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FEATURE |
Classification Societies, Negligence Liability and Pure Economic Loss
Traditionally, classification societies have always been “immune” to negligence liability. Is such immunity available today? Can Singapore law play a part in the global development of such laws?
Introduction
Classification societies today not only serve private and public law functions in the maritime industry, but have also expanded their services to other industries.
Traditionally, classification societies have always been “immune”1 to negligence liability, especially if it leads only to pure economic loss. This paper examines briefly the reasons for such “immunity” and changes
in the law that will lead to the loss of such “immunity”.
Modern Functions of Classification Societies
Private law functions2
Classification societies were formed to inspect ships’ hull and machinery “to give underwriters and merchants an idea of the condition of the vessels they insured and chartered”.3 Charterparties, insurance contracts and ship finance agreements all contain conditions that vessels must be maintained in class.
Today, classification societies:4
1. “establish and apply technical standards” in vessel “design, construction and survey”;
2. technically review design plans and documentation of new vessels to ensure compliance with rules;
3. attend at shipyards and manufacturing facilities to verify that vessels are built according to rules; and
4. conduct periodic surveys to ensure that vessels in service remain in class.
Public law functions5
With conventions like MARPOL and SOLAS, measures like the ISM and ISPS Codes, contracting states have to inspect vessels to ensure compliance. States appoint classification societies to act on their behalf inthese matters.
Non-traditional functions
Classification societies have expanded into industries like oil & gas, chemical, power and aerospace. For example, Lloyd’s Register is “an independent risk management organisation providing risk assessment and risk mitigation solutions and management system certification”.6
Similarities with Inspection Bodies
Hence, classification societies are made up of professionals with special knowledge. These professionals apply such knowledge to promulgate rules, conduct inspections and certify compliance. Third parties rely on certificates issued by classification societies.
Classification societies serve the same function as inspection companies who set standards for products ranging from home appliances to quality and environmental management systems.7 Third parties also rely on such companies’ certificates. Similarly, state authorities also approve building plans, and architects as well as engineers also inspect and certify work involving safety and the environment.
So, classification societies are not unique. They do for sea going vessels and systems what inspection companies, state authorities, architects, engineers and members of all professions do for land based structures, facilities and systems.
Traditional “Immunity” from Negligence Liability
Traditionally, classification societies have been “immune” from negligence liability for various reasons, all
of which are not valid. The most common are:
1. their “unique” role in enhancing safety at sea and environmental protection, that states have to
fulfill if classification societies do not;8
2. the ship owner’s non-delegable duty to maintain a seaworthy vessel;9 and
3. the fees paid to classification societies are incommensurate with the liability.
First, inspection companies, state authorities, architects, structural engineers and members of all professions serve the same unique functions as classification societies. If such inspection companies,10 state authorities11 and architects12 are liable for negligence, why should classification societies be immune?
Second, classification society’s negligence liability should not affect an owner’s duty to maintain a seaworthy vessel.
Once a classification society reports defects that make a vessel un-seaworthy or refuses to certify an
un-seaworthy vessel, the owner has to ensure that the vessel is made seaworthy to the classification
society’s satisfaction. If the vessel sails despite its un-seaworthy state, the owner is ultimately liable.
Even insurers are not liable in such a situation as cover would be void by reason of un-seaworthiness.
Third, the fees paid to inspection companies and other professionals are always minute compared to the loss and damage that may arise.13
Finally, the proliferation of classification societies, loss of confidence and increasing incidence of
sub-standard shipping, led to measures such as self-regulation through the International Association
of Classification Societies (“IACS”) and EU Directive 94/57/EC & IMO Resolution A 739(18) regulating the standards and quality of classification societies.14 Such measures, combined with the imposition of
negligence liability may in fact weed out sub-standard societies15 and enhance environmental protection
and safety of property and life. Courts have taken steps in such a direction and change is imminent.
United States of America
In the United States, a small step was first taken in the Great American Insurance Company v Bureau
Veritas.16 Bureau Veritas conducted an annual survey and certified the vessel “Tradeways II” to be in class. Shortly afterwards, defects were found during an “on-hire” survey and the class certificate was revoked.
