OCM Maritime Nile & Anor v Courage Shipping Co & Ors - The Courage and The Amethyst

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DMC/SandT/22/07

England

OCM Maritime Nile LCC & Another v Courage Shipping Co & Others (The “Courage” and “Amethyst”)

English Commercial Court: Sir Andrew Smith: [2022] EWHC 452 (Comm): 4 March 2022

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2022/452.html

Robert Bright QC and Charles Holroyd (instructed by Reed Smith LLP) for OCM (Owners)

Graham Dunning QC, Chris Smith QC and Claudia Wilmot-Smith (instructed by Rosling King LLC) for Courage (Charterers)

BAREBOAT CHARTERPARTIES: BARECON 2001: DEFAULT EVENTS: US IRANIAN SANCTIONS AGAINST SOLE BENEFICIAL OWNER AND DIRECTOR OF CHARTERERS: TERMINATION OF CHARTERS: WHETHER OWNERS HAD RIGHT TO REPOSSESS VESSELS UNDER CLAUSE 46: WHETHER RIGHT TO REPOSSESSION AN UNENFORCEABLE PENALTY UNDER CLAUSES 28, 29 & 46: WHETHER CHARTERERS ENTITLED TO RELIEF AGAINST FORFEITURE

Summary

Where Charterers admitted there had been a default event under the bareboat charterparties, the High Court held that (a) Owners were entitled to terminate the charters, (b) Owners had the right to repossess the vessels under clause 46, (c) that right was not an unenforceable penalty under clauses 28, 29 and/or 46, and (d) Charterers were not entitled to equitable relief against the forfeiture of the vessels.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes

Background

OCM Nile and OCM Kama (“Owners”), both Marshall Islands companies which were ultimately beneficially owned by investment funds managed by Oaktree Capital Management LP of Delaware, USA, but headquartered in California, agreed two ‘Hell and High Water’ bareboat charterparties on the Barecon 2001 form (“CPs”) with Courage and Amethyst also Marshall Islands companies (“Charterers”). The Charterers were ultimately beneficially owned by Mr Abdul Jalil Mallah, a Syrian national resident in Greece and the sole director of both companies. Charterers were obliged to purchase the vessels under the CPs, which were, in effect, a method of financing the intended eventual purchase off Oaktree’s managed capital investment funds.

During the course of the performance of the CPs, the United States (“US”), under Executive Order 13224 of 23 September 2001, sanctioned Mr Mallah on 10 June 2021, and included him on the Specially Designated Nationals and Blocked Persons lists, and also “blocked” his property and property interests, including Charterers. The sanctions arose due to an alleged association, through certain alleged facilitative transactions, between Mr Mallah and another designated person, Mr Sa’id al-Jamal, who himself was said to have materially assisted or supported Iran’s Islamic Revolutionary Gard Corps-Qods Force, in relation to their alleged involvement in the Yemeni war and the shipment of Iranian oil to Hezbollah in Lebanon.

As a result, Owners claimed that an event, or events, of default arose under the CPs whereby they were entitled to terminate the charterparties and to repossess the vessels. On that basis, Owners sought declarations, from the High Court that the CPs had been lawfully terminated and that they were entitled to possession of the vessels, only one of which had been repossessed to date, in Sharjah, United Arab Emirates, with the other vessel understood to be at Latakia, Syria.

Whilst Charterers admitted that an event or events of default had occurred under both CPs, they denied that Owners were entitled to possession of the vessels. First, Charterers contended that, on the proper construction of the CPs, Owners were not entitled to possession (“Construction Defence”). Second, Charterters submitted that Owners’ claim for possession relied on provisions that were penal, and so void and unenforceable (“Penalty Defence”). Third, Charterers brought a counterclaim for relief from forfeiture by way of (i) restoration of the CPs, or (ii) restitutionary relief in respect of the payments made to Owners thereunder.

Judgment

The Judge first outlined the key facts (above), the key terms of the CPs (fn.1) and proceeded to consider the evidence and the merits of the dispute in detail.

US Sanctions

The evidence of the US law experts was largely in agreement. US sanctions broadly prohibit US persons and those persons subject to US jurisdiction from engaging in transactions with or involving blocked persons or their assets. A person can also become subject to US jurisdiction by engaging in activity with a US nexus. Owners, despite being non-US entities, faced risks of civil and criminal penalties for causing a US person to engage in a prohibited transaction, for causing a US financial institution or other US person to assist in processing US dollar payments from Charterers, and potential designation by US authorities, where financial support need not be direct nor be substantial. Whilst in principle it was possible for the US authorities to issue licences to allow prohibited activities, if in US policy or national defence interests, the likelihood of the grant of such licences for commercial purposes was most doubtful.

