Limitation and Arrest Regimes in Far East Jurisdictions

01 September 2007

Richard Lovell and John Simpson, Ince & Co

The Issues

After a maritime incident, the parties will be concerned to ensure that their interests are properly protected. If the parties have large claims, limitation of liability is likely to become an issue. If the incident involves serious negligence and the company management was aware of the problems beforehand, then the defending party may be concerned that any applicable limit of liability might be broken. Any party which has a claim against a shipowner will also want to ensure that it has adequate security to cover its claims in case the vessel is lost or sold on.

Most jurisdictions operate a system entitling shipowners to limit their liability for maritime claims, generally by reference to the tonnage of the vessel involved in the casualty (as opposed to the vessel arrested). There are various international conventions dealing with limitation of liability. Some jurisdictions apply the conventions directly, whilst in others local laws have been enacted containing provisions with similar effect, although not all follow the convention regimes (see below).

If the parties cannot agree a jurisdiction for the claims, the claimant will be obliged to arrest and/or serve proceedings on either the offending vessel or, in jurisdictions where this is possible, one of her ‘sister’, or even ‘associated’, ships. When carrying out an arrest to found jurisdiction, the claimant will also invariably be entitled to detain the ship until the owner or demise charterer provides security.

The Different Regimes

The main limitation regimes are the 1957 Convention, the 1976 Convention and the 1996 Protocol (to the 1976 Convention). All of these allow shipowners and some other parties (such as charterers, salvors and liability insurers) to limit their liability for claims, based on the tonnage of the vessel involved. The method of calculating a vessel’s tonnage varies between Conventions, but each Convention stipulates a per ton limit calculated in Gold Francs (1957 Convention) or Special Drawing Rights / SDRs (1976 Convention and 1996 Protocol). The virtue of this system is that the value of these currency units adjusts with inflation.

The 1957 Convention sets relatively low limits of liability and for this reason the diminishing number of 1957 Convention jurisdictions tend to be popular with potential defendants. However, the 1957 Convention is a double-edged sword. Any shipowner seeking to take advantage of its low limits should also beware of the relatively low threshold required to break the limit.

The 1957 Convention limit will be broken if the incident occurred with the “actual fault or privity” of the defendant shipowner; and the shipowner has the burden of proving that the loss did not arise with his “actual fault or privity”. The main difficulty with this test lies in deciding which individual is responsible for decisions concerning the ship. If the shipowner is a company, this can be difficult; English law has developed the concept of alter ego to address this issue.

The alter ego of a shipowning company is generally the person with direct responsibility for the vessel. Each case will turn on its own facts; however, following the introduction of the ISM Code, claimants seeking to break the limit have tended to focus on the actions taken by the vessel’s designated person ashore (DPA). If the evidence shows that the DPA sent the ship to sea knowing that she had defects which could cause loss or damage, then the potential claimant is likely to turn his thoughts towards breaking the limit. Even if the alter ego did not actually know about relevant defects, “actual fault or privity” may still be proved if he turned a blind eye to the situation.

The 1976 Convention sets higher limits of liability, which can only be broken if the claimant proves that the loss resulted from the shipowner’s intentional or reckless “personal act or omission” with knowledge that such loss would probably result. The relevant individual is identified in much the same way as under the 1957 Convention. However, the requirement that the act or omission be done intentionally or recklessly with knowledge means that the limit is virtually unbreakable.

The 1996 Protocol sets the applicable limit of liability at a much higher level than the 1976 Convention limits, particularly for owners of small vessels. As a result, 1996 Protocol countries are likely to be far more attractive arrest jurisdictions for claimants (assuming they are not confident of breaking the limit in an available 1957 Convention jurisdiction).

These general comments are based on English law. Although the limitation regimes in many South East Asian jurisdictions are also based on the above Conventions, each country has its own laws and this can produce important differences. Some of these are briefly explored below.

The Common Law Jurisdictions (Australia, Hong Kong, Malaysia, Singapore)

Both Hong Kong and Singapore apply the 1976 Convention, directly in Singapore and by incorporation into national legislation in Hong Kong. Australia (like Japan – see below) has additionally acceded to the 1996 Protocol and as a result, claimants able to arrest and maintain jurisdiction there can expect to benefit from a sizeable limitation fund. Hong Kong is also in the process of implementing the 1996 Protocol limits, although these have not yet come into force. At the other end of the scale, Malaysia applies the 1957 Convention and may therefore be an attractive jurisdiction to potential defendants seeking to limit liability.

Arrest in the common law jurisdictions is generally straightforward and relatively inexpensive. There is no need to give counter security and claims for wrongful arrest can only be brought in very limited circumstances (essentially where the arrest is wrongful and was obtained or prolonged without good grounds and maliciously).

Other Convention Jurisdictions (China, Japan and South Korea)

Although China and South Korea have not directly acceded to any of the Limitation Conventions, local laws apply similar rules to those in the 1976 Convention. Japan has ratified the 1976 Convention and the 1996 Protocol, but with some changes to fit in with other Japanese laws.

The mechanism for breaking the limit in all three jurisdictions is similar to that set out above, although the concept of “reckless” intent is new to South Korean jurisprudence. There has been some debate in South Korea about whether “recklessness” is equivalent to “gross negligence”, but it seems likely that something more than gross negligence will be required – arguably some element of intentional harm. An additional consideration for any party considering South Korean jurisdiction is that this jurisdiction applies the law of the flag state of the limiting vessel both as regards the shipowner’s entitlement to limit and the amount of the limitation fund.

