Court finds owners made reasonable decision in good faith not to perform sub-charter due to sanctions risk

Court finds owners made reasonable decision in good faith not to perform sub-charter due to sanctions risk

Ceto Shipping Corporation -v- Savory Shipping Inc (Victor 1) [2025] EWHC 2033 (Comm)

The Court has held that the bareboat charterers had not fulfilled the conditions listed in the bareboat charter that obliged the owners to transfer title to the vessel upon the expiry of the bareboat charter period. Therefore, the putative transfer obligation had not accrued and, the bareboat charter having now expired, the charterers could not remedy the situation by fulfilling the outstanding conditions post-expiry. The opportunity was gone.

The Court also found that the decision of owners/managers not to perform a sub-charter that involved the carriage of Iranian gasoline, potentially destined for Venezuela, was an objectively reasonable one and made in good faith.

The background facts

The bareboat charter

The dispute arose out of a bareboat charterparty (BBC) dated 28 February 2019 between Savory Shipping Inc (Savory) as owners of m/v VICTOR 1 (the Vessel) and Ceto Shipping Corporation (Ceto), as charterers. Ceto is a Liberian-registered company, with an owner who is a UAE resident.

The BBC was for a period of 36 months and provided that, on its expiry and so long as Ceto fulfilled its contractual obligations, Savory was to transfer title to the Vessel to Ceto. In other words, it was a financing arrangement.

The management agreement

Pursuant to a technical and crew management agreement dated 28 February 2019, Ceto appointed Opera SA (Opera) as managers, but Opera was subsequently replaced by Delfi SA (Delfi). Savory, Opera and Delfi belonged to the IMS group of companies (IMS Group), whose beneficial owner was Captain Gialozoglou or members of his family. Under the management agreement, Delfi arranged and employed the Vessel’s crew and arranged and concluded various insurance policies in relation to the Vessel on Ceto’s behalf.

Addendum

After delivery into the charter service, the Vessel was used to carry Iranian oil cargoes between Iran and the UAE. Some issues that arose between the parties were ultimately resolved by way of an addendum to the BBC which, among other things, added Iran to the restricted trading list and also amended clause 39, the provision that set out the obligation to transfer title to the Vessel on the expiry of the BBC and that listed the conditions Ceto had to fulfil before this could take place. 

Potential sanctions breaches/non-performance of charter

Thereafter, the Vessel continued to load cargoes of Iranian oil and to carry them between Iran, Iraq and the UAE. From April 2020, the Vessel was on charter to Imperium DMCC (Imperium) for the carriage of Iranian origin gasoline to Trinidad and Tobago. However, the Imperium charter was ultimately not performed because the master and crew refused to perform the voyage due to Savory/Delfi’s concerns that to do so would breach US sanctions with regard to Iran, as well as with regard to Venezuela insofar as Savory/Delfi suspected the gasoline cargo was destined for Venezuela. It was also suspected that the person behind this charter was a sanctioned individual with connections to President Maduro of Venezuela.

Ceto denied this and also pointed out that Savory or other companies within IMS Group had four other vessels carrying consignments of Iranian oil to Venezuela. The owners of those four vessels subsequently obtained injunctive relief from the High Court in London allowing them to withdraw their vessels from service. Additionally, a US district court issued warrants for the gasoline on board, which was ultimately forfeited to the US Government.

Insurance dispute

A subsequent issue arose between Ceto and Delfi as to the additional war risk insurance that Delfi was supposed to obtain on behalf of Ceto and for which Delfi was charging Ceto on a monthly basis. Ceto sought the insurance and supporting documents but alleged it never received them from Delfi.

Purported termination

In May 2020, Ceto purported to terminate the management agreement pursuant to the contractual termination clause and/or at common law, alleging various breaches by Delfi. Delfi denied the breaches and contested the validity of Ceto’s termination. Delfi continued to send Ceto routine invoices, which Ceto declined to pay. 

Change of managers

There was also a dispute with regard to Ceto’s request to change managers which ultimately came before the English courts. Transfer of management to St James Shipping Ltd (St James) took place on 22 November 2020. Up till this time, Delfi had continued to send management invoices to Ceto.

Vessel arrest

Following the transfer of management, the Vessel remained untraded until the end of March 2021 and the crew were unpaid. As of January 2022, the Vessel engaged in limited trading but was ultimately arrested in Singapore for non-payment of crew wages. Ceto alleged that St James had been responsible for paying the crew and that those sums had been included in the management fees.

No transfer of title

When the BBC expired on 1 April 2022, Savory declined to transfer title to Ceto as it was requested to do because it alleged that early termination and management fees remained outstanding and because the Vessel was still under arrest. Savory contended that Ceto was in repudiatory breach of the BBC.

Sale of Vessel

Meanwhile, in addition to the crew’s claims for unpaid wages, bunker suppliers had also brought court proceedings against Ceto in Singapore for unpaid bunkers. The Vessel was sold via judicial auction and there remained a net amount after payment of liabilities that Ceto would be entitled to if it had in fact been entitled to the transfer of the Vessel’s title.

The Commercial Court proceedings

Crew wages/unpaid bunkers

Pursuant to clause 39.1 of the BBC, as amended by the addendum, Savory was obliged to transfer title to the Vessel if Ceto “paid all hire and any other sums due under this Charter and… all management fees and any other sums due under the Management Agreement to Delfi…”

Pursuant to clause 10(b), Ceto was obliged to pay crew salaries, amongst other things. The issue was whether that liability became a sum due for the purposes of clause 39.1. 

