AN AMERICAN ADMIRALTY LAW VIEWPOINT ON THE CHANGING ROLE OF CLASSIFICATION SOCIETIES

Presently there is ample case law and legislation in the United States to resolve all liability issues that may arise from both the traditional and expanding roles of classification societies. To those who might propose to develop an entirely new legal regime to regulate the role and labilities of classification societies, this author replies: If it is not broken, don’t fix it.

The Traditional Roles of Classification Societies
At the outset it should be emphasized that the role of classification societies is not to assure the safety of worldwide shipping. The recent Carbotrade case decided by the Second Circuit Court of Appeals at New York gives an accurate description of the traditional role of classification societies:
A classification society sets standards for the quality and integrity of vessels and performs surveys to determine whether vessels are in compliance with the classification society’s rules and regulations, national laws, and international conventions. If a vessel passes inspection, the classification society either issues a certificate attesting to the vessel’s conformity with the applicable rules, regulations, laws, and conventions orendorses an existing certificate with a visa reflecting the survey. If the vessel fails to pass the inspection, the classification society either does not issue the certificate or withdraws the existing certificate.
Without classification certificates, vessels can not operate because classification is a prerequisite for ship registry and insurance coverage.

The Shipowner’s Non-Delegable Duty
The role of assuring a vessel’s safety falls solely on the shipowner’s shoulders. Under maritime law, only the shipowner has a non-delegable duty to furnish a seaworthy vessel.

In the United States, as in other maritime nations, this absolute duty has been modified by legislation. The United States Carriage of Goods at Sea Act (COGSA) has lessened the shipowner’s obligation to that of exercising due diligence to furnish a seaworthy vessel.

Because the shipowner’s duty to furnish a seaworthy vessel is non-delegable, an ocean carrier is responsible for the negligent acts of ship repairers, contractors, or agents used to fulfill its obligation. For example, a classification certificate may attest to the vessel’s conformity to class rules, but this alone does not fulfill the shipowner’s obligations as to seaworthiness. However, operating a vessel which has failed a classification inspection may constitute a breach of the shipowner’s obligation to furnish a seaworthy vessel.

The Shipowner’s Limitation Rights
Under maritime law, the shipowner’s liability for certain claims may be limited. For example, in the United States, the Limitation of Shipowner’s Liability Act of 1851, as amended, may reduce the shipowner’s liability for a maritime casualty to the value of the vessel and pending freight. If freight has been paid and the vessel is sitting at the bottom of the sea, the value may be zero. Only a shipowner or bareboat charterer can invoke the Limitation Act.

The Applicable Law
For more than two decades our courts have resolved complex legal issues that often arise when classification societies are sued. The cases can be complicated because the applicable law is not always apparent. For example, a contract to provide classification services for a new building could be governed by state law. Yet a contract to provide the same services to a vessel in navigation would apply maritime law. To further complicate matters, these contracts might also be governed by foreign law if the contract contains a forum selection or choice of law clause.
Many cases against classification societies have relied on tort liability theories. If the case is international, our courts will apply a maritime conflict of law test to determine the applicable law based upon which country has the greatest interest in the controversy. This interest analysis approach looks to the: (1) place of the wrongful act; (2) law of the ship’s flag; (3) domicile of the injured party; (4) domicile of the shipowner; (5) place of contract; (6) inaccessibility of the foreign forum; (7) the law of the forum; and (8) shipowner’s base of operation.

The Case Law
In tort actions, the shipowner must prove the society had a duty to conform to a standard of conduct for its protection, a breach of that duty, causation, foreseeability and damages. Most cases fail because of the inability to prove causation. While a presumption of unseaworthiness may be imposed against shipowners when vessels sink without explanation, it can not be used against classification societies. The shipowner controls its vessel, while the society’s presence on the ship is limited.

Cases against classification societies based upon contract theories seldom succeed because parties of equal bargaining power are permitted to assert disclaimers, limit liabilities and modify duties by mutual agreement. Courts are also reluctant to find classification societies liable on implied warranty or strict liability theories because the societies’ limited role aboard ships would rarely, if ever, create hazards or defects.

Public Policy Considerations
Admiralty law developed the seaworthiness doctrine because shipowners were in a superior position to prevent maritime casualties by discovering and correcting vessel defects. As the court stated over a decade ago in the AMOCO CADIZ case:
[A] shipowner who has knowledge of problems with its vessel cannot escape liability for failing to correct those problems on the basis that a classification society hired to survey the ship did not detect those defects.

In 1992 the court in the SUNDANCE case rationalized that an action against a classification society for damages sustained by an inspected vessel would be unfair because in effect it would make the society an absolute insurer of any vessel it classified.

A strong public policy argument could be made that if classification societies were held liable for unexplained maritime casualties, shipowners would be more likely to disregard their obligation to furnish a seaworthy vessel. By the same token, courts might be reluctant to impose full liability on the society based upon tort principles when a shipowner may potentially limit liability under the Limitation of Shipowner’s Liability Act or through COGSA contract provisions.

The Expanded Role and Liability
Legally, nothing prevents classification societies from expanding their roles to other technical maritime fields. Indeed, our laws are designed to encourage competition. There is an abundance of law to cover all liability issues that may arise as a result of the changing roles of classification societies. Of course, the societies in their new roles will be held to the same professional standards as all others in a particular field.

Economics Will Dictate Class Standards
There is now a concerted effort by the 11 members of the International Association of Classification Societies (IACS) to upgrade classification standards. However, there are over 40 classification societies worldwide and not all subscribe to the same professional standards.

Some believe classification societies are inadequately regulated and legislation should be enacted to correct their deficiencies. Legally, this approach is not feasible because of jurisdictional considerations and potential conflicts with the existing body ofinternational maritime law. The legal concepts of seaworthiness and limitation of liability are central to the problem. Economics, not legislation, will dictate classification standards.

Statutes passed by legislators on maritime matters are sometimes motivated by political knee-jerk reactions. Often the laws are shortsighted, ambiguous and incomplete. For example, in 1936 Congress enacted COGSA to level the playing field in ocean common carriage. The Act permitted ocean carriers to limit cargo liability to $500 per package. Unfortunately, Congress neglected to define “package”. Six decades later parties are still litigating what is meant by a COGSA package. A shipowner’s hull insurance and protection and indemnity premiums are largely a function of a vessel’s condition as certified by class. If a shipowner attempts to cut corners by utilizing the services of a classification society with low standards, its insurance loss record and premiums, in all likelihood, would increase. This in turn should cause the sub-standard society to lose credibility with the shipowner’s underwriters. The economic realities are that the sub-standard classification society will raise its standards or eventually be forced out of business.

It should be noted that a shipowner’s protection and indemnity insurance will usually cover liability arising out of unseaworthy vessels. It would make little or no economic sense to increase insurance costs in shipping by assessing full liability against classification societies. The societies in turn would pass on the cost of their insurance premiums to the shipowner.

Conclusion
Presently all the key players in international shipping know or are presumed to know the law as it relates to the complex liability issues associated with the duties and obligations of shipowners and classification societies. Knowing the law permits shipowners, cargo interests, classification societies and their respective underwriters to evaluate and insure the inherent risks associated with shipping. Any attempt to change the delicately balanced legal regime between shipowners and classification societies would cause uncertainty and chaos to international shipping.


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