A claimant seeking to arrest in China will generally need to post counter security. The counter security can sometimes be as much as the value of the claim, although usually it is equivalent to about 30 days’ hire for the vessel arrested. The arresting party should also be careful when negotiating the security wording, as foreign court judgments are not always enforceable in China; depending on the circumstances, this difficulty can be overcome by agreeing security responding to a judgment of the “competent court or tribunal”.

In Japan and South Korea, a vessel can be arrested pursuant to a maritime lien without the need to post counter security. Alternatively, where there is no maritime lien, the vessel can be attached to obtain security for a claim, in which case counter security must be posted. In Japan, the required counter security is generally about one-third of the claim amount (or one-third of the vessel’s value), whereas in Korea it is generally about one-tenth of the claim amount.

Indonesia

Although Indonesia has not acceded to any of the Limitation Conventions, it applies provisions of national law which are similar in some respects to the 1957 Convention. Nevertheless, there remain a large number of uncertainties in the interpretation and application of these provisions, which have very rarely been tested in the courts.

In order to break limit in Indonesia, it must be shown that the loss was caused by “wilful act or gross negligence”. The meaning of “gross negligence” is unclear. The size of the fund is also very much open to debate. The stated limit is still 50 Netherlands Indies guilders (NIG) per cubic metre net volume of the ship plus engine room space. Obviously, the NIG is no longer legal tender in Indonesia, having been replaced by the rupiah (on a 1:1 basis) in the early 1950s. The current value of 50 rupiah is roughly half a US cent, which would produce derisory funds if this measure were to be used. There appear to be various alternatives, however. One is that the pre-independence gold value of 50 NIG would be adopted. This option is likely to result in a substantially higher fund than under normal 1957 Convention principles. The other is to adopt a multiplier that reflects the relative valuations of the rupiah and the Guilder since independence.

Until these issues are clarified, considerable uncertainty is likely to remain. Moreover, it can be extremely complicated and potentially very expensive for claimants to effect formal arrest or attachment of a vessel in Indonesia.

Vietnam

Although Vietnam has not acceded to any of the limitation conventions, there is a tonnage limitation regime available, loosely based on the 1976 Convention. However, considerable doubt remains as to the level of the applicable limit. Moreover, the Vietnamese courts have on occasions tended not to apply the limits of liability set out in the Vietnamese Maritime Code, but have relied instead on a provision of the Civil Code which requires defendants to meet their liabilities in full. There is also still doubt in some quarters as to whether a foreign shipowner is entitled to limit liability at all.

Arrest proceedings can also be complicated, particularly where the owner of the vessel arrested is based in Vietnam, since the shipowner may be assumed already to have assets in Vietnam.

Philippines

The Philippines has not acceded to any of the limitation conventions, but applies a limitation regime similar to that of the USA. In the Philippines, an owner is entitled to limit liability based on the post-casualty (damaged) value of the vessel plus any freight earned on the voyage; or, in the event of a total loss where the vessel is insured, the insurance proceeds received by the owner plus any freight earned.

Only a shipowner or ship’s agent is entitled to limit in the Philippines, rather than the wider range of entities entitled to limit under the conventions. The limit can also be broken more easily than in other jurisdictions. In the Philippines, a shipowner will lose his right to limit if the loss occurs as a result of his own fault or negligence, such as when the vessel is allowed to sail in an unseaworthy condition or is manned by unlicenced officers or crew.

There is no specific right of ‘arrest’ in the Philippines; however, it is possible for a claimant to obtain an attachment order over a ship. The attachment must be obtained in the court for the locality where the ship is situated and as a result, there can be regional variations in interpretation of the rules. The claimant must also post counter security, which is generally set at the same level as the claim.

Taiwan

Taiwan has not acceded to any of the conventions, but applies a hybrid of the 1976 Convention and the US system. Essentially, a shipowner is entitled to limit his liability to the post-casualty (damaged) value of the vessel (plus freight and accessories). However, if that limit is less than the applicable 1976 Convention limit for that ship, the 1976 Convention limit prevails. In order to break the limit, the claimant must prove that the incident occurred with the shipowner’s wilful intent or actual fault.

When arresting in Taiwan, the question whether a claim amounts to a maritime lien is decided on the basis of the law of the vessel’s flag state. It is also possible to arrest for security. The claimant must provide counter security, generally ranging from 33 to 100 per cent of the claim. Unless the claimant is wholly successful, it can be a complicated matter to retrieve the counter security (which must be put up in cash, by certificate of time deposit, or by bank guarantee).

Thailand

Tonnage limitation does not apply in Thailand and a claimant who is not domiciled in Thailand cannot arrest there. As a result, unless the claimant is based in Thailand, it can be extremely difficult to obtain security for the claim.

***

As can be seen from the above summary, there are a number of significant regional differences in relation to the various limitation and arrest regimes applying in the Far East. A claimant will also need to take into account other important factors, such as his ability to retain his chosen jurisdiction (against forum non conveniens arguments etc), certainty of judicial outcome and available precedents, legal costs and formal requirements (such as the need for the local lawyer to arrange powers of attorney and translations); and the likely speed of local proceedings. The discerning claimant will take advantage of all these factors wherever possible, so long as they remain.

Richard Lovell is the senior partner and John Simpson is an associate in Ince & Co’s Singapore office. This article is intended as a general guide only. The reader is advised to take legal advice about his/her specific circumstances.

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