On 17 October 2005, two vessels collided in the Suez Canal: Pearl of Jebel Ali (Pearl) and Pride of Al Salam 95 (Pride). Pride sank. Pride's owner, Gold Shipping Navigation Co SA (Pride), claimed USD 10,600,000. Pearl's owner, Lulu Maritime Ltd (Pearl), claimed USD 1,500,000. Pearl and Pride agreed to English law and jurisdiction and to provide security for the other's claim. There was a two-year time limit for commencing proceedings. Section 190 of the Merchant Shipping Act 1995 (UK) (the MSA), which was the successor to s 8 of the Maritime Conventions Act 1911 (UK) (the MCA), which in turn enabled the Convention for the Unification of Certain Rules of Law with respect to Collisions between Vessels (the Collison Convention 1910) to be given domestic effect in the UK, provides:

190. Time limit for proceedings against owners or ship

(1) This section applies to any proceedings to enforce any claim or lien against a ship or her owners-

(a) in respect of damage or loss caused by the fault of that ship to another ship, its cargo or freight or any property on board it; or
(b) for damages for loss of life or personal injury caused by the fault of that ship to any person on board another ship. ...

(3) Subject to subsection (5) and (6) below, no proceedings to which this section applies shall be brought after the period of two years ...

(5) Any court having jurisdiction in such proceedings may, in accordance with rules of court, extend the period allowed for bringing proceedings to such extent and on such conditions as it thinks fit

(6) Any such court, if satisfied that there has not been during any period allowed for bringing proceedings any reasonable opportunity of arresting the defendant ship ... shall extend the period ... .

Between May and September 2007, solicitors representing both Pearl and Pride discussed commencing proceedings in Egypt to obtain evidence. On 2 October 2007, Pearl's solicitors stated that Pearl could agree to 'a mutual unlimited extension of time from 16/10/07 within which to commence proceedings in England subject to one month's notice of termination of intention to proceed by either side'. Through Pride's solicitors, Pride agreed. On 16 October, the day on which the two-year limitation period expired, Pride's solicitors emailed Pearl's solicitors to confirm that 'both sides have granted the other a mutual extension of time beyond the 2 year time bar terminable on 1 month's notice'.

Between November 2007 and March 2008 there were updates on and discussions about the Egyptian proceedings. On 19 September 2008, Pride's solicitors e-mailed Pearl's solicitors: 'Please consider this e-mail as notice to start proceedings in England within one month from today.' This email notice was prefaced by a reference to 'the mutual time extension agreed between [Pride and Pearl] on 2 October 2007'. On 14 October 2008, Pride's solicitors issued a claim form but did not inform Pearl's solicitors. Pride's claim form was not served until 26 January 2009. On the same day Pearl's solicitors issued a claim form and e-mailed Pride's solicitors: 'Please consider this email as notice on behalf of our clients to commence proceedings within one month from today.'

Pearl's claim form was served on 29 January. On 6 and 12 February, Pride's solicitors told Pearl's solicitors that Pearl's claim form was time-barred. On 23 February, Pearl applied for a declaration that Pearl's counterclaim in Pride's claim form, or Pearl's claim in Pearl's claim form, was not time-barred or, alternatively, for an extension of time under MSA s 190(5). The parties' arguments focused on Pearl's counterclaim.

The first issue was identifying the effect of the agreement reached on 2 October 2008. The second issue was whether a counterclaim is subject to the two-year time bar in MSA s 190. The third issue was whether this was a proper case for extending time in favour of Pearl.

As to the first issue, Pearl argued that the words 'of termination' should be deleted, which (according to Pearl) would mean that the parties had agreed a mutual unlimited extension of time and that if either party wished to proceed with its claim it must give one month's notice of its intention to do so. Meanwhile, Pride argued that the words 'of intention to proceed' should be deleted, which (according to Pride) would mean that the mutual unlimited extension of time could be ended by either party on one month's notice.

As to the second issue, Pride argued that Pearl's counterclaim was time-barred because Pearl's claim form was not issued within time. Pearl argued that the time bar in MSA s 190(3) did not apply to counterclaims. Pearl's arguments may be summarised as follows:

1. 'Proceedings' in MSA s 190 should be construed as originating proceedings, and not as including proceedings by way of counterclaim. There are four sound policy reasons for doing so. First, to allow a counterclaim to be advanced against a claim brought within time would not offend against the policy underlying statutes of limitation, which is to ensure that claims are pursued with reasonable diligence. Second, the owners of ship A may decide not to bring a claim against the owners of ship B for good reason eg because the owners of ship B have no means. But if the owners of ship B choose to bring their claim just before the limitation period ends it would be unjust if the owners of ship A could not advance their counterclaim. Third, there is no purpose in requiring a second claim form to be issued when, following the inevitable counterclaim in the first action, it will be stayed. Fourth, counterclaims in collision actions should be put on the same basis as other counterclaims which, by reason of s 35 of the Limitation Act 1980 (UK), 'relate back' to the date of the claim.
2. There is no binding decision that 'proceedings' in MSA s 190(3) includes proceedings by way of counterclaim. The Fairplay XIV [1939] P 57 (The Fairplay XIV), which is authority for the proposition that a counterclaim was caught by the two year time limit in MCA s 8, was not a decision on MSA s 190. It should not be applied to s 190 because it was based upon s 34 of the now-repealed Admiralty Court Act 1861 (UK).
3. In The Kafur Mamedov [1996] 3 HKC 706 (HKCA) (The Kafur Mamedov), Seagroatt J found the policy arguments in support of the proposition that counterclaims were not covered by MCA s 8 persuasive and held that The Fairplay XIV was wrongly decided. Although Seagroatt J was in the minority, the majority disagreed with him primarily because The Fairplay XIV was regarded as settled law.