Some repairs were executed, but others were allowed to be deferred. “Tradeways II” subsequently sank.
The court dismissed the claims against Bureau Veritas as the claimants could not prove causation.
However, the Court stated obiter that classification societies are obliged to perform the following duties
with due care:
1. Survey and classify a ship in accordance with rules and standards established and promulgated
by the society; and
2. Detect defects and notify the owner/charterer. The United States took another step in Otto Candies
LLC v Nippon Kaiji Kyokai Corporation (“Otto Candies”), 17 where NKK was held liable, on the basis of negligent misrepresentation, for economic losses suffered by a buyer.
Unfortunately, it is difficult to succeed on claims for negligent misrepresentation as claimants have to
prove that:
1. the defendants knew that the statements were false or were reckless in their belief as to the truth
of those statements;
2. the defendants knew that the claimants would be relying on the statements; and
3. the claimants actually relied on the statements to their detriment.
In Otto Candies, the court did emphasise the need for actual knowledge that the third party is relying on the society’s statements, without which no duty of care arises.
England
In England, the purchaser of the “Morning Watch” sued Lloyd’s Register of Shipping for economic loss arising from a negligent survey.18 The surveyor was found negligent in failing to report an area of corrosion and making its repair a condition of class, but Lloyd’s was absolved of liability as the loss suffered was purely economic.
For pure economic loss, the court required “a sufficient degree of proximity” between the society and the
purchaser, even though it was admitted that Lloyd’s “ought to have foreseen” or did foresee that “a
purchaser might be influenced by the classification status” and that “classification provides a degree of
reassurance as to condition”19 – indeed, Lloyd’s constitution envisaged purchasers’ reliance on vessels
being in class to be an indication of good condition.
The court applied the following principles to determine the degree of proximity and held that there was an insufficient degree of proximity between Lloyd’s and purchasers as Lloyd’s objective was to “enhance the
safety of life and property at sea”, not to protect third parties’ pecuniary interests:20
1. “Where the defendant voluntarily assumes responsibility to the plaintiff and the plaintiff
relies on that assumption of responsibility sufficient proximity will be created”, but “voluntary
assumption of responsibility is not an essential element in creating the necessary proximity”;
2. “Where the relationship between the plaintiff and the defendant has many, though not all, incidents of a contract, sufficient proximity may well exists”; and
3. Whilst forseeability will not automatically give rise to a duty, it plays a part.
The Court distinguished Caparo Industries PLC v Dickman,21 which concerned relationships between shareholders and auditors; and Smith v Bush,22 which concerned relationships between mortgagors and valuers.
“Incidents of contract” were found in both cases, but not in the relationship between Lloyd’s and purchasers. Auditors had a statutory duty to provide shareholders with accurate financial reports and were paid out of funds that would have been dividends. A valuer engaged by mortgagees knew that his report would be presented to the mortgagor, who paid for his services.
The distinction is contrived. Societies, like Lloyd’s, have declared that part of their work is for the benefit and reliance of third parties. It is a certainty, not merely a “high degree of probability”,23 that thirdparties rely on classification status.
The court relied on the following statements to support the decision for Lloyd’s, but these statements
actually support an opposite decision:24
1. “The essential ingredient” to prove proximity was that the defendant knew that his statement
would be communicated to the plaintiff “ … as a member of an indentifiable class” ie, purchasers of vessels classed by the societies, “specifically in connection with …transactions of a particular kind” ie, sale and purchase of ships; and
2. “The necessary relationship” may be held to exists where the purpose for which the statement is required is described to the maker, “specifically or generally” and made known to him “actually or inferentially”, the maker “actually or inferentially” knows that his statement will be communicated to the advisee “specifically or as a member of an ascertainable class”, that the maker “actually or inferentially” knows that the advice is likely (note: merely “likely”) to be acted on without independentinquiry and is so acted on to the advisee’s detriment. (All emphasis and comments mine).
