Key takeaways
Courts reinforce payment duties under charter agreements
Owners can recover unpaid hire even when disputes arise over vessel performance.
Guarantors remain accountable for outstanding obligations
Guarantees continue to apply despite operational disagreements or delays.
Clear wording in contracts avoids costly litigation
Well-drafted terms and guarantees reduce risk of enforcement challenges.
The claims in this case relate to disputes arising under two bareboat charterparties between the Owners on the one hand and the Charterers and their Guarantors on the other. In permitting the Owners’ claims, the Court has emphasised the principles applicable to contract formation, as well as the distinction between “see to it” and “on demand” obligations under a guarantee.
The case is also notable for the nature of the Charterers’ witness evidence, which the Court described as being inconsistent with itself, inconsistent with the contemporary documents, and inconsistent with Charterers’ pleaded case.
The contractual matrix
The disputes in this case arise in respect of bareboat charterparties for the MV Kailash and MV Ben Nevis respectively (together, the Vessels). One of the Vessels was initially owned by Global Offshore Services BV (GOSBV), with the other owned by Global Offshore Services Limited (Guarantors).
In 2014, the MV Kailash and MV Ben Nevis were purchased by MT Kailash Sarl (MT Kailash) and Ocean Clap Shipping Limited (OCSL) respectively (together, the Owners) as part of a sale and leaseback financing arrangement. Both companies are SPVs owned by Minsheng Financial Leasing Limited (Minsheng), and whose only business is the leasing out of the relevant vessel.
Both fixtures were entered into with GOSBV on a BARECON 2001 form with amendments (the Charterparties), with the contracts effectively acting as hire purchase agreements. Both Vessels were due to revert back to their original ownership at the end of the lease scheme some 72 months after delivery.
As is routinely the case with bareboat charterparties, GOSBV’s obligations under the respective Charterparties were guaranteed by way of a guarantee. By a deed dated 14 July 2014, the Guarantors guaranteed GOSBV’s obligations under the Kailash Charterparty (the Kailash Guarantee) up to a maximum of US$ 6 million. By a deed dated 10 April 2015, the Guarantors guaranteed GOSBV’s obligations under the Ben Nevis Charterparty (the Ben Nevis Guarantee) up to a maximum of US$ 7.5 million (the Kailash Guarantee and Ben Nevis Guarantee together, the Guarantees).
The background facts
The MV Kailash was delivered to GOSBV on 30 May 2014, and MV Ben Nevis on 11 February 2015.
In late 2014, the price of oil fell sharply, significantly affecting the amounts which the Vessels could earn by way of hire.
Hire payments were paid by GOSBV in respect of the MV Kailash until 28 December 2015, and until 11 January 2016 in respect of the MV Ben Nevis. No subsequent hire payments were made.
Various restructuring proposals were discussed between Owners, GOSBV and their affiliated companies between July 2015 and September 2021, none of which, on Owners’ case, had been successfully agreed.
The Owners subsequently brought claims under the respective Charterparties for outstanding sums due from GOSBV, as well as claims under the Guarantees for the maximum agreed amounts from the Guarantors.
The Commercial Court decision
Contract formation and the General Agreement
In defending the claims, GOSBV sought to assert that a general agreement had been entered into by conduct in early 2016 or subsequently, the effect of which was that the Charterparties would be cancelled, the Guarantees would no longer be called upon, and the account between the parties under the Charterparties would be “zeroed” (the General Agreement).
The issue was whether the parties’ conduct was sufficiently unambiguous such that it was consistent only with one contract, here the General Agreement, rather than another contract, here the Charterparties. Although, the Court added, the fact that the relevant conduct might be inconsistent with the Charterparties did not of itself show that there was a different contract made by conduct.
GOSBV relied on two types of conduct on the part of Owners in support of their case. The first was that GOSBV failed to pay hire, and the Owners acquiesced in that, and the second was that Owners had paid some costs towards the operation of the Vessels.
