This case demonstrates the narrow interpretation of penalty clauses under English law and should be of comfort to entities who provide financing for vessels and wish to protect their position by incorporating terms which allow repossession of a vessel in the event of default.
Further, this case demonstrates that in certain circumstances, charterers of vessels under bareboat charters have rights that can be protected by relief from forfeiture.
Factual background
The claimants were companies incorporated in the Marshall Islands and each owned a vessel. Both claimants were ultimately beneficially owned by an investment fund called Oaktree Capital Management LP, an American entity.
The defendants were also incorporated in the Marshall Islands, but at the relevant time were beneficially owned by a Mr Mallah. The first two defendants were bareboat charterers of the vessels owned by the claimants (the ‘charterers’) and were companies controlled by the third defendant. The third defendant was the operational manager of the vessels and was appointed by the first two defendants.
By an agreement made between Oaktree Maritime Finance I LLC (‘Oaktree Maritime’) and the third defendant on 12 July 2019, Oaktree Maritime offered, and the third defendant accepted, terms on which Oaktree Maritime would provide finance for the acquisition of bulk carriers to be owned by single purpose companies wholly owned by Oaktree Maritime and to be chartered to companies controlled by the third defendant. The charters were also to provide the charterers with an option to purchase the vessels at any time during the charter period, and to be under an obligation to purchase on the last day of the charter.
Oaktree Maritime was to provide up to half of the purchase price of the vessels or, if lower, 60% of the appraised value of the broker at delivery.
The charterparties were prepared on the Barecon 2001 with substantial amendments, including terms in relation to events of default, termination, re-possession, and regarding the defendants’ options and obligations to purchase the vessels.
On 10 June 2021, the US authorities designated Mr Mallah a ‘Specially Designated Global Terrorist’ (‘SDGT’) and he was included on the ‘Specially Designated Nationals and Blocked Persons List’. This resulted in Mr Mallah’s property and property interests (including the defendant’s assets) being blocked.
It was the claimants’ position that when Mr Mallah was designated as an SDGT, various events of default under the relevant charterparties occurred and that these events entitled the claimants to terminate the charterparties and to take possession of the vessels.
Matters before the Commercial Court
The claimants sought declarations that the charterparties had been lawfully terminated and that they were entitled to possession of each of the vessels.
While the defendants admitted that defaults had occurred under both charterparties, they denied that the claimants were entitled to possession of the vessels.
The defendants contended/sought:
(i) that on the proper construction of the charterparties, the claimants were not entitled to possession (the ‘Construction Defence’)
(ii) that the claimants’ claim for possession relied on provisions that are penal, and thus were void and unenforceable (the ‘Penalty Defence’); alternatively
(iii) a counterclaim for relief from forfeiture by way of (i) restoration of the charters, or (ii) restitutionary relief in respect of payments made to the claimants.
The Construction Defence
This defence was largely based on the amended wording of the charterparties and, therefore, given its limited application, comment on this particular defence is only set out briefly in this article.
The claimants’ position was that, following termination of the charterparties after an event of default (or multiple events), the claimants were entitled to call for possession of the vessels and remain entitled to their possession. The defendants contended that the claimants were only entitled to repossess their respective vessels following a notice being served in accordance with clause 46(i) of the charterparties when the defendants failed to pay the amount stated in that notice.
The court preferred the claimants interpretation of the charterparties on this point.
The Penalty Defence
This defence has wider applicability to charters which include a right or obligation to purchase the vessel.
The defendants argued that the claimants’ alleged rights to obtain immediate possession in the event of a default under the charterparty in the event of termination amounted to an unenforceable penalty clause because it deprived the defendants of their right to purchase the vessels, thereby losing their contribution to the purchase price and any capital appreciation. The defendants argued that this detriment was disproportionate to any legitimate interest the claimants had in enforcing the defendants’ primary obligations.
In this matter the court applied the test set out in Cavendish Square Holding BV -v- Makdessi, [2013] UKSC 76, in which it was found that a term can only be considered unenforceable by way of a penalty when the term is a secondary obligation which only applies when a party is in breach of a primary obligation.
The court found that due to the way that the relevant clause 48 was drafted, it did not impose any secondary obligation on the charterers in the event of a breach of a primary obligation. The clause gave the charterers the right to purchase the vessels provided they were not in default. Therefore, the clause was not subject to the penalty rules. Consequently, the defence was rejected.
Relief from Forfeiture
The defendants sought relief by way of:
(i) an order reinstating the charterparties; or alternatively
(ii) an order that the claimants reimburse them payments of hire and initial payments for the purchase of the vessels, together with an account of the capital appreciation in the value of the vessels attributable to their contributions to the purchase prices.
Before the court could decide whether relief from forfeiture was available to the defendants, it had to first decide whether the defendants’ rights under the charterparties were those which could be protected by relief from forfeiture and, secondly, whether the defendants should be debarred from seeking the relief due to their conduct in relation to the proceedings.
It is settled law that relief from forfeiture is only available in respect of contracts involving the transfer of proprietary or, in some circumstances, possessory rights. It is not available to provide relief for purely commercial rights/obligations.
The court concluded that, while the demise charterparties did not involve the transfer of proprietary rights, the transfer of possessory rights was involved and, therefore, the rights afforded under a demise charter are rights which might qualify for protection by relief from forfeiture.
The court therefore moved on to consider whether, by their conduct, the defendants should be prevented from seeking the relief.
The right for relief is an equitable one and, therefore, discretionary and it is often said that a party seeking equitable relief must come before the court with clean hands.
In this case, it was the claimants’ position that the defendants had failed to obey court orders and to comply with undertakings that they had given to the court in the proceedings and that the defendants were even guilty of dishonest and otherwise reprehensible behaviour and therefore should not be granted the relief sought.
The conduct complained of included:
(i) turning off the AIS and other tracking systems of the vessels for a period and failing to comply with a ‘forthwith’ order to switch these tracking systems back on.
(ii) allowing or causing one of the vessels to enter a jurisdiction excluded by the charterparty, despite a court order preventing this.
(iii) failing to make proper efforts to ensure one of the vessels was towed to Piraeus in compliance with a court order.
(iv) failing to maintain insurance in relation to both vessels.
(v) failing to discontinue proceedings in another jurisdiction.
(vi) providing misleading and untrue information to the court.
The court concluded that misconduct/impropriety of the defendants was sufficiently closely connected to the application for relief and found that the defendants’ actions prevented them from seeking the equitable relief now sought.
The court also commented that, despite neither the claimants nor the defendants being US persons, if the court were to grant relief from forfeiture, the order would put the claimants and the US based beneficial owners, at risk of penalties under the sanctions regime if they complied with the order. The found that this was a strong reason not to grant the relief any event.
For further information, please contact:
Michael French, Hill Dickinson
michael.french@hilldickinson.com
