Norwegian Supreme Court clarifies distribution of interest component in global limitation fund

In a recent judgment in the “Full City” limitation fund proceedings, the Norwegian Supreme Court clarified how a global limitation fund established pursuant to the Norwegian Maritime Code is to be distributed. The Supreme Court held that the interest component in the limitation fund should only be distributed on the claims for interest and not on the other claims filed in the fund because the owners’ limitation of liability should remain the same regardless of whether a limitation fund is established or not.

The bulk vessel “Full City” grounded at Såstein, off the southern coast of Norway, on 31 July 2009. The incident resulted in a significant bunker oil spill and the Norwegian state immediately initiated a clean-up operation. Following receipt of the state’s reimbursement claim for the costs of the clean-up operation, it became clear that the global limitation amount in the Norwegian Maritime Code (“NMC”) would be exceeded. The owners therefore invoked their right to limit liability and established a limitation fund in accordance with the rules in NMC.

Pursuant to NMC section 232, a limitation fund shall consist of two components: (1) the limitation amount calculated based on the vessel’s tonnage and (2) interest calculated from the time of the incident until establishment of the fund. This is in accordance with the provisions of the Convention on Limitation of Liability for Maritime Claims 1976 as amended by the 1996 Protocol (“LLMC”), on which the provisions in the NMC on limitation of liability are based. The interest component of the fund is calculated in accordance with the interest rate for overdue payment. The court may also require additional security for interest and costs accruing after establishment of the fund.

Claims were filed in the fund by the state and the owners, and the total claim amounts exceeded not only the limitation amount, but also the total amount of the fund. The question therefore arose as to how the limitation fund should be distributed amongst the claimants.

The distribution of the fund is regulated by NMC section 244, which reads:
“once all disputes have been settled, the Court will by judgment distribute the fund according to the provisions of section 176 or 195”.

The principal question before the Supreme Court was the proper construction of section 244. The state argued that the limitation fund as such, i.e. both the limitation amount and the interest component, should be distributed proportionally on all claims made against the fund, ultimately resulting in the highest possible dividend for the creditors. This interpretation would mean that the owners’ liability exceeded the limitation amount.

The state heavily relied upon the wording “distribute the fund”, and argued that … it provided for the whole fund to be distributed
proportionally on all claims.

The owners argued that only the limitation amount was to be distributed proportionally amongst the claims made against the fund, and that the interest component was security for interest claims only (which are excluded from limitation), and thus could only be distributed on such claims. The implications would be that any amount left after all interest claims had been paid, was to be released.

In the proceedings the state relied heavily upon the wording “distribute the fund”, and argued that because of this wording, the proper interpretation of section 244 was that it provided for the whole fund to be distributed proportionally on all claims. In turn, the owners argued that the reference in section 244 to section 176 was of more importance, where it is stated that only the “limitation amount” shall be distributed proportionally. Furthermore, the fact that the state’s interpretation would increase the owners’ liability in excess of the limitation amount would imply a difference in liability for the owners depending on whether a fund was established or not, which supported an interpretation that only the limitation amount should be distributed proportionally. In the owner’s opinion the state’s view had neither basis in the reports on negotiations from the conference nor the Norwegian preparatory works.

The Supreme Court initially noted that the right for ship owners to limit liability is an exception from the principle that the tortfeasor is liable for damages in full. This right applies regardless of whether a limitation fund has been established or not. However, certain claims are excepted from the right to limit liability, for example claims for interest.

The Supreme Court approached the interpretation of NMC section 244 as a question of whether the establishment of a limitation fund entailed an exception to the limit set out by the limitation amount due to the interest component being added to the fund.

The Supreme Court found the wording in section 244 to be unclear, since the provision read in isolation could be said to support both the state’s and the owner’s interpretation. Because of this ambiguity, the Supreme Court emphasised that the state’s interpretation would result in owner’s liability increasing when a limitation fund is established compared to when limitation is sought without establishment of a fund. The Supreme Court implicitly remarks that such an exception would have to be evident in the NMC if this was the intended solution.
The Supreme Court also reviewed other legal sources, such as the legislative history of the LLMC, and the preparatory works to the relevant Norwegian legal provisions, and could not find support for the view that the constitution of a limitation fund would entail a higher limit of liability than without the constitution of a fund. The Supreme Court therefore concluded that only the limitation amount was to be distributed on the claims filed in the fund and that the interest component only constituted security for interest claims. By implication therefore, any amount left after all claims for interest had been paid has to be released to owners.

Comment

The judgment provides important confirmation on how a limitation fund shall be distributed, clearly emphasising that the owners’ liability for marine accidents should remain the same regardless of whether a limitation fund is established or not. The judgment follows on from the Supreme Court’s 2017 judgment in the “Server” limitation fund proceedings, where the Supreme Court held that the owner’s duty to remove a wreck, or otherwise take action to prevent pollution, was not limited by the owner’s right to limitation. It is therefore particularly welcome to receive the Supreme Court’s validation of the importance of the limitation amount in determining the owner’s limit of liability for claims made against them.

By confirming that only the limitation amount is available for distribution on the claims filed in the fund, the Supreme Court has ensured that the potential exposure remains foreseeable for owners and their insurers.

Wikborg Rein acted on behalf of the vessel’s owners, managers and P&I insurers. Gaute Gjelsten appeared before the Supreme Court.