On 6 March 2014, the English Court of Appeal (Civil Division) handed down their judgment of Kairos Shipping Limited v. Enka & Co. LLC (and Others)1. Lady Justice Gloster, giving the leading judgment, ruled that as a matter of English law, pursuant to the Convention on Limitation of Liability for Maritime Claims 1976 (as amended by the 1996 Protocol) (the LLMC 1976) owners are“entitled to constitute a limitation fund … by means of the production of a guarantee”. Given the forthcoming increase to the 1996 Protocol limits (on 8 June 2015), this decision takes on even more significance.

Gloster LJ took as her starting point the construction of Article 11.2 of the LLMC 1976, which effectively determined the issue. Gloster LJ held that “the ordinary meaning of the words could not be clearer”. An owner is given a clear choice under Article 11.2 to constitute a fund either by depositing the sum or by producing a guarantee acceptable under the legislation. The production of a guarantee was therefore a legitimate choice, with the remainder of the LLMC 1976 being expressly subject to this Article. This meant that there were only two constraints on the right to constitute a fund by guarantee:

  • Is it acceptable under the state party’s legislation?
  • Will it be considered adequate by the court?

Gloster LJ dealt with the first issue and overturned Simon J’s first instance judgment addressing the three bases of his judgment:

  1. The fact that the guarantee had to be “acceptable under the legislation of the State party” did not“require specific additional enabling legislation” permitting the use of a P&I Club LOU for this purpose. It simply meant that if a guarantee did “not contravene any relevant statutory provision” it would be acceptable. Simon J’s error in analysis was looking for specific legislation permitting a guarantee for use in constituting a fund.
  2. CPR 61, whilst providing for “payment into Court”, did not preclude the use of a guarantee. In any event, had it done so, Gloster LJ would have struck out that provision as being ultra vires as secondary legislation should not override primary statute nor the LLMC 1976.
  3. The “acceptable” v “enforceable” distinction was too technical. The Statute of Frauds had to be construed in the “context of the aim and intention of the 1976 Convention”. Therefore, if the Statute’s requirements for “enforceability” are complied with, a guarantee is “acceptable”.

The judgement usefully summarises the principles of construction to be applied to international conventions, i.e. they must be “considered as a whole”, should receive “purposive construction”, and should be attributed a meaning which was “consistent with the common intention of the State parties” which led to a “generally acceptable result”.

Gloster LJ did not address the second issue, but left the adequacy of a P&I LOU to be determined by the Admiralty Court. This has the potential to be hotly contested and requires an assessment of:

  1. The financial standing of the guarantor: many would expect an IG P&I Club to qualify as “adequate”. Whether other insurers/guarantors with less certain financial standing will be adequate is unknown.
  2. The practicality of enforcement: an address for service in England will likely be required.
  3. The terms of the guarantee: this is disputed in many cases, and the wording of the only known precedent (the RENA) may not be accepted. The guarantee will likely need to be irrevocable, unlimited in time and may need to address the possibility of limits being broken. One solution might be for a standard wording to be prepared by the Admiralty Solicitors Group.

The judgment should be welcomed as a commercially sound solution recognising the “financial and practical benefits” to owners, P&I Clubs and the shipping industry in allowing a fund to be constituted by way of guarantee. It also maintains England’s position as a sensible forum for maritime matters.