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Are Letters of Undertaking (LOUs) still good currency?

Cosmotrade SA v Kairos Shipping Ltd (“The Atlantik Confidence”) [2014] EWCA Civ 217

By way of background, a number of claims for loss of cargo arose following a fire which broke out in the engine room of a bulk carrier. The vessel was en route from Turkey to Oman with a cargo of steel. The fire spread and the crew were forced to abandon ship before she sank in deep waters.

Various parties obtained worldwide freezing injunctions against the owners in support of claims arising out of the loss of cargo. The owners issued a claim in the Admiralty Court seeking to limit their liability and for permission to constitute a limitation fund by means of a guarantee in the form of a club letter of undertaking.

The judge agreed that the Merchant Shipping Act 1995, s 185(1) incorporated the Convention on Limitation of Liability for Maritime Claims 1976 into English law. Article 11(2) of the Convention provided that such a fund could be based on a club guarantee. However, the judge noted that CPR 61.11 and CPR PD 61 para 10 provided that a limitation fund could only be constituted by a payment into court and that a guarantee was not enough. His view was 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.

That surprising result would have serious ramifications for the shipping and insurance industry and permission was given to appeal.

The Court of Appeal held that the first instance judge was wrong to take a narrow and technical approach in order to change what had been “long standing previous practice”. Instead, a purposive approach to the relevant law was required so that international trade would continue to be encouraged by allowing ship owners to limit their liability by the provision of a guarantee or deposit.

The Court concluded that, as a matter of law, a Limitation Fund could be constituted by the production of a guarantee acceptable to the court, as an alternative to payment of money into court.

The decision reflects the applicable law in other important maritime jurisdictions, as well as the international practice of P&I Club LOUs being widely used as security. Fortunately the decision should also mean that no substantive amendments to English law will be required to allow the continuing practice of using LOUs to constitute limitation funds.


This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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