Court confirms sanctions did not frustrate long-term bareboat charters and enforces performance guarantees

GTLK Malta Four Ltd v Pola Maritime Ltd & Ors

The Court has granted summary judgment in respect of guarantee claims relating to a bareboat charterer’s contractual obligations to pay hire; the decision is particularly interesting as it provides useful guidance on a number of key issues, including:

1. It clarifies the practical distinction between bareboat charters as (i) finance leases as opposed to (ii) operating leases.

2. It confirms that the primary obligations of a guarantor under an on-demand bond are independent of any dispute in relation to the underlying contract, including invalidity or legal unenforceability of that contract.

3. There will be a high threshold for demonstrating that a long-term contract, in this case 10-year bareboat charters, will be frustrated by the imposition of economic and trade sanctions.

4. The imposition of sanctions does not automatically mean that contractual obligations are frustrated or terminated; rather, they will be suspended for the time that the sanctions remain in place or until a licence is granted.

The background facts

The parties

GTLK Malta Four Ltd (GTLK) was the registered owner of seven vessels (the Vessels). GTLK’s immediate parent was GTLK Europe Designated Activity Company (GTLK Europe). GTLK’s ultimate parent company was JSC GTLK, which was wholly owned by the Russian Federation.

GTLK entered into seven, separate, bareboat charterparties (collectively, the Charters), on substantially the same terms, in amended BARECON 2001 forms, for each of the Vessels with Pola Logistics (Pola). The Charters were each for a period of 10 years between February 2018 and April 2020.

The defendants (Guarantors) were the guarantors and indemnifiers of Pola’s' obligations under the Charters pursuant to twelve materially identical Joint Guarantees.

Sanctions designations

Each of the Vessels was duly delivered into the Charters. However, on 8 April 2022, following the Russian invasion of Ukraine, JSC GTLK and named associated entities, were designated under Regulation 269/2014 (EU Regulation). As a result, GTLK was also caught by the EU Regulation and the Vessels’ P & I cover was automatically terminated. Pola immediately ceased paying hire under the Charters.

On 21 April 2022, JSC GTLK became subject to UK sanctions. On 17 May 2022, Pola informed GTLK that, by reason of the EU Regulation, it was in breach of the terms of each of the Charters because Pola did not have quiet enjoyment of the Vessels, could not use the Vessels, pay hire in respect of them, keep them insured or comply with many of the provisions of the Charters.

On 2 August 2022, JSC GTLK was designated under US sanctions regulations (US Regulation).

On 1 September 2022, Pola served notices of termination under the Charters relying on EU and UK sanctions (the Notices of Termination). The Notices of Termination stated, amongst other things, that Pola regarded GTLK as being in repudiatory breach of their obligations under the Charters (particularly clause 42, the Quiet Enjoyment provision); further or alternatively, that the Charters had been frustrated.

On 7 February 2023, GTLK rejected Pola's termination of the Charters and asserted that they continued in effect.

On 31 May 2023, GTLK Europe was put into liquidation in Ireland and joint liquidators were appointed. As a result of the liquidation, GTLK Europe was no longer considered to be subject to an asset freeze.

On 1 August 2023, the UK Office of Financial Sanctions Implementation (OFSI), issued a licence (OFSI General Licence) permitting GTLK Europe and its subsidiaries, including GTLK, to make and receive payments and to take actions in connection with the insolvency of GTLK Europe, and this was extended on 24 April 2025.

Further, specific, licences were granted in the US by OFAC on 18 September 2023 (OFAC Licence) and extended on 20 September 2024 and 15 September 2025. In substantive terms, the effect of the sanctions on Pola was arguably quashed because payments under contracts that pre-existed designation could now be made provided that they were made into blocked accounts.

On 28 February 2024, two and a half years after Pola had served the Notices of Termination and eight months after the liquidation of GTLK Europe had been initiated, GTLK issued its own termination notices under the Charters and sent letters of demand under them to Pola (GTLK Notices of Termination).

The GTLK Notices of Termination were sent under Clause 28(a)(i) of the Charters and relied on a failure to pay hire since 7 June 2022 and asserted GTLK’s right to require Pola to purchase the Vessels at the Purchase Option Price within 15 days of the termination notice (pursuant to clause 46.2 of the Charters). Pola did not pay within 15 days of the Notices of Termination or at all.

The disputes

On 10 October 2024, GTLK made demands under the Guarantees for payment within 3 business days of the Purchase Option Price for each of the Vessels and the outstanding hire and interest which GTLK claimed had accrued (Demands). The Guarantors did not pay within 3 days of the Demands or at all.

