Fionna Gavin Partner
Court considers impact of sanctions on bareboat charterparty obligations
Gravelor Shipping Ltd v. GTLK Asia M5 Ltd & another (Totma and Kirillov) EWHC 131 (Comm)
This summary judgment application arising out of a bareboat charterparty dispute required the Court to consider the parties’ rights and obligations in relation to the contractual purchase option for the two vessels in question and the resulting transfer of the vessels. Of specific interest were the Court’s findings on the Charterers’ obligations to make payment and the Owners’ obligations to nominate a bank account into which payment could be made in the light of international sanctions.
The case highlights the potential risks to parties of sanctions impacting on contractual performance, particularly long term contractual commitments, and the importance of considering carefully the wording of contractual provisions intended to address such risks.
The background facts
The dispute arose out of two bareboat charterparties concluded in June and July 2019 respectively. The registered Owners’ parent company, JSC GTLK, was owned and/or controlled by the Russian Ministry of Transportation.
The charterparties were essentially finance leases, providing the Charterers with a means of financing the purchase of the vessels, and they contemplated that at their expiry, title to the vessels would be transferred to the Charterers. The charterparties set out a formula for the calculation of the sums payable by the Charterers for the vessels, which would depend upon the circumstances in which the charterparties came to an end. In simple terms:
- If the charterparties were terminated for the Charterers’ default, they would be obliged to purchase the vessels against the payment on demand of the total of the amounts set out in Clause 18.3 of the charterparties, which would include default interest and other costs, expenses and losses incurred by the Owners (the Clause 18.3 Sum).
- The Charterers also had early purchase options, and a purchase obligation at the end of the charterparties' term if they expired without breach on their part, in which case certain of the items making up the Clause 18.3 Sum were not payable (Clause 19.1).
The charterparties incorporated provisions dealing with, among other things: sanctions and sanctions payment restrictions; “Charterer Default” and “Consequences of an Event of Default” (Clause 17); “Owners rights” and “Payments upon termination” and “Title Transfer/Final Disposition of Ship” (Clause 18); and “Purchase Option and Obligation” (Clause 19).
Introduction of sanctions
As a result of Russia’s invasion of Ukraine on 24 February 2022, international sanctions were introduced. On 3 March 2022, the Charterers indicated an intention, but no more than that, to purchase the vessels. In April 2022, the Owners’ parent company, JSC GTLK, and its associates were made the subject of EU sanctions which the Charterers contended prevented them from paying hire under the charterparties. In addition, the vessels’ P & I and FDD insurers withdrew cover, and the hull and machinery insurers stated that they would be withdrawing cover on 22 April 2022.
On 25 April 2022, the Owners stated that the non-payment of hire amounted to an Event of Default and that the charterparties would be terminated "effective immediately". However, the Charterers asserted their entitlement to exercise purchase options under the charterparties, and asked the Owners to calculate the purchase option price payable.
The Owners replied stating, without prejudice to their Default Notice and their contention that the Event of Default was continuing, that they would be ready to transfer the vessels on receipt of all amounts due into a Moscow bank account, with payment sought in HKD, CNY or RUB. The Charterers indicated their willingness to exercise the purchase option and pay outstanding hire, but contended that EU sanctions were proving an obstacle.
On 2 August 2022, the US State Department designated the Owners’ parent company and its subsidiaries as "blocked" under an Executive Order. On 22 September 2022, the Owners informed the Charterers that the shares in their parent company had been sold to new owners such that none of the entities in the chain of ownership were now subject to sanctions. However, the circumstances surrounding, and effect of, those transfers were unclear and, as the Court noted, raised some red flags.
The Charterers contended that they had validly exercised their purchase options for both vessels on 3 March 2022, but this was disputed by the Owners who submitted that the options were not validly exercised, and that from late April 2022 onwards, the Charterers were in default under the charterparties. The Owners alleged that they were entitled to and did terminate the charterparties by notice dated 25 April 2022.
The Charterers argued that even if the Owners had terminated for the Charterers’ breach, nonetheless the Charterers were entitled to acquire title of the vessels on payment of the Clause 18.3 Sum. The Owners disagreed, alleging that the pre-conditions to any right to acquire title on payment of the Clause 18.3 Sum had not been satisfied. There was also a dispute as to what would constitute payment of this Sum in the light of EU and US sanctions.
The summary judgment issue for the Court was whether by tendering payment of the Euro equivalent of the amount claimed by the Owners as the Clause 18.3 Sum, the Charterers were entitled to specific performance of the Owners’ obligations to transfer the vessels.
