High Court: Mr Justice Simon

Court of Appeal: Lord Justice Rimmer, Lord Justice Beatson and Lady Justice Gloster

Mr Macey-Dare (instructed by Clyde & Co) for the Applicant

Mr Nigel Jacobs QC (instructed by Holman Fenwick Willan LLP) for the First Respondents

Background

On the 30th March 2013, a fire broke out in the engine room of the bulk carrier ATLANTIC CONFIDENCE(the "Vessel") while the Vessel was in a position off Masirah Island, Oman. The master ordered the crew to abandon ship and the Vessel subsequently sank with its cargo of steel in deep water three days later on the 3 April 2013. The cargo was made up several different parcels, shipped by different entities and to be delivered to different entities.

On the 23 April Enka and Bechtel cargo interests were granted a worldwide freezing injunction in support of an arbitration claim against the Owners from Hamblen J in the sum of US$10,108,424, plus interest and costs, an overall sum of US$11.5 million.

On the 8 May 2013 the Al-Rashed cargo interests made a similar application to Popplewell J in support of their arbitration claim. He granted relief in the sum of US$18.5 million which was calculated by adding the Al-Rashed interests claim of US$7 million to the sum enjoined by the prior order of Hamblen J.

On the 10 May 2013 Cosmotrade, the time and voyage charterers, made a similar application in respect of its claim for an indemnity under the head charter against potential claims from sub-charterers, and Field J granted an order in the sum of US$30 million, which included the alleged value of the entire cargo plus interest and costs.

On the 13 May 213 the Owners issued a claim form seeking to limit their liability in respect of loss and damage under the Merchant Shipping Act 1995 and the 1976 Limitation Convention (the "LLMC 1976") to the sum of £6,595,767 plus interest until the Limitation Fund was constituted.

The key question that was put before the judge at this hearing, which was also the combined return date hearing for all three freezing orders, was whether the Owners were entitled to constitute a Limitation Fund by the provision of a P&I Club guarantee for the purposes of CPR Part 61, and Article 11(2) of Part 1 of Schedule 7 of the Merchant Shipping Act 1995.

Traditionally the English Courts have required a claimant wishing to do so to constitute a Limitation Fund by way of a cash payment into court. However, in the RENA [2012] Folio 225 Mr Justice Teare permitted the Swedish Club to constitute a Limitation Fund by lodging a P&I Club LOU into court following an uncontested application. When presented with a similar application by another IG P&I Club in this matter, he directed an oral hearing was necessary to determine whether the English Court had jurisdiction to permit this.

Court of First Instance Judgment

Mr Justice Simon ruled that “without a specific statutory provision that a guarantee is acceptable the rule remains that a Fund may only be constituted by making a payment into court”. Therefore, the application was refused.

In reaching this decision, Simon J explored three potential avenues which had been put before him as part of the Owners’ submissions, but ruled none assisted them:

  1. Section 185 Merchant Shipping Act 1995 gives Article 11(2) LLMC 1976 (which provides a “Fund may be constituted either by depositing a sum or producing a guarantee acceptable under the legislation of the State party where the Fund is constituted ...”) the force of law, but Article 11(2) still requires further national legislation under which a guarantee is acceptable. There is no such statutory provision.
  2. Article 14 LLMC 1976 provides that rules relating to constitution of a Fund shall be governed by the law of the State party. In England, this means reference to the CPR61.11. CPR 61.11(18) provides that “the claimant may constitute a limitation fund by making a payment into court”. Further, the provisions of the accompanying Practice Direction (10.10.10 – 10.10.13) all imply a payment (i.e. cash) into court. A guarantee is not a cash payment.
  3.  The Statute of Frauds, which requires a guarantee to be made in writing and signed to be enforceable, does not assist as this deals with “enforceability” whereas the LLMC 1976 refers to“acceptability”. The phrase “enforceability” was insufficient to satisfy Article 11(2) as enforceability and acceptability are different concepts. To allow such a change to established practice would require clear words, but there were none.

