Doctrine of Limited Liability: Everything You Need to Know

The Doctrine of Limited Liability states that the liability of the shipowner is restricted to only the shipowner's interest in the vessel.3 min read

The Doctrine of Limited Liability, also known as the "no vessel, no liability doctrine," states that the liability of the shipowner is restricted to only the shipowner's interest in the vessel. In the case of a total loss, the liability of the shipowner ends. In the case of the vessel's total destruction, all maritime liens also end.

Limited liability is put in place as a way to protect the personal interests of an investor from any wrongdoing of a corporation. However, it is possible for the investor to lose what they have invested in the corporation. Limited liability for a shipowner extends to the following:

  • Appurtenances.
  • Equipment.
  • Freightage.
  • Insurance proceeds.

Advantages and Disadvantages of Limited Liability

Limited liability is a legal precedent that was pivotal to the modern corporation and stock markets. By instituting limited liability, entrepreneurs were given the ability to use small investments from a large pool of corporate shareholders, rather than just a few wealthy partners.

In partnerships, the partners are each responsible for any wrongdoing. This is removed with limited liability. Shareholders have the confidence to invest knowing they will only lose what they put in, nothing more. With the introduction of limited liability, the economy boomed from a new way to source investment capital.

A major disadvantage of limited liability is the problem of who is deemed responsible in the case of wrongdoing. When limited liability is in place, the blame is hard to place based on the corporate structure. This is especially true when corporate subsidiaries are not held to the highest standards and perform risky tasks like oil drilling. Parent corporations use lawyers to legally protect themselves and the assets of their subsidiaries.

Exceptions to the Doctrine of Limited Liability

Typically, the shipowner's liability is limited to what they are entitled to abandon the vessel. This includes all equipment and freight that was collected on the trip. If the freight was lost, this can be sufficient for the shipowner's discharge. However, there are exceptions to consider when reviewing the doctrine of limited liability:

  • Repairs and provisioning of the vessel that took place before losing the vessel.
  • Any insurance proceeds. Any proceeds will go to the claimant if the vessel is insured.
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