As to the third issue, parties accepted that the discretion to extend time under MSA s 190(5), although unfettered, should be exercised in the principled manner explained in The Al Tabith and The Alabfushi [1995] 2 Lloyd's Rep 336 (CA) (The Al Tabith). First, the Court must consider whether there is good reason for an extension of time. Secondly, if there is good reason, the Court must consider whether it is appropriate to exercise its discretion in favour of extending or refusing to extend time.

Pearl claimed that they were genuinely and reasonably misled by the agreement's wording, believing that the agreement was an unlimited extension of time, and that one party's notice of intention to proceed did not affect the right of the other party to give its own one-month notice of intention to proceed. Pride challenged this, arguing that Pearl misunderstood a clear and usual effect of an agreement to extend time.

Held: Application allowed.

As to the first issue, the Court rejected both Pearl's and Pride's arguments to delete words in the agreement. Something had gone wrong with the wording of the agreement so it must be construed by reference to the principles in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) 912–913. One of those principles concerned the background knowledge which both parties had at the time of making their agreement on 2 October. This knowledge was that one of the parties wished to commence proceedings in Egypt to obtain evidence regarding the collision before commencing proceedings against the other. For that purpose an extension of the two year time limit which would expire on 16 October 2007 was required. The meaning of the Agreement is that which it would convey to a reasonable person having that background knowledge. Such a person would not expect the parties to have agreed an unlimited extension of time which was not capable of being brought to an end. Such an extension was not required.

The meaning of the agreement was that the parties had agreed a mutual unlimited extension of time from 16 October 2007 within which to commence proceedings; and that mutual unlimited extension of time might be terminated by either party on giving one month's notice of such termination, during which month that party intended to proceed with its claim by commencing proceedings. It was implicit in an agreement whereby a mutual extension of time may be terminated by one month's notice that each party must issue proceedings within that month.

The Court rejected Pearl's argument that Pride's notice did not give notice of termination of the time extension. The meaning of Pride's notice, objectively construed, was that the mutual unlimited extension of time would end in one month. The effect of a notice terminating the mutual unlimited extension of time is that the parties must commence proceedings within one month, which was what Pride's notice stated. Pride commenced proceedings within time. Pearl did not. The action in Pearl's claim form is time-barred.

As to the second issue, Pearl's counterclaim is time-barred subject to the exercise of the Court's discretion to extend time. Pearl's argument challenges in effect the principles underlying the following longstanding admiralty practice. Admiralty practice was that each owner of a ship involved in a collision issues a writ, now known as a claim form, within the two year limitation period or within such further period as has been agreed. If one owner serves its claim form and a collision statement of case, the other owner will usually serve a defence and counterclaim. That counterclaim will not be regarded as time-barred because the owner who served it will have issued its own claim form within time. (Section 35 of the Limitation Act 1980 (UK) pursuant to which counterclaims relate back to the date of the writ or claim form does not apply to limitations periods in other enactments). The counterclaimant's own claim form will then usually be stayed.

The Court rejected Pearl's arguments because apart from salvage, MSA s 190 restates MCA s 8 in a modern legislative style. Thus, 'proceedings' in MSA s 190(3) has the same meaning as 'action' in MCA s 8, because the MSA was merely meant to consolidate enactments relating to merchant shipping. When MSA s 190 was enacted, it was settled and accepted that MCA s 8 extended to counterclaims: The Gniezno [1968] P 418, 447; The Fairplay XIV. The Igman v The Atilim 2 [1993] EWCA Civ J0527-2 (The Igman) does not suggest otherwise. Thus, MSA s 190 should not be regarded as changing that settled position unless there are clear words to that effect in the section. No such words exist. Whilst there is merit in Pearl's first three policy arguments in favour of exempting counterclaims from the scope of MSA s 190(3), they cannot overcome the apparent approval by Parliament of the settled position. Finally, Pearl's argument was rejected by the majority in The Kafur Mamedov.

To hold that MSA s 190 does not apply to counterclaims arising out of the fault of a ship is contrary to s 35 of the Limitation Act 1980 (UK). Any consequential injustice can be remedied through the Court's power to extend time under MSA s 190(5), rather than through construing MSA s 190 in a manner contrary to the settled meaning of its predecessor.

As to the third issue, there was good reason to extend time. It was fair and just to do so to enable Pearl to bring their counterclaim. Contrary to Pride's argument, Pearl misunderstood a badly drafted agreement and was misled by its clumsy terms.

