Novel Charters: Considering a New Approach to Protect Injured Third Parties Against Insolvent Charterers

Katherine Clements | Comment

Parties in the shipping industry have engaged in charter arrangements for centuries. Charter arrangements allow the parties to allocate the risks and costs of engaging in business by creating agreements that fit their particular needs. While parties’ liability to each other in traditional maritime charters is well established, parties may enter into nontraditional charter agreements in which liability to injured third parties is unclear. Thus, courts have had to address shipowners’ liability to third parties in a wide variety of circumstances. In so doing, the circuit courts of appeals have split over the question of whether shipowners may evade liability to injured third parties through a charter arrangement. Most jurisdictions recognize at least one type of charter arrangement–a bareboat charter–as an avenue for the limitation of shipowners’ liability. In numerous cases, bareboat charter arrangements absolving shipowners of liability have been upheld. However, within the United States Court of Appeals for the Fifth Circuit’s jurisdiction, a shipowner may not use a charter agreement to escape liability, and an injured seaman may have recourse against a shipowner without regard to who is at fault. Given this split of opinion, the exact circumstances in which a shipowner will be held liable to injured third parties is unclear. Specifically, if a chartered oil tanker spills hundreds of thousands of gallons of oil and the charter agreement allocates liability to the charterer, who is underinsured and without assets, who is liable to injured third parties? Is the shipowner protected by the terms of the charter arrangement even if she knowingly contracted with the negligent and undercapitalized charterer?

This Comment examines the legal rights and remedies available to injured third parties attempting to recover against insolvent charterers. It will first address bareboat charters and how liability has traditionally been shifted to a charterer. Existing authority tends to focus on shipowners’ liability in the context of unseaworthiness claims related to workers’ injuries rather than in the context of injured third parties. This Comment will then address the circuit split on shipowners’ liability and the lack of clear precedent. The second Part of this Comment takes a closer look at a recent court decision holding a shipowner free from liability where the charterer was the owner pro hac vice (“for this occasion”) pursuant to a bareboat charter, but the shipowner simultaneously chartered back the ship for her own use. Lastly, this Comment will address a different approach to determining shipowners’ liability and discuss developing situations that courts may face in determining shipowners’ liability in an arms-length charter arrangement.