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Court upholds Rena owners' right to create a limitation fund

08 April 2013

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The High Court has authorised the Rena’s liability insurer to create a limitation fund. 

The fund will provide security for claims – within a prescribed cap – in the (highly likely) event that the ship’s owners and managers are entitled to limit their liability to parties affected by the Rena grounding.

Background

On 5 October 2011, the Rena ran aground on Astrolabe Reef, northeast of Mount Maunganui.  She could not be removed from the reef and subsequently broke in two.  The ship was a wreck, containers were lost overboard and oil was discharged into the sea. 
The resulting pollution caused beaches in the vicinity to be closed for around six weeks, creating economic loss to local businesses.  It appears that these businesses intend to pursue claims against the Rena interests.

Court application

The owner of the Rena, together with its liability insurer (The Swedish Club) and two companies which provided management services to the owner and the ship, applied for an order under Part 7 of the Maritime Transport Act 1994 (the Act) that they are entitled to limit their liability in respect of claims arising from the grounding of the Rena. 
The Swedish Club also applied for an order authorising it to constitute a limitation fund for all claims falling within Part 7 of the Act.
One of the defendants, a Mr Lancaster who hired kayaks and catamarans from Mount Maunganui beach and claimed that he had suffered loss of rental income of about $3,000, applied for disclosure from the plaintiffs to enable him to decide whether or not to oppose the limitation application.

Limitation of liability for maritime claims

Ship owners’ limitation of liability has a more than 250 year history and was originally intended to promote trade by ensuring a large and viable merchant fleet.  This concept has endured and been accepted by most maritime nations around the world.
Had it not been for limitation, freight and fuel prices could be expected to be less competitive, and insurance would be scarce – hence there would be no guarantee for payment of claims – and the movement of goods would be slower or more difficult.1 
As the Court pointed out, “…limiting liability provides a balance between the benefits of shipping and trade, and the interests of those who may suffer loss from casualties relating to shipping operations”.
In most cases, a defendant ship owner will be able to limit its liability, unless it acted intentionally or recklessly.
The relevant New Zealand provision is Part 7 of the Act which incorporates the 1976 Convention on Limitation of Liability for Maritime Claims.
 

Mr Lancaster not entitled to disclosure

Mr Lancaster’s application for further disclosure relating to the causes of the grounding and the operational and safety management responsibilities of the plaintiffs was declined on the basis that:
  • there is already extensive documentation available
  • to require more would be expensive and serve little purpose, and
  • the information sought was out of proportion to the relatively small amount of Mr Lancaster’s claim.
Mr Lancaster now has until 9 April to indicate whether he opposes the limitation of liability application.  If he does not, the Court will order that the plaintiffs are entitled to limit their liability.

Limitation fund application

A limitation fund enables ships and shipping businesses to continue to operate, while claimants have collateral for pending claims (self-evidently, the Rena is not continuing to trade).  There may be financial advantages in fixing the amount of the fund at a particular date and a fund may encourage settlement of litigation.

Jurisdiction

There is no provision in the Act or High Court Rules which expressly provides that the Court may authorise the constitution of a limitation fund.  In Tasman Pioneer2, the Court held that it did not have jurisdiction, but in this case, the Court chose not to follow that decision and found that:
  • although Part 7 of the Act does not state that an owner may apply to the Court for an order authorising the constitution of a limitation fund, there are a number of provisions which refer expressly, or by necessary implication, to a limitation fund
  • there is a drafting error in section 89 of the Act, in that it refers to s86(2) of the Act (which defines claims which are not subject to limitation of liability).  The powers contained in s89 should also apply to cases where there is limited liability, and
  • the Court has jurisdiction to order a willing ship owner to constitute a fund.
The Court agreed that it is appropriate for the limitation fund to be constituted on the lodging of a letter of undertaking by The Swedish Club.

Chapman Tripp comments

Although the effects of the Rena grounding have been widespread in the Bay of Plenty community, there is a sound policy basis for ship owners to be able to limit their liability to claimants. 
The Court was correct to find that it had jurisdiction to authorise a ship owner to constitute a limitation fund and we would expect that the Court will also order that the plaintiffs are entitled to limit their liability.
The decision provides welcome clarity on the application of the limitation fund provisions in the Act following the controversial Tasman Pioneer decision.
Our thanks to James McMillan for writing this Brief Counsel.
For further information, please contact the lawyers featured.

Footnotes

1  Modern Maritime Law and Risk Management, Aleka Mandaraka-Sheppard, London 2009

2  Tasman Orient Line CV v Alliance Group Ltd [2004] 1 NZLR 650 (HC), [2003] 2 Lloyd's Rep 713

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