Ordinarily, under English law, an innocent party such as the owner of Hythe Pier is entitled to be fully compensated by the negligent party for loss or damage to their property. This creates a major problem for ship owners, as the goods they carry are often worth more than the ships that carry them. If bankruptcy and the consequent interruption of international trade is to be avoided, national governments, as a matter of public policy introduced limitation of liability provisions into their maritime laws and codes to prevent this. As a consequence, where a claim exceeds an individual ship owner's limitation figure, the claimant will not be able to recover their loss in full and the difference will have to be borne by the claimant and his insurers.

The concept of limitation was introduced in order to promote the growth of national and international trade. It has its origins in the 17th Century and the earliest limitation provisions were introduced via the statutes of Hamburg in 1603. Over the next 100 years the majority of European States also amended their maritime codes to include limitation. Great Britain, although a major trading nation, did not introduce its own Act until 1733.

As nations and the growth in international trade have developed over the past 400 years, so too has the doctrine affecting limitation. Currently a ship owner can limit their liability for damage to another vessel, to cargo and to property and personal injury claims to crew and passengers. The majority of major trading nations now incorporate the latest convention on Limitation of Liability (1976) into national maritime codes such as the UK's Merchant Shipping Act 1995.

The UK limitation limit is calculated using a formula set out in Articles 6 and 7 of the Act, using the vessel's gross tonnage multiplied by scale units of account expressed as Special Drawing Rights (SDRs).

The SDR is defined by the International Monetary Fund and converted into the appropriate national currency at the rate applicable on the date the limitation fund is tendered or security provided.

In addition to ship owners, Port Authorities are also allowed to limit their liability for marine claims, using the same formula as the ship owner. However, the limiting factor is the gross tonnage of the largest vessel to use the port in the past five years.

In the case of the Donald Redford/Hythe Pier incident, the Limitation Fund of the vessel is less than the cost of repairs to the pier. Queries as to whether the vessel was properly insured must be answered in terms of understanding that all liability cover, whether it is marine or otherwise, is on a legal liability basis and insurers will only pay claims on this basis.

The limitation fund relating to the Donald Redford was £167,000, not enough to cover the cost of repairing Hythe Pier. Fortunately for the Pier's owners, the dredger's owners, Northwood (Fareham), agreed to pay the difference.

MJ Information No: 19318