News / 03-11-2022 / London

Ceto Shipping Corporation v. Savory Inc (Victor 1) [2022] EWHC 2636 (Comm)

The Court in this case had to construe a purchase option clause in a bareboat charter. Specifically, it considered whether the fact that the charterer had not fulfilled certain payment obligations under the charter because it was disputing them in good faith meant that the owner was not obliged to transfer title to the vessel at the end of the charter period.

The background facts

The product tanker “Victor 1" was bareboat chartered by the defendant as Owners to Bareboat Charterers, Ceto, for a period of 36 months, until 1 April 2022.

The charter included a provision whereby the vessel would be sold to Ceto on the terms of an appended memorandum of agreement (MoA). The sale price was US$12 million less a down payment of US$5 million and bareboat hire paid under the charter. The intention, therefore, was that the sale price would be nil if hire was paid in full during the charter period.

Technical and crew management was delegated to Delfi SA under a management contract dated 28 February 2019.

An addendum to the charter was concluded in December 2019, whereby certain outstanding amounts due by Ceto were agreed to be paid and clause 39.1 was replaced as follows:

"39.1 Purchase and Sale obligations

On expiration of this charter, and provided that the Charterers have paid all hire and any other sums due under this Charter and provided that the Charterers have also paid all management fees and any other sums due under the Management Agreement to Delfi, it is agreed that Owners will sell the Vessel to Charterers for no further consideration, that title to the Vessel will automatically transfer to Charterers and Charterers will automatically be required to purchase and will be deemed to have purchased the Vessel. The sale will be in accordance with the MOA appended to this contract.” (emphasis added)

In the summer of 2020, Delfi were replaced as technical and crew managers by Saint James Shipping Ltd.

The vessel was subsequently arrested and due to be sold in Singapore at the instance of claims made by the crew for unpaid wages; the vessel was also subject to claims made by various suppliers as well as claims brought by both Delfi and Saint James under their respective management agreements.

Ceto disputed liability for the claims by Delfi and Saint James Shipping. It sought a declaration from the English Court that, on a proper construction of clause 39.1, title to the vessel automatically transferred to Ceto upon the expiry of the charter on 1 April 2022 on the basis that any sums due to Delfi were in dispute and, therefore, the proviso relating to Delfi in clause 39.1 was not engaged.

The Commercial Court decision

The Court had to decide:

1. Whether a sum owed to Delfi under its management agreement was not a sum "due under the Management Agreement to Delfi" if Ceto disputed the debt;
2. Whether in "hire and other sums due under this Charter", "other sums" included debts owed to third parties (e.g. the crew and other suppliers) that Ceto, as Bareboat Charterers, had promised the Owners they would pay pursuant to clause 10(b) of the charter; and
3. Whether Ceto’s obligation and entitlement to acquire the vessel, and the Owners’ corresponding obligation and entitlement to transfer title, persisted beyond the expiry of the charter if the conditions set by clause 39.1 for title to transfer were not met on expiry.

As to i), Ceto sought a declaration that there was no impediment to title passing under clause 39.1 when the charter period expired, because it was disputing in good faith Delfi's claim that sums were due to it under its management agreement. The Owners objected on the basis that there were (and remained) sums due to Delfi, such that the conditions in clause 39.1 for title to transfer were not met. Ceto on the other hard contended that there was no difficulty for Delfi if the transfer of title in the vessel occurred while Delfi was still owed substantial sums because Delfi could pursue an action in rem for the debt and arrest the vessel for security.

The Court disagreed with Ceto. If Delfi had a claim in rem in respect of its technical and crew management services, an arrest by Delfi could happen at any time, thereby undermining the parties’ choice of proviso language in clause 39.1 in relation to sums “due under the management agreement.”

In any event, and distinguishing Delfi’s claims from those by a vessel’s commercial manager, the Court did not agree that a claim by a crewing and technical manager was a maritime claim falling within the definition of “an agreement relating to the use or hire of the ship,” (section 20(2)(h) Senior Courts Act 1981). Therefore, Delfi had no claim in rem and no right to arrest. It followed that both the Owners and Delfi, who were associated companies, had a clear commercial interest in the Owners continuing to own the vessel until Delfi had been paid in full. That strongly indicated that when it was agreed that title would only be transferred if Ceto had paid "all management fees and any other sums due under the Management Agreement to Delfi", the wording used by the parties meant precisely that, namely that there should be no unpaid debt owed to Delfi under its management agreement before title passed to Ceto.

The Court disagreed that there was anything unfair in a provision that required Ceto to have fulfilled all of their payment obligations under the bareboat charter before they acquired title and this was so even if there was a bona fide dispute in respect of any particular payment obligation.

The Court acknowledged that interpreting 'due' to mean admitted or determined to be due, or disputed only in bad faith, might narrow the scope for dispute, or modify the nature of the dispute that would need to arise for the position as to title to be in dispute. However, in its view, a reasonable business person in the position of the parties would have said that due means due. If the parties had meant to contract on the basis of something more complicated or nuanced, they would have spelt that out expressly in their agreement.

In the light of its decision on i), the Court did not need to take a final view on issues ii) and iii).

Comment

It is not unusual for certain conditions to have to be met before an asset is transferred, and for such conditions to include fulfilment of certain payment obligations such that no amounts are due to certain parties. This decision provides useful guidance that if liability for a certain amount is disputed, the pre-condition will not be fulfilled.

The English Court will strive to give contractual wording its natural meaning. Parties who wish to contract on the basis of more nuanced or complicated terms should choose carefully the wording they use in their agreement to reflect their intention.