However, the Court was not persuaded that either matter, taken individually or collectively, was conduct consistent only with the existence of the alleged General Agreement.
Among other things, there were inconsistencies between GOSBV’s pleaded case, their own evidence, and the contemporaneous documents. GOSBV’s pleaded case was that there was an agreement with Owners to retake possession of the Vessels in 2016. By contrast, GOSBV’s witnesses contended that GOSBV would set up new SPVs to charter the vessels. The evidence from individual witnesses was also inconsistent. Notably also, the contemporaneous documents over the course of the charter period – including correspondence detailing various restructuring proposals, draft term sheets and framework agreements – all supported a case that, in the end, all hire should be paid by the Charterers.
The Court, therefore, rejected GOSBV’s defence that there had been a General Agreement between the parties. The Charterers were, therefore, liable under the respective Charterparties.
Claims under the Guarantees
The relevant provisions of the Guarantees provided, as relevant:
"1.2 Definitions
"Guarantee Period" means the period beginning on the date of this Guarantee and ending on the earlier of:
(a) the date on which all the Guaranteed Liabilities and all obligations (whether actual or contingent) under or in connection with this Guarantee have been unconditionally and irrevocably paid and discharged in full; and
(b) the date falling seventy-two (72) Months after the date of this Guarantee;
………….
2.1 Guarantor as principal Debtor; indemnity
2.1.1 The Guarantor irrevocably and unconditionally:
(a) guarantees to the Owner the due and punctual observance and performance of all the obligations of the Charter under the Bareboat Charterparty and the Security Documents and the due and punctual payment of all the Guaranteed Liabilities; and
(b) undertakes with the Owner that whenever the Charterer does not pay any amount of the Guaranteed Obligations when due, the Guarantor shall immediately on demand pay that amount as if it were the principal obligor…
3 Guarantee Period
This Guarantee shall remain in full force and effect as a continuing guarantee for the duration of the Guarantee Period.”
In defence of the claims under the Guarantees, in addition to the argument regarding the General Agreement, the Guarantors sought to argue that litigation was required to be commenced within the applicable guarantee period for there to be any liability and that, in this instance, since the claims were commenced well after the expiry of both guarantee periods, there could be no liability.
The Guarantors argued in the alternative that there was no liability under the Guarantees, whether pursuant to Clause 2.1.1(a) or (b), without a demand, and if there had been no demand before the end of the guarantee period, then there could be no liability.
In assessing the Guarantors’ case, the Court emphasised the distinction between a “see to it” obligation and an “on demand” obligation, noting the fact that a guarantee may include different obligations with different triggers. The former is an obligation by the guarantor to “see to it” that the obligor performed its obligation, the essential feature of which is that the obligor has an underlying liability. The latter expressly requires the presentation of a demand as a trigger for payment.
In this instance, the Court decided that clause 2.1.1(a) was a “see to it” obligation, with liability under it not being contingent on any demand. Whilst it was ultimately unnecessary to determine whether or not any such demand would be required to be presented within the guarantee period, the Court held that it would not have been necessary to do so.
The Owners were consequently entitled to recover under the Guarantees and were entitled to the maximum guaranteed sums under each Guarantee.
Comment
The judgment in this case provides a useful reminder of the legal requirements necessary to establish a contract by conduct. Specifically, it is necessary to examine the relevant conduct, which may occur over a period of time, to assess whether the party has evinced an intention to make the contract, and to ask whether the conduct is consistent with the existence of there being such a contract.
In the context of guarantees, whilst the judgment confirms that “decisions on differently worded documents are of limited assistance,” it is useful to bear in mind the distinction between “see to it” and “on demand” obligations when considering the proper construction to be applied to any particular obligation under a guarantee.
Finally, the case highlights the importance of ensuring that the case a party chooses to run is reflected in and borne out by the evidence presented.