Australia: Lloyds List Australia - Ernest van Buuren - Limitation of liability, wreck removal and forum

This article was originally published by Lloyd's List Australia and is reproduced with permission.

Limitation of liability, wreck removal and forum shopping
Ernest van Buuren, Partner and Australian Head of Transport and Shipping, Norton Rose Fulbright

Wreck removal operations have become more costly in the past decade and in certain cases, costs have risen dramatically.

According to the Large Casualty Working Group of The International Group of P&I Clubs, the total cost of the top 20 most expensive wreck removals in the past decade is some $2.1 billion.

Increasing vessel sizes and growing cargo volumes are largely behind the increase. Another reason is that some national authorities require ship wrecks to be removed even if they pose no danger to navigation or the environment.

Therefore, it is not surprising that many states do not include the cost of wreck removal as a claim that can be subject to limitation of liability or that some countries have a different liability regime dealing with wreck removal costs.

This article examines a case that involved a shipowner seeking to recover wreck removal costs in Australia for a collision off Malaysia, that had no connection with Australia. The contest between the parties was whether Australia or China should have jurisdiction to hear the matter, with Australia potentially providing a higher recovery.

Why are limitations imposed on liability in the case of ship wrecks? The rationale for allowing shipowners to limit their liability in respect of ship-sourced damage is historic and was said to encourage shipping and trade. This involves balancing the competing objectives of compensating anybody who suffers loss or damage caused by ship owners or their representatives, while ensuring that shipping remains a profitable venture.

The provisions limiting a ship owner's liability are found in two Conventions, one of which is the Convention on the Limitation of Liability for Maritime Claims 1976. Article 2 of the 1976 Convention provides a list of claims that may be subject to limitation.

Interestingly, the cost of wreck removal is included in Article 2(1)(d) as a cost that is subject to limitation of liability. However, many countries, including Australia, have exercised the option to exclude the cost of wreck removal from the list of limitable claims in Article 2. Australia has also adopted the 1996 Protocol which increased limits of liability, thus allowing for greater recovery against ship owners than under the limits provided for in the 1976 Limitation Convention.

China has not ratified any of the Limitation Conventions, but it has modelled its maritime domestic law upon the 1976 Convention, which is found primarily in Chapter XI of the Chinese Maritime Code.

Under Article 207 of the Code, in the situation where two ships collide and one ship owner claims against the other, the other ship owner is entitled to raise limitation of liability as a defence, including against claims for wreck removal. Having not adopted the 1996 Protocol, the limits of liability are also lower in China when compared to Australia.

The difference between Australia and China on limitation of liability, Australia having higher limits and excluding wreck removal from the list of limitable claims, means that there is an advantage to claimants in the Australian jurisdiction. The Federal Court of Australia has considered this in the B Oceania case.

The collision and the proceedings
In July 2011, B Oceania sank after colliding with Xin Tai Hai in the Straits of Malacca. The owner of B Oceania was Atlasnavios Navegaзгo LDA (Atlas), and the owner of Xin Tai Hai was China Earth Shipping Inc (China Earth). Although China Earth sounded like a Chinese company, it was Panamanian.

That same year, China Earth commenced limitation proceedings in China in August and Atlas against the Xin Tai Hai in Australia in November. In May 2012, Atlas arrested the Xin Tai Hai at Port Hedland. The service of the in rem writ on the Xin Tai Hai in Australia meant there were parallel proceedings in both China and Australia and at issue was which country should hear the claims.

China Earth applied to stay the Australian proceedings in favour of those in China. One of the arguments raised by China Earth was that Australia was a clearly inappropriate forum and that these proceedings should be dismissed or stayed in favour of the matter being heard in China.

Clearly inappropriate forum
The controversial issue was that the collision had no connection with Australia and therefore it was alleged that Atlas was simply using a jurisdiction that would provide the most advantageous outcome of its damages claim.
The limitation of liability, including wreck removal, was about US$18 million if decided in China. But if payable in Australia, it was about US$35 million and possibly also the wreck removal costs incurred by Atlas of about US$65 million - a potential total recovery of US$100 million.

The court held that the existence of the proceedings in China did not necessarily mean that Australia was a 'clearly inappropriate forum'. China Earth's application was not granted and the liability proceedings against Xin Tai Hai in Australia were allowed to continue, although ultimately it was settled.

