UK: Court Of Appeal Confirms Limitation Fund May Be Constituted With Guarantee In England

Last Updated: 14 April 2014
Article by Ian Chetwood and Reema Shour

Kairos Shipping Ltd v. Enka & Co LLC and Others (Atlantik Confidence) [2014] EWCA Civ 217

The English Court of Appeal has recently clarified that it is, in principle, possible to constitute a tonnage limitation fund in England with a guarantee, including a P & I Club letter of undertaking ("LOU"). The appeal decision reverses the first instance decision of Mr Justice Simon (reported on in our Autumn 2013 Shipping E-Brief).

In coming to this conclusion, the Court of Appeal considered the scope of the applicable provisions in the Convention on Limitation of Liability for Maritime Claims 1976 (as amended by the 1996 Protocol) ("the 1976 Convention"). The 1976 Convention has the force of law in England by virtue of S. 185(1) of the Merchant Shipping Act 1995 ("MSA 1995").

The 1976 Convention was intended to simplify the process by which shipowners could limit their liability for maritime incidents and thereby encourage international trade by sea-carriage. The Court of Appeal's confirmation that, under English law, owners have the option of constituting a limitation fund by way of an adequate and acceptable guarantee reflects the purpose of the 1976 Convention.

This is an important issue for the shipping industry, particularly for P & I Clubs, and the decision has some considerable practical significance.

The background

Following a maritime incident (such as the fire that broke out on board the Atlantik Confidence in this case), a shipowner can usually limit its liability for claims arising out of the incident by constituting a limitation fund. The amount of the fund is calculated on the basis of the tonnage of the vessel. The value of claimants' claims is subsequently paid out of the fund on a pro rata basis.

The Owners in this case issued a limitation claim in the English Admiralty court and the issue arose as to whether they could constitute the limitation fund by means of a Club LOU, as opposed to a cash deposit into court.

Prior to the incorporation into English law of the 1976 Convention, a limitation fund could only be constituted in England by means of a cash payment into court and that has traditionally been the practice for owners setting up limitation funds in England. The English Civil Procedure Rules reflect this practice by providing that when a limitation decree is granted by the Court, "the claimant may constitute a limitation fund by making a payment into court" (CPR 61.11(18)).

Article 11(2) of the 1976 Convention, however, provides that:

"A fund may be constituted either by depositing the sum or by producing a guarantee acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the court or other competent authority." (our emphasis)

In a 2012 case, Daina Shipping Co. v. MSC Mediterranean Co SA (The Rena) (an Ince case), on an uncontested application by a P & I Club, Mr Justice Teare allowed the Club to constitute a limitation fund by means of an LOU. Concerns as to whether this decision was inconsistent with the law meant that, when a similar issue arose in the Atlantik Confidence, the matter went to an oral hearing before Mr Justice Simon.

The Commercial Court decision

At first instance, Mr Justice Simon considered that the key issue was whether a P & I Club guarantee was "acceptable under the legislation of" England. He noted that Article 11(2) of the 1976 Convention was incorporated into English law by virtue of the MSA 1995. However, in his view, it was still necessary for there to be domestic legislation providing expressly that a guarantee was acceptable under English law. There was no such domestic legislation in England and, in fact, the provisions of the CPR contemplated a payment into court, rather than the provision of a guarantee. He concluded that without a specific statutory provision that a guarantee is acceptable, the rule remained that a fund may only be constituted by making a payment into court.

The Court of Appeal decision

The Court of Appeal was unanimous in allowing the appeal. Lady Justice Gloster gave the leading judgment. She considered that Mr Justice Simon was wrong to focus on the fact that there was no express provision in English legislation allowing the provision of a guarantee to constitute a limitation fund. It was sufficient that the 1976 Convention, as incorporated into English law, expressly provides the party constituting the fund with a choice of which method to employ, either a cash deposit or provision of a guarantee.

Furthermore, it was not necessary for the CPR expressly to reverse "the previous well-established" practice of constituting a limitation fund by a payment into court. The words of Article 11(2) of the 1976 Convention were sufficient to "change" this practice and confer the right to constitute a limitation fund by way of a guarantee. There was in any event nothing in the CPR that precluded the constitution of a limitation fund by way of a guarantee, even though the Rules only expressly contemplated the provision of a limitation fund by means of a payment into court.

There are, however, conditions for allowing a party to constitute a limitation fund by way of a guarantee pursuant to Article 11(2) of the 1976 Convention. As stated by her Ladyship, these are that: (i) the guarantee must be "acceptable under the legislation of the State Party"; and (ii) the guarantee must be considered to be adequate by the domestic Court or other competent authority.

As to (i), the guarantee would be acceptable if it did not contravene any relevant English statutory provision. A guarantee that satisfied the requirements of the Statute of Frauds (in writing and signed by the guarantor or his authorised agent) was likely to be "acceptable" for the purposes of the MSA 1995 although, in certain cases, such as where the guarantee was provided by an insurance business, other English legislation might also be relevant. It was not, however, necessary to have an express statutory provision permitting the provision of a guarantee to constitute a limitation fund.

As to (ii), adequacy of a guarantee simply meant it had to provide adequate security for the fund. This meant that the Court would need to be satisfied as to the financial standing of the guarantor, the practicality of enforcement and the terms of the guarantee instrument itself. These were almost daily considerations, however, for Admiralty and Commercial Court judges dealing with the provision of security by parties to litigation.

The appeal was, therefore, allowed and the Owners were entitled to constitute a limitation fund under the 1976 Convention by provision of a guarantee, subject to the guarantee providing adequate security in the Court's opinion.

Comment

The Court of Appeal's judgment reflects the fact that guarantees are commonly used as acceptable security for other maritime claims and that P & I Club LOUs are usually accepted as sufficient security in those cases, for example when releasing a vessel from arrest. The decision has been welcomed by many for the practical advantages it will bring for P & I Clubs and parties wishing to constitute limitation funds in England.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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