Cosmotrade SA (the appellant) was the charterer under a time-trip charter from Gemlik in Türkiye to Oman. Kairos Shipping Ltd (the respondent) was the owner of the Atlantic Confidence. On 30 March 2013, while the Atlantic Confidence was in a position off Masirah Island, Oman, a fire broke out in the engine room. In spite of the endeavours of the salvors, the vessel sank with its cargo of steel on 3 April. It appeared that the cause of the loss was the ignition of a leak of oil from a hot exhaust from a generator causing subsequent thermal stresses to the plating or damage to the sea water pipes in the engine room.

The appellant made an application in respect of its claim or an indemnity under the head charter against potential claims from sub-charterers. The application was granted in the sum of USD 30 million, which included the alleged value of the entire cargo plus interest and costs.

The respondent made an application under the Civil Procedure Rules (UK) (CPR) pt 25(1)(b) for an interim declaration that it was entitled to constitute a limitation fund by the provision of a P&I Club guarantee for the purposes of CPR pt 61 and art 11.2 of pt 1 of Schedule 7 of the Merchant Shipping Act 1995 (UK) which gives domestic effect to the Convention on Limitation of Liability for Maritime Claims 1976 (LLMC 1976).

One of the core questions was whether a P&I Club guarantee was effective to constitute a limitation fund for the purposes of CPR pt 61 and the LLMC 1976 scheduled to the Merchant Shipping Act 1995.​

The respondent argued that there is nothing in English law to indicate a change in situation. The effect of s 185(1) of the Merchant Shipping Act 1995 and art 11.2 of the LLMC 1976 is that a claimant in a limitation claim in England is entitled to constitute a limitation fund by means of a guarantee provided only that the particular guarantee proffered is acceptable under English legislation and provided that it is considered adequate by the English court. Article 14 of the LLMC 1976 allows English law to determine the rules relating to the constitution of a fund but only 'subject to the provision of this Chapter', including art 11.2. The proper interpretation of art 11.2 is that contracting States cannot rule out the provision of security by way of guarantee. Thus, any subordinate legislation which purports to have the effect of a blanket exclusion on guarantees must be read, if possible, as not having that effect, and if it cannot be so read it should be struck down as ultra vires. This approach was consistent with the travaux préparatoires of the LLMC 1976, which suggested that guarantees were expected to be the normal method of constituting a limitation fund. The respondent also argued that the word 'constitute', which is found in art 11.2 of the LLMC 1976, includes payment into courts and provision of a guarantee. The respondent submitted that if CPR pt 61 and the Practice Direction are inconsistent with a fund being constituted by a guarantee, then, by the terms of s 185 of the Merchant Shipping Act 1995 and art 11.2 of the LLMC 1976, the former must yield to the latter.​

Held: Appeal allowed.

Before the incorporation of the LLMC 1976 into UK law, limitation of liability for maritime claims had been governed by s 503 of the Merchant Shipping Act 1894 (UK), as amended to reflect the LLMC 1957. The LLMC 1957 contained no guidance as to how and where the fund was to be constituted but left it to the domestic courts of each country. In England, the courts required a party wishing to constitute a limitation fund to make a payment into court. The question now is whether the position has been changed by the LLMC 1976.

Leaving aside whether a P&I Club guarantee should normally be considered adequate security, the real question is whether any guarantee is 'acceptable under the legislation' of this country. The respondent was driven to relying on three possible ways in which a guarantee could be 'acceptable under the legislation'. First, it is acceptable under the legislation which enacted the LLMC 1976 into English law. The difficulty with this argument is that it is circular. The Merchant Shipping Act 1995 gives the force of law to art 11 of the LLMC 1976, but art 11.2 is clearly looking at legislation which applies specifically to guarantees. Second, it is acceptable according to 'rules relating to the constitution and distribution of a Limitation Fund and all rules and procedure in connection with therewith' within the meaning of art 14 of the LLMC 1976, including the CPR. This argument is not persuasive since art 14 does no more than make it clear that procedural matters, such as the form of the security, are for the laws of the relevant State Party. It would be wrong to conclude that the CPR enables a court to direct that the fund can be constituted other than by payment into court. The CPR only contemplates that, if the owner decides to constitute a limitation fund and thereby obtains the protection of art 13 of the LLMC 1976, this must be done by a payment into court. Furthermore, the Practice Directions PD 10.10.10-13 are entirely directed to the constitution of the fund by payment into court. Third, it is acceptable under the general body of English statute law affecting guarantees such as the Statute of Frauds 1677 (UK). However, the words of art 11.2 of the LLMC 1976 do not say 'enforceable under the legislation' but 'acceptable under the legislation'. If such a change to the long-established previous practice were to be made then one would expect clear words. There is nothing that makes the provision of a guarantee 'acceptable under the legislation' of this country.

Therefore, without a specific statutory provision that a guarantee is acceptable, the rule remains that a fund may only be constituted by making a payment into court.