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u Ottawa f.'t.'nivi'i'siio ( niKiiliiiint' (•;iiiinlii's iini\cj sily FACULTE DES ETUDES SUPERIEURES l^^l FACULTY OF GRADUATE AND ET POSTOCTORALES u Ottawa POSDOCTORAL STUDIES L'Universit6 canadienne Canada's university Muhammad Masum Billah AUTEUR DE LA THESE / AUTHOR OF THESIS LL.D. GRADE/DEGREE Faculty of Law FACULTE, ECOLE, DEPARTEMENT/ FACULTY, SCHOOL, DEPARTMENT Effects of Insurance's Absence or Presence on Maritime Liability Law with Special Reference to Cargo Liability and Oil Pollution Liability Regimes: An Economics Analysis TITRE DE LA THESE / TITLE OF THESIS Andre Baren DIRECTEUR (DIRECTRICE) DE LA THESE / THESIS SUPERVISOR CO-DIRECTEUR (CO-DIRECTRICE) DE LA THESE / THESIS CO-SUPERVISOR EXAMINATEURS (EXAMINATRICES) DE LA THESE/THESIS EXAMINERS Jamie Benidickson Denis Boivin Martin Davies Donald McRae Gary W. Slater Le Doyen de la Faculte des etudes superieures et postdoctorales / Dean of the Faculty of Graduate and Postdoctoral Studies Effects of Insurance's Absence or Presence on Maritime Liability Law with Special Reference to Cargo Liability and Oil Pollution Liability Regimes: An Economic Analysis Muhammad Masum Billah Thesis submitted to the Faculty of Graduate and Postdoctoral Studies in partial fulfillment of the requirements for the degree of Doctorate of Laws Faculty of Law University of Ottawa © Muhammad Masum Billah, Ottawa, Canada, 2009 Library and Archives Bibliotheque et 1*1 Canada Archives Canada Published Heritage Direction du Branch Patrimoine de I'edition 395 Wellington Street 395, rue Wellington OttawaONK1A0N4 Ottawa ON K1A 0N4 Canada Canada Your file Voire reference ISBN: 978-0-494-61255-2 Our file Notre reference ISBN: 978-0-494-61255-2 NOTICE: AVIS: The author has granted a non L'auteur a accorde une licence non exclusive exclusive license allowing Library and permettant a la Bibliotheque et Archives Archives Canada to reproduce, Canada de reproduire, publier, archiver, publish, archive, preserve, conserve, sauvegarder, conserver, transmettre au public communicate to the public by par telecommunication ou par Nnternet, prefer, telecommunication or on the Internet, distribuer et vendre des theses partout dans le loan, distribute and sell theses monde, a des fins commerciales ou autres, sur worldwide, for commercial or non support microforme, papier, electronique et/ou commercial purposes, in microform, autres formats. paper, electronic and/or any other formats. The author retains copyright L'auteur conserve la propriete du droit d'auteur ownership and moral rights in this et des droits moraux qui protege cette these. Ni thesis. Neither the thesis nor la these ni des extraits substantiels de celle-ci substantial extracts from it may be ne doivent etre imprimes ou autrement printed or otherwise reproduced reproduits sans son autorisation. without the author's permission. In compliance with the Canadian Conformement a la loi canadienne sur la Privacy Act some supporting forms protection de la vie privee, quelques may have been removed from this formulaires secondaires ont ete enleves de thesis. cette these. While these forms may be included Bien que ces formulaires aient inclus dans in the document page count, their la pagination, il n'y aura aucun contenu removal does not represent any loss manquant. of content from the thesis. 1+1 Canada Table of Contents ACKNOWLEDGEMENTS viii ABSTRACT ix INTRODUCTION 1 Chapter 1 Lack of Marine Insurance and Its Effect on Alternative Risk Management Strategies and on Liability Law: A Historical Evaluation Introduction 16 I. Use of Alternative Risk Management Strategies in the Absence of Insurance 17 A. Risk-Avoidance 18 B. Risk-Control 19 C. Risk-Retention 20 D. Risk-Transfer 21 1. Transfer to governments 21 2. Transfer to financiers (i.e., bottomry and respondentia) 23 3. Transfer to co-adventurers (i.e., general average) 25 4. Transfer to liability claimant (i.e., limitation of liability) 26 II. Lack of Insurance and Under-development of Liability Law 29 A. Increasing need for marine liability insurance 31 1. Enactment of Lord Campbell's Act 32 2. Increasing immigration to the US and Australia 33 3. Insufficient collision liability coverage 33 4. No coverage for excess liability 34 B. P&I clubs to meet the increasing need for liability insurance 35 1. History of hull clubs 36 2. From hull clubs to P&I clubs 38 C. History of Cargo and Oil Pollution Liability Regimes 40 1. History of cargo liability regime 41 2. History of oil pollution liability regime 45 Conclusion 47 Chapter 2 Connection between Insurance and Limitation of Shipowners' Liability: An Economic Analysis Introduction 49 I. Nature of the Problem 50 II. Economic Analysis of the Problem 57 ii A. Nature of Economic Analysis 57 B. Descriptive Analysis of Limitation of Liability 58 1. The effect of liability on behaviour: deterrence 59 2. The effect of limitation of liability: under-deterrence 60 C. Normative Analysis of Limitation of Liability 61 1. Social desirability of limitation of