In Cosmotrade SA v Kairos Shipping Ltd (“The Atlantik Confidence”) [2014] EWCA Civ 217, the Court of Appeal reversed the High Court’s first instance decision that English law does not allow constitution of a Limitation Fund by P&I Club Letter of Undertaking.

First Instance Decision

The first instance decision was reported in a previous blog post. The Court considered whether a Limitation Fund could be constituted by lodging a P&I Club LOU into court, and held that it could not. Simon J found that there must be a specific statutory provision stating that a guarantee is acceptable to constitute a Limitation Fund. English law contained no such provision, and so a Fund could only be constituted by a payment into court.

One of the key legal provisions considered was Article 11(2) of the Convention on Limitation of Liability for Maritime Claims 1976 (LLMC 1976). This states that 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…”. Whilst this is given force of law in England by s.185 Merchant Shipping Act 1995 (MSA 1995), Simon J held that further national legislation is required under which a guarantee is acceptable, and there is no such legislation in England.

Appeal

The Court of Appeal held that there was no ambiguity about the effect of the wording in Article 11(2), nor was specific legislation required defining what was “acceptable” for the purposes of the MSA 1995.

The first instance judge had also been incorrect in drawing a distinction between the terms “enforceable” and “acceptable” in the context of the relevant legislation. Rather than take a narrow and technical approach, the court should construe the legislation purposively. In order to encourage international trade, the court should facilitate vessel owners in limiting their liability by the provision of either a deposit or a guarantee.

The Court concluded that, as a matter of law, a Limitation Fund could be constituted by the production of a guarantee acceptable to the court, as an alternative to payment of money into court.

Comment

The Court of Appeal’s decision is far more in line with the law in other major maritime jurisdictions, as well as international practice where P&I Club LOUs are used widely as security.

After the first instance decision was handed down, there were concerns that a substantive amendment to English law would be required in order to allow LOUs to be used to constitute Limitation Funds, and to prevent parties seeking to litigate in alternative jurisdictions. Following the Court of Appeal’s decision, this should no longer be necessary.