Global limitation developments

Trading Straits

Admiralty & casualty lawyers Richard Gunn (partner) and James Scott (counsel) discuss developments in relation to the 1976 Convention on limitation of liability for maritime claims. Richard provides analysis on the application of Articles 12 and 13 of the Convention and James talks on limitation of liability for indemnity claims for wreck removal costs.

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Transcript:

Intro: Trading Straights brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith, litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.

James: Welcome to the Trading Straights podcast on Global Limitation Developments with your host, Reed Smith Casualty lawyers, Richard Gunn and James Scott. This podcast is a continuation of the presentations given recently by Richard and James in Japan Tokyo at the shipping seminar to the local market. I'm James Scott and my section of the podcast is on the Hong Kong final court of appeal judgment number 20 of 2003 on limitation of liability for indemnity claims for wreck removal. Richard will give a talk on his views on other matters in relation to article 12 of the Limitation Convention, but I'll get started on my bit now.

So in January 2019, Antea collided with another vessel called the Star Centurion whilst the latter was anchored in Indonesian waters, Star Centurion became a total loss. The Indonesian Ministry of Transportation issued a wreck removal order to the owners of Star Centurion requiring them to raise and remove the vessel and render her harmless. It was not disputed in this action that the collision was entirely the fault of the Antea. The owners of the Star Centurion commenced proceedings in Hong Kong seeking an indemnity for the costs of complying with the Indonesian order. The owners of Antea commenced their own action in Hong Kong seeking to establish a limitation fund under the 1976 convention. Contrary to their presumptive position in England, the Hong Kong CFA concluded that the owners of Antea could not limit their liability. And before we turn to the reasons for that decision, let's cap the relevant articles of the convention and there's four of them as follows. Article 2.1.A provides for limitation for losses consequential to the direct operation of the ship. Article 2.1.D provides expressly that wreck removal expenses are limitable. Article 2.2 provides that indemnity claims for wreck removal expenses are limitable except for expenses arising from contracts. And fourthly article 18.1 provides that contracting states may reserve the right to exclude article 2.1.D. The effect of exercising that right is that wreck removal expenses cannot be limited under article 2.1.D.

So with these articles in mind, let's talk now on how the courts in England and Hong Kong are likely to apply them. The first thing to say is that article 2.1.D does not apply in either England or in Hong Kong. This suggests that the courts in these two countries apply the 1976 convention differently in relation to indemnity claims for wreck removal. Indeed, following the Hong Kong CFA judgment in the Star Centurion, this appears to be the case. So let's take a look at the position in England first. There is yet to be a directly applicable precedent in England. But many believe that the English courts would find that interparty wreck removal claims fall within article 2.1.A that is that they are consequential on the operation of a ship and therefore limitable. It's clear as a matter of English law that consistent construction must be given to international conventions. In the Aegean Sea, Thomas J referred to precedent whereby the limitation convention is to apply to all cases which can reasonably be bought within its language. And it's been suggested that the decision by the legislators in England not to bring article 2.1.D into force arises from the concern not to leave harbor authorities under compensated. However, there is no evidence of any similar intention to prevent limitation for indemnity claims as was established in the 1961 case of Arabic Number 2. Further under article three, the limitation convention excludes salvage costs when incurred directly with a salvor.

However, if the party that incurred salvage costs submits an indemnity claim in damages against the other party then that claim would be limitable under article 2.1.A. And this indeed was held by the English Court in the 1992 case of the Braden Merchant. Commentators have therefore suggested that an English Court would likely continue the Arabert approach and be willing to view wreck removal costs in the same way. So let's now compare this to the position taken by the Hong Kong courts in the case of the Star Centurion. At first instance, the court focused on the maxim that general provisions do not overrule specific provisions and reasoned that general provisions of article 2.1.A should not give way to the specific provision for wreck removal claims. In article 2.1.D, the view is taken that any country's position would render article 18-1 and the decision not to implement article 2.1.D as meaningless. The court of appeal agreed with the lower court and noted that there is no distinction between statutory private or consequential wreck removal costs. Then the matter went up to the court of final appeal. And this highest court in Hong Kong also agreed and held that the task of the court in construing the convention is to do so without any English preconceptions. And this included the principles arising from the Arabic Number 2. As to the Braden Merchant arguments, the Hong Kong CFA acknowledged that the case had been decided correctly.

