Personal guarantees in the Greek shipping market
It is not uncommon in the Greek shipping market, for personal bank guarantees to be governed by Greek law in the context of loan agreements governed by another legal system, usually English law. Why, one may ask, would someone do this? There are several reasons put forward for such an arrangement. First, as a matter of Greek law, consideration is not a prerequisite for contracts. A valid guarantee may be issued without referring to actual or ‘iconic’ consideration. Secondly, in the context of the Greek shipping market, the guarantors are usually domiciled in Greece, with personal assets there. Thirdly, Greek banks and the Greek branches of international banks are usually more familiar with Greek guarantees. Therefore, for various largely practical and historical reasons, such a practice prevails in the Greek shipping market. However, such an arrangement gives rise to potential issues and arguments that would not have arisen if the guarantee was governed by the same law as that of the loan agreement.
Background to HSBC Bank PLC v. Pearl Corporation SA and Ors
HSBC Bank (the Bank) entered into loan facility agreements with two ship-owning companies (the Borrowers), which were themselves beneficially owned by a well-known Greek shipowner, Dimitrios Kritsas (the Guarantor). The loans were advanced in 2010 in respect of two ships and contained a minimum asset cover ratio (ACR) covenant. The ACR required the total security provided for the loan to be maintained at 135 per cent of the outstanding loan debt. Where the value of the security fell below this ratio, the Bank could demand additional security or prepayment.
As security for the loans, there was a mortgage over each ship and a personal guarantee (the Guarantees) provided by the Guarantor. The Guarantees were subject to Greek law and contained a broad waiver clause. This waived various rights of objection that would ordinarily be available to a guarantor under Greek law, including, for example, the right available under article 855 of the Greek Civil Code, which provides for the benefit of excussion or discussion. Such a right allows a guarantor to resist paying the lender until all remedies have been exhausted against the primary debtor.
The dry-bulk recession and the restructuring of the loan agreements
The significant fall in the dry-bulk sector throughout the period of the loans led to repeated breaches of the ACR covenants. Due to these breaches, the parties to the loan agreements entered into negotiations with a view to restructuring the loans and related securities.
In 2013 the Bank agreed temporarily to relax the ACR covenants (to 120 per cent) for a period of time. In 2016 there was a further restructuring of the loan agreements but the ACR covenants were not maintained. The Borrowers proposed to sell the vessels and bring the loan agreements to an end, releasing the Borrowers and the Guarantor from any liability. The Bank did not in principle object to such sale but refused to absorb the losses on the loans. Instead, it required proposals regarding the method of repayment of any balance after the sale proceeds had been applied, as well as appropriate security arrangements.
After various developments, the two mortgaged vessels were ultimately sold by the Bank to a buyer of its choice for approximately 12 per cent and 15 per cent, respectively, of their original purchase price. The purchase by the new buyers was wholly financed by the Bank.
The Greek law defences
The High Court considered the Bank’s claim against the Guarantor. The Bank had already obtained default judgment against the Borrowers and the other security parties.
The Guarantor put forward various defences in respect of the personal guarantee under Greek law.
- He argued that the Bank was at fault for the fact that satisfaction of the loan by the Borrowers had become impossible. Article 862 of the Greek Civil Code provides that a guarantor is released if satisfaction of the creditor’s claim against the original debtor has been rendered impossible due to the fault of the creditor. It was open to the Bank to have prevented what later occurred by electing to enforce its security at a time when the value of the vessels would have been sufficient to pay off the loans.
- Pursuant to the personal guarantee, the Guarantor had waived his rights of objection available under Greek law, including those under article 862. However, agreements to release or limit liability due to wilful misconduct or gross negligence are invalid as a matter of Greek law. The Guarantor therefore argued that his waiver of rights under article 862 was invalid to the extent that the Bank had shown wilful misconduct or gross negligence, which resulted in the repayment by the Borrowers becoming impossible.
