Kairos Shipping Ltd & Anr -v- Enka & Co LLC & Ors [2014]: Limitation funds

The Court of Appeal has overturned the Commercial Court’s decision and confirmed that a London Limitation Fund may be constituted by way of a Guarantee (including where appropriate a P&I Club LoU).

Following the sinking of their vessel, the MV "ATLANTIC CONFIDENCE", shipowners wished to limit their liability to cargo and other interests by reference to the vessel’s tonnage and the limits set out in the 1976 Limitation Convention. In order to do so, they looked to establish a Limitation Fund. A key issue was whether that fund could be set up by way of a Club Letter of Guarantee (or Letter of Undertaking), rather than a cash payment into court.

The Commercial Court judge had noted that Club LoUs were generally acceptable security, yet he found himself constrained by the wording of statutory legislation which he interpreted to mean the moneys must be paid into court. But he did show some sympathy for shipowners and their club , accepting that legislation on this subject would benefit from review, and he gave permission to appeal against his finding as ‘there is likely to be more than one view of the matter’. It was little surprise therefore that the case came before the Court of Appeal.

The Court of Appeal approached the matter starting with the construction of Article 11.2 of the 1976 Limitation Convention. That article, headed ‘Constitution of the fund’, states: ‘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 body.’

The appeal judges considered Article 11.2 ‘in its proper context.’ They further noted that the interpretation of international conventions required a ‘broad, purposive approach’. Particular reference was made to The CMA Djakarta, citing ‘… the duty of a court is to ascertain the ordinary meaning of the words used, not just in their context but also in the light of the evident object and purpose of the convention’.

Against this background, the Court of Appeal considered that the express words ‘either… or’ as used in Article 11.2 clearly indicated a choice between a cash deposit and a guarantee, and that this choice fell to the party constituting the fund.

Once that conclusion was reached, the judge’s other reasoning at first instance was similarly difficult to follow. For example, on the subject of the UK’s civil procedure rules, the Court of Appeal noted that although reference was made specifically to the constitution of a limitation fund by way of a payment into court, there was no provision barring against other means such as a guarantee.