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The bay was named in 1800 by the British navigator James Grant, who sailed in the Lady Nelson along the Victorian coast. "I also distinguished the Bay by the name of Portland Bay, in honour of His Grace the Duke of Portland," wrote Grant. The bay, the only deep sea port between Adelaide and Melbourne, offers a sheltered anchorage against the often wild weather of Bass Strait.
By the early 19th century, whalers and sealers were working the treacherous waters of Bass Strait and Portland Bay provided good shelter and fresh water which enabled them to establish the first white settlement in the area. Whaling captain William Dutton is known to have been resident in the Portland Bay area when the Henty clan arrived and is said to have provided seed potatoes for the Henty garden.