Court of Appeal: Letter of guarantee effective security to constitute a Limitation Fund in England
KAIROS SHIPPING LTD AND OTHERS V ENKA & CO LLC AND OTHERS  EWCA 217
Jackson Parton and Mark Jones of Stone Chambers recently acted for Cosmotrade SA in the Court of Appeal on an appeal from the decision of Mr. Justice Simon, in which the Admiralty Court rejected the owners’ application to set up a Limitation Fund by way of a Letter of Undertaking (LOU) provided by the owners’ P&I Club. The High Court ruled that a limitation fund could only be constituted by a cash payment to Court.
The Court of Appeal reversed this in its judgement of 6th March 2014, allowing the constitution of the limitation fund by means of a letter of guarantee - Kairos Shipping Ltd and Others v Enka & Co LLC and Others.
This is a landmark decision reversing the long-held practice of the Admiralty Court that a Limitation Fund can only be constituted by means of a cash payment into court.
The appeal related to the loss of the mv. “ATLANTIK CONFIDENCE”, following an engine room fire with a cargo of steel products valued at approximately US$ 30 million. The vessel sank in 3,000 metres off the coast of Oman in April 2013. Using Jackson Parton as advocates, the time charterers, Cosmotrade SA, made an application to the High Court in respect of their claim for indemnity under the head charter against potential claims from sub charterers. A worldwide freezing injunction was granted in the sum of US$ 30 million. Various cargo interests represented by leading counsel were also granted worldwide freezing injunctions in support of arbitration claims against the owners of the vessel.
The High Court Proceedings
The owners issued an Admiralty Limitation Claim in the Admiralty Court, seeking to limit their liability in accordance with the 1996 Protocol to the Convention of Limitation of Liability for Maritime Claims 1976 (“the Convention”). They sought to constitute a Limitation Fund by the provision of an International Group Club Guarantee.
Under the Article 11(2) of the Convention “a fund may be constituted, either by depositing 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 authority”. In England the enacting UK Legislation, the Merchant Shipping Act 1995 (“the 1995 Act”), gives this force of law. However, Mr. Justice Simon stated in his judgement that the Convention requires a guarantee “acceptable under the legislation of this country”.
The 1995 Act and the Civil Procedure Rules (“CPR”) govern the procedure for constituting limitation funds in England. CPR 61.11(18) provides that if the owner decides to constitute a Limitation Fund, this can be done by making payment into court. The Judge considered English statutes related to guarantees, including the Statute of Frauds, and came to the conclusion that there is no statutory provision permitting the setting up of a limitation fund by way of a Club LOU. Mr Justice Simon concluded that “without a specific statutory provision that a guarantee is acceptable the rule remains that a fund may only be constituted by making payment into court”. However, whilst giving permission to appeal Mr. Justice Simon added: “there is likely to be more than one view of the matter”.
The Court of Appeal Decision
The Court of Appeal reversed the High Court decision. In her judgment Lady Justice Gloster stated that Mr. Justice Simon was wrong to reach the conclusion that a limitation fund could not be constituted by way of a Club LOU. She held that the error in Mr. Justice Simon’s analysis was that he was expecting to find clear wording permitting the provision of a guarantee rather than focusing on the meaning and the effect of the Article 11.2 of the Convention.
Lady Justice Gloster emphasised that the correct construction of Article 11 is as incorporated into United Kingdom Law by the 1995 Act in its proper context.
The Court of Appeal explored the judgments of Lord Hope in Morris v KLM Royal Dutch Airlinesand Longmore LJ in The CMA Djakarta regarding the interpretation of an international convention and construing the provisions of a convention incorporated into English Law. In these judgments the judges had suggested that the language used should be construed broadly and “the interpretation of international conventions must not be controlled by domestic principles but by reference to broad and generally acceptable principles of construction”. Lady Justice Gloster with reference to these judgments emphasised that the duty of the court is to interpret the wording not just in its context but also in light of the evident object of the Convention.
The Court of Appeal focused on the meaning of the Article 11.2 of the Convention. The provision expressly provides that a fund may be constituted, either by depositing the sum, or by producing a guarantee acceptable under the legislation of the State in which the fund is to be set up. The Court of Appeal was of the view that, as the Convention specifically provides, the party constituting the fund has a choice. A state which is party to the Convention is not entitled to impose a blanket exclusion on all guarantees. Article 14 of The Convention provides that rules relating to the constitution and distribution of the limitation fund shall be governed by the law of the state in which the fund is to be constituted but this is “subject to provisions of this chapter” which includes Article 11.2, allowing the constitution of the fund by production of a guarantee.