However, where that case concerned salvage services, the quarter final of appeal found that the principles do not extend to wreck removal indemnity claims. So in conclusion on this point, the Hong Kong CFA’s judgment makes Hong Kong an attractive jurisdiction for parties seeking to recover wreck removal costs that exceed limitation. And it is not therefore inconceivable that the lower courts of some other convention contracting states might be inclined to follow the Hong Kong CFA judgment and other courts may find it persuasive in general application. Nonetheless, in light of both English precedent and the general presumption to the opposite, it cannot be ruled out that the same question might be determined differently in other courts and particularly in England, The English Court might, for example, find that the Aegean Sea obliges it to interpret the convention so that all cases which can reasonably be brought within its language are so brought. The English Court might also find less reason to distinguish between salvage expenses and wreck removal expenses and so not share the Hong Kong CFA's view on the Braden Merchant. If the question arises before the English Court, the CFA judgment in Hong Kong would nevertheless be a hurdle to overcome as and when the English Court has to consider the question, please look out for further updates on Trading Straits and I'll now hand over to Richard for further views on limitation of liability. Thank you.

Richard: Uh Well, thanks James, the one of the things that we've been discussing in the past was the importance of the cases that you've just been referring to. And, uh, what I'm gonna talk about and it's all about what's in and what's out of the fund and that affects all interests, Really - owners, charterers, cargo, hull, P&I, in fact, the entire industry and the fund has become increasingly important. uh, At a time when, uh, it was thought that after the protocol was introduced, that limitation issues would fall away. That turns out not to have been the case. And the reason for that is that if it's out, then uh that's an additional owner's liability. Uh And if it's in, then obviously, that reduces the owner's liability, but equally reduces the amount that other claimants can take from the fund. And that's why it covers all issues really. Now, the point that I'm gonna look at now is the point that arose from the MSC Flaminia case, which the listeners may recall was a fire on a container ship some years ago.

Now these cases take a long time to get through the courts. Uh principally because one has to wait for G/A to be dealt with and the complex issues relating to the size of claims of quantum when it does come through. Uh There was some interesting points interesting for lawyers and uh ultimately, the outcomes are interesting for everybody. The particular case that struck me was the MSC Flaminia and I'll give the citation that was [2022] EWHC 835 heard by Justice Baker. You'll be familiar with the facts, I'm sure. But uh the issues that arose in relation to certain things was in this application by the owners to have a claim brought by one of the charters that their action uh to enforce an arbitration award should be barred under article 13 of the London Limitation Convention.

Now, London Limitation Convention provides at article 13 that where a limitation fund has been constituted in accordance with article 11, that's just the basic fund that uh provision that sets out how to it. Any person having made a claim against the fund shall be barred from exercising any rights in respect of such a claim against any other assets of the person by or on behalf of whom the fund has been constituted. So in other words, you can't go after the owner. If it's the owner's fund, you can't go after the owner in any other jurisdiction. You can only go against the fund as I say the charters or had an arbitration award. And it was contemplated that they would enforce uh against MSC uh the subject of the particular case in some other jurisdiction. And uh MSC then applied to an anti suit injunction restraining that party from doing so under article 13. And it's quite a long judgment to be fair. Uh quite a difficult judgment if you're a non English uh speaker, in fact, for many English speakers, they might find it difficult too. It's quite complex and requires a couple of readings to deal with issue as sole uh and various other aspects. But the important point, there are two important points, I suppose.

One is that the English court refused the application. They said no, the particular claimant was perfectly at liberty to bring his claim elsewhere. And there were a number of reasons for allowing that. But one of which uh uh which is the important one which lit me up was that the court said that there was no evidence that the claimant had any intention to claim against the fund whatsoever. And that could be found at paragraph uh 87 of the judgment. So there was no evidence that the claimant was going to bring a claim against the funds. And that was a reference to the wording in the clause, having made a claim against the fund. And the judge said, well, if he's not made a claim against the fund and he has no intention of making a claim against the fund, then article 13 cannot apply. And therefore there was no right to the bar to any other action. At the time uh that was regarded as somewhat controversial. Uh But on reflection, one can see that that seems right.

