Shipowners’ Limitation Actions and Funds

The Eleni, HCAJ 189/2013, 9 May 2017, arises out of a collision at sea. The case considers the relevance of s. 7 (“Limitation of actions”) of the Merchant Shipping (Collision Damage Liability and Salvage) Ordinance (Cap. 508) to the deadline specified for making claims against a shipowner’s limitation fund. The judgment decides that the two-year limitation period in s. 7(1) of the Ordinance is properly protected by issuance of a writ in certain circumstances and not necessarily by the filing of a claim against a limitation fund.

The judgment is an interesting review of the nature of a shipowner’s limitation action. In certain circumstances, a shipowner and/or charterer that does not dispute liability can seek a declaration that their liability be limited in accordance with the Merchant Shipping (Limitation of Shipowners Liability) Ordinance (Cap. 434). At the time of setting-up the limitation fund in this case the Ordinance applied the Convention on Limitation of Liability for Maritime Claims 1976 (set out in Schedule 2 of the enabling legislation), which has subsequently been replaced with the updated 1996 Tonnage Convention.

A “limitation action” is, therefore, usually an action by shipowner to limit its liability for major incidents at sea, including collisions or major cargo losses such as multiple containers falling overboard. Under the regime, in return for a payment into court a shipowner gets to limit its liability. The amount of security is calculated by reference to units of account (or special drawing rights) based on the ship’s gross registered tonnage.

A shipowner’s limitation action begins with the issue of an in personam writ, which it will serve on a claimant affected by the incident, and concludes with the grant of or refusal to grant a “limitation decree”. The court determines whether the shipowner has the right to limit its liability.

There are very limited circumstances in which a claimant (such as a cargo owner) can object to the setting-up of the limitation fund. If a limitation decree is made, it will include (among other things) provision for an administrative deadline for the filing of claims (known as “references”) against the fund. The limitation fund is constituted on the shipowner’s payment into court of the fund with interest since the date of the incident.

The regime for a shipowner’s limitation fund is important. As the judgment in The Eleni notes (at para. 12):

“Once the fund is constituted, the shipowner ceases to have any interest in disputing anybody’s claim because he is liable only for the amount he has paid in, and that being so all competing claimants to the fund are entitled to dispute one another’s claims against the fund. It is similar to the interpleader proceeding in which the interpleader brings the claimants to court and leaves it to them to resolve their rights over the subject matter of the interpleader.”

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RPC, Partner