanish Mercantile Code. The pertinent portions of the Code of Commerce states:
“Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipments (sic) and the freight it may have earned during the voyage.
Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of their interests in the common fund for the results of the acts of the captain referred to in
Art. 587. Each co-owner may exempt himself from his liability by the abandonment, before a notary, of the part of the vessel belonging to him.
Art. 837. The civil liability incurred by shipowners in the case prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and the freightage served during the voyage.”
The limited liability rule states that the shipowner’s or agent’s liability in a marine casualty is merely co-extensive with their interest in their vessel, whereby a total loss of the vessel results in the extinction of liability.[1] In essence, “no vessel, no liability” defines the limited liability rule.[2]
The limited liability rule is based on the real and hypothecary nature of maritime law. The rationale of the real and hypothecary nature of maritime law was discussed as early as 1946 in the case of Abueg vs. San Diego,[3] and reiterated in Chua Yek Hong v. Intermediate Appellate Court[4].
The historic background of the limited liability rule has been recognized by the Supreme Court, and the Justices have noted that in Europe in particular the liability of the shipowners or agents is limited to the value of the vessel, equipment, or freight, and nothing more if the vessel is totally lost at sea or, if not totally lost, abandoned by the shipowner or agent by a notarial act. To echo the ruling in the old case of Yangco v. Laserna (G.R. Nos. 47447-47449, October 29, 1941, 73 PHIL 330-341):
LIABILITY OF OWNER NOT TO EXCEED INTEREST. — The liability of the owner of any vessel, for any embezzlement, loss, or destruction, by any person, of any property, goods, or merchandise, shipped or put on board of such vessel, or for any loss, damage, or injury by collision, or for any act, matter or thing, loss, damage, or forfeiture, done, occasioned, or incurred without the privity, or knowledge of such owner or owners, shall in no case exceed the amount or value of the interest of such owner in such vessel, and her freight then pending.
Over the course of many Supreme Court judgments, however, the Supreme Court noted exceptions to the application of the limited liability rule:
a. Where the injury or death to a passenger is due either to the fault of the shipowner, or to the concurring negligence of the shipowner and the captain;
b. Where the vessel is insured; and
c. In workmen’s compensation claims. (Phil-Nippon Kyoei, Corp. v. Gudelosao, G.R. No. 181375, July 13, 2016, 790 PHIL 16-42)
LIMITATION ACTION UNDER THE ADMIRALTY RULES
Section 1, Rule 8, Part IV of the Admiralty Rules states that a person, who may be a shipowner, charterer, or other person in control or possession of a ship, seeks or limit his or her liability to the full amount of a limitation fund constituted for the purpose of satisfying claims in respect of a marine casualty involving the ship. Similar to the aforementioned cases, a Limitation Action is available only in cases of (a) collisions; (b) injuries to third parties; and (c) acts of the captain or master of a ship (Sec. 2, Rule 8, Part IV).
Before availing of a Limitation Action, the plaintiff is required to have abandoned the vessel with all her appurtenances and equipment and freightage earned, or part hereof belonging to such plaintiff, during the last voyage(Sec. 2, Rule 8, Part IV). Abandonment of the vessel is made by notarial act filed with the Ship’s Registry, except in cases of total loss whereby such notarial act is no longer necessary.
THE PROBLEM UNDER THE ADMIRALTY RULES
In reading this portion, please assume that all the requirements and none of the exceptions to avail of a Limitation Action are present.
As we mentioned earlier, the limited liability rule was enacted to limit the liability of shipowners or agents to the value of the vessel, equipment, or freight, and nothing more. The same concept should also be applied to the Limitation Action under the Admiralty Rules.
Based on the foregoing, once abandonment of the vessel, equipment, or freight is made by the Plaintiff in a Limitation Action, then, in theory, the Plaintiff shall have no more liability outside of these. Note also that under Sec. 3, Rule 8, Part IV of the Admiralty Procedure, abandonment is a necessary and indispensable part of the verified Complaint to be filed to avail of the Limitation Action.
The confusion in the Admiralty Rules stems from its Part IV, Rule 8, Section 6, which provides for a procedure of establishing a limitation fund by depositing the same in cash with the court or by providing a P&I Club letter of guarantee. This necessitates a clarification of the Admiralty Rules because the establishment of the Limitation Fund after abandonment violates the theory behind limitation under Philippine law. In particular, it expands the ship owner’s liability outside of the value of his abandoned vessel, equipment, or freight. For easy reference, Part IV, Rule 8, Section 6 states:
“Constitution of the Limitation Fund. – The plaintiff may, upon order of the court, constitute a limitation fund by making deposit to the court, or by producing a letter of undertaking from a Protection and Indemnity Club acceptable to the court. The fund may be constituted during the hearing, but not later than thirty (30) calendar days after the conclusion of the hearing.”
Proceeding therefrom, there will be two steps involved in a Limitation Action, i.e., the abandonment of the vessel, equipment, or freight upon filing of the verified complaint, and the establishment of a limitation fund during the Limitation Action proceedings, which is accomplished by depositing money with the trial court OR submitting a P&I Club letter of undertaking. Consequently, the claimants will end up with two funds: (1) the abandoned vessel, equipment, or freight; and (2) the limitation fund. This clearly expands (or gives an opportunity to expand) the liability of the Plaintiff beyond the value of the abandoned vessel, equipment, or freight and, hence, conflicts with the essence of the Limited Liability Rule.
We wonder whether the intention of the framers of the Admiralty Rules was to simplify the recovery process of the claimants by having a liquid fund available in the trial court rather than having to wait for the sale and disposal of an abandoned res. If that was the intention, then perhaps some clarification will be required in the Rules.
This was not intended to criticize the Admiralty Rules and/or the authors thereof. There is no doubt that the Admiralty Rules will assist greatly in the development of shipping law in the Philippines. However, the Supreme Court was perhaps restricted by the Philippines’s Code of Commerce which was created in the late 19th Century and is also in great need of revision and updating.
For more information contact Atty. Valeriano del Rosario of VeraLaw Philippines (veralaw.com).
[1] Monarch Insurance Co., Inc. v. Court of Appeals, G.R. Nos. 92735, 94867 & 95578, June 8, 2000, 388 PHIL 725-762
[2] Ibid..
[3] 77 Phil. 730 (1946).
[4] G.R. No. 74811, [September 30, 1988], 248 PHIL 422-429.