The Commercial Court decision
The Court dismissed the argument that the Owners had not made a demand for payment so as to trigger a Clause 18.3 entitlement to delivery of the vessels. Rather, Clause 18.3 should be interpreted as giving rise to an implied obligation on the Owners’ part to make the relevant demand within a reasonable time. In any event, and on the evidence, the Owners had clearly made such a demand on 9 December 2022.
The Court also found that, on their true construction, the relevant contractual provisions did not preclude the Charterers from exercising their rights under Clause 18.3 by reason of their breach of the Clause 18.1 obligation to redeliver the vessels to the Owners. However, in circumstances where there was an arguable breach in failing to pay hire that would continue until payment of the Clause 18.3 Sum, the Charterers were obliged (under Clause 19.3) to provide a legal opinion from an independent insolvency lawyer that there was no material risk of payments made by the Charterers being clawed back by e.g. liquidators, administrators or creditors or shareholders of the Charterers. This was a provision intended to guard against any form of insolvency event.
The Owners also contended that the Charterers could only acquire title if the requisite payment was made in USD into Owner’s nominated account (with Gazprombank). The Charterers could not do so in light of the sanctions imposed on the Owners.
Clause 8.10 provided in part that:
“Where a payment under this Charterparty is incapable of being processed by the relevant banking institution and has not been received by the Owner on the due date by virtue of the Owner becoming a Sanctions Target, the Owner and the Charterer shall cooperate and promptly take all necessary steps in order for the payments to be resumed”.
This gave rise to a number of arguments on which the Court concluded as follows:
- Clause 8.10 still applied even if it was arguable that the Owners were no longer a Sanctions Target because of the disputed transfer of ownership. Payments within Clause 8.10 had to be made within a tight period and whether a Sanctions Target had successfully removed itself from the scope of sanctions could be complex and fact intensive and would be treated with caution by sanctions authorities and banking institutions. It made commercial good sense, therefore, for the parties to agree that the incapability of a sanctions institution to process a payment arising from the continuing effects of an original designation, even if it was subsequently shown that the Owners no longer fell within the sanctions regime, would nonetheless trigger the operation of Clause 8.10. Whether or not a payment was, in these circumstances, "incapable of being processed" by virtue of the original designation would be a question of fact.
- Cl. 8.10 was intended to apply to the incapability of both the paying and receiving institutions to process the payment into the Gazprom bank account.
- On the evidence, the circumstances surrounding the transfer of ownership were suspicious and no reasonable bank would risk breaching US and EU sanctions and facing the serious consequences. The Owners had accepted that they would not be able to persuade a bank subject to US or EU sanctions to release the funds to them any time soon. Clearly, therefore, payment could not be made in USD into the Owners’ nominated account in the foreseeable future.
- The mere fact that the transfer of funds was made into a bank account from which the Owners would have great difficulty withdrawing them did not of itself mean that payment had not taken place for the purposes of the charterparties. By paying into a bank account that had been frozen after it had been nominated by the Owners, the Charterers would have done all that the charterparties required. Any inability to access the funds would arise from an entirely external limitation i.e. the Owners being designated as a Sanctions Target, rather than anything to do with the contractual payment process itself.
- Following the Court of Appeal decision in Mur Shipping BV v. RTI Ltd  EWCA Civ 1406, it was accepted that there might well be circumstances where one party had to accept performance otherwise than in strict accordance with the contractual terms. In that case, the Charterers under a contract of affreightment were subject to US sanctions and could not lawfully pay the freight in USD, as contractually provided for. The Court of Appeal found that the Owners should have accepted payment in Euros to a bank not subject to any sanctions as they would have suffered no prejudice had they done so. Here, the Owners would suffer real prejudice as a result of payment being made into a bank applying EU and US sanctions. However, Clause 8.10 expressly addressed the position where a payment could not be processed because the Owners had become a Sanctions Target and, in the Court’s view, extended to requiring the Owners to nominate an alternative bank account into which payment could be made even if the Owners could not access the funds.
On the facts, the Court thought that damages would not be an adequate remedy in this case and was inclined to grant specific performance of the Owners’ obligation to transfer the vessels, provisional on the Charterers complying with Clause 19.3, the clawback provision.
Both the Court of Appeal decision in Mur Shipping, together with this Commercial Court decision, demonstrate that the English courts will endeavour to ensure that parties perform their contractual obligations notwithstanding international sanctions where it is possible to do so without breaching the sanctions. Given, however, that the sanctions landscape is constantly changing, careful consideration of the potential impact of sanctions on payment and other performance obligations under shipping contracts remains key.
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