P&I Insurers can now constitute Limitation Fund by issuing security

P&I Insurers can now constitute Limitation Fund by issuing security

In a court judgment issued on 6 March 2014, the English Court of Appeal ruled that a Limitation Fund may be constituted through the provision of a suitable guarantee issued by a P&I insurer. The previous position was that the only acceptable way of establishing a Limitation Fund was by depositing cash into court.
On 3 April 2013, the m/v ATLANTIK CONFIDENCE sank off the coast of Oman following a fire on board. Owners wanted to limit their liability to cargo interests and various other third parties and subsequently commenced limitation proceedings under the Convention on Limitation of Liability for Maritime Claims 1976 (as amended by the 1996 Protocol) (the "Convention") in an attempt to limit Owners' liability. In order to establish a Limitation Fund, a calculation for the limitation amount is generally made with reference to the ship’s tonnage.
The Convention provides that the "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" (Article 11) and this was given the force of law in the UK through the Merchant Shipping Act 1995. The UK’s Civil Procedure Rules provides that a Limitation Fund can be constituted by depositing funds in the court. The question therefore for the Court was whether the provision of a guarantee issued by a P&I insurer was deemed "acceptable" for the constitution of a Limitation Fund.
The English High Court, initially held that the provision of security by a P&I insurer was insufficient to establish a Limitation Fund and held that cash payment was the only option open to Owners. The absence of a specific statutory provision referring to guarantees and the wording of the Civil Procedure Rules clearly influenced this decision.
The Court of Appeal has now set a precedent for the benefit of “the shipping industry, including P&I Clubs and others who provide insurance and reinsurance in respect of maritime claims”, and held that a Limitation Fund may be established by the provision of suitable security provided by a P&I insurer.
It may well be the case that the English courts will take a conservative view as to what they deem to be “adequate” security to constitute the limitation fund and anticipate that factors such as the financial standing (amongst other things) of the P&I insurer will be given due consideration at the relevant time.
The benefits of being able to establish a Limitation Fund through the provision of a guarantee provided by a P&I insurer are many such as speed and cost (in comparison to depositing cash to the courts), however, from a shipowner’s perspective the minimal disruption to their commercial obligations constitutes arguably the most significant benefit of all.