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Effect of constitution of a limitation fund on arrested ship or other security earlier furnished by the shipowner as security for a claim in the court

The Federal High Court of Nigeria sitting in Lagos has issued a landmark decision1 by which it ordered the cancellation of a Bank Guarantee which was furnished as alternative security by Shipowners to secure the release of their ship from arrest. The Court ordered the cancellation of the Bank Guarantee against the backdrop of the Shipowners constitution of a limitation fund pursuant to the limitation of their liability by the Court.

The Plaintiff in the suit commenced an admiralty action in rem against a dredging vessel for alleged damage to the Plaintiff’s property allegedly caused by the dredging activities of the vessel and her sister vessel. The Plaintiff secured the arrest of the vessel as security for their claims whereupon her owners posted a Bank Guarantee as alternative security for the Plaintiff’s claims to secure her release from arrest.

On the shipowners’ application, the Federal High Court determined that they were entitled to limit their liability for any damages allegedly caused by the dredging activities and ordered them to constitute a limitation fund in the amount to which their liability was limited.2 The shipowners, in compliance with the order of the Court, furnished another Bank Guarantee representing the limitation fund.

Following huge costs of maintaining the two parallel Bank Guarantees, the Shipowners applied to the Court to cancel the first Guarantee on the ground that the Plaintiff’s claim is already secured by the limitation fund, thereby rendering the first Guarantee unnecessary.

After hearing the parties’ arguments, the Court held that its order for the provision of the first Bank Guarantee was not a final order that only an appeal could set aside. That a Bank Guarantee is only a proof of funds which binds the Guarantor to performance in the event of non-performance by the Guaranteed and was made without prejudice to the Shipowners’ rights to limit their liability in accordance with the Merchant Shipping Act, 2007. That by Section 351 of the Merchant Shipping Act 2007, the Shipowners were entitled to limit their liability and by Article 13(2) of the Limitation of Liability Convention, after the constitution of a limitation fund, an arrested ship or any security given may be released by order of the Court. The Court accordingly found merit in the application and ordered the cancellation of the Bank Guarantee.

The procedure of arrest of a ship to secure a claim is always known to be a potent tool at the disposal of a Plaintiff who has a claim against the ship and her owners. On the other hand, occasions may arise where a shipowner is exposed to liability or potential liability on account of damage allegedly done by the ship in very huge amounts way above the value of the ship herself. The limitation of shipowners’ liability in deserving circumstances is therefore very vital for the protection of shipowners from such limitless liability.

The foregoing decision of the Federal High Court is very laudable in the sense that the purpose and effect of the judgment of the Federal High Court (affirmed by the Court of Appeal), which limited the liability of the shipowners and ordered them to constitute the limitation fund, would be defeated if the shipowners were to continue maintaining the initial Bank Guarantee furnished as alternative security for the release of the vessel from arrest at very prohibitive costs along with the subsequent Bank Guarantee representing the limitation fund.

1. Ruling delivered by the Honourable Justice D.E. Osiagor on 15th March 2022 in Suit No. FHC/L/CS/1329/2015 – Mondinvest Limited v. MV “Breughel & 2 Ors.↩
2. Judgment delivered by the Honourable Justice I.N. Buba on 16th February 2016 in the Suit No. FHC/L/CS/1611/2015 – Dredging Environmental & Marine Engineering NV v. Mondinvest Limited and all other persons claiming damages by reason of or arising from the dredging of the Shoreline of Kuramo Waters ↩
Source: Dentons

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