The decision is in line with the views of many leading commentators such as Griggs and Fogarty, and an Australian Federal Court ruling on the same issue.

Court of Appeal Judgment

Lady Justice Gloster, giving the leading judgment ruled that as a matter of English law, pursuant to the LLMC 1976 Owners are "entitled to constitute a limitation fund by means of the production of a guarantee in the form of a Club LOU".

In her judgment Gloster LJ cited the relevant provisions of the LLMC 1976 and the applicable English legislation. She took as the starting point, the correct construction of Article 11.2 of the LLMC 1976, the answer to which effectively determined the issue.

The judgment provides a useful summary of the principles of construction to be applied to international conventions, i.e. that the Convention 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 also drew on the judgment of Longmore LJ in the CMA DJAKARTA which summarised the duty of the Court as being to "ascertain the ordinary meaning of the words used ... in light of the evident object and purpose of the Convention."

Turning to Article 11.2 of the LLMC 1976, 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 method of producing a guarantee was therefore clearly a legitimate choice under the Convention.

The remaining parts of the LLMC 1976 including Article 14 are all expressly subject to the provisions of this Chapter (including Article 11.2). This meant that the only constraints on the right to constitute a Fund by guarantee were:

  1. is it acceptable under the State party's legislation?
  2. will it be considered adequate by the Court?

Gloster LJ commented that Simon J's error in analysis was looking for specific legislation permitting a guarantee for use in constituting a fund. The fact that the guarantee had to be "acceptable under the legislation of the State party" did not "predicate or require specific additional enabling legislation"permitting the use of a P&I Club LOU for this purpose. It simply meant that provided such a guarantee did"not contravene any relevant statutory provision" it would be acceptable.

Further, the distinction made by Simon J between "acceptable" and "enforceable" was held to be too technical. The construction of this term in the Statute of Frauds had to be construed in the "context of the aim and intention of the 1976 Convention" and that therefore if the requirements for "enforceability" set out within the stature were complied with, a guarantee would be "acceptable" for the purpose of the Merchant Shipping Act 1995 and the LLMC 1976. Such a conclusion thereby giving effect to "the general purpose and intention of the LLMC 1976, namely that the provision of international trade by way of sea carriage should be encouraged by facilitating the ability of Owners to limit liability by the provision of a guarantee".

This conclusion was no doubt influenced, and rightly so, by the International Group of P&I Clubs' letter filed in advance of the Appeal hearing which highlighted the advantages to the industry of allowing for the provision of security to be given by way of LOU instead of a cash deposit.

Finally, Gloster J held that whilst the provisions of CPR 61 and the accompanying Practice Direction contemplated only "payment" into Court, they did not preclude the use of a guarantee. Further, had the CPR done so, she would have struck those provisions out as being "ultra vires" as it should not override the primary statute nor the LLMC 1976. In this regard the note at 2D-115 of the White Book was found to be "simply wrong".

The second question of whether a P&I LOU will be "adequate" was left open by the Court of Appeal. Without doubt, this leaves open significant room for debate between parties in this and future cases until the Admiralty Court issues their ruling. This question requires an assessment of:

  1. the financial standing of the guarantor;
  2. the practicality of enforcement; and
  3. the terms of the guarantee itself.

One would suspect that an IG P&I Club would qualify as adequate, but a guarantee provided by other P&I Clubs or smaller insurers with a more uncertain financial standing is likely to be more controversial.

The final issue remains that of wording. In many cases - in England and abroad, and in various different contexts including that of the LLMC1976, LOU wordings are unfortunately not always straightforward. The LOU accepted in this case will hopefully provide useful guidance to future litigants. However, this has not proved the case with the LOU permitted by Teare J in the RENA [2012] Folio 225 which we are aware has been debated in other situations. Perhaps the most effective resolution of this final question would be for an agreed wording to be issued, either by the IG of P&I Clubs or the Admiralty Solicitors Group in the same way as other ASG Wordings are now relatively commonly accepted.