Think Recoveries: Collision Case Study – Marshalling the Strategy

A collision case often involves complex issues of fact, assessment of blame, jurisdiction, limitation of liability and an understanding of legal procedure. 

Many academic articles have been written on each of these subjects. This article is not one of them. Instead, this article will explain the practical application of the relevant principles in a real-life example, and how that can translate into a significant financial advantage if the correct approach is followed. 

To illustrate this, we will take a look at the collision between the "HEUNG-A DRAGON" and "ELENI".

Facts 

On 7 November 2013, a collision occurred between the "HEUNG-A DRAGON" ("HAD") and the "ELENI" off the coast of Vietnam. The "HAD" partly sank as in the picture below, and virtually all the cargo was ultimately lost. The "ELENI" suffered slight bow damage. 

The total value of the claims against the "ELENI" was approximately $45m, of which about $30m was in respect of cargo loss and the balance related to the loss of the "HAD" and related salvage, wreck removal and clean up costs. We represented more than half the cargo on the "HAD".

Blame for the Collision

Our in-house master mariners formed a preliminary view on the likely apportionment of blame for the collision. It seemed to us that the "ELENI" bore significantly more responsibility for the collision than the "HAD". Ultimately this aspect was concluded on terms consistent with that early analysis, with the "ELENI" bearing 70% of the blame, and the "HAD" 30%. Having this information available at an early stage in-house was useful as it permitted us to estimate the likely quantum of recoverable losses, the possible impact of limitation, and to direct the strategy most effectively from an early stage.

Jurisdiction

Evidently there was no contractual relationship between the cargo on the "HAD" and the "ELENI". The claim against the "ELENI" was based on tort/negligence principles and it fell to the claimants and defendants to consider the appropriate jurisdiction for the claim.

The most obvious options were either the location of the collision (Vietnam), or a subsequent place of arrest, with that arrest being used to found jurisdiction, or the jurisdiction where the defendant was based, or some other jurisdiction agreed between the parties.

Key to the choice of jurisdiction in a case such as this is the applicable global (tonnage) limitation available to the defendant in a particular jurisdiction. However, selection of the best jurisdiction will also require a careful assessment of all of the positive and negative elements of a particular jurisdiction, and weighing up the prospects of retaining jurisdiction in the preferred forum.

The "ELENI" commenced limitation proceedings in Hong Kong and constituted a limitation fund there (on which more below).

For the reasons set out below, Hong Kong was a favourable jurisdiction for the "ELENI" and only a modest potential recovery was available there. Consequently, we considered what other jurisdiction options were open to our clients to improve their recovery.

The Marshall Islands were identified as a potential jurisdiction for bringing claims on the basis that the Marshall Islands flagged "ELENI" was owned by a Marshall Islands registered company.

After detailed and extensive research, our clients pursued a claim in the Marshall Islands. The key attraction was that the Marshall Islands are a signatory to the 1996 Protocol, the impact of which we will explain further in this article.

Global Limitation

Following a maritime casualty, owners / charterers are able to constitute a limitation fund to limit their liability for claims arising out of the incident. The purpose of the limitation fund is to provide a "pot" of money for the claimants to share, and to provide the party who constituted the fund protection "against the world" for losses above the limitation amount.

The two most common international limitation conventions are the 1976 Convention on Limitation of Liability for Maritime Claims (the "76 Convention") and the 1996 Protocol to the 76 Convention (the "96 Protocol").

The limits of liability differ between these conventions, with the 96 Protocol providing a significantly higher limit of liability than the 76 Convention. As such, the 96 Protocol limit is more favourable to cargo claimants, and that is all the more so in cases where the 2015 updated limits are applicable.

However, the limitation fund provides protection only for claims brought in jurisdictions that recognise the fund, by virtue of being a signatory to the relevant convention.

Limitation proceedings in Hong Kong

In order to limit their liability for claims arising out of the collision, the "ELENI" constituted a limitation fund in Hong Kong, pursuant to the 76 Convention, which has a low limit of liability. The Hong Kong fund was established in spite of the fact that, at that stage, no claims had been lodged against the "ELENI" in Hong Kong. This is a tactic used by vessel interests which is permitted under Hong Kong law and for that matter, English law.

The value of the limitation fund was approximately $6.3m, which represented a potential recovery of 14% of the total value of claims ($45m), if all the claims were lodged there.

All the major cargo representatives lodged their clients'/principals' claims against the Hong Kong fund, save for those clients represented by us.

Marshall Islands proceedings – which limitation regime applied?

Whilst the Marshall Islands are a signatory to both the 76 Convention and the 96 Protocol, it has not adopted either of the conventions in full into national law, although the 96 Protocol limits were for the most part adopted.

The "ELENI" argued, amongst other things, that the Marshall Islands court was required to recognise the Hong Kong limitation proceedings and the limitation fund established there under the 76 Convention. Furthermore, the "ELENI" requested the Marshall Islands court to decline to accept jurisdiction for the claim, and to direct the claimants to Hong Kong where the low limits would apply. 

The Supreme Court of the Marshall Islands decided that they will apply the laws passed by its legislature, which in this case permitted the "ELENI" to limit their liability only on the basis of the 96 Protocol limits.

It also found that the Marshall Islands court was not required to defer to the Hong Kong limitation proceedings.

The Marshall Islands Fund

The applicable limitation amount was therefore approximately $13.5m, which was more than double the value of the Hong Kong limitation fund. Interest was also to be added to that sum.

There was a further benefit for our clients as they were the only claimants in the Marshall Islands. Therefore, they were the only ones with claims against the $13.5m Marshall Islands fund, which meant that the impact of limitation for our clients would be quite modest.

The other claimants who had lodged claims in the approximate sum of $30m in the $6.3m Hong Kong limitation fund were restricted to a recovery of a share of that much lower limitation fund amount.

The Money!

Once the points of principle that were subject to litigation were resolved by the court in the Marshall Islands, the "ELENI" settled, paying our clients $10.75m, which was a recovery of approximately 70% of their loss. This is over four times the anticipated recovery which would have been obtained had our clients lodged claims against the Hong Kong fund along with all the other claimants.

Incidentally, because our clients' claims were not lodged in the Hong Kong fund, this may also have benefitted those claimants who did lodge claims there as there were fewer parties to share that fund. As such, their recovery may have improved above the predicted 14%, but only marginally, and we doubt the recovery from the Hong Kong fund would be more than a quarter of what was recovered in the Marshall Islands.

Conclusion

As stated at the beginning of this article, optimising the recovery outcome in collision cases involves an understanding of complex and often inter-linked factors.

In-depth analysis of each case, applying the theory to the relevant facts, and pursuing the case to conclusion requires time and experience. We were able to deploy our considerable resources to achieve this, and significant rewards were obtained by our clients as a result of the execution of the optimum strategy.