Australian Legal Update: Salvage, General Average and Ship Arrest

TM Law’s Janine Liang reviews two recent Australian cases holding important lessons for shipowners and underwriters. 

Mount Isa Mines Ltd v The Ship “Thor Commander” [2018] FCA 1326

On 11 January 2015, the vessel Thor Commander (Vessel) was en route from Chile to Townsville, Australia, carrying a cargo of altonorte cooper anodes owned by Mount Isa Mines Ltd (Mount Isa) when her main engine broke down. Although her owners, MarShip GmbH & Co KG MS (MarShip), had arranged for a salvage tug to tow her to safety, the salvage tug would only arrive on scene in 19 hours. AMSA and the Vessel’s master were uncertain that the salvage tug would arrive in time before prevailing weather conditions which might cause the Vessel to ground on the Great Barrier Reef.

On 12 January 2015, AMSA issued a notice seeking assistance to provide a tow for the Vessel. The vessel Xinfa Hai offered assistance and AMSA directed that the Vessel accept the tow from Xinfa Hai until relieved by the salvage tug. Xinfa Hai towed the Vessel away from the Reef for about 5 hours where she was then met by the salvage tug and towed to Gladstone.

Once the Vessel had been salved, she was moved to Gladstone where some of the cargo was delivered to Mount Isa against a bill of lading and a letter of indemnity. General average was declared. MarShip and Mount Isa settled Xinfa Hai’s salvage claim separately and dispute arose, amongst other things, as to the quantum of settlement.

A number of legal issues arose during the proceedings but for brevity, this article focusses on the following two issues:

1. Did the Xinfa Hai perform salvage and was the USD1 million that Mount Isa paid for salvage a reasonable sum?
2. Did MarShip commit an actionable fault and was Mount Isa is liable to contribute to general average?

The Court found that while Xinfa Hai may have acted in accordance with an AMSA Direction, she assisted the Vessel when she was in danger which constituted salvage.

Mount Isa’s underwriters agreed to pay US$1 million to Xinfa Hai to settle the former’s salvage claim. MarShip settled their portion of the salvage claim for US$100,000. The Court had to evaluate whether Mount Isa had shown that it had acted reasonably in collecting the information it had when deciding to settle, and whether objectively, the settlement was reasonable in the circumstances. The Court found that Mount Isa had failed to seek advice from Australian lawyers as to the range within which Mount Isa could expect a salvage award to be made by an Australian court. It had also failed to seek legal advice regarding evidence required to prove that any settlement for which it claimed damages against MarShip would, or could be found to be recoverable as damages. This is important because in relation to proof of reasonableness of settlement, the High Court of Australia in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 departed from the English position in Biggin & Co Ltd v Permanite Ltd [1951] 2 KB 314, finding that where a settlement is made in reliance of legal advice, evidence of the legal advisors needs to be led.

Despite having found that Mount Isa had not acted reasonably, the Court eventually found that the salvage award of US$1 million was reasonable taking into account the considerations in the International Convention on Salvage (28 April 1989).

In relation to the second issue, Mount Isa denied that it was liable to contribute to general average because of MarShip’s “actionable fault” within the meaning of rule D of the York-Antwerp Rules 1994. The evidence showed that the chief engineer and technical superintendent knew that the fuel injector nozzles (which caused the break down) needed to be replaced but failed to do anything to replace the nozzles. This was a failure to exercise due diligence before and at the commencement of the voyage to make the Vessel seaworthy. As a result, the Vessel was unseaworthy at the commencement of her voyage and Mount Isa was not liable to contribute to general average.

This case is a timely reminder that parties seeking to recover any settlement in Australian proceedings need to ensure that they obtain Australian law advice on quantum and reasonableness. 

Korea Shipping Corporation v Lord Energy SA [2018] FCAFC 201

In a short set of proceedings (the writ in rem was issued on 26 October 2018, the Federal Court issued a judgment on 7 November 2018 and the judgment on appeal was issued on 14 November), the Full Court of the Federal Court considered the issue of beneficial ownership in the context of a surrogate or sister ship arrest.

Lord Energy commenced a writ in rem against the vessel Dangjin, for a breach of charterparty by Korea Shipping Corporation (KSC) as disponent owner of DS Valentina. The issue in the proceedings was whether KSC was the beneficial owner of the Dangjin for the purposes of section 19(b) of the Admiralty Act.

Prior to 15 March 2018, KSC was the registered owner of the Dangjin but transferred ownership to IBK Securities Co. Ltd pursuant to a trust agreement. The trust deed named IBK as trustee, KSC as the trustor, secondary beneficiary and debtor, Nonghyup Bank (Bank) as the primary beneficiary, and Dangjin as the trust property.

Parties agreed that Korean law determined the existence, nature and extent of rights in and to the ship. The first instance judge looked into the substance rather than the form of the trust agreement and other associated documents and determined that KSC had real and complete control of the Dangjin. The judge reasoned that KSC could repay the debt at any time, and that its interest as the residuary beneficiary under the trust, was comparable to the Australian equivalent of a mortgagor of land holding the equity of redemption. Accordingly, KSC was the owner for the purposes of the Admiralty Act.

The Full Court disagreed. It is trite law in Australia that ownership of a ship is determined by the right or power to have and dispose of dominion, possession and enjoyment of the ship. The Court found that while KSC was left to control the operations and trading of the Dangjin, the consent of the Bank was required to enter any charterparty or dealing with the vessel and with the freight receivables. There was no evidence to show that KSC had the legal right to make early repayment. In addition, the Court found that it was incorrect to presume that Korean law had the concept of ‘equity of redemption’ as this was not addressed in the expert evidence. There was no evidence that under Korean law, KSC had any equity of redemption or some equitable interest in the Dangjin. As such, KSC did not have beneficial ownership of the Dangjin.

This is twice (first in the Maria Luisa and now here) that the Court has decided that control should not be used as a criterion in deciding whether an entity owns a vessel. Should Australia wish to further liberate its arrest regime, there would be a need for Parliament to adopt broader limbs for ownership such as ‘associated ship’ arrest in South Africa.

For any questions on these topics, please contact TM Law’s Sydney team.

Janine Liang, Marine & Transport Lawyer

T: + 61(0)2 8262 5854

[email protected]