Vega Dream and Yangze 22 collided near Shanghai. The owner of Yangze 22 applied to the Shanghai Maritime Court to constitute a limitation fund for claims arising from the collision for approximately USD 9 m, and sought pre-litigation seizure of the Vega Dream. A letter of undertaking in the amount of RMB 200 million was provided, and the Vega Dream was released.

The plaintiffs, the owner and bareboat charterer of the Vega Dream, arrested Yangze 22 at the Port of Newcastle, Australia, regarding their claim for damage arising from the collision. The defendant owner of Yangze 22 provided the plaintiffs with a letter of undertaking in the amount of USD 25,375,672 (the LOU).

The defendant appeared conditionally in the proceedings without submitting to the Court's jurisdiction and applied to release its vessel on the ground that sufficient and reasonable security had been provided. The parties did not dispute that the amount of the LOU was appropriate or that there was any risk with respect to the LOU. The issue was whether certain conditions contained in the LOU rendered it an inadequate substitute security for the vessel. The main disagreement centred on this para:

For the avoidance of doubt, the Claimants' rights to call for payment under this letter of undertaking shall automatically expire in the event that: 1. the Shipowners establish a limitation fund in any jurisdiction and it is either: i. ordered by a Court of competent jurisdiction; or ii. agreed in writing between the Shipowners and the Claimants that the Claimants' claims in the Proceeding are limitable and (if so) to the extent those claims are limitable and may be brought against the limitation fund established by the Shipowners.

The plaintiffs argued that they would be at risk of the LOU simply expiring should a limitation fund - whether or not as provided for in the LLMC 1976 - be established in any jurisdiction, whether or not a State party to the LLMC 1976, and whether or not the plaintiffs participated in the fund or obtained any compensation under the fund. The plaintiffs' position was that the para should be amended as follows:

For the avoidance of doubt, the Claimants' rights to call for payment under this letter of undertaking shall automatically expire in the event that: 1. the Shipowners establish a limitation fund in Australia under the LLMC Act, and the claims are found or agreed to fall within Art 2 of the 1976 Convention made to have the force of law in Australia by the LLMC Act, s 6.

Held: Application dismissed.

The principles for fixing security in the case of a vessel under arrest are uncontroversial. An arrested ship will only be released on the provision of sufficient security to cover the claimant's reasonably arguable best case plus interest and costs, assessed on a standard basis. An order to release a vessel without security being given against the wishes of a claimant who has properly exercised the right to arrest is a drastic order that should only be made in a clear case. Nevertheless, the power to insist that a ship remain under arrest unless security of a certain amount is given is not to be exercised oppressively. If the parties are unable to agree on the security offered, the Court cannot impose an agreement upon them.

The overriding purpose of the LLMC 1976 is to provide for the quantification of a shipowner's maximum liability in respect of a particular occurrence and for the enforcement of that liability against a single source of security. Its geographical scope is confined to State parties both in relation to the constitution of the limitation fund and in relation to the release of additional security (in the form of a ship or other property arrested or attached or any security given) which is 'within the jurisdiction of a State Party': ICL Shipping Ltd v Chin Tai Steel Enterprise Co Ltd [2003] EWHC 2320 (Comm) (CMI778). In circumstances where there was no dispute that the People's Republic of China was not a party to the LLMC 1976, the amendment sought to para 1 by the plaintiffs was readily explicable.

On a plain reading of the LOU, the plaintiffs' right to call for payment under the LOU automatically expires in the event that a limitation fund is established in any jurisdiction and it is either ordered or agreed that the plaintiffs' claims in this proceeding are limitable and may be brought against the fund so established. The plaintiffs would therefore be left with nothing should this condition be met, contrary to their current position where they have the ship.