Why should uh the convention which is only applies to those states that have signed up to it have some global effect over other jurisdictions and other parties in different places that apply different limitations. The U.S., for example, is not a signatory to the Limitation Convention. Uh Other countries are signatories to the Limitation Convention but not the protocols or the subsequent uplifts. So clearly, uh it applies that there should be different aspects in different parts of the world and the English courts were going to uphold that. And it seems to me that that's clear and not contrary to uh to the laws that James was talking about earlier. The point there being that in fact, there should be a standard if you'd like, a global standard. But that's only in respect of the particular convention to which it applies. So that gave me thinking then about um other clauses within the limitation convention itself, in particular uh article 12. Now, article 12 provides as follows and this is to do with distribution of the fund. What this says is that if before the fund is distributed, the person liable or his insurer has settled a claim against the fund, such person shall up to the amount he is paid, acquire by subrogation, the rights which the person so compensated would have enjoyed under this convention. In other words, if you set up the funds and that's often, that's the club or the hull or some mixture of owners of the club and others, if you set up the funds, and nevertheless, you settle some other claim. Uh You can normally then claim back against your own funds. Certainly that's been the, the practice over many years uh in London and I'm sure elsewhere. But if I apply the same reasoning that Justice Baker applied to the article 13 in the MSC Flaminia, what we saw in MSC Flaminia, I'll remind you is that article 13 said that the right to bar an action only existed in circumstances. Uh And the law says, uh with a person having made a claim against the fund is barred. So Baker said, yeah, well, there must actually be a claim against the fund or the intention to make a claim against the fund if the convention refers to a claim against the fund. Uh and uh as a matter of English, that seems quite clear now, those words, “claim against the fund” in article 13 are replicated in article 12 and it follows therefore that if you have settled a claim uh in any particular incident and seek to claim against the fund yourself by the rights of subrogation set out in article 12, the claim that you have settled must have been a claim that was actually made against the fund or there was intention to bring that claim against the fund. And if there wasn't, you have simply settled a claim in some other jurisdiction and there are no rights to bring that back against your own fund. And remember if you bring it back against your own fund. It diminishes the recovery of the other parties against the fund and actually allows you to claim your losses in respect of that settle claim are, are less, by contrast, if you can't bring it against the fund, it's a liability that sits probably with the P & I club and/or the ship owner outside of the fund, uh, and allows a greater recovery for those people claiming against the funds. Now, uh this, this is my judgment. It's not uh opinion, I suppose a lot of the judge. Well, I'm not a judge, of course, the uh uh uh ask the meaning of those words, but nevertheless, it seems to follow.

Now just to bring that up to date and where that might take us in the case of the Ever Given, uh which is in front of the courts. The facts there as people are very familiar with, ran aground in the Suez Canal on the 23rd of March 2021 and it was refloated subsequently a week or so later. Uh long delays. Nevertheless, I in the canal with other vessels and on the third of July 2021 a limitation degree was granted in England by uh the Admiralty Registrar and those proceedings continue in that action, the fund is around U.S. dollars, $115 million and there are claims being brought against it by numerous claimants including several delay claims and some, some cargo claims, although they are limited, the majority of the claims tend to be delay claims for other vessels that are outside the canal or you could not get through because the canal was blocked for serious lengths of time. Owners having set up the, the limitation fund have settled claims in the region of between $40- $80 million, the precise amount is currently unclear but a sizable proportion. And if those claims were outside of the fund, then it's highly likely that the claims against the fund would not reach limit. And that's important then for the claimants against the fund, it's also important procedurally in moving that action forward. Therefore, an application has been made in the English courts for this position on article 12 to be determined such that if in fact, one applies that same reasoning as applies to article 13, that would remove the issues of the owner's claims and if successful, thereby increasing the recovery for the other claimants against the funds to significant proportion. And the reason that it's thought that there might be some success in that is because the owners claim that they have paid were to the Egyptian authorities. And it is quite clear uh as was made clear by owners and indeed by the authorities, they had no intention of bringing a claim against the funds and they have not brought a claim against the fund. If that's right, then it seems that the owners would not have set up a claim against the fund as is required by article 12. And therefore, they don't acquire the rights of subrogation set out to.

That's an important point and tied in with James's points as we've spoken about earlier, there were some interesting developments in uh in limitation having thought that there wouldn't be. That sort of brings me to the end. Thank you, everybody for listening to this podcast and the Trading Straight series and we hope to see you back or hear you back shortly. Uh If you've got any questions in relation to this, then of course, do feel free to get in touch with James I others uh others in Reed Smith as you might prefer and we look forward as I say to seeing you again. Thank you.

Outro: Trading Straights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's Energy and Natural Resources or Transportation practices, please email [e-mail]. You can find our podcast on Spotify, Apple, Google, Stitcher and reedsmith.com and our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter.

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