Applying the test from Voth's case, decided in 1990, the court noted that the question on a stay application focuses on the appropriateness of the local court, not the appropriateness or comparative appropriateness of a foreign forum.

The Australian court will be a clearly inappropriate forum if continuation of the proceedings in Australia would be "oppressive" or "vexatious" to the defendant. China Earth was unable to establish that this was the case. Interestingly, in the B Oceania case the court noted that neither China nor Australia was a "natural" forum for the litigation to resolve liabilities arising from the collision. His Honour Justice Rares stated:
"I am not satisfied that this court is a clearly inappropriate forum, even if the Maritime Court were not to permit Atlas to withdraw its claim against China Earth. Atlas regularly invoked this court's jurisdiction and seeks the benefit of the legitimate advantages of the greater amount of security for its claim, a larger limitation fund and exclusion from limitation of liability of wreck removal expenses to which it seems, prima facie, entitled."

B Oceania considered
The B Oceania case was considered in the CMA CGM Florida case, which was appealed to the Full Court of the Federal Court.

The appeal considered whether the case had applied the "natural and obvious forum" test (an English test) rather than the "clearly inappropriate forum test" (the Australian test) and whether the primary judge adequately considered juridicial advantage in assessing whether Australia was a clearly inappropriate forum.
This arose after the capesize bulk carrier Chou Shan collided with the container ship CMA CGM Florida in the East China Sea on 19 March 2013 approximately 100 nautical miles from the Chinese coastline and within the Exclusive Economic Zone Liability for the collision, which was disputed.

CMA CGM Florida interests commenced proceedings in Australia. Shortly after this, Chou Shan interests applied in the Ningbo Maritime Court to establish a limitation fund under Chinese Law.

Interests for Chou Shan then arrested CMA CGM Florida in China and interests for Chou Shan made an application to stay the proceedings in Australia. As with the B Oceania case, the stay application was made on the basis that both parties were subject to Chinese jurisdiction before they were subject to Australian jurisdiction and therefore Australia was a clearly inappropriate forum.

Justice McKerracher agreed and distinguished this case from the B Oceania case by saying "the natural and obvious forum for all disputes relating to the collision is China".

The collision occurred in ChinaТs Exclusive Economic Zone (EEZ), rather than the Straits of Malacca near Malaysia ,and afterwards both ships went to Chinese ports for repair, he said.

"Neither ship sank but there was considerable oil spillage in China's EEZ which was expressly governed by Chinese jurisdiction. That jurisdiction is well and truly in train and was immediately in train following the collision", he said. "Generally speaking, the amount of activity in China in the present case, appears to me have been significantly greater and certainly involving a greater number of interests than the proceeding in Australia."
His Honour held that there was simply no connection with Australia other than the commencement of the in rem proceeding and the arrest of the ship. Accordingly, an action could have occurred in any country having comparable legislation and therefore there was no sufficient connection to substantiate the claim.

The Full Court of the Federal Court dismissed the appeal in July this year. Their Honours were satisfied the primary judge had applied the 'clearly inappropriate test' from Voth appropriately and that "the mere fact that the primary judge used expressions such as 'natural and obvious forum' or examined factors such as to the suitability of China as a forum does not necessarily betray any misapplication of Australian principle".

Justice McKerracher did not discount the appellant's juridicial advantage of a higher limitation amount in considering whether Australia was a clearly inappropriate forum, they said. The assessment of juridical advantage focuses on the factors that make a local forum inappropriate, as opposed to why the other forum is appropriate. "In a legal environment governed by Voth where a plaintiff had a legitimate advantage in an Australian limitation of liability regime in the enforcement of a maritime lien claim, in circumstances where the risk of inconsistent findings in parallel proceedings could be eliminated, or at least significantly ameliorated, it might be difficult to conclude that the Federal Court was a clearly inappropriate forum", they said.

The B Oceania case illustrates that the differences between countries in limitation of liability, whether it be higher limits of liability or the exclusion of wreck removal from limitation, together with the right forum selection laws such as the Уclearly inappropriateФ forum test, can lead to a juridical advantage in the recovery of loss and damage. A victory for ship owners in these disputes can mean millions in terms of the eventual damages bill.

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