The recent collapse of the Francis Scott Key Bridge in Baltimore, Maryland caused shockwaves around the world. Closer to home, this event has had considerable implications for the equipment finance industry. In the aftermath, many vessel owners and financing parties have wondered how they would be protected in the event that they owned or leased a vessel that was involved in a such a large-scale collision or similar disaster.

Below, we discuss statutory and non-statutory methods by which a vessel owner or passive-financier can limit its liability, including regulatory limitations such as the Federal Shipowner’s Limitation of Liability Act and the Oil Pollution Act, as well as including strong indemnity language within lease or loan documentation. By supplementing statutory limitation of liability regimes with robust indemnity language in applicable legal documentation, an owner or other passive financing party can significantly limit its liability in the event of a maritime disaster involving one of its vessels.

The Crash

At approximately 1:29 in the morning on March 26, 2024, the 947-foot-long container ship MV DALI collided with the Francis Scott Key Bridge, causing the bridge to collapse into the Patapsco River and disrupting the Baltimore Harbor. Several minutes before the collision, the ship suffered a malfunction in its electrical systems, which triggered a backup generator. However, that power source did not provide power to the ship’s propulsion systems. The ship veered off of its intended course and collided with the southwest supporting pier in the main truss section of the bridge.

In an attempt to stop the MV DALI prior to impact, the crew dropped the ship’s anchor, which was not successful. The Francis Scott Key bridge was “fracture critical,” meaning that it did not have any redundancy against the removal of any of its supports. The collision with a main pier caused it to break apart, and, within moments, it collapsed into the Patapsco River despite having passed its most recent inspections and having been rated in fair or satisfactory condition.

The Dali was transporting approximately 4,700 shipping containers, 56 of which contained hazardous materials. The NTSB’s preliminary report indicates that 14 containers with hazardous materials may have been damaged in the accident, but thus far, the NTSB believes no hazardous materials have reached the water.

The route under the Francis Scott Key Bridge connected the Port of Baltimore to the Chesapeake Bay and the Atlantic Ocean, functioning as the sole passageway in and out of the port. In 2023, the Port of Baltimore handled 52.3 million tons of foreign cargo worth approximately $80 billion and served as the departure point for cruises carrying more than 440,000 passengers. In addition, the port ranked No. 1 in the United States in handling automobiles, light trucks, farm and construction machinery in 2023. Locally, the port generated more than $395 million in taxes, more than $3 billion in personal income, $2.6 billion in business income directly supported over 15,000 port workers and supported an additional 139,000 jobs related to work done at the port.

The collision has caused major supply chain disruptions, in addition to any possible environmental damage and repair costs. According to initial estimates, insured losses relating to the crash are estimated between $2 and $4 billion, with costs related to supply chain disruptions caused by the closure of the port of Baltimore estimated at over $1 billion per week. The rebuilding of the Francis Scott Key Bridge is itself expected to cost nearly $2 billion and take until the fall of 2028. As of April 20, three channels into the port had been opened, allowing the port to accept around 15% of its pre-collision shipping volume. On April 25, the port opened a fourth channel, allowing 11 ships that had been trapped in the port to leave. Salvage and channel restoration operations remain ongoing, and experts expect that the port will re-open sooner rather than later.

On May 20, the Dali was refloated and towed to a local maritime terminal, clearing the way for the re-opening of the Fort McHenry Limited Access Channel, a channel large enough to easily accommodate deep draft vessels. Full access to the port is expected to be restored within weeks.

Owners of vessels may be concerned about potential liability in similar circumstances. Absent any regulatory or contractual protections, an owner or operator could be found liable if it had taken any action or was negligent in an action that led to a crash (such as the staffing or maintenance of the ship). Such damages would include the costs of damage to any affected vessel, as well as any additional damage caused by the collision, such as the damage to the Francis Scott Key Bridge. In addition, especially in the case of a ship like the Dali that was carrying hazardous materials, owners may face possible environmental liability due to the accidental release of pollutants into a waterway, especially if the owner or charterer was at fault for the crash that led to the release of those pollutants.

The Shipowner’s Limitation of Liability Act

The primary method for a passive financier of a vessel to avoid potential liability is the Shipowner’s Limitation of Liability Act. The act was originally enacted to protect the maritime shipping industry by allowing owners who can prove they were not aware of the defect causing the accident to limit their liability for damage or injury. The liability of the owner of a vessel for any covered claim is limited to the value of the owner’s interest in the vessel (or, in the case of co-owners, such owner’s proportionate share of interest in the vessel) and its freight then pending.

