Kairos Shipping Ltd & Anor v Enka & Co LLC & Ors

The Court of Appeal held that, as a matter of law, a limitation fund under the International Convention on Limitation of Liability for Maritime Claims 1976 (the 1976 Convention), as given force of law in the United Kingdom by the Merchant Shipping Act 1995 (section 185 and Schedule 7), may be constituted by producing a guarantee in the form of a letter of undertaking provided by a protection and indemnity club (a Club LOU), as an alternative to a cash deposit. The court construed Article 11.2 of the 1976 Convention purposively and concluded that the words "either by depositing the sum, or by producing a guarantee acceptable under the legislation of the State Party" confer a choice on the person constituting the fund.

The court identified the two conditions in Article 11.2: (i) the guarantee must be acceptable under the domestic legislation and (ii) it must be considered adequate by the court. It rejected the first-instance judge's requirement that specific primary legislation be enacted to make guarantees acceptable, holding instead that "acceptable under the legislation" means acceptable under any relevant domestic statute and not manifestly prohibited by domestic law. The court explained that adequacy is a matter for the court and involves assessment of the guarantor's financial standing, the instrument's terms and enforceability.

Background and facts:

• The appellants were the owner of the MV Atlantik Confidence (Kairos Shipping Ltd) and their P&I Club (The Standard Club Europe Ltd). On 30 March 2013 a fire occurred aboard the vessel and the ship was subsequently lost. Various cargo interests obtained worldwide freezing injunctions and owners issued an Admiralty limitation claim seeking to constitute a limitation fund under the 1976 Convention (as enacted by the Merchant Shipping Act 1995).
• The owners sought to constitute the limitation fund by producing a Club letter of undertaking (LOU) rather than by paying a cash deposit into court. Simon J refused a declaration that a fund could be constituted by means of a Club LOU (judgment dated 21 June 2013) and the owners obtained permission to appeal.

Procedural posture: Appeal from the Queen's Bench Division, Admiralty Court (Simon J). The Court of Appeal heard argument and considered authorities, practice materials and the travaux préparatoires.

Nature of the application / relief sought: (i) A declaration that a limitation fund under the 1976 Convention may be constituted in England and Wales by the production of a guarantee (in this case a Club LOU) rather than only by payment into court; and (ii) if necessary, further directions as to the adequacy and form of any such guarantee.

Issues framed:

1. Whether Article 11.2 of the 1976 Convention (incorporated into UK law by section 185 and Schedule 7 to the Merchant Shipping Act 1995) permits a limitation fund to be constituted by producing a guarantee, and if so on what terms;
2. Whether domestic law (including CPR Part 61.11 and PD61) amounts to legislation which precludes guarantees being "acceptable" for the purposes of Article 11.2; and
3. What the two conditions in Article 11.2 ("acceptable under the legislation" and "considered to be adequate by the Court") require in practice.

Court's reasoning: The Court of Appeal adopted a purposive construction of Article 11.2 and Article 14 of the 1976 Convention, emphasising that the Convention must be interpreted in its context and with regard to its object and purpose. The court concluded that Article 11.2 gives the party the option to constitute the fund either by depositing the sum or by producing a guarantee acceptable under domestic legislation and adequate in the view of the court. The court rejected the first-instance judge's conclusion that specific primary legislation was necessary to render guarantees acceptable. Instead, the phrase "acceptable under the legislation of the State Party" requires that the guarantee must not be prohibited by domestic statute and, where relevant, must meet ordinary statutory requirements (for example, evidential and enforceability requirements under the Statute of Frauds or regulatory authorisation under financial services legislation). Adequacy is a judicial assessment of the guarantor's standing, enforceability and the terms of the instrument. The court noted confirming material in the travaux préparatoires that guarantees were contemplated as a normal means of constituting funds under the Convention.

Wider context/implications: The court recognised the practical and commercial importance of permitting Club LOUs (used internationally) as an alternative to cash deposits and observed the wider shipping industry's reliance on guarantees in many jurisdictions. The court declared that any detailed consideration of the adequacy of the specific LOU proffered should be undertaken by the Admiralty Court.

Appeal allowed. The Court of Appeal held that Article 11.2 of the 1976 Convention, as incorporated into UK law by the Merchant Shipping Act 1995, permits the constitution of a limitation fund by producing a guarantee (such as a Club LOU) provided the guarantee is acceptable under relevant United Kingdom legislation and is considered adequate by the court; the first-instance judge was wrong to require specific primary legislation to permit guarantees and to conclude that only payment into court could constitute a fund.

Appeal from the Queen's Bench Division, Admiralty Court (Simon J). At first instance Simon J refused to grant a declaration that the limitation fund could be constituted by a Club letter of undertaking (judgment dated 21 June 2013). The Court of Appeal allowed the appeal ([2014] EWCA Civ 217).