In Cosmotrade SA v Kairos Shipping Ltd and others  EWHC 1904 (Comm), the Commercial Court considered the question of whether English law allows a Limitation Fund to be constituted by way of a P&I Club Letter of Undertaking.
The Convention on Limitation of Liability for Maritime Claims 1976 (LLMC 1976) allows owners to limit their liability for all claims arising out of a single maritime incident. In order to do so, the English courts have generally required a Limitation Fund to be constituted by way of a cash payment into court. In The Rena  Folio 225, however, the court allowed a Fund to be constituted by lodging a P&I Club LOU into court.
In the present case, the court considered whether the jurisdiction of the English Court permitted this to be done. It found that it did not. Simon J found that there must be a specific statutory provision stating that a guarantee is acceptable to constitute a Limitation Fund. English law contained no such provision, and so a Fund could only be constituted by a payment into court.
In reaching this decision, the judge considered the following key aspects and provisions of English law:
- Article 11(2) LLMC 1976 states that a “Fund may be constituted either by depositing a sum or producing a guarantee acceptable under the legislation of the State party where the Fund is constituted…”. This is given the force of law in England by s.185 Merchant Shipping Act 1995. However, further national legislation is still required under which a guarantee is acceptable, and there is no such legislation in England.
- CPR 61.11 provides that a “claimant may constitute a limitation fund by making a payment into court”. Similar terminology is used in the associated Practice Direction. However, a guarantee is not a cash payment.
- The Statute of Frauds requires a guarantee to be in writing and signed to be enforceable. This deals with enforceability, which is entirely different to the “acceptability” requirements under the LLMC 1976, and so is insufficient to meet those requirements.
This decision suggests that amendment to the current English law position may be required. P&I LOUs are used widely as security, for example to release vessels for arrest, and it may be unlikely that any party would argue that a LOU from an International Group Club would as a matter of fact be insufficient to constitute a Limitation Fund. The question is whether the law should be amended to reflect this.
Some other jurisdictions, such as France, allow Limitation Funds to be constituted by lodging a P&I Club LOU with the court. It may now be time to bring English law in line with these other jurisdictions, in order to ensure that parties do not seek to litigate elsewhere.
Leave to appeal has been granted, and so this decision is unlikely to be the final word on the matter.