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

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...