liability in the past 61 a. Full liability may lead a risk-averse person to over-deterrence 61 b. Limitation of liability: a mechanism against over-deterrence in the past 63 2. Social desirability of limitation of liability today 64 a. Insurance now solves the problem of over-deterrence 64 b. Insurance may create under-deterrence 66 c. Corporation: another mechanism to ameliorate the problem of over-deterrence 67 III. Limitation of Liability and Insurance Arguments 69 A. Insurance Arguments in Specific Maritime Liability Convention 72 1. General Liability Conventions 73 2. Cargo Liability Conventions 79 3. Convention on Passengers' Liability 84 4. Conventions on Oil Pollution Liability 86 5. Convention on Liability for Bunker Oil Pollution 91 6. Convention on Liability for Damage from HNS 93 7. Conventions on Nuclear Liability 95 B. Rebuttal of Insurance Arguments 96 1. Insurance Capacity 96 2. Insurance Cost 99 C. The Reality of Marine Liability Insurance Market 102 1. Capacity of Marine Insurance Market 102 2. Cost of Marine Insurance 104 IV. Abolition of Limitation of Liability and Its Consequence 106 A. Confusion between insurability and unpredictability 107 B. Unlimited Liability and cost of litigation 109 C. Unlimited liability and price of consumer goods 110 D. Social desirability of maritime liability laws 110 E. The impossible test to break limitation 112 Conclusion 115 Chapter 3 Insurance through General Average: Its Justifications and Its Effects on Optimal Care and on Social Costs Introduction 117 I. Nature and Practice of General Average 118 iii A. Meaning and nature 118 B. Modern practice of general average 119 C. Its function as insurance 120 II. Justifications of General Average 121 A. Justification of General Average in the Past 121 B. Possible justification of general average today 123 III. Effects of General Average on Optimal Care and on Social Cost 126 A. Possible distortion of incentives towards optimal care 126 1. General average may not affect incentives at all 126 2. Divergence in care level before and after an incident 127 3. Negligence may be shadowed by peril of the sea 129 4. Express exoneration of employee's negligence 130 5. Exemption of liability of negligent shipowners 131 B. Possible Social costs arising from general average 132 1. Costs to determine various items for contribution purpose 133 2. Costs to obtain bonds and guarantee 134 3. Costs of collecting contribution 134 4. Costs may be more than total contribution 135 5. Social costs due to moral hazard 136 C. Abolition of General Average 137 1. Absorption clause as substitute for general average 137 2. Possible increase in freight rate following the abolition 139 3. Salvage in general average situation 139 Conclusion 141 Chapter 4 Maritime Cargo Liability Regimes in the Light of Insurance Realities Introduction 143 I. Cargo Liability Regimes in Brief 145 II. Economic Analysis of Liability Rules 148 III. Economic Analysis of Cargo Liability Regimes 149 A. Function of Liability Rules: Deterrence 149 1. Incentive is created only when cost of care is less than the expected liability 149 2. Exceptions to negligent navigation and fire damage not justified 151 3. Liability may be unnecessary in a world of perfect information 153 4. Incentive is not affected by most of the exceptions in the liability regimes 156 5. Incentive requires imposition of liability on everyone who can take care.. .161 B. Function of Liability Rules: Compensation or Insurance 163 1. Modified cargo liability rules which used to serve insurance purpose 165 a. Strict liability of common carrier 165 b. Automatic cancellation of contract after deviation 168 IV c. Warranty of seaworthiness 171 2. Surviving cargo liability rules those designed to serve insurance 172 a. General average 173 b. Limitation of Cargo liability 177 IV. Evidence of Widespread Insurance Practice 181 Conclusion 182 Chapter 5 Role of Insurance in Providing Adequate Compensation for Oil Pollution Damage and in Reducing Oil Pollution Incidents Introduction 184 I. Oil Pollution Liability Regime in Short 187 II. Adequate Compensation by Various Insurance Arrangements 191 A. Compulsory Insurance 192 1. Tendency to keep assets low checked 194 2. 'Flag-of-convenience' tendency checked 195 3. Compulsory insurance in other maritime liability conventions 196 4. Compulsory insurance becomes part of all maritime laws 197 B. Direct Action against Insurers 198 1. No policy defence or exception allowed 199 2. Direct action in other maritime liability convention 200 3. Arguments for direct action and compulsory insurance in general maritime liability 200 4. Capacity of insurance market for compulsory insurance and direct action...201 C. Certificate of Insurance 202 D. Insurance through the IOPC Fund 203 1. Situations when the IOPF Fund comes in the scene 204 2. The IOPC Fund's source of contributions 205 3. The IOPC Fund's effects on deterrence 206 4. Justification of the Fund's payment for natural disaster 207 5. A similar fund under HNS Convention 208 E.