Reed Smith In-depth

In recent years, heightening international tensions have led to increased sanctions risks. Recently, two English law cases involving sanctioned Russian leasing companies, Havila Kystruten AS and Others v. STLC Europe Twenty Three Leasing Ltd and Another [2022] EWHC 3166 (Comm) (the Havila case) and Gravelor Shipping Ltd v. GTLK Asia M5 [2023] EWHC 131 (the Gravelor case), have offered a glimpse into the challenges, such as lease termination, security enforcement and payment, that might be faced by contracting parties if the lessor is sanctioned. The cases also provide valuable lessons to leasing companies and charterers around the world.

The Havila case

This case involved the sale and leaseback of four newbuilding vessels (the Vessels).

HKO, a subsidiary of Havila Group based in Norway, entered into four shipbuilding contracts with a Turkish shipyard. Upon delivery, the Vessels would be sold by HKO respectively to four subsidiaries of Russian leasing company GTLK (the Lessors), and the Lessors would charter the Vessels on finance lease terms respectively to four subsidiaries of Havila group (the Lessees) pursuant to four bareboat charters (the BBCs). As pre-delivery security, HKO assigned its rights under the shipbuilding contracts to the corresponding Lessors (the Pre-delivery Security Assignments). Both the BBCs and the Pre-delivery Security Assignments were governed by English law.

In February 2022, the Russo-Ukrainian war broke out. The Lessors were soon sanctioned by the EU and Norway. The UK and U.S. followed.

In May 2022, the Lessors terminated the BBCs.

As Vessels 3 and 4 were yet to be delivered under the shipbuilding contracts, Lessors 3 and 4 further sought to enforce the Pre-delivery Security Assignments of Vessels 3 and 4.

The Lessees commenced proceedings at the English High Court, requesting the court to rule on, amongst others, the following issues.

Had Termination Events occurred under the BBCs?

The Lessors submitted that the following situations constituted Termination Events under BBCs 1 and 2:

  1. BBC 1: Vessel 1’s insurances ceased to be effective due to the sanctions on Lessor 1. Lessee 1 had therefore failed to fulfil its obligation to “insure and keep the Vessel insured”.
  2. BBC 2: In order to avoid sanctions risks, Lessee 2 altered the transaction structure without Lessor 2’s prior consent by changing the seller under the shipbuilding contract from HKO to another entity.

The Lessees submitted that they were not in default of insurance or restructuring breaches by way of the Sanctions Clause in the BBCs.