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:
- 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”.
- 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.
The BBC Sanctions Clause provided that: “Notwithstanding any other provision of this Charter …, neither the Lessor nor [the Lessee] is obliged to do or omit to do anything [emphasis added] if it would, or might in its reasonable opinion, constitute a breach of any Sanctions or any laws and regulations relating to anti-money laundering, counterterrorism financing or economic and trade sanctions applicable to it.”
The judge held that this BBC Sanctions Clause had the effect of releasing Lessee 1’s obligation under the insurance clause in BBC 1.
However, for BBC 2, the judge held that Lessee 2’s amending the deal structure without Lessor 2’s consent remains a Termination Event. The rationale was that it was not the case that Lessee 2 could not perform its contractual obligations without breaching sanctions, but instead Lessee 2 had proactively breached the terms of the BBC in response to sanctions, which was inconsistent with the meaning of the BBC Sanctions Clause.
Since a Termination Event had occurred under BBC 2, this also constituted a Termination Event for Leases 1, 3 and 4 by operation of the cross-default provisions.
Had the Lessors effectively terminated the BBCs, and did Lessors 3 and 4 have the right to enforce the Pre-delivery Security Assignments?
To terminate the BBCs, BBCs provided that (clause 28.1): “If a Termination Event occurs and is continuing, the Lessor may, by written notice to the Lessee:…
(c) accept the repudiation of this Charter by the Lessee, and cancel the Memorandum of Agreement and/or terminate the leasing of the Vessel under this Charter with immediate effect … if the Lessee does not purchase the Vessel upon first demand of the Lessor, the Lessee’s right to purchase the Vessel thereafter shall not be exclusive and for such purposes, the Lessor confirms that it will keep the Lessee informed of the process of any firm offer of sale of the Vessel, …; and/or
…
(e) notify the Lessee of the occurrence of the same and demand the payment of the Termination Sum by the Lessee, whereupon the Lessee shall immediately pay the Termination Sum to the Lessor (and upon receipt of the Termination Sum in full, the Lessor shall sell, transfer and redeliver, at the cost and expense of the Lessee, the Vessel to the Lessee in accordance with Clause 29 (Transfer of Title).” [Emphasis added.]
The Lessors duly terminated the BBCs in accordance with paragraph (e) of the above clause. However, on a proper reading of the clause, the judge was of the view that paragraph (c) and paragraph (e) were different and contradictory in nature. Paragraph (c) explicitly stipulated the Lessors’ rights to terminate the BBCs and to sell the Vessels. By contrast, paragraph (e) explicitly obliged the Lessors to sell, transfer and deliver the Vessels to the Lessees upon receipt of the Termination Sum in full, and hence did not have the legal effect of terminating the BBCs but rather sought to “keep [the BBCs] alive”.
The judge was of the view that, despite the “and/or” wording in the clause, paragraph (e) was by its nature contradictory to and mutually exclusive of paragraph (c) and the enforcement of the Pre-delivery Security Assignments. Therefore, once Lessors 3 and 4 elected to follow the procedures under paragraph (e), they could not then elect to follow the procedures under paragraph (c) or enforce the Pre-delivery Security Assignments for the same Termination Event.
The judge further pointed out that even though the Lessees’ failure to pay the Termination Sum could constitute a new Termination Event, the Lessees were unable to do so due to the sanctions on the Lessors, and were therefore not obliged to do so by operation of the BBC Sanctions Clause.
Would the Lessees’ payment of the Termination Sum into a frozen bank account be good discharge of the Lessees’ liability to the Lessors?
The payment clause of the BBCs provided that: “All payments … payable by the Lessee under this Charter … shall be made … in full, without any set-off or counterclaim and … free and clear of any deductions or withholdings … to the Payment Account ….”
The Lessors argued, citing The Brimnes [1973] 1 WLR 386, that the concept of payment requires that the recipient has a right to the immediate use of the funds; hence, payment into the Payment Account (which was frozen due to sanctions on the Lessors) did not satisfy this requirement. However, the judge disagreed, since the payment clause only stipulated that payment was to be made to the Payment Account, and the parties had not agreed to any further requirement under the BBCs.
The Gravelor case
In this case, the two Owners respectively bareboat chartered two vessels (the Vessels) to the Charterer by way of finance lease under two bareboat charters (the BBCs) governed by English law. The two Owners were indirectly owned and/or controlled by the Russian Ministry of Transportation (through GTLK Asia, and JSC State Transportation Leasing Company (JSC)). The Charterer was a Cypriot company.