The Court referred to clause 37, the indemnity clause. Pursuant to clause 37.1.1, Savory had a right of indemnity for:

"[C]osts, charges, expenses which [Ceto has] agreed to pay under this Charter and which shall be claimed or assessed against or pay by [Savory]. . ."

The Court held that, as at March 2022, the crew claim properly fell within clause 37.1.1 as an expense which had been claimed against Savory because there had been an actual claim for wages that dated back some months and that claim had been brought as an in rem claim against the Vessel. And inherent in such an in rem claim was a claim in personam against the person who would acknowledge service of proceedings, namely Savory (as the owners). 

The Court found that the wide wording of clause 37.1.1 naturally covered the risk of such claims against the Vessel and Savory. It concluded that Ceto had not fulfilled the condition in clause 39.1 and so the obligation to transfer title to Ceto had not arisen. Additionally, the Court found, on the facts, that one of the two unpaid bunker claims also amounted to a “sum due” under clause 39.1.

Termination of management agreement

Clause 39.2 required that there be no sums due under the management agreement at the time of expiry of the BBC. If Ceto had not been entitled to terminate the management agreement for Savory’s breach, then pursuant to clause 18.5, an early termination fee became due and that would constitute a sum that was due when the BBC expired.

• Termination for insurance issues
   
  The Court found that Delfi had breached its contractual obligation to obtain insurance that expressly named Ceto as well as Savory. Further, on the evidence, the Court found that Delfi had breached its obligation to obtain additional war risk insurance on reasonable terms and at the best achievable rate and had also breached its obligation to provide Ceto with details of the insurance policies and related documents.
   
  However, Ceto’s purported notice of termination did not comply with the express contractual machinery that governed the steps to be taken following breach. Therefore, there was no valid contractual termination for insurance issues. 
   
  Nor could Ceto rely on termination at common law because the alleged breaches were not of their nature repudiatory. The Court stressed that termination at common law could not be used simply to get round the inconveniences of a contractual scheme, particularly where the breach was (as here) at least potentially capable of being cured.
    

• Termination for non-performance of Imperium charter
   
  The issue was whether Delfi had formed a genuine, reasonable belief that performing the voyage in question would have exposed the Vessel and its stakeholders to US sanctions. 
   
  This was an issue arising under clause 25 of the management agreement which in essence provided that “[Delfi] shall not be obliged to comply with the provisions of this Agreement if in the reasonable judgment of [Delfi] it will expose them or their insurers, re-insurers, crew, registered owners, to any sanction … imposed by any State,….”
   
  The Court accepted expert US law evidence that the risk of Savory, Delfi or the Vessel’s crew being added to the US designated persons list under the strict Iran sanctions regime was very high, particularly given the following factors: the cargo was Iranian gasoline, it had links to multiple US-sanctioned persons and entities, the destination being Venezuela, the timeline of the US agenda vis a vis President Maduro, the use of deceptive shipping practices and the Vessel’s history of transactions involving sanctioned Iranian oil.
   
  On the witness evidence, the Court found that Savory had actively considered the sanctions risk. Even though it had not taken legal advice, it had taken other steps to ascertain the US approach to the supply of gasoline into Venezuela, including by discussing the matter with other stakeholders in the Greek shipping market. It also noted that Iran was becoming riskier, hence its exclusion under the charter by way of the addendum. The Court concluded that Savory’s decision had been a reasonable one and made in good faith.
   
  There was, therefore, no failure by Delfi to ensure performance of the charter because Delfi would only be in breach of the management agreement if there had been an unreasonable decision as to sanctions risk. Savory was entitled to refuse to perform the Imperium charter and Delfi was not in breach in actioning that refusal.

Rescuing the right to buy

On its true construction, Clause 39.1 was an all or nothing provision and imposed a once-and-for-all-cut-off. Ceto could not now, therefore, pay the outstanding sums such that the duty to transfer title would arise. The contractual regime that the parties agreed repeatedly contemplated that if Ceto did not comply with its payment obligations, then it would lose both the Vessel and anything it had paid to Savory to that point.

Ceto’s claim, therefore, failed.

Comment

This is a useful decision for those dealing with difficult sanctions-related decisions in similar circumstances. The Court acknowledged that sanctions risks were “a moving target”. As with Owners in this case, they had to take a difficult decision with limited information. They had a contract and had to justify refusal to perform by reference to an assessment. 

Although the Court’s decision on the reasonableness of Savory’s refusal to perform the trade in question was highly fact specific, this case makes for an apt reminder that any party to a trade that may have a concern that a sanctioned party may be directly or indirectly involved in a proposed trade or that there may be a sanctions-related trade restriction, has a non-delegable duty to undertake sanctions due diligence. Although, curiously, the Court here found that Savory had actively considered the sanctions risk even though it had not taken legal advice, the most solid way (but, crucially, not the only way) for a party to prove that it undertook appropriate due diligence is to seek legal advice, ideally prior to accepting to perform the trade in question. 

Taking a common-sense approach and asking questions of its counterparties (including, for example, ownership information of unknown parties) goes a long way towards a party showing that it undertook all reasonable steps to avoid dealing with sanctioned parties or in restricted trades. Putting together and complying with an internal sanctions compliance policy is also something that sanctions authorities around the world take into serious consideration too.