The real reason for finding that there was an insufficient degree of proximity between Lloyd’s and potential purchasers is because the court was not ready to “advance the law of negligence”, perhaps for public policy reasons.25
In The Nicholas H,26 the House of Lords also declined to advance the law. The House declined to impose a duty of care on classification societies towards cargo owners because such a duty is “unfair, unjust and unreasonable” to owners, who ultimately have to bear the costs.
The finding makes no sense and solace can be found in Lord Lloyd’s dissenting judgment. Lord Lloyd found that:
1. the owners’ non-delegable duty to maintain a seaworthy ship and the Hague Rules have nothing
to do with negligence, the former being contractual obligations and the latter a tort – tort being
the general law under which parties contract and is not supplementary to contract law;
2. it is absurd to hold that there is no duty in contracts governed by the Hague Rules and a duty in contracts not so governed;
3. even under contracts governed by the Hague Rules, third party stevedores owes cargo owners a duty of care;27
4. surveyor’s “de-facto” control through the power to prevent sailing by withdrawing a class certificate constitutes a sufficient degree of proximity with cargo owners danger to a ship must also be danger to its cargo – especially since the basis of general average law is that “ship and cargo take part in a joint venture”;
5. it is “mere guesswork” that the imposition of a duty of care increases the insurance costs.
Competition amongst the societies may keep costs low.
All this may be set to change with the decision in AIC Ltd v ITS Testing Services (UK) Ltd.28 In this case, the defendant inspection company tested and issued certificates of quality for gasoline that the claimants purchased from Mobil and sold onwards to Galaxy.
The Court found the defendant negligent in the way they conducted the tests on the gasoline and in “failing to have in place any proper system to check the certificates of quality before they were issued”.29
The defendant was held liable to the claimant who engaged them, paid half their fees and suffered economic losses. However, it was also stated by the Court that the defendant “assumed responsibility to persons who” it “should have had in contemplation as most likely to be affected by any error in any certificate”, such as a third party sub-purchaser of the gasoline.30
Singapore
Singapore is one of the few jurisdictions that have imposed a duty of care for pure economic loss.
Since 1996 Singapore courts have allowed claims for pure economic loss, limited to cost of repairs, arisingfrom damage to real property due to negligence.31
Singapore courts have reaffirmed the existence of tort liability for pure economic loss and imposed a duty of care on architects, owed to management corporations, to correctly design buildings.32
The Singapore courts distinguished building defects from defects in consumer goods because of “the scale of investment involved in the purchase of real property and the greater expectations attached to a structure of permanence”. The same must be said for vessels. Ships are substantial investments and although not permanent structures, the environmental impact of incidents may be the same as that of a permanent structure.
Singapore’s Court of Appeal cleared the confusion in imposing a duty of care33 in Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency.34
In Singapore there is only one test for imposing a duty of care, for physical damage or economic loss.35 The test is a two-stage test of legal proximity and policy preceded by “the threshold question of factual foreseeability”.
Factual foreseeability is simply whether the “defendant ought to have known that the claimant would suffer damage from the defendant’s carelessness”.36
If the threshold factual foreseeability test is satisfied, a court then determines legal proximity, focusing on “closeness of the relationship”, taking into account physical, circumstantial and causal proximity supported by voluntary assumption of liability and reliance.37 If this is satisfied, a prima facie duty of care arises, at which point the court determines if the prima facie duty ought to be negatived by policy considerations.38
If a court is not going to impose a duty of care on grounds of public policy, it must articulate its concerns and not give the impression that “there remain “unexpressed motives” behind their finding for or against a duty”.39
As for pure economic loss, although the decided cases all relate to loss suffered by owners of real property, the Court held that there was no reason not to extend the liability if the “issues of indeterminate liability and policy can be adequately dealt with”.40
Nevertheless, the Court did state that the imposition of a duty of care not to cause pure economic loss should be done incrementally. First decide if the step forward can be “satisfied with reference to decided cases” and only resort to the general principles if there are no decided cases.