Similar to the Havila case, the Russo-Ukrainian war broke out in February 2022, and JSC and its associates (hence including the Owners) were sanctioned by the EU and the U.S.
The Charterer sought to exercise the option under the BBCs to purchase the Vessels. According to the terms of the BBCs, the purchase price was to be paid in U.S. dollars into a bank account nominated by the Owners (i.e., JSC Gazprombank).
The Charterer commenced proceedings at the English High Court, applying for an order for specific performance requiring that the Owners complete the sale of the Vessels to the Charterer including that the Owners should nominate a frozen euro account compliant with EU sanctions for receiving the purchase price as per the Sanctions Payment Restrictions Clause of the BBCs.
The Sanctions Payment Restrictions Clause provided 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. Any delay in payments resulting solely from the circumstances referred to in the immediately preceding sentence shall not be deemed an Event of Default contemplated by clause 17.1(a) of this Charterparty.” [Emphasis added.]
The judge granted an order for specific performance on the basis of the following analysis and interpretation of this Sanctions Payment Restrictions Clause:
- The Owners argued that this clause was not applicable, because after the sanctions were imposed, the Owners were no longer owned and/or controlled by JSC due to the corporate restructure and were no longer subject to sanctions. However, the judge was of the view that this clause was applicable, because once this clause had been triggered by the condition “by virtue of the Owner becoming a Sanctions Target”, subsequent lifting of sanctions by virtue of the corporate restructure would not have the effect of stopping the operation of this clause.
- “Relevant banking institution” covered not only the receiving bank, but also the paying bank (i.e., the Charterer’s bank).
- The judge was of the view that the purchase price remained “incapable of being processed” by the Charterer’s bank due to a number of “concerning features” of the corporate restructure which may have exposed the Charterer’s bank to sanction risks (even though the Owners argued that the Owners were not sanctioned anymore), including:
- After the corporate restructure, the Owners were indirectly owned by the government of Chelyabinsk, a Russian province.
- The entity controlling the Owners had no history of activity or operations in the maritime sector.
- In the copy of the relevant share purchase agreement, the “Consideration” section had been redacted, so it was not possible for the court to determine whether the sale was at arms’ length.
- The Owners remained managed by some of the same individuals (as directors at different levels of the group) after the corporate restructure.
- The Charterer had raised a number of questions regarding the corporate restructure, but received no response from the Owners.
Similar to the Havila case, the Owners also argued that they should not be required to accept payment of the purchase price into a frozen account, because the Sanctions Payment Restrictions Clause only required the Owners and the Charterer to take all necessary steps in order for the payments to be resumed, and that the concept of “payment” requires that the payee has “the unconditional right to the immediate use of the funds transferred” or the “unfettered and unrestricted use of those funds” (citing The Brimnes [1973] 1 WLR 386 and The Chikuma [1981] 1 Lloyd’s Rep 371). However, the judge distinguished the present case from The Brimnes and The Chikuma because the Owners were restricted from using the funds by virtue of their own attributes/characteristics, rather than matters intrinsic to the receipt and processing of the payment in the banking chain.
Conclusion
The Havila case and the Gravelor case show that the impact of sanctions on the operation of a contract and the applicability of sanctions provisions largely depend on the way the provisions are drafted and the circumstances of the transaction. As is made clear from these cases, and in the team’s practical experience, the imposition of sanctions by any of the EU, UK and/or U.S. can significantly hamper a vessel’s ability to trade – with the associated loss of insurance and international banking chains. Whilst Western regulators are becoming more familiar with the operational and practical implications associated with the “sanctioning” of vessel owners, resolution can take months if not years.
That being so, careful thought needs to be given to the most appropriate financing structure for the deal, the obligations on the parties to comply with sanctions throughout the term of the financing, and their respective obligations in the event of a breach.
Where financers can also become embroiled in regulatory investigations following suspected violations by the borrowers, they may need to carefully consider whether any jurisdictional or cargo-specific restrictions are appropriate, the compliance processes of the borrower, and what degree of independent monitoring is justified, given due diligence obligations are non-delegable.
It is therefore recommended that proper drafting should be in place to reflect the exact requirements under the relevant laws (in particular, English laws which govern most transactions of this kind) and the relevant sanctions regime, especially when the risk of sanctions or breach arises.
In-depth 2023-121
