Heavy Burden on Claimants to Set Aside Limitation Decree

Introduction
In admiralty proceedings, shipowners are often entitled to limit their liability in respect of certain types of maritime claims for reasons of public policy. In order to obtain the fullest protection against potential claims, it is necessary for the shipowners who seek to rely upon limitation of liability to obtain under the Merchant Shipping (Limitation of Shipowners Liability) Ordinance (Cap. 434) (the “MSLSLO”) a decree of limitation. However, there are circumstances in which such decree of limitation will be set aside. In the recent Hong Kong case of Floata Consolidation Ltd v Man Lee Hing (Hong Kong) Vehicles Ltd and othersHCAJ178/2014, the Court revisited the law on setting aside a decree of limitation by claimants in maritime claims.

Background
The relevant background of the case can be briefly set out as follows. In the early morning on 23 March 2014, a barge “FLOATA 97” (the “Barge”) owned by the Plaintiff was carrying out mid-stream operations, which literally means loading and unloading containers, beside the vessel “Heung-A Singapore” (the “Vessel”) at the North Lamma Anchorage. During the course of the said operation, an incident took place when some containers fell onto the Vessel while some others fell into the sea (the “Incident”).

On 11 March, upon the application by the Plaintiff, the Court of First Instance granted a decree of limitation to the Plaintiff in relation to the Incident (the “Decree”). Subsequently, one of the claimants, Mr. Cheung, who claimed to be the owner of a cargo stored in a container which fell into the sea in the Incident, applied for an order to set aside the Decree.

Principles governing setting aside of decree of limitation
The legal basis for setting aside a decree of limitation can be found in the Convention on Limitation of Liability for Maritime Claims 1976 (the “1976 Convention”) which has the force of law in Hong Kong pursuant to section 12 of the MSLSLO. Articles 1 and 2 of the 1976 Convention provide that certain claims against shipowners and salvors shall be subject to limitation of liability. However, Article 4 of the 1976 Convention goes on to provide that “a person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”.

After considering the case law, the Court found that a claimant seeking to set aside a decree of limitation had the burden to establish sufficient prima facie grounds that the loss (i) resulted from the personal act or omission on the part of shipowner; and (ii) the shipowner had intent to cause such loss in question or was reckless with actual knowledge that such loss would probably result. However, the Court noted from case law that such burden is a “very heavy” burden on a claimant seeking to set aside a decree of limitation.

(1)   Personal act or omission
In order to set aside a decree of limitation, the claimant should first establish that the loss resulted from a personal act or omission of the shipowner (the “1^st Requirement”). However, this issue might not be so straight forward when the ship in question is owned by a corporation, which is invariably the case in practice very often. In that case, the identification of the act or omission of the shipowner often presents particular difficulty.

In The Lady Gwendolen [1965] P 294, the question arose as to whether a collision, caused principally by the fault of the master of a vessel traveling at excessive speed in very thick fog, occurred without the “actual fault or privity” of the company which owned the vessel (the “Company”). In holding the Company guilty of “actual fault”, the Court found that there were certain failures on the part of the Company’s management at board level which contributed to the collision. The Court further held that the head of the Company’s traffic department with responsibility for running its ships, although not a director, could also be regarded as someone whose action was the very action of the Company itself. However, the Court did observe that the fault of the master traveling at excessive speed could not regarded as the very action of the Company.

In another case of Meridian Global Fund Management Asia Ltd v Securities Commission [1995] 2 AC 500, the Court elaborated the decision of The Lady Gwendolen and held that, for a company to be liable for somebody’s act which was to be regarded as the very act of the company itself, that somebody had to be the “directing mind and will” of the company. It is therefore clear from this line of cases that the wrongs of servants or agents of a company in themselves would not constitute personal act or omission of the company for the purpose of setting aside a decree of limitation.

(2)   Reckless conduct and knowledge
The second requirement a claimant needs to establish is that the shipowner was reckless and it had actual knowledge that the very loss would probably result (the “2^nd Requirement”). As case law suggests, this requirement contains two separate and cumulative elements: recklessness and knowledge. Thus, a challenge to the decree of limitation will fail if only recklessness but not knowledge is established.

Furthermore, the wording of Article 4 of the 1976 Convention has made it more difficult to satisfy the element of knowledge. Under Article 4 of the 1976 Convention, the relevant knowledge is that “such loss” would probably result. It has been suggested by case law that this requires foresight of the very loss that actually occurs, not merely of the type of loss that occurs. In this connection, the right of shipowners to limit their liability under the 1976 Convention has been described as an “almost indisputable right”.

Application
Applying the law to the facts of this case, the Court found that the act or omission that Mr. Cheung primarily relied on to set aside the Decree was that of the person-in-charge of the Barge and/or other crew members on board the Barge. Thus, the Court considered the critical question was whether the crew members’ act or omission can be regarded as the Plaintiff’s “personal act or omission” within the meaning of Article 4 of the 1976 Convention.

In answering the question, the Court found that neither the person-in-charge of the Barge nor other crew members were servants or agents of the Plaintiff as such, since they were all employed by an independent labour contractor. The Court went further to comment that, even if they were servants or agents of the Plaintiff, their act or omission was not to be regarded as the “personal act or omission” of the Plaintiff for the purpose of Article 4 of the 1976 Convention. It was because, firstly, the person-in-charge of the Barge was not a director of the Plaintiff or part of its senior management. As illustrated by The Lady Gwendolen, simply being the master of a vessel would not make one’s act or omission that of the company which owns the vessel. Secondly, there was no evidence of the functions and responsibilities of any particular individual within the senior management of the Plaintiff whose act or omission may potentially be regarded as the act or omission of the Plaintiff. Therefore, the Court held that Mr. Cheung had failed to identify and establish any causative personal act or omission of the Plaintiff under the 1^st Requirement, let alone that such act or omission was caused by the Plaintiff’s recklessness under the 2^nd Requirement. This spelt the end of his application and the Decree was not set aside.

Implications
This case illustrates the heavy burden on claimants to set aside a decree of limitation. In essence, the Court will not consider setting aside a decree of limitation unless the claimants can provide evidence which may show (i) the loss was caused by the act or omission of a person, either a director or at least someone sufficiently senior within the shipowner’s management, which can be regarded as the “directing mind and will” of the shipowner; and (ii) the shipowner was recklessness and has knowledge that such loss would result. Therefore, a claimant who wishes to set aside a decree of limitation must consider carefully and obtain sufficient evidence before such an application should be made.