On 23 July 1967, a collision occurred between the World Mermaid (the Mermaid) and the Giacinto Motta (the Motta). The parties agreed on the following facts:

1(a) The Motta was lost and its owners claimed damages of about GBP 500,000;

(b) The cargo on Motta was lost and its owners claimed GBP 1,350,000 (the cargo claim);

(c) The Mermaid was damaged and its owners claimed GBP 250,000.

(2) Two sets of proceedings were instituted.

(a) In the US, the cargo owners' claim was settled by a payment of USD 2,485,880.37 (cargo claim that was paid by the Mermaid);

(b) In England, the owners of Motta and Mermaid were parties to a collision action in which liability had been agreed on the basis of equal blame;

(3) According to English law, the limitation fund of Mermaid was GBP 845,705;

(4) The owners of Motta were not liable to the cargo owners for the loss of the cargo by virtue of the Hague Rules, which applied to the contracts of carriage.

Two questions were posed to the Court. Both concerned the sum of the cargo claim paid by the Mermaid:

(1) Whether and to what extent the damages recoverable by the Mermaid from the Motta include the cargo claim; and

(2) Assuming that the owners of the Mermaid have a right to limit their liability arising out of the collision, whether they are entitled to retain out of the limitation fund a sum in respect of the whole or any part of the cargo claim or alternatively to have the whole or any part of the cargo claim taken into account in the distribution of the fund.

Held: The Mermaid was entitled to the credit in the distribution of the limitation fund in the amount of the cargo claim that could have been brought against the limitation fund in England and under English law.

The answer to the first question hinges on the true construction of s 1 of the Maritime Conventions Act 1911 (UK) (the Act). The Act was enacted to give effect to two international Conventions, the Collision Convention 1910 and the Salvage Convention 1910. Its primary aim was to establish the rule that the liability of ships in a collision should be divided in proportion to their respective fault. The previous English Admiralty rule, which divided liability equally in both-to-blame collisions without regard to the degree of fault, was repealed.

The rule was enacted in s 1 of the Act, which addressed liability for damage to one or more vessels involved in the collision, their cargoes or freight, or any property on board. Brandon J also emphasised that there was no joint liability of both ships for any or part of the damage or loss involved. Regarding liability for personal injuries and loss of life, the regime was different. Concerning these types of claims, the liability of involved ships was joint and several, with the subsequent right of contribution between them (ss 2 and 3 of the Act).

Another relevant provision of the Act was s 1(1)(c). It stated that nothing in s 1 is to be construed as imposing any liability upon any person from which it is exempted by any contract. The Motta was exempted by the carriage contracts from liability for loss of the cargo in the events which occurred.

The result was that if the cargo owners had sued the Motta in England, their claim would have been unsuccessful. If they had decided to sue the Mermaid in England, only 50 per cent would have been recoverable. This was because the Collision Convention 1910 and the Act followed the pre-existing Admiralty rule, known as the rule in The Milan (1861) Lush 388, which states that the cargo, as far as fault is concerned, is identified with the ship carrying it.

The USA, on the contrary, is not a party to the Collision Convention 1910 and its maritime law differs. The rule in The Milan does not apply there. The cargo is not identified with the ship and is treated as an innocent party unaffected by the fault. Therefore, in case of damage to the cargo caused by the collision, both ships are liable jointly and severally.

This difference led to forum shopping by cargo owners in the USA. The cargo owners were unable to recover any part of their loss from the Motta in any forum because of the contract terms between them, and they could only recover 50 per cent of their loss from the Mermaid in England. They decided to sue the owners of the Mermaid in the US to recover the full amount of their loss from them alone.

Therefore, to answer the first question, it was necessary to decide two points:

(1) Is the cargo claim loss or damage to the Mermaid for 50 per cent of which the Motta would be liable under s 1 of the Act unless protected from such liability by s 1(1)(c)?

(2) If so, is the Motta protected from such liability by s 1(1)(c)?

The Mermaid argued that the Court was bound by The Cairnbhan [1914] P 25. The Motta contended that The Cairnbhan was wrongly decided. Brandon J analysed the decision in this case but concluded that the current case was not exactly the same as The Cairnbhan. The relevant point was that, if the liability of the Mermaid was determined under English law, it would only be liable to pay half the loss to the cargo. Its liability would stem solely from its own 50 per cent fault and not from the 50 per cent fault of the Motta. Therefore, it would have no basis for claiming a recovery from the Motta for such liability.