The provision imposes two conditions on the right to constitute a fund by way of a guarantee; a guarantee must be:
(i) “acceptable under the legislation of the State Party” and
(ii) “considered adequate by the Court or other competent authority”.
Regarding the first requirement, Lady Justice Gloster referred to Mr. Justice Simon’s judgment and considered that he took the erroneous view that there had to be primary legislation, or provision arising from primary legislation, expressly providing that a guarantee was “acceptable” for the purposes of the 1995 Act. Mr. Justice Simon in his judgment concluded that a Club LOU was therefore not “acceptable” for the purposes of Article 11.2 of the Convention, even if it complied with the requirements of the Statute of Frauds 1677.
Lady Justice Gloster disagreed with this approach and concluded that there is no ambiguity about the effect of the wording in Article 11.2. She held there is no additional requirement that there should be specific legislation, expressly defining what is acceptable for the purpose of the 1995 Act. She further explained that “acceptable” for the purposes of the 1995 Act simply means that the guarantee must be acceptable under any relevant United Kingdom legislation and not in contravention of any relevant statutory provision, without giving it a technical meaning. Therefore, on this point she concluded that “even on the hypothesis that there were no statutory provisions in English and Welsh legislation expressly governing the form of guarantees, restricting their enforceability or imposing restrictions as to who was able to issue them, a guarantee would nonetheless be “acceptable” for the purpose of the 1995 Act, provided it did not contravene the provisions of any statute”.
The Court of Appeal considered the approach adopted by Mr. Justice Simon, drawing a distinction between “acceptable” and “enforceable” was too narrow and technical and did not follow the wide purposive application of construction in line with the aim of the Convention.
The earlier legislation dealing with the constitution of the fund was purely domestic. During the Appeal hearing it was suggested that it was wrong to take this domestic legislation as a starting point, as Mr. Justice Simon did. The Convention now includes an extra section titled, “The Limitation Fund”. However, the 1957 Convention was different. As Lord Justice Beatson stated 1957 Convention did not include anything about how to constitute a Limitation Fund. The international legislators at that time left the issue of constitution to the domestic legislators and since then the general custom of payment into court had continued. However, the Convention now sets out detailed provisions about constitution and distribution of the fund in Article 11 (1) and Article 12.
Regarding the second requirement that the guarantee must be considered adequate by the Court or other competent authority, in her judgment Lady Justice Gloster stated, in the absence of any defined criteria in the CPR, a court approving the limitation fund will need to be satisfied that the guarantee provides “adequate” security for the fund. She held that the consideration of issues such as the financial standing of the guarantor, the practicality of enforcement and the terms of the guarantee should be dealt with by the Admiralty Court, since judges of the Admiralty and the Commercial Court consider those issues every day.
The Court of Appeal came to the conclusion that none of the authorities referred to in the High Court provided a real analysis of the guarantee issue and, in some of them, the construction of Article 11.2 was wrong.
During the oral argument before the Court of Appeal, Lady Justice Gloster also referred to the decision of Mr. Justice Teare in The Rena in which he permitted a Club LOU to constitute a Limitation fund. She stated that the Admiralty Judge, Mr. Justice Teare, “made the order on paper as the natural thing to do… It did not strike him, as somebody with incredible experience in this field, as anything out of ordinary at all”. However, when the Owners applied to Mr. Justice Teare in this case to constitute the limitation fund by way of a Club LOU, he ordered an oral hearing. Lord Justice Beatson at the hearing suggested this could have been because of the editorial comment in White Book, suggesting there was inconsistency between treating a limitation fund as being constituted by way of a Club LOU and the terms of CPR 61.11(8).
Lady Justice Gloster in her judgment reiterated that there was no need to find anything in CPR 61 and Practice Direction 61 reversing the previous well established practice, as the change had been brought by the clear wording of the Article 11(2). She added that “although CPR Part 61 and PD61 only expressly contemplate the provision of a limitation fund by means of a payment into court, there is nothing in either the rules or the Practice Direction which precludes the constitution of a limitation fund by means of the production of a guarantee. Indeed, if and in so far as they purported to do so, they would in my view be ultra vires as contrary to the provisions of primary legislation. They could not operate to override section 185 of the 1995 Act and 11.2 of the 1976 Convention.” She also referred to the specific wording of the CPR 61.11(18) that “the claimant may constitute a limitation fund by making a payment into court…” and emphasised that the use of “may” is permissive and does not exclude provision of a guarantee. Additionally, other provisions of CPR Part 61were analysed and considered to be consistent with a fund being established by way of a guarantee. The only thing which was not consistent with this analysis is the note at 2D-115 in White Book which specifies that “any person wishing to constitute a limitation fund must pay into court of fund constituted in accordance with section 185 and Schedule 7 to the Merchant Shipping Act” which Lady Justice Gloster considered “simply wrong”.