- It was further argued that the Bank’s claim was an abuse of its rights: article 281 of the Greek Civil Code is a defence used very often in disputes and if established, it prevents the exercise of a right in cases where such exercise obviously exceeds the limits imposed by good faith, morality or the social or financial purpose of the
said right.
In essence, the Guarantor argued that the Bank failed to accept the Borrowers’ “reasonable requests” for restructuring. This led to the Borrowers’ inability to minimise their losses under the loans, rendering repayment from the Borrowers impossible. Having decided not to enforce its rights when the market was still high but to ease the loan conditions as early as 2013, the Bank should be treated as having elected to pursue a strategy of supporting the vessels until prices rose.
The Guarantor also submitted that the Borrowers were asked to pay to the Bank money which was necessary to support the vessels. This ultimately caused the Borrowers’ inability to repay the loans, leaving only the Guarantor to cover the shortfall.
The Decision
Sir Ross Cranston ultimately dismissed the Guarantor’s defences. It was held that the Bank’s conduct was reasonable on the facts of the case. There was no fault or abuse of rights in the Bank refusing to accept certain proposals. Nevertheless, the Guarantor’s defences were valid in law and needed to be considered. The Court acknowledged that had the Bank accepted one of the Borrowers’ restructuring proposals, the vessels would have been sold for a higher price than they were ultimately sold for.
Future cases
Although the Guarantor’s defences were not successful in this case, in a future case and on different facts such defences may succeed. What would the position have been if, for example, the Bank had taken a more robust approach, or if it had even refused to engage in any restructuring discussions and had insisted on strict performance of the loan agreement? There is a good argument to say that this would constitute an abuse of rights or fault as a matter of Greek law under articles 281 and 862 of the Greek Civil Code. In such circumstances, it is difficult to see how an English Court would not uphold such defences.
This case therefore serves as a reminder that guarantees applying Greek law, issued for loan agreements governed by English law, may have complications. Contracting parties should be mindful of the particularities of Greek law and of the delays and costs such a choice of law may cause in the event of a dispute, in particular one arising in connection with any of the following topics.
1. Waivers
Greek law is considerably more favourable to the debtor than English law. As this judgment demonstrates, a waiver may be set aside completely or in part, despite a clear and unambiguous agreement to the contrary. Accordingly, the waiver of a guarantor’s rights is never complete and categorical under Greek law. Where there has been wilful misconduct or gross negligence, the agreed waiver will not be upheld and the guarantor will be entitled to rely on the objections available to a guarantor as a matter of Greek law.
2. Good faith – morality
The principle of good faith is omnipresent in Greek contract law. It may provide a complete defence to a claim or it may affect the manner in which parties to a contract perform their obligations or pursue their claims against the various debtors. Good faith and the concept of morality may also act as a ground for a counterclaim: under Greek law, breach of the obligation of good faith established by the provisions of the Greek Civil Code can support a claim for damages in tort. In such a situation, lenders under the loan documents run the risk of facing a claim in tort in Greece.
3. Interpretation of contracts
Greek law seeks the subjective intention of the parties when construing contractual terms. This is said to do justice between the parties, as opposed to the stricter objective approach favoured by English law. However, such an approach may be said to give rise to uncertainty or arguments when a dispute arises.
Difficulties also, of course, arise where the loan agreement is in the English language and the guarantee, for example, is in Greek. Ambiguities and issues may arise insofar as there is disagreement on the exact meaning of words in either language and how these agreements or provisions might interrelate.
Conclusion
The case of HSBC Bank PLC v. Pearl Corporation highlights the issues that may arise where a guarantee is governed by Greek law in the context of English law loan agreements. Such arrangements are very common in the Greek shipping industry. Many loan facilities provided to the Greek market will include personal guarantees that are in Greek and subject to Greek law. Accordingly, it is likely that we will see the defences like those in the Pearl Corporation case being rehearsed again. In different circumstances and on different facts, these defences may well prove successful.
- [2019] EWHC 231 (Comm).
Client Alert 2019-059
