Case of Company A v. Company B and XX Insurance Company Regarding Dispute over Liability for Ship Collision Damage 

–Determining the Limitation of Liability for Maritime Claims for Fishing Vessels Engaged in Operations in Unrestricted Area

In the context of an expanding world economy, the marine economy grows rapidly alongside the shipping industry.  Safety of navigation is of paramount importance to ships, especially to ships navigating at night, which must always stay alert and prudent. In this case, two ships failed to keep a proper look-out during night navigation, resulting in a collision. One of the ships sank and suffered a total loss. How should the court rule on the attribution of the liability and the amount of compensation?

Case Review

At noon on August 31, 2019, the ship YUAN HANG 286, registered under the name of Company A, departed from Wenzhou City, Zhejiang Province, toward Dongfang City, Hainan Province.

In the early morning of September 5, when many people were asleep, the intercom suddenly sent out a sound signal from YUAN HANG 286 in the waters near Xiachuan Island in Taishan, Jiangmen. "The fishing vessel ahead! The fishing vessel ahead! Please give way to us." It was an avoiding signal sent out by the crew on duty when they spotted the approaching fishing vessel YUE TAI YU 11838 owned by Company B, only to go unanswered. The crew directed the beam of the searchlight toward the bridge of the approaching vessel. Yet the vessel still did not respond and continued steady course. At this moment, YUAN HANG 286 was unable to avoid it, and it took the wrong avoiding action of turning left. Eventually, the two ships collided.

Upon the collision, YUE TAI YU 11838 moved astern and disengaged itself from YUAN HANG 286, and then it came to a halt and drifted. Soon, it made a turn near the collision location and left. Due to low awareness of safety, the crew of YUAN HANG 286 left the watertight doors of the cabins under the deck open. As a consequence, water entered the ship through all cabins. What's worse, the watertight doors, which failed to be properly maintained, could not be closed and locked promptly, allowing a large amount of water to enter multiple cabins. In the end, the ship capsized 180 degrees and sank.

The Taishan Maritime Safety Administration investigated the accident and concluded that both YUAN HANG 286 and YUE TAI YU 11838 were liable for this collision and shall assume the liability equally. It was found that during the night navigation, the crew of YUAN HANG 286 was unable to make a full appraisal of the situation and the risk of collision due to its look-out failure. As the give-way ship, it did not maintain a safe speed and failed to take avoiding action early. The captain of YUE TAI YU 11838 also failed to maintain a proper look-out and steered the ship while fatigued. He failed to detect the approaching ship in time and make a full appraisal of the situation and the risk of collision. At the time he found the approaching ship, a collision was inevitable.

Company A was dissatisfied with the investigation conclusion, stating that the collision accident resulted in the total loss of YUAN HANG 286, with a loss amounting to RMB 6,858,748.08, and therefore claimed that Company B should bear 70% of the liability. It also claimed that as Company B had purchased relevant insurance from XX Insurance Company and the collision occurred during the insurance liability period, XX Insurance Company should, within the scope of insurance liability, bear the joint and several liability for compensation together with Company B.

Company A filed a lawsuit with the Guangzhou Maritime Court (GZMC), requiring that (1) Company B should compensate for its collision-induced loss of RMB 4,801,123.65 plus interest (calculated from September 5, 2019 to the date of payment as determined by the court judgment based on LPR announced by the National Interbank Funding Center); (2) XX Insurance Company should, within the scope of insurance liability, bear the joint and several liability for the settlement of the compensation payable by Company B; (3) Company B and XX Insurance Company should jointly bear the litigation costs.

Upon hearing the case, GZMC ascertained facts as follows: YUAN HANG 286 was a steel dry cargo ship, with the permit to navigate the Coastal Service Area, and Company A was its registered owner and operator.

On March 1, 2014, Lin signed a contract on entrusted operations and management of cargo carrier with Company A, by which he entrusted Company A with the operations and management of YUAN HANG 286. On August 27, 2019, Lin Long sold the ship to Wang for RMB 3.65 million. The ship was handed over between the parties in the Wuniu waters, Yongjia County. During the first-instance proceedings, Wang issued a statement, saying that he was the actual owner and operator of YUAN HANG 286, and YUAN HANG 286 was registered under the name of Company A under a sales contract he entered into with Lin Long.

YUE TAI YU 11838 was a steel trawling ocean fishing vessel with a gross tonnage of 561. It was permitted to be engaged in operations in the C3 (South China Sea) fishing area and navigate the Unrestricted Area. Its registered owner was Company B.

In June 2019, Company B purchased coastal and inland waters insurance for the vessel with XX Insurance Company, under which XX Insurance Company agreed to cover the total loss and all risks.

On September 5, 2019, YUAN HANG 286 collided with YUE TAI YU 11838 about 22 nautical miles southwest of Litouzui, Xiachuan Island in the Taishan waters of Jiangmen, and the former sank. After the collision, Wang engaged Company C to conduct underwater exploration and other work on the sunken ship, and paid Company C RMB 60,000 for that.