The limited liability afforded by the act applies only to claims arising during the voyage or incident that gave rise to potential liability (including all liens attached during the voyage). However, the act applies both to claims against a thing — the vessel — and those against a person or entity — its owners and operators. In other words, the owners of the MV DALI have asked that a single federal district court in Maryland hear all claims arising out of or related to the wrongful death of the six construction workers, claims for losses related to the cargo, claims for damages related to the bridge and that their liability be capped at $42.5 million. If successful, one would expect that — as was the case with other disasters, including the Deepwater Horizon oil spill — a single fund would be established from which payment of all eligible claims would be distributed. Under a principle established by the Supreme Court, recovery of economic losses in the absence of physical damages is prohibited, meaning that claims for business interruption may not be recoverable from the owners of the MV DALI.

While the limitation of liability provided by the act is robust, it is worth noting that the act does not apply to claims brought under the Park System Resources Protection Act, the Trans-Alaska Pipeline Authorization Act of 1973, the Clean Water Act, claims by the federal government under the Wreck Act or a claim under the Oil Pollution Act. In addition, the applicability of the act is limited to waters that qualify as “navigable,” meaning that the waterway is used (or can be used) for commerce, such as interstate or international shipping. The act does not apply to navigable waters that are located completely within a single state with no exterior connections.

Historically, the purpose of the act was to encourage American shipbuilding and investment into the shipbuilding industry. At the time that the act was passed, foreign countries had already enacted similar limitation of liability regimes for ship-owners, so the act was intended to allow American shipowners to compete on a level playing field with their foreign counterparts. The protection of the act is available to both American and foreign shipowners, and the benefit of the act can be invoked by the owner of a vessel notwithstanding a charter of the vessel.

For the purposes of the act, the term “owner” is interpreted broadly and, while title ownership is indicative of ownership under the act, it is not dispositive. Factors considered in determining who is an “owner” under the act include who pays for storage of the vessel, who skippers the vessel and who has possession and control of the vessel. Courts also look to the degree of autonomy a manager exercises with respect to the vessel and who is responsible for maintenance and operation of the vessel.

The act applies to individual and corporate vessel owners, however, when the owner of a ship is a corporation. The liability of the corporation is not limited under the act if the negligence is that of a corporate agent whose scope of authority includes supervision of the vessel or its business operations. Moreover, the act applies to vessel owners and charterers but does not apply to nonowners, nor to nonowner operators who fall short of status as an owner. As such, if a party fails to show that they were an owner or charterer of a vessel at the time of an accident, such party is not entitled to limitation of liability under the act. In the case of the MV DALI, one can expect there to be litigation regarding the owner of the vessel, Grace Ocean Private, Maersk, who was the charterer of the vessel and Synergy Group, which employs the crew of the vessel. All will try to invite the protections of the act.

The protections of the act are available unless the events leading to the liability or loss occur without a shipowner’s privity or knowledge. In this context, the phrase “privity or knowledge” means some personal participation or responsibility of the owner in the fault or negligence which caused or contributed to the loss or injury. The phrase is also often interpreted as a term of art that indicates a shipowner’s involvement (whether by participation or neglect of a duty with respect to the vessel) in the fault that caused the accident¹. For the purposes of limitation (or denial thereof) under the act, the owner must not have knowledge of or privity to the specific acts or conditions that contributed to or caused the action — knowledge or awareness of every fact or condition related to the vessel is not necessary². In order to establish that the vessel owner should have foreseen damages, a defendant must show that the vessel owner appear to have (or actually had) knowledge of a probable danger³. One can expect, in the case of the MV DALI, that there will be significant litigation over whether previous power failures on the vessel constitute privity or knowledge, and, if so, whose knowledge.

When the owner of a vessel is in control of and operating the vessel, the owner is not entitled to a limitation of liability for accidents arising from the owner’s negligence. However, the presence of the owner aboard the vessel is not dispositive as to whether or not the owner can limit its liability under the act. If, while aboard, the owner fails to exercise its duty of control, the owner will lose the ability to limits its liability under the act. But, if the cause of the liability is due to a condition that the owner does not have knowledge (or means of knowledge) of, the owner may still limit its liability even if they are aboard during a casualty event⁴.

Given the above, regardless of how the cases about the MV DALI turn out, it is extremely likely that, in most situations, a passive financing party such as a bank will be able to take advantage of the protections offered by the act. Firstly, as the entity that provided the capital to purchase the vessel and holds title to the vessel, it is clear that a passive financing source would qualify as an “owner” under the act. In addition, as a passive financing source, banks and other similar lenders are typically not in control of the leased assets and do not take any role in the day-to-day operation of such assets. As such, as long as the financing source is not aware of any issue with the vessel and does not take part in the regular operation of the vessel, it is extremely probable that the financing source can avail itself of the protections of the act.

