Kairos Shipping Ltd and another v Enka & Company LLC and Others

Hearing dates: Wednesday 4 th December 2013

Introduction

This appeal raises the interesting question as to whether it is in principle possible to constitute a limitation fund under the International Convention on Limitation of Liability for Maritime Claims 1976 ("the 1976 Convention"), which is scheduled to the Merchant Shipping Act 1995 ("the 1995 Act"), by means of a guarantee in the form of a letter of undertaking ("LOU") provided by a protection and indemnity club ("P&I Club") ("a Club Lou").

In a judgment dated 21 June 2013 ("the judgment"), Simon J refused to grant a declaration to the effect that the First Appellant, Kairos Shipping Limited ("Owners"), owners of the MV "ATLANTIK CONFIDENCE" ("the Vessel"), and the Second Appellant, Owners' P&I Club, The Standard Club Europe Limited, were entitled to constitute a limitation fund under the 1976 Convention, by means of a guarantee in the form of a Club LOU.

The issue is one of considerable importance to the shipping industry, including P&I Clubs and others who provide insurance and reinsurance in respect of maritime claims. Because of concerns that had arisen in shipping circles about the consequences of the judgment, this court was provided with a helpful letter from the International Group of P & I Clubs, dated 8 November 2013. This letter explained the financial and practical benefits both for P&I Clubs, and for those who need to constitute limitation funds, of the use of guarantees, as opposed to cash deposits paid into court. The letter also informed the court that numerous countries throughout the world, including states which are parties to the 1976 Convention, and states which are not, readily accept Club LOUs as an acceptable method of constituting limitation funds. The judge did not have the advantage of this additional material at the date of the hearing before him.

The basis of the judge's decision was that, as a matter of law, a limitation fund can only be constituted in England and Wales by means of a payment into court. In coming to his conclusion, the judge found support in the views expressed in the relevant specialist practitioners' textbooks, which almost uniformly appeared to adopt this approach. However the judge expressed some misgivings about this result, as appears from the following passages from his judgment:

"9. … It might seem surprising in today's world that it could be argued that a suitably framed guarantee in an appropriate amount from a creditworthy provider is not effective security, and therefore suitable to constitute a Limitation Fund, and none of the cargo parties has argued that it would not be. Nevertheless it seems to me that the Court must approach this as a question of principle.

…

17. I hope from what I have said that I have made clear that consideration should be given to effecting a change in the law; and, in any event, since there is likely to be more than one view of the matter, I have decided to give permission to appeal."

The Appellants appeal against that decision, with the permission of the judge. They contend that, as a matter of law, a limitation fund may indeed be constituted in England and Wales by the production of a guarantee, provided only that the particular guarantee proffered is not unacceptable under UK legislation, and provided also that the guarantee is considered adequate by the English Court. They contend that these requirements are all satisfied here.

Background

The Vessel was a Handysize bulk carrier built in 1996. Early on the morning of 30 March 2013, she was on passage from Turkey to Oman carrying a cargo of steel products, when a fire broke out in her engine room. The crew were unable to control it and the Master ordered them to abandon ship. Fortunately, no-one was injured. As a consequence of the fire and/or explosions, the Vessel took on water and began to sink. Salvors were engaged to assist her but, before steps could be taken, she sank in deep water. Preliminary investigations suggest that the likely cause of the fire was a leak of lubricating or diesel oil igniting off a hot exhaust on a generator; and that the resulting ingress of water may have been caused by thermal stresses in the shell plating or damage to seawater pipes in the engine room.

Between 24 April and 10 May 2013, various parties obtained worldwide freezing injunctions against Owners under section 44 of the Arbitration Act 1996, in support of claims arising out of the loss of cargo on board the Vessel ("the claiming parties").

On 13 May 2013, Owners issued an Admiralty limitation claim in the Admiralty Court, seeking to limit their liability, if any, arising from the fire and loss of the Vessel in accordance with the 1996 Protocol to the Convention. The claiming parties were made defendants to that action. On the same day, Owners' solicitors wrote to the Admiralty judge, Teare J, asking for permission to constitute a limitation fund by provision of a Club LOU, as Teare J had previously ordered in Daina Shipping Co v Mediterranean Shipping Co SA (The "Rena") [2012] Folio 255, as noted at 2D-76.1 in Volume 2 of Civil Procedure 2012 ("the White Book"), p. 556.

However Teare J directed an oral hearing. That was apparently because the editorial comment in the White Book referred to above could be read as suggesting some inconsistency between treating a limitation fund as being constituted by a guarantee given by means of a Club LOU, and the terms of CPR 61.11(8). The application was listed to be heard before Simon J, at the same time as the return dates for the freezing injunctions. The Club applied for, and obtained, permission to be joined as a party at the hearing. Various claiming parties appeared at the hearing.

The 1976 Convention as enacted into UK law

A right for a shipowner to limit his liability in respect of certain claims according to the tonnage of his ship has been granted by United Kingdom statute for a long time, although the matter has increasingly been dealt with by international convention. Both the United Kingdom statutory history and the history of the international conventions which preceded the 1976 Convention (namely the 1957 Convention for the Unification of Certain Rules relating to the Limitation of the Liability of Owners of Seagoing Ships ("the 1957 Convention") and the 1924 Convention for the Unification of Certain Rules relating to the Limitation of the Liability of Owners of Seagoing Ships ("the 1924 Convention")) were set out in detail by David Steel J in CMA CGM S.A. Classic Shipping Co. Ltd [2003] 2 Lloyd's Rep. 50. So far as the United Kingdom is concerned, the current United Kingdom statute which enacts that the provisions of the 1976 Convention shall have the force of law in the United Kingdom, is the 1995 Act.Section 185(1) of that Act provides as follows:

"The provisions of the Convention on Limitation of Liability for Maritime Claims 1976 as set out in Part I of Schedule 7 (in this section and Part II of that Schedule referred to as "the Convention") shall have the force of law in the United Kingdom."

Chapter I of the Convention is entitled "The Right of Limitation".Article 1 provides that:

"1. Shipowners and salvors, as hereinafter defined, may limit their liability in accordance with the rules of this Convention for claims set out in Article 2."

Chapter III of the Convention is entitled "The Limitation Fund". The first article, Article 11, is entitled "Constitution of the fund". It provides as follows:

"1. Any person alleged to be liable may constitute a fund with the Court or other competent authority in any State Party in which legal proceedings are instituted in respect of claims subject to limitation. The fund shall be constituted in the sum of such of the amounts set out in Articles 6 and 7 as are applicable to claims for which that person may be liable, together with interest thereon from the date of the occurrence giving rise to the liability until the date of the constitution of the fund. Any fund thus constituted shall be available only for the payment of claims in respect of which limitation of liability can be invoked.

2. 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 authority.

3. A fund constituted by one of the persons mentioned in paragraph (1)(a), (b) or (c) or paragraph 2 of Article 9 or his insurer shall be deemed constituted by all persons mentioned in paragraph (1)(a), (b) or (c) or paragraph 2, respectively.

Article 14, in the same chapter, provides:

" Governing law Subject to the provisions of this Chapter the...