A fire broke out in the engine room of the bulk carrier Atlantik 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.

The owners of the vessel, Kairos Shipping Limited, issued 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 was whether the owners were entitled to constitute the limitation fund by the provision of a P&I club guarantee.

At first instance, Simon J held in Cosmotrade SA v Kairos Shipping Ltd (CMI26) that, without a specific statutory provision that a guarantee was acceptable, a limitation fund in England and Wales could only be constituted by making a payment into court. The owners and their P&I club, The Standard Club, appealed.

As a result of concerns that arose in shipping circles about the consequences of the High Court’s first instance judgment, the International Group of P&I clubs provided the court with a letter: (a) explaining the financial and practical benefits of the use of guarantees as opposed to cash deposits paid into court; and (b) informing the court that numerous countries throughout the world, including states which are parties to the LLMC 1976, and states which are not, readily accept club LOUs as an acceptable method of constituting limitation funds.

Held: The appeal would be allowed. As a matter of law, the owners are entitled to constitute a limitation fund under the LLMC 1976 by means of the production of a guarantee.

Gloster LJ, giving the judgment of the Court of Appeal, explained that the correct starting point of the analysis is the construction of art 11.2 LLMC 1976, as incorporated into UK law by the 1995 Act, in its proper context.

Citing Lord Hope’s judgment in Morris v KLM Royal Dutch Airlines [2002] 2 AC 628, Gloster LJ set out the principles of construction, or interpretation, applicable to an international Convention as:

1. The Convention must be considered as a whole, and it should receive a purposive construction;

2. The ordinary and natural meaning of the words used in the English text provides the starting point;

3. The language should not be interpreted according to the idiom of English law. What one is looking for is a meaning which can be taken to be consistent with the common intention of the States which were represented at the international conference. The exercise is not to be controlled by technical rules of English law or domestic precedent.

4. It is legitimate to have regard to the travaux préparatoires in order to resolve ambiguities or obscurities, but caution is needed in the use of this material. It will only be helpful if, after proper analysis, the travaux clearly and indisputably point to a definite intention on the part of the delegates as to how the point at issue should be resolved.

She then cited CMA CGM SA v Classica Shipping Co Ltd (The CMA Djakarta) [2004] EWCA Civ 114 (CMI728), and emphasised that the task of any court is to construe the convention as it stands without any English law preconceptions. The interpretation of international conventions must not be controlled by domestic principles but by reference to broad and generally acceptable principles of construction. She turned to art 31 of the Vienna Convention on the Law of Treaties 1969 (ratified by the UK in 1971, and which entered into force in 1980) for guidance on what are broad and generally acceptable principles. Article 31 states that the ordinary meaning should be given to the terms of the treaty in their context and in the light of its object and purpose.

Returning specifically to art 11.2 of the LLMC 1976 the Court of Appeal held that the ordinary meaning of the words could not be clearer. The ‘either … or … ’ structure of the provision indicated that the party constituting the fund had a choice ie whether to deposit the sum or to produce a guarantee.

Disagreeing with the conclusions of the first instance judge, the Court of Appeal held that there was no additional requirement that there should be specific legislation expressly defining what is ‘acceptable under the legislation of the State Party’. ‘Acceptable’ in this context did not need to be construed as having any technical meaning. It could equally mean a guarantee which was not regarded as ‘unacceptable’ under any United Kingdom legislation ie simply a guarantee that did not contravene any relevant statutory provision. A guarantee which satisfied the requirements of the Statute of Frauds, because the guarantee itself was in writing and signed by the guarantor or his authorised agent, would be likely to be regarded as ‘acceptable’ as a guarantee for the purposes of the 1995 Act because it was enforceable.

Gloster LJ also noted that the LLMC 1957 (the immediate precursor to the LLMC 1976) gave no guidance as to how and where the fund was to be constituted. This was all left to the domestic law of each country. In contrast, the LLMC 1976 expressly provides in art 11.2 that a fund may be constituted by producing a guarantee. She also considered that none of the authorities or text books contained any real analysis of the guarantee issue, and that the approach taken by Griggs (considering whether anything altered the position under the old law) was wrong.

Turning to the Civil Procedure Rules (CPR), Gloster LJ held that there was nothing either in the rules or in the Practice Direction which precluded 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 Gloster LJ’s view be ultra vires as contrary to the provisions of primary legislation (since the 1995 Act gives the LLMC 1976 the force of law in the UK). They could not operate to override s 185 of the 1995 Act and art 11.2 of the LLMC 1976. In any event, the use of the word ‘may’ clearly did not exclude the guarantee method.

As to the travaux préparatoires Gloster LJ considered that the drafters of the LLMC 1976 clearly contemplated that guarantees would be possible, and indeed the normal, way to constitute a fund. This was evident from the commentary, and from remarks by the Swedish and British delegations. Nevertheless, the Court of Appeal held that, as there was no ambiguity in the wording of art 11.2, recourse to the provisions of the travaux préparatoires was no more than confirmatory.

Finally, as to the second condition in art 11.2 of adequacy, the Court of Appeal held that this merely meant that a court approving the constitution of the limitation fund would need to be satisfied as to the financial standing of the guarantor, the practicality of enforcement and as to the terms of the guarantee instrument itself. This was the type of question which judges of the Admiralty Court or the Commercial Court consider ever day, the implication being that this too was no impediment to the constitution of a limitation fund in England and Wales by means of a guarantee.