Applying the aforesaid criteria, it is definitely possible for Singapore courts to impose a duty of care againstclassification societies. Given the reliance on classification societies nowadays, it would be impossible for them to claim that they do not pass the threshold factual foreseeablity test.
As for the proximity test, for the reasons cited by Lord Lloyd in The Nicholas H,41 classification societies should satisfy the requirements of physical, circumstantial and causal proximity.
Nevertheless, realities dictate that Singapore needs classification societies. As a major port, Singapore’s economy would be affected if the classification societies cease operations due to the imposition of negligence liability. This may form a policy ground for refusing to impose a duty of care. However, this concern may be invalid as classification societies may well welcome imposition of such liability as a boon to their reputation and to weed out sub-standard competition.
France
France made a great leap forward in 2008. Following the “Erika” incident, a French court found that RINA, the Italian classification society, was negligent in carrying out its duties and caused the incident.
The Court held that RINA ought not to have issued the class certificate without certain repair works and if it had not done so, the vessel would not have been chartered.42
The Court found that the classification society acted “in concert” with the owner’s representative to “jeopardize deliberately the safety of the ship, and thereby endanger third parties”.43
RINA was fined €375,000, the maximum allowed under French criminal law and made to pay civil damages running into the tens, if not hundreds, of millions Euros.
Unfortunately, the report on the French Court proceedings merely reveals a detailed finding of fact and does not discuss the law of negligence. Hence, not much guidance on this issue can be gleaned from this groundbreaking decision. The case is currently on appeal and we await the outcome with abated breath.
Conclusion
The mere imposition of a duty of care does not automatically make classification societies liable for all maritime incidents. Breach of duty and causation must still exist. However, the imposition of such a duty may make classification societies more careful in executing their tasks, enhancing safety of life and property at sea.
The laws in most jurisdictions allow for classification societies’ traditional “immunity” from negligence liability to be removed and many jurisdictions may well follow France’s lead.
Chew Yee Teck, Eric*
Asia Ascent Law Corporation
E-mail: ericchew@asiaascent.com
© Chew Yee Teck, Eric
*LL.B. (Hons) University of Sheffield; LL.M. (Maritime Law) National University of Singapore;
Barrister-at-Law (Gray’s Inn); Advocate & Solicitor, Singapore; FCIArb; FSIArb; FMIArb; FIPAS.
The author wishes to thank Professor Stephen Darryl Girvin, Director of the LL.M. (Maritime Law) course at the National University of Singapore, for setting the research topic that formed the basis of this paper.
This paper was presented at the 17th International Congress of Maritime Arbitrators held
from 5-9 October 2009 in Hamburg, Germany.
Notes
1 Marc Rich & Co v Bishop Rock Ltd (The “Nicholas H”) [1996] 1 AC 211 at 218/F-G – classification societies do not have general immunity to tort claims. “Immunity” arises from judicial reluctance to extend the duty of care to include loss & damage caused to third parties by negligent classification societies.
2 Mariola Marine Corporation v Lloyd’s Register of Shipping (The “Morning Watch”) [1990] 1 Lloyd’s Report 547 at pp 558-559, reproducing Lloyd’s constitution.
3 Lloyd’s Register website at http://www.lr.org/About+Us/Our+history.htm.
4 “Classification Societies: What, Why and How” - http://www.iacs.org.uk/document/public/explained/Class_WhatWhy&How.PDF.
5 Note 4, supra.
6 http://www.lr.org/.
7 http://www.psbcorp.com/CorporateOverview.aspx & http://www.psbcorp.com/productlisting.aspx – for an example of the process involved in certifying a product.
8 The Nicholas H [1996] 1 AC 211 at 212/C-D.
9 In Re Marine Sulphur Transport Corp 312 F Supp 1081.
10 AIC Ltd v ITS Testing Services (UK) Ltd [2006] 1 Lloyd’s Report 1, especially at para 14 on p 4 where the role of inspection companies is clearly described by Mr Justice Cresswell, whose description bears resemblance to the roles of classification societies.