The Court of Appeal also considered the 1973 and 1985 Supreme Court Rules and concluded that, whilst there was no reference to payments into court, there was an assumption that a Limitation fund could only be set up by payment into court. Lady Justice Gloster referring to the notes which state that payment “must” be paid into court said “I don’t know where they get the “must” from”. Lord Justice Beatson also stated that everybody in the industry has worked on the assumption that, before the most recent Convention, that was the rule.
The Court of Appeal further referred to the Travaux Preparatoires of the 1976 Convention to support the analysis that Article 11.2 is intended to give the choice of constituting a limitation fund by means of a guarantee. Indeed during the negotiations covering this issue, the option of a guarantee was considered an incentive to the liable party to set up the limitation fund at an early date. However, Lady Justice Gloster stated that as the wording of Article 11.2 or s. 185, is clear there was no need to refer to the Travaux Preparatoires other than for confirmation.
The Significance of the Decision
This decision is very important for the industry, as the earlier English Court practice of not accepting a suitably framed guarantee in an appropriate amount from a creditworthy provider to constitute a Limitation Fund was outdated. The payment of cash into court had become the long established practice in the industry which had continued without challenge until now despite the provisions of the Convention. LOUs are now accepted all over the world and considered generally in the industry as good as a cash deposit.
The shipping industry wanted clarification and the International Group of P&I Clubs adduced a letter supporting the appeal. They advised the Court of Appeal that the decision would be of interest to all their members and would potentially have a significant impact on their business. The International Group stressed that the provision of security by way of LOU has a number of advantages to their members, and also to the claimants, as LOUs can be prepared at minimum expense and without unnecessary delays. They are also very important for the continued viability of the Clubs given the drain on resources a cash deposit entails.
The existing approach was in conflict with the practice of courts in England in relation to Club LOUs in the context of anti suit injunctions. For example, in the cases Kallang and Duden where the owners represented by Jackson Parton, applied for anti suit injunctions in England, the Commercial Court ordered the defendants to accept Club LOUs for the release of arrested vessels. Until the decision of the Court of Appeal in the “ATLANTIK CONFIDENCE”, the courts in England considered Club LOUs acceptable security in respect of various maritime claims to release arrested vessels but not for the constitution of a limitation fund. This anomaly had caused confusion in the shipping industry and led to a risk of shipowners choosing another jurisdiction to initiate their limitation claims.
The earlier position was also in conflict with the practice of the other countries and the signatories to the Convention. In many countries Club letters are accepted as adequate security to constitute a limitation fund. Considering the infrequency of limitation actions, setting up a limitation fund has not been tested in every contracting state. However, it is known that contracting states such as Croatia, Denmark, France, Germany, Greece, Japan, Korea, the Netherlands, Norway and Spain do not insist on cash payments into court to set up a limitation fund. Even some countries which are not contracting states to the Convention appear to accept P&I Club LOUs as sufficient security to constitute a limitation fund (e.g. USA, Russia and India).
Mr. Justice Simon in his judgement accepted that P&I Club guarantees should normally be considered adequate security but concluded that he was restrained by the legislation. The judgment of the Court of Appeal has now resolved this problem and established a consistent practice by the Courts in England towards letters of guarantees.
The result is significant, not only for the shipping industry in London, but also all over the world. Considering the weight given to English judgments by other countries in shipping and international trade matters, it is very important that a guarantee is accepted as a sufficient security to establish a Limitation Fund in England. Following the decision of Mr. Justice Simon at first instance, courts in various countries had indicated that they may change their attitude towards guarantees and that they would now require cash payments into court. Thus, the change in the law is to be welcomed by the shipping world and, in particular, P&I Clubs, but will also be welcomed by cargo interests as the constitution of Limitation Funds should, henceforth, be quicker and cheaper for all concerned.
This article is provided for information purposes only and is free of charge. Every reasonable effort is made to ensure the information is up-to-date at the original date of publication. The firm recommends seeking legal advice specific to any matter affecting the reader. For further information on this or other topics contact us.