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Limitation of Liability

ICL Shipping Ltd. and Steamship Mutual Underwriting Association (Bermuda) Ltd. -v- Chin Tai Steel Enterprise Co. Ltd. and Others

October 2003

In August 1997 a consignment of 10,078 tonnes of casting billets was shipped on board the vessel ICL Vikraman ("the vessel") for carriage from Poland to Taiwan and delivery there to Chin Tai Steel Enterprise Co Ltd., the holders of the bill of lading issued by the owners of the vessel, ICL Shipping Ltd. ("ICL"). Tragically, on 26 September 1997 the vessel collided with the Mount 1 in the Malacca Strait and sank with the loss of 26 lives and all the cargo.

The bill of lading incorporated a London arbitration clause. Nevertheless, in April 1998 Chin Tai commenced proceedings against ICL in Singapore for the purpose of obtaining security for its claim for the total loss of the casting billets. Following the arrest in Singapore of another vessel owned by ICL, such security was provided to Chin Tai in the form of a letter of undertaking ("the LOU") of the Steamship Mutual Club ("the Club"). The Club's liability to Chin Tai was expressed to be limited to the sum of US$4,500,000. However, the LOU contained no reference to ICL's entitlement to limit liability by reference to the vessel's tonnage. Security in similar form was also provided by the Club in respect of eight other cargo claims against ICL arising from the same incident.

The question of ICL's liability for the cargo claims was duly referred to arbitration in London. However, during the period between the conclusion of the arbitration hearing and the publication of the award, ICL and the Club came to appreciate that, if the claims succeeded, the aggregate of the amounts that would become payable to the cargo claimants would exceed the vessel's limit of liability calculated in accordance with the 1976 Limitation Convention. On 18 March 2003 ICL therefore commenced a limitation action in England and paid into court the vessel's limitation fund of £6,265,288.77. On the following day ICL applied to the court ex parte and succeeded in obtaining an injunction restraining Chin Tai and the other cargo claimants from seeking to enforce the Club security they had been given. A few weeks later, on 9 April 2003, an interim final award was published in the arbitration proceedings by which Chin Tai was awarded damages against ICL in the sum of US$2,696,127.15 plus interest - a sum which was substantially larger than Chin Tai's rateable proportion of the vessel's limitation fund.

In those circumstances, Chin Tai applied to the court to set aside service of the limitation proceedings and to discharge the injunction. In essence Chin Tai contended that its right to enforce the arbitration award and the Club security was unaffected by the establishment of the limitation fund and the limitation proceedings in London, arguing that the English courts had no jurisdiction over Chin Tai in relation to limitation under the 1976 Convention. Chin Tai submitted that the scope of the limitation regime contained in that Convention was limited to those States which were party to it ("State Parties"), and that the Convention did not prevent a claim being pursued against a shipowner in any other State, such as Singapore, which was not a party to the Convention.

It was common ground that under Article 11.1 of the 1976 Convention the right of a shipowner to constitute a limitation fund was conditional upon "legal proceedings" having already been commenced against that shipowner in the jurisdiction of the State Party in which the fund was to be constituted. Chin Tai submitted that an arbitration was outside the scope of Art.11. Mr Justice Colman agreed that the words "legal proceedings" did not in their ordinary sense at first suggest the commencement of an arbitration. Nevertheless, as was demonstrated by the Court of Appeal's decision in The Merak [1964] 2 Lloyd's Rep. 527, the English courts have always been ready to accord a meaning to a Convention that was wide enough to be consistent with the general practice of the shipping industry. Arbitration clauses in bills of lading are by no means uncommon, and it would be distinctly unsatisfactory were a shipowner's ability to limit its liability to the holders of bills of lading dependant on whether the bills contained an arbitration clause. The judge therefore concluded that the words "legal proceedings" in Article 11 included the commencement of arbitration. It followed that ICL was entitled to constitute a limitation fund in respect of Chin Tai's claim.

The next question was whether the Admiralty Court could exercise jurisdiction over Chin Tai in relation to ICL's limitation claim, bearing in mind that Chin Tai had not submitted to the Court's jurisdiction. It was accepted that, in such circumstances, the Court had jurisdiction only if it could properly give permission for the service of the limitation proceedings upon Chin Tai in Taiwan. That in turn depended on the interpretation of Part 61.11(5)(c) of the Civil Procedure Rules ("the CPR"), which empowered the court to grant such permission if the Court had "jurisdiction over the claim under any applicable Convention". In the event, the judge rejected Chin Tai's submission that, in this context, the word "claim" referred to Chin Tai's underlying claim against ICL, rather than the latter's limitation claim. He concluded that "claim" should be construed as meaning "claim to limit" and "any applicable Convention" should be construed as covering the 1976 Convention. Thus, once ICL had established the limitation fund, there was jurisdiction to give permission to serve the limitation proceedings on Chin Tai in Taiwan - which had, therefore, become a party to those proceedings.

The injunction restraining Chin Tai from making a demand under the LOU for the purpose of enforcing the arbitration award was founded on Article 13.2 of the 1976 Convention, which empowers the courts of a State Party to order the release of arrested property or any security therefor once a limitation fund has been constituted. The judge was in no doubt, however, that the protection afforded by this provision worked only by reference to the jurisdiction of the State Party within which a ship or other property had been attached or security given to obtain its release; moreover the 1976 Convention could not be construed so as to create a power in the courts of a State Party to interfere with the disposition of property or security in the jurisdiction of a State which was not party to the Convention. The judge held that for the purposes of Article 13.2 the security represented by the LOU was located in Singapore, since the LOU could be released only by order of the Singapore courts. Accordingly, since Singapore was not a party to the 1976 Convention, ICL was not entitled to the protection afforded by Article 13.2 and there was no basis, therefore, for restraining Chin Tai from enforcing the LOU provided by the Club.

In summary, therefore, it was held that ICL was entitled to constitute a limitation fund in England and to proceed with its claim against Chin Tai for a decree of limitation of liability, but that the security obtained by Chin Tai as a result of the arrest proceedings in Singapore did not have to be released.

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