In The Cairnbhan analysis, Brandon J also mentioned that it may be open to doubt whether the Act was giving full effect to the Collision Convention 1910. The reason is that art 4.2 of the Collision Convention 1910, which might signify that the rule that each ship at fault should only be liable for its proportion of damage or loss to property, should apply even against innocent third parties like the barge owners on The Cairnbhan. However, even if that was the intention of art 4 of the Convention, it could not affect the construction of s 1 of the Act as indicated.

Brandon J asked whether the liability under English law of the Motta to the Mermaid should be increased because the cargo owners sued the Mermaid in the USA rather than in England. The purpose of the Act was to establish the rule that when two or more ships are at fault, each should be only severally liable for its proportion of the damage or loss caused to cargo. On the basis of this, the Court considered whether the Act contemplated that a cargo claim might be brought in another jurisdiction and whether any of the ships at fault that paid such a claim should have the right to recover over from the other ship as part of the damage or loss caused by the collision.

The conclusion was drawn based on the general principles. If the liability of the Mermaid to the cargo in the USA was a reasonably foreseeable consequence of the collision, then, even though such liability on that basis could not have been enforced in England, the Mermaid was entitled to include it in its claim. Brandon J found this liability to be reasonably foreseeable. For these reasons, the cargo claim was the damage or loss for which the Motta would be 50 per cent liable, subject to the effect of s 1(1)(c) of the Act.

Regarding the effect of s 1(1)(c) of the Act, Brandon J concluded that the Act's intention was to ensure it did not impose liability on any person when they had a valid defence at common law, by contract, or under some statute. This was the policy of the Act and was reflected in ss 2 and 3. The language of s 1(1)(c), in its ordinary natural meaning, was broad enough to preserve that defence for a party to a claim for damages, whether the claim was brought directly by the primary claimant or indirectly by another person. Therefore, the Motta was protected from liability for 50 per cent of the cargo claim by contract and s 1(1)(c) of the Act.

It is well-established that a shipowner can take into account the claims that have already been paid when distributing the limitation fund under the Merchant Shipping Acts 1894-1974 (UK). This right applies irrespective of whether the payment was made through an out-of-court settlement of the claim in England or abroad, or in satisfaction of a judgment by a foreign court (Rankine & Raschen [1877] 4 R 724; The Crathie [1897] P 178; The Kronprinz Olav [1920] P 52; The Coaster [1922] 10 Lloyd’s Rep 592, [1922] 39 TLR 511). This right cannot be regarded as a claim against the fund, because the shipowner cannot claim against itself. Rather, it is an equitable right to be credited in the distribution of the fund for a payment made by the shipowner in respect of a claim that could have been brought against the fund but has not been so brought (The Kronprinz Olav 57, 60-61; The Coaster 512). The existence of this right was recognised and endorsed by the legislature in s 7(1) of the Merchant Shipping (Liability of Shipowner and Others) Act 1958 (UK). This provision was intended to put on a statutory footing the discretion to postpone the distribution of a fund pending the establishment of claims in a foreign court.

In light of these authorities, the Motta did not argue that the Mermaid was not entitled to have the cargo claim which they paid be taken into account. The dispute was rather regarding the amount of the notional claim against the fund in respect of which the credit must be given. The Motta contended that the amount should be the figure the cargo owners were entitled to in the proceedings against the Mermaid in England. The Mermaid argued that the amount should be the figure actually paid in settlement in the USA.

Brandon J preferred Motta’s contention without hesitation. The principle, as explained by the Judge, was that when a claim which could have been made against the fund was not pursued but was instead settled by the shipowner, the shipowner was entitled to receive the credit equivalent to the dividend that could have been received from the limitation fund by the cargo-owners. Both The Crathie and The Kronprinz Olav supported this principle as explained.

Therefore, the Mermaid was entitled to receive credit in the distribution of the limitation fund in relation to the cargo claim. The amount of this credit could not exceed the sum that the cargo owners would have received if the claim had been made against the fund in England. This dividend would have been governed by English law, and by virtue of s 1 of the Act, it would not exceed 50 per cent of their loss.