This case arose from the sinking of the Bao Ge 7 following a collision with the fishing vessel Zhe Xiang Yu 13032. The Bao Ge 7 had heavy fuel oil, light fuel oil, and oily water on board. After the accident, Ningbo Yongjie Oil Spill Emergency Response Service Co Ltd (Yongjie), a certified tier-one ship pollution response organisation, deployed specialist vessels to undertake oil-spill surveillance, pollution prevention, and clean-up operations at the wreck site. Yongjie claimed pollution-prevention and clean-up costs from Rizhao Baoge Shipping Co Ltd (the shipowner) and sought to recover those costs directly from the Rizhao Branch of the People's Insurance Co of China (the insurer), subject to the applicable policy limit.

At first instance, the Ningbo Maritime Court assessed the reasonable pollution-prevention and clean-up costs at approximately CNY 3.89 million. However, it held that the claim was subject to limitation, and assessed the shipowner's limit of liability at SDR 288,659.50. It ordered both the shipowner and the insurer to make payment within that limit. Yongjie appealed against the classification of the claim as subject to limitation and the amount recoverable. The insurer also challenged the finding that Yongjie was entitled to bring a direct claim against it, and the manner in which the policy deductible had been applied.

Held: Appeals allowed in part.

The Zhejiang High People's Court set aside the first-instance judgment and ordered the shipowner to pay approximately CNY 3.89 million in pollution-prevention and clean-up costs. The insurer was liable subject to the policy limit and after deduction of the 10 per cent contractual deductible, which remained payable by the shipowner.

The Court held that, where the person liable had not raised limitation of liability as a defence, the first-instance Court should not have invited or guided that party to do so. The central issue nevertheless remained whether the pollution-prevention and clean-up costs constituted a claim subject to limitation.

The Court distinguished claims for pollution damage caused by bunker oil from claims in respect of the raising, removal, destruction or rendering harmless of a ship which is sunk, wrecked, stranded or abandoned, including anything that is or has been on board such ship. Claims for pollution damage caused by bunker oil, and the costs of measures taken to prevent or minimise such damage, are generally subject to limitation. Costs incurred in dealing with a sunken, wrecked, stranded or abandoned ship, and the items on board, however, fall within an exception.

The Court therefore examined the relationship between ch 11 of the Maritime Code of the PRC and the LLMC 1976. Arts 2.1.d and 2.1.e of the LLMC 1976 include among the claims subject to limitation claims in respect of the raising, removal, destruction, or rendering harmless of a ship which is sunk, wrecked, stranded, or abandoned, including anything that is or has been on board such ship, and claims in respect of the removal, destruction or rendering harmless of the cargo of the ship. Art 18.1 permits a State to reserve the right to exclude the application of those provisions. The Maritime Code of the PRC did not include either category among the claims subject to limitation. The Court treated the domestic-law effect of that omission as equivalent to the exercise of the reservation permitted by art 18.1.

The Court further held that 'ship' in the relevant judicial interpretation included not only the hull but also the ship's equipment, fuel, and other items on board, whether or not they had become separated from the hull as a result of the casualty. The pollution risk arose from the sunken Bao Ge 7 and its fuel. Yongjie's operations therefore constituted measures to remove or render harmless the wreck and the items on board. The resulting costs were not subject to limitation, and the shipowner was not entitled to limit its liability under ch 11 of the Maritime Code of the PRC. As to quantum, the Court considered the extent of the pollution, the amount of oil released, the necessity of the measures and the resources actually deployed. It upheld the first-instance Court's assessment of the reasonable pollution-prevention and clean-up costs.