11 Town councils were liable for negligence in ensuring compliance with building codes in Dutton v Bognor Regis Urban District Council [1972] 1 QB 373, Anns v Merton LBC [1978] AC 728, Lester v White [1992] 2 NZLR 483 & Invercargill City Council Hamlin [1994] 3 NZLR 513.
12 RSP Architects Planners & Engineers (Raglan Squire Partners FE) v Management Corporation Strata Title Plan No 1075 [1999] 2 SLR 449.
13 AIC Ltd v ITS Testing Services (UK) Ltd [2006] 1 Lloyd’s Report 1, at para 30 on p 6 and para 344 at p 43 where ITS was paid £1,601.24 and its liability was in excess of US$2 million.
14 Juan L Pulido Begines, “The EU Law on Classification Societies: Scope and Liability Issues” (2005) 36 Journal of Maritime Law & Commerce, p 487.
15 The Nicholas H [1996] 1 AC 211 at 229/D.
16 Great American Insurance Company v Bureau Veritas 338 F Supp 999 [1972].
17 Otto Candies LLC v Nippon Kaiji Kyokai Corporation 346 F 3d 530 (5th Cir 2003).
18 The Morning Watch [1990] 1 Lloyd’s Report 547.
19 The Morning Watch [1990] 1 Lloyd’s Report 547, p 556.
20 The Morning Watch [1990] 1 Lloyd’s Report 547, p 557.
21 Caparo Industries PLC v Dickman [1990] 2 WLR 358.
22 Smith v Bush [1989] 2 WLR 790.
23 The Morning Watch [1990] 1 Lloyd’s Report 547, p 562.
24 The Morning Watch [1990] 1 Lloyd’s Report 547, p 562.
25 The Morning Watch [1990] 1 Lloyd’s Report 547, p 557 – the principle that the existence of a duty of care is “in the last resort a question of policy” is approved & at p 560 – the Court refused to “make a substantial further advance in the law of negligence” by imposing a general duty on classification societies.
26 The Nicholas H [1996] 1 AC 211, p 212/C-D.
27 Wilson v Darling Island Stevedoring & Lighterage Co Ltd [1956] 1 Lloyd’s Report 356 & Midland Silicones Ltd v Scruttons Ltd [1962] AC 446.
28 AIC Ltd v ITS Testing Services (UK) Ltd [2006] 1 Lloyd’s Report 1.
29 AIC Ltd v ITS Testing Services (UK) Ltd [2006] 1 Lloyd’s Report 1 at para 212.
30 AIC Ltd v ITS Testing Services (UK) Ltd [2006] 1 Lloyd’s Report 1 at para 185.
31 RSP Architects Planners & Engineers v Ocean Front Pte Ltd [1996] 1 SLR 113.
32 RSP Architects Planners & Engineers (Raglan Squire Partners FE) v Management Corporation Strata Title Plan No 1075 [1999] 2 SLR 449.
33 United Project Consultants Pte Ltd v Leong Kwok Onn (trading as Leong Kwok Onn & Co) [2005] 4 SLR 214 at paras 32 & 33.
34 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency (“Spandeck”) [2007] 4 SLR 100.
35 Spandeck [2007] 4 SLR 100 at paras 71 & 72.
36 Spandeck [2007] 4 SLR 100 at paras 75 & 76.
37 Spandeck [2007] 4 SLR 100 at para 73.
38 Spandeck [2007] 4 SLR 100 at para 83.
39 Spandeck [2007] 4 SLR 100 at para 85.
40 Spandeck [2007] 4 SLR 100 at paras 69, 71 & 72.
41 The Nicholas H [1996] 1 AC 211 at 219/D-220/A & 225/E-227/F.
42 Vincent J Foley & Christopher R Nolan , “The Erika Judgment – Environmental Liability and Places of Refuge: A Sea Change in Civil and Criminal Responsibility that the Maritime Community Must Heed” 33 Tul Mar L J 41, p 68.
43 Ibid, p 70.