In the case of Kairos Shipping Limited and others v Enja & Co LLC and others (The “Atlantik Confidence”) [2014] EWCA Civ 217, the English Court of Appeal held that a letter of undertaking provided by a P&I Club could in principle be used to establish a limitation fund as an alternative to a cash payment into court.
This was an appeal from the Admiralty Court concerning limitation proceedings arising from the sinking of M/V “Atlantik Confidence” in March 2013, due to an engine room fire. The vessel Owners sought to limit their liability based on the vessel’s tonnage and the limits in the Convention on Limitation of Liability for Maritime Claims 1976 (as amended by the 1996 Protocol).
In Daina Shipping Co v Mediterranean Shipping Co SA (The “Rena”) Mr Justice Teare had allowed a limitation fund to be secured by a P&I Club letter of undertaking although the Owners’ application in that case was unopposed. However, in the Atlantik Confidence, Teare J directed an oral hearing because of editorial comments in Volume 2 of Civil Procedure Rules 2012 (“the White Book”) which suggested possible inconsistency between the Rena and the Civil Procedure Rules.
The issue was the proper construction of the 1976 Convention, as enacted into UK law by the Merchant Shipping Act 1995 (“MSA 1995”).
Article 11.2 of the 1976 Convention provides:
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.
Admiralty Court
At first instance, the Admiralty Court judge, Simon J, approached the task by considering whether enactment of the 1976 Convention into UK law had changed the options available for establishing a limitation fund in the UK. Under the 1957 Convention this issue had been left to individual States to determine. It seemed to be accepted that prior to enactment of the 1976 Convention, the only means of establishing a fund was payment into court.
There was nothing in the MSA 1995 itself which the judge thought sufficiently clearly indicated that the position had changed. No other legislation was identified which specifically, or expressly, made a Club letter of undertaking or other guarantee “acceptable” for the purposes of MSA 1995. Nor did the relevant Civil Procedure Rules (CPR61.11 and Para 10 of the accompanying Practice Direction), or their predecessors, say anything about the use of a guarantee for the purpose of establishing a fund. The Statute of Frauds was concerned with the “enforceability” of guarantees generally, the judge said, and did not address the concept of “acceptability”.
The judge therefore held that a limitation fund could only be constituted by a cash deposit and not by way of a P&I Club letter of undertaking. That said, the judge acknowledged (i) that the law might be capable of being interpreted in more than one way, and (ii) that it might seem surprising in today’s world that a suitably framed guarantee in an appropriate amount from a credit worthy provider is not effective security to constitute a Limitation Fund. Permission was given for owners and their P&I Club to appeal.
Court of Appeal
The Court of Appeal reversed the Admiralty Court decision.
Rather than referring to pre-existing domestic rules of practice, the Court of Appeal’s approach was to focus on the meaning and effect of Article 11.2. This required consideration of the ordinary meaning of the words used, not just in their context, but also in light of the evident object and purpose of the convention. So far as context, neither party relied on any special context and the object and purpose of the 1976 Convention could not be ascertained with certainty beyond its main purpose - higher limits in return for making it harder to “break” the limit.
As to the words used the phrase “acceptable under the legislation of the State party” there was no ambiguity. The enactment of this Article into UK law gave a party seeking to establish a fund the choice of either depositing cash or providing an acceptable guarantee, without a need for a separate enabling statute or regulations.
Article 14 of the 1976 convention provides that “subject to the provisions of [Chapter III of the Convention]” State parties may make and apply “rules relating to the constitution and distribution of the limitation fund”, and “rules of procedure in connection therewith”. Chapter III of the Convention comprises Articles 11-14. The Appellant submitted, and the Court of Appeal agreed, that it was not open to State parties to impose domestic rules which had the effect of creating a blanket ban on guarantees, because by Article 14 the State Parties had agreed that a fund may be constituted by providing an acceptable guarantee .
As a matter of English law a guarantee would be “acceptable” if it was not “unacceptable”; in other words, as long as (i) it was made in writing to satisfy the general requirements of the Statute of Frauds, and (ii) it did not contravene any other relevant statutory provisions, it would satisfy the requirements of the first limb of the test in Article 11.2.
The case was sent back to the Admiralty Court for consideration of whether the guarantee offered by owners’ P&I Club was “adequate”.
Article by Andrew Hawkins