Oil Pollution Control Act

The Oil Pollution Act (OPA) is another federal statute that provides for the limitation of liability of passive financing sources or owners of marine vessels. The OPA is the primary method for governing liability for oil spills and the expenses associated with such spills and, as mentioned above, claims under the OPA are not covered under the limitation of liability regime of the Shipowner’s Limitation of Liability Act. To impose liability under the OPA, a plaintiff must show that the defendant is a responsible party (which includes the owner, operator or charterer of a vessel) for a vessel or facility from which there has been a discharge of oil or substantial threat of a discharge of oil, into navigable waters and, that such incident resulted in removal costs and damages.

Section 703 of the Coast Guard and Maritime Transportation Act of 2004 amended the OPA by redefining “owner” to exclude passive financing entities in vessel financing transactions. This exclusion is commonly referred to as the “secured creditor exemption” and excludes from the definition of owner or operator “a person that is a financing source and that holds indicia of ownership primarily to protect a security interest in a vessel or facility/” A financing source or owner is protected from liability under the secured creditor exemption if it holds an “indicia of ownership” in a vessel primarily to protect a security interest in such vessel or facility.

The OPA secured creditor exemption also insulates owners and financing sources following foreclosure on the vessel facility if the financing source sells, re-leases (in the case of lease financing), liquidates, maintains business activities, winds up operations, undertakes a removal action or takes any other measures to preserve, protect or prepare the vessel or facility prior to the sale or disposition “at the earliest practicable, commercially reasonable time, on commercially reasonable terms.”

Importantly, and similarly to the limitation of liability regime under the Shipowner’s Limitation of Liability Act, to avail itself of the secured creditor exemption provided for by the OPA, an owner or passive financing source must not participate in the day-to-day operations of the chartered vessel and must not exercise decision making control over vessel operations.

Indemnity Provisions

In addition to the limitation of liability, regimes provided for by statute general indemnity provisions within a lender or passive financier’s typical documentation can serve to insulate the owner or financing source from liability. The owner of any chartered vessel or a financing source that provides a loan for the purchase of a vessel should be sure to include robust indemnity provisions within their lease or loan documentation, making special note to require a charterer or borrower to indemnify the owner or financing source and all affiliated persons against any claims that arise with respect to the applicable vessel(s), including, without limitation, the borrower’s or charterer’s use or operation thereof.

Financing parties should also consider adding a specific reference to environmental liability in their indemnification provisions in order to ensure a properly broad interpretation of the borrower’s or charterer’s indemnification obligations. Such indemnity will obligate the charterer, to the fullest extent possible, to reimburse the owner or financing source against any claim, liability, loss or expenses (including for court costs and reasonable attorneys’ fees and expenses) that results from an incident which occurred during the term of the lease, or due to the fault of the charterer.

It should be noted that the creditworthiness of the applicable charterer and/or guarantor will play a direct role in determining whether such indemnity will function as anticipated and whether charterer/guarantor could practically cover any potential liability of the financing source. In addition, many charters and loans contain restrictions against use of the applicable equipment by the borrower or charterer under such loan or charter to store hazardous materials (and indemnification by such borrower or charterer in the event of a breach of such restriction). Care should be taken to ensure that a reference to “hazardous materials” in such a provision is sufficiently broad to cover any potential liability arising under Federal regulations related to the discharge of hazardous materials. As long as indemnification provisions are properly drafted and the applicable charterer and/or guarantor has the means to pay for all liability incurred, indemnification provisions can function as a good “catchall” for liability that is not otherwise covered by statutory liability-limiting regimes.

Conclusion

As discussed above, many protections exist to serve to limit or eliminate a vessel owner or financier’s liability in the event of a significant collision. The Federal Shipowner’s Limitation of Liability Act provides a robust limitation of liability for passive vessel owners, limiting damages to the value of the owner’s interest in the vessel and the vessels freight then pending, so long as the owner did not have privity or knowledge of the events leading to liability. In addition, although not covered under the Federal Shipowner’s Limitation of Liability Act, claims arising under the OPA are also subject to a statutory limitation of liability regime meaning that a financier should be found not liable for damages unless they have taken an active role in managing the vessel in question.

Moreover, financing parties can shift any remaining burden of potential liability to the party chartering or operating the equipment through indemnity provisions and restrictive covenants. As such, by complying with applicable law, refraining from participation in the day-to-day management of vessels under operation by another party, and through the use of strong indemnity language in charter/loan documentation, a vessel financing party can significantly limit its possible liability in the case of vessel collision or other disaster.

¹ Crowley v. Costa, 924 F. Supp. 2d 402 (D. Conn. 2013); In re Treanor, 2015 A.M.C. 2857, 2015 WL 7016954 (E.D. N.Y. 2015).
² Suzuki of Orange Park, Inc. v. Shubert, 86 F.3d 1060 (11th Cir. 1996); In re Dieber, 793 F. Supp. 2d 632 (S.D. N.Y. 2011).
³ Tittle v. Aldacosta, 544 F.2d 752 (5th Cir. 1977).
⁴ Tittle v. Aldacosta, 544 F.2d 752 (5th Cir. 1977).