A fire broke out in the engine room of the bulk carrier Atlantic Confidence on 30 March 2013, which the crew were unable to control. The master ordered the crew to abandon ship and, despite the endeavours of the salvors, the vessel sank with all its steel cargo in deep water on 3 April 2013.

Two sets of cargo interests, as well as the charterers, Cosmotrade, applied for, and obtained, worldwide freezing injunctions (exceeding USD 30 million) in support of their arbitration claims against the owners of the vessel. The owners responded by issuing a claim form seeking to limit their liability in respect of loss and damage under the Merchant Shipping Act 1995 (UK) and the LLMC 1976, to the sum of GBP 6,595,767 plus interest until the limitation fund was constituted.

The main issue which arose for consideration in this case was whether the owners were entitled to constitute the limitation fund by the provision of a P & I Club guarantee.

Article 11.2 of the LLMC 1976 provides ‘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.’ Article 14 provides that all rules of procedure in connection with a limitation fund shall be governed by the law of the State Party in which the fund is constituted.

The central question to be answered was therefore whether a guarantee was acceptable under English legislation. Counsel for the owners submitted that when the English civil procedure rules CPR 61.11(18) said ‘The Claimant may constitute a Limitation Fund by making a payment into court’, the key word was ‘may’ which was permissive, and the fact that nothing was said about the regulation of a guarantee was not material, since any guarantee had to be considered adequate by the court anyway. He argued that his approach was consistent with the travaux préparatoires of the LLMC, which suggested that guarantees were expected to be the normal method of constituting a limitation fund in the future.

The contrary position had been adopted by the authors of at least four leading textbooks, who doubted that a limitation fund could be constituted in England by a guarantee. Under the LLMC 1957, the English courts required a party wishing to constitute a limitation fund to make a payment into court. Academic authors such as Griggs, Williams & Farr argued that the situation had not changed under the LLMC 1976. Looking elsewhere in the commonwealth, the Federal Court of Australia said in Bard AS v ABB Power Systems [1995] FCA 1602 that there was no legislation in force in Australia which said specifically that a guarantee was acceptable, and a limitation fund in Australia therefore had to be constituted by deposit.

Held:

Without a specific statutory provision that a guarantee is acceptable, the rule remains that a limitation fund in England and Wales may only be constituted by making a payment into court.

The English Civil Procedure rules only contemplate that if the owner decides to constitute a limitation fund, and thereby obtain the protection of art 13 of the LLMC 1976, this must be done by a payment into court. There is nothing that makes the provision of a guarantee ‘acceptable under the legislation’ of England and Wales.