On October 30, 2019, Wang signed a wreck removal contract with Company D regarding the sunken YUAN HANG 286. Company D failed to remove the shipwreck; thereafter, a dispute arose between Wang and Company D. Wang applied for arbitration with the China Maritime Arbitration Commission with Company D as the respondent, requiring Company D to pay him liquidated damages of RMB 537,130 and compensate him for various losses of RMB 5.51 million. During the arbitration process, Company D filed a counterclaim that Wang should compensate Company D for economic losses of RMB 1,506,010.85. The arbitral tribunal rendered an arbitral award based on a majority opinion, ruling that Wang shall compensate Company D for economic losses of RMB 1,204,808.68.

Company B argued that Company A should bear 70% of the liability for the collision, that Company B enjoyed the right to limitation of liability for maritime claims under the law, and that its liability for compensation should be capped at RMB 815,905. XX Insurance Company argued that it was not the defendant in this case, that the circumstances of "determination of liability" and "the insured's negligence in making a request" as stipulated in Article 65 of the Insurance Law of the People's Republic of China (the "Insurance Law") did not exist in this case, and that Company A had no legal basis to sue XX Insurance Company.

Court Decision

GZMC rendered a first-instance judgment on October 28, 2022 as follows: Company B shall compensate Company A for the loss of RMB 814,563.19 plus interest calculated from September 5, 2019 to October 18, 2022 based on LPR announced by the National Interbank Funding Center during the period, while Company A's other claims were dismissed.

Company A was not satisfied with the first-instance judgment and filed an appeal with Guangdong High People’s Court. On May 28, 2024, Guangdong High People's Court rendered the second-instance judgment, dismissing the appeal and upholding the first-instance judgment.

Key Points of Judgment

The effective judgment sets out the rationale as follows: Both YUAN HANG 286 and YUE TAI YU 11838 violated the relevant provisions of the International Regulations for Preventing Collisions at Sea, 1972. It was determined, based on the causal force for the formation of the collision, duty of care, the ability to avoid risks, and the avoiding actions taken, that YUAN HANG 286 and YUE TAI YU 11838 were equally liable for the collision accident. According to Article 4 of the Supreme People's Court Rules on Some Issues about the Trial of Cases Related to Ships Collision Disputes, Company A shall have the right to institute a tort action. XX Insurance Company was merely the insurer of the total loss insurance and additional rescue and salvage insurance of coastal and inland waters for YUE TAI YU 11838 owned by Company B. It was neither the tort subject of the collision nor the insurer of liability insurance. It therefore shall not be required to bear compensation liability to Company A. Among the various losses claimed by Company A, the loss of hull value and the cost of wreck exploration totaling RMB 3.68 million were reasonable losses. Other losses lacked factual basis and were therefore not supported by the Court.

After the collision, YUE TAI YU 11838 failed to use good seamanship to push YUAN HANG 286 at a slow speed to slow down the ship's water intake. Instead, it moved astern and disengaged itself from YUAN HANG 286, and then left the scene. As a result, a large amount of water entered YUAN HANG 286 quickly, leading to its sinking. This was an important reason for the expanded loss to YUAN HANG 286. However, the aforesaid damage was caused by the negligence of the crew of YUE TAI YU 11838, rather than the intentional or reckless inaction of the person responsible for the vessel. Therefore, according to Articles 204, 207, and 209 of the Maritime Code of the People's Republic of China (the "Maritime Code") and Article 15 of the Supreme People's Court Rules on the Trial of Compensation Disputes over Property Damages Occurred in Ships Collision and Touch Cases, Company B, as the registered owner of YUE TAI YU 11838, shall have the right to claim the limitation of the tort liability that Company B should bear to Company A.

YUE TAI YU 11838 was a fishing vessel engaged in operations in the C3 fishing area, with the Unrestricted Area as its approved navigation area. The collision occurred in the sea area within China's jurisdiction. YUE TAI YU 11838 was a "ship engaged in coastal operations"; hence, Article 4 of the Provisions of on the Limitation of Liability for Maritime Claims for Vessels with a Gross Tonnage of Less than 300 and Vessels Engaged in Coastal Transport or Coastal Operations applies to the calculation of its limitation of liability for maritime claims. Pursuant to Articles 210 and 277 of the Maritime Code, Company B shall bear the liability amounting to RMB 814,563.19 plus interest calculated from September 5, 2019 to October 18, 2022 based on LPR announced by the National Interbank Funding Center during the period.

Related Legal Provisions

Paragraphs 1 and 3, Article 50 of Maritime Traffic Safety Law of the People's Republic of China (2016 Amendment)

"Coastal waters" mean the harbors, inland waters, territorial waters and all other sea areas under the jurisdiction of the State, along the sea coast of the People's Republic of China.

"Operations" mean investigations, exploration, exploitation, survey, construction, dredging, demolition, rescue, salvage, towing, fishing, aquatic breeding, loading and unloading, scientific experimentation and other surface and underwater operations.

Article 4 of the Provisions Concerning the Limitation of Liability for Maritime Claims for Ships With a Gross Tonnage Not Exceeding 300 Tons and Those Engaged in Coastal Transport Services As Well As Those for Other Coastal Operations, promulgated by the former Ministry of Transport

For vessels engaged in cargo transport between ports of the People's Republic of China or in coastal operations, if they have a gross tonnage not exceeding 300, the liability for maritime claims shall be limited to 50% of the limit liability stipulated in Article 3 of these Provisions; if they have a gross tonnage exceeding 300, the liability for maritime claims shall be limited to 50% of the limit liability stipulated in Paragraph 1, Article 210 of the Maritime Code of the People's Republic of China.