Meanwhile, on 30 September 2024, Pola had commenced LMAA arbitration proceedings against GTLK, arguing that the Charters had been terminated and/or frustrated by the time of the GTLK Notices of Termination.

GTLK sought summary judgment against the Guarantors under the Joint Guarantees.

The relevant contractual provisions

Charters

Clause 28 of the Charters dealt with early termination. Clause 28(a) addressed Charterers’ default, with clause 28(a)(i) permitting termination for non-payment of hire. Clause 28(b) dealt with Owner’s default, providing Charterers with a right to terminate due to GTLK’s breach of contract that deprived Pola of the Vessel’s use for 14 running days.

Clause 38.10 of the Charters was an ‘Obligation absolute’ clause that was described as a ‘hell or highwater’ clause. It was a detailed provision that imposed an absolute obligation on Pola to pay hire irrespective of any contingencies.

Clause 42 of the Charters was the ‘Quiet Enjoyment’ provision.

Clause 46(2) of the Charters provided that upon termination of the Charters as a result of Pola’s default under clause 28(a), Pola had to pay GTLK the Purchase Option Price applicable at the time of termination.

Guarantees

Clause 2(c) of the Joint Guarantees provided that if performance of any of the obligations guaranteed became unenforceable, invalid or illegal, the Guarantor retained an independent and primary obligation to indemnify GTLK.

Clause 5(f) of the Joint Guarantees provided under the general heading ‘Waiver of Defences’ that the Guarantor’s obligations would not be affected by any unenforceability, illegality or invalidity of any obligation under any of the Transaction Documents (which included the Charters and the Joint Guarantees).

The Commercial Court decision

‘Hell or highwater clause’

The Court decided that the effect of clause 38.10 was to allocate the entirety of the risk of the unavailability or inability to use the Vessels to Pola. This was consistent with the fact that they were finance charters whose primary subject matter was not the chartering of the Vessels but the repayment of the finance.

Nature of Charters as finance charters

The Bareboat Charters formed part of a wider arrangement whereby GTLK financed the purchase of the Vessels for Pola’s benefit and each Charter constituted a finance lease by which Pola operated the respective Vessel and repaid the financing through the quarterly payment of hire and balloon payment at the end of the charter period after which ownership of the Vessel would pass to Pola.

Joint Guarantees – alleged frustration

The underlying commercial rationale of the Joint Guarantees was that the Joint Guarantors bore the risks associated with Pola’s failure to repay the loan even if it could not be enforced legally or practically against it. That was consistent with the underlying commercial purpose of the Charters as finance charters. Therefore, the fact that the Charters might be legally unenforceable or invalid did not affect the Guarantors’ obligations under the Guarantees.

Furthermore, even if there was an arguable case of frustration, it did not matter because the Joint Guarantees still responded. In any event, the Court did not think that Pola had established that the Charters were frustrated at the point at which sanctions were imposed or at all.

The Charters were long-term charters and while the sanctions affected Pola’s performance of the Charters, they did not radically alter that performance such as to amount to frustration of the Charters’ purpose. The sanctions only suspended Pola’s obligation to pay hire, they did not frustrate it.

Joint Guarantees – alleged termination

The Court held that once there was a failure to pay the charter hire, GTLK was entitled to terminate under clause 28(a) of the Charters and the Guarantors then stood in Pola’s shoes and were obliged to pay the Purchase Option Price under clause 46.2 of the Charters.

Leaving aside GTLK’s argument that the EU sanctions did not in fact prevent payment of hire, the Court decided that clause 38.10 did not distinguish between accrued and unaccrued obligations. The very purpose of clause 38.10 was to ensure that hire continued to accrue. Clause 38.10 provided expressly that the obligation to pay hire would survive a cause that might, but for that provision, have the effect of terminating the relevant obligation.

The Court also found that Pola had not established that GTLK were in breach of clause 42, the Quiet Enjoyment clause. The Charters allocated the entire risk of the unavailability of the Vessels or the inability to use them to Pola.

The Court, therefore, granted GTLK summary judgment.

Comment

This is the latest in a line of cases in which the English Court has taken a commercial approach to the issue of whether and to what extent sanctions against Russia excuse contractual performance.

Although the decision reached was justified on the terms of the Charters, it should be kept in mind by parties involved in contracts where one of the parties becomes sanctioned.

The sanctioned party may believe that all the parties’ obligations (and importantly time-bars) are interrupted during the period of its sanctions and that, upon becoming unsanctioned, it may be able to collect its debt; however, the chances are that, save for express wording to that effect, time will continue to run and the formerly sanctioned party’s claim may have become time-barred by the time it has become unsanctioned.

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