The Al Tabith two-stage test reflected the approach to applications to extend the validity of a writ pursuant to the former RSC O 6 r 8. '[V]ery similar considerations' apply whether the Court is asked to renew a writ or extend time under the MCA: The Norwhale [1973] 1 Lloyd's Rep 56 (QB) 59. See also The Zirje [1989] 1 Lloyd's Rep 493 (QB) 497; The Seaspeed America [1990] 1 Lloyd's Rep 150 (QB) (The Seaspeed America) 153. Now, the relevant rule for extending or renewing a claim form is CPR Pt 7.6: The Baltic Carrier [2001] 1 Lloyd's Rep 689 (QB) (The Baltic Carrier). MCA s 8 had been used in the past to permit the extension of the validity of an existing claim form as well as extending time so as to validate the issue of a claim form out of time. The practice is to treat MSA s 190 applications 'on similar principles to applications to extend the validity of the claim form pursuant to the relevant Rules of Court': The Baltic Carrier [25].

As to CPR Pt 7.6, the discretion is unfettered subject to the express limitations in the rule that the applicant must have taken all reasonable steps to serve the claim form and must have acted promptly in making the application: The Baltic Carrier. The former limitation is inapplicable because a claim form was not issued within time (The Baltic Carrier [29]). The latter limitation can apply and in any event would be a consideration to bear in mind when exercising the discretion conferred by MSA s 190. Pearl's application was made promptly.

The discretion conferred by MSA s 190 is, like its predecessor, an unfettered discretion. But it must be exercised in a principled manner just like the discretion under MCA s 8: The Llandovery Castle (1920) 2 Ll L Rep 273; The Hesselmoor and The Sergeant [1951] 1 Lloyd's Rep 146 (The Hesselmoor); The Seaspeed America. There must be good reason for extending time because doing so would bypass the statutory time bar. What is a good reason cannot be defined. Whether one exists depends on the circumstances: The Myrto (No 3) [1987] AC 597, 622 (HL).

The context in which Pearl misunderstood the agreement was one in which Pearl had been careful to agree an extension of time so that Pearl might commence proceedings in Egypt to obtain evidence in Egypt before commencing proceedings in England. Earlier attempts had been made to get such evidence but to no avail. Whilst both owners could have and probably should have commenced proceedings within the two years neither did. Any fault in not commencing proceedings within the two years was therefore a fault of both shipowners. The Egyptian proceedings progressed slowly but did produce the evidence. When Pride's solicitors sent the notice of 19 September 2008 they did not use the language of the agreement and did not expressly mention termination of the mutual extension of time.

There is good reason to extend time because Pearl's misunderstanding of the agreement and consequent failure to issue a claim form within time was not culpable, notwithstanding that that misunderstanding may be described as Pearl's 'mistake': cp The Al Tabith 339, 342. The agreement was in an unusual form and had a muddled syntax. Pearl's conduct is not 'dilatory conduct', which is not tolerated in the Admiralty Court: The Hesselmoor 148. The delay was the result of Pearl's misunderstanding of the agreement and of the effect of Pride's notice received on 19 September 2008. It was also partly because Pride's solicitors did not serve Pride's claim form until 26 January 2009.

If time is extended, Pride will be unable to rely upon the limitation defence provided by MSA s 190. However, that defence is not absolute. It may be lost where the court considers that time may properly be extended.

This is an application to extend time for bringing a counterclaim. Thus in The Fairplay XIV, a case where the applicants were content not to prosecute their claim until the offensive was taken against them just eleven days before the two years had elapsed, time was extended on the following ground:

[I]t would be a manifest injustice if the plaintiff were allowed to proceed as if there were no counterclaim, when, on the same material, and without any increase of expense that is worth considering, the matter can be tried out with both sides' cases before the Court, and that, whatever is the result, it will be arrived at fairly and equitably between the two. […] the interests of justice demand that this counterclaim should be allowed to go forward.

See also The Igman. In The Kafur Mamedov 722, Godfrey JA stated that The Fairplay XIV is 'a useful guide to the proper exercise of the discretion conferred on the court by [MCA s8]: the court must ask itself whether the "interests of justice demand" that the counterclaim should go forward'.

In this case, it would be unjust and unfair if the applicants were deprived of their ability to counterclaim for the damage sustained by them in the collision which forms the subject matter of the claim which has now been brought against them. It would not be unjust and unfair if the respondents were deprived of a limitation defence in circumstances where they had agreed to the badly phrased time extension. It is true that the email sent on 16 October 2007 by Pride's solicitors might be said to have set out their understanding of the agreement. But this post-dated the agreement and Pearl cannot be criticised for seeking to understand the effect of what had been agreed on 2 October rather than the effect of the email dated 16 October.

To grant permission to bring a counterclaim does not offend against the policy underlying statutes of limitation, which is to ensure that claims are pursued with reasonable diligence. The counterclaim will be heard at the same time as the claim. In such circumstances a limitation defence would be a windfall.