Construction Defence

The issue turned on the proper interpretation and effect of clause 46 of the CPs. Charterers contended that Owners could repossess the vessels after the CPs were terminated only if they had served a notice under clause 46(a)(i) and Charterers had not paid the amount stated in the notice. Owners said they were entitled to repossess the vessels unless they chose to serve a notice under clause 46(i) and Charterers had paid the full amount required. The Judge agreed with Owners.

The Judge noted that nothing in clause 46 indicated that, if the CPs were terminated for a default event, Owners were required to serve a notice on Charterers under clause 46(i). On the contrary, it made clear that Owners had an option to serve notice, but were not obliged to do so. Sub-clauses 46 (ii), (iii), (iv) and (v) stated the position if notice was served and Charterers complied with it, but they did not require that notice be served.

The Judge considered that Owners’ interpretation of clause 46 was harmonious with clause 29, whereas Charterers’ interpretation was not, where the right to repossession of the vessels is unqualified, and was amended to improve Owners’ position, by obliging Charterers to care for the vessels, pending repossession.

Charterers had placed great emphasis on the underlying purpose of the charters, being to finance the acquisition of the vessels and to provide security for the finance until it was fully repaid, where repossession was never intended unless Owners were forced to realise their security. By contrast, upon a default event, however minor, Charterers would lose the vessels and the investment they had made in them, unless granted relief from forfeiture, all of which meant there was good commercial sense, based on the context, in Charterers’ interpretation.

However, the Judge was not persuaded. The same risk of loss was faced even if notice was given if Charterers were unable immediately to make the outstanding principal and indemnity sum payments envisaged by clause 46(f). Even more importantly, despite the purpose of the arrangements, the parties chose to give effect to that purpose by chartering arrangements, and the consequences of Owners’ interpretation did not lack commercial sense nor were so commercially unreasonable as to permit an interpretation that departed from the natural meaning of clauses 29 and 46, and indeed the CPs read as a whole.

In that regard, the Judge was prepared to accept Owners’ submissions that there might be an understandable preference to take possession instead of give notice and receive payment instead; for example, because Owners might be unable, or quite reasonably not wish, to take payment from Charterers where the default event, as in the present case, involved the breach of the US sanctions regime.

Penalty Defence

Charterers’ position was that to the extent Owners, under clauses 28, 29 and/or 46, would otherwise gain an immediate and/or unrestricted right to the possession of the vessels in the event the CPs were terminated, then such clauses amounted to an unenforceable penalty, as the exercise of such a right would deprive Charterers of their right to purchase the vessels, with Charterers losing their contribution to the purchase price and any capital appreciation in the value of the vessels, thereby suffering a detriment disproportionate to any legitimate interest that Owners might have in enforcing Charterers’ primary obligations.

However, the focus of the penalty defence, as the Judge noted and Charterers acknowledged, was clause 48, whereby unless the qualifications therein on the Charterers’ right to purchase the vessels (namely, that no event of default should have arisen and remain continuing at the purchase completion date) were void and unenforceable, then clauses 28, 29 and/or 46 were not capable of being penal on their own. That was a matter of contractual interpretation to be decided by reference to when the CPs were concluded and without regard to later events.

The Judge identified that whether a term is penal, and so void and unenforceable, raises an initial question, following Cavendish v Makdessi (fn.2), as to whether the term that is challenged is capable of being a penalty. It was clear from Cavendish v Makdessi that this depends on whether the term is, in substance, a “secondary obligation” on a contracting party that applies when that party is in breach of a “primary obligation”. If it is, then the second question is whether it is in fact penal, and this depends on whether it imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the wronged party in enforcing the primary obligation.

The Judge agreed with Owners that clause 48 failed the initial test because it did not impose a secondary obligation on the parties, i.e. that if a primary obligation is not performed then the contract-breaker is under a secondary obligation to pay a specified sum of money. That is because the legal rules about penalties regulate the remedies available for breach of obligations, not the fairness of the contractual rights and obligations themselves. What followed was that whether the rules are engaged may depend on how a contractual provision is framed.

On that basis, the Judge considered the second question (whether the term was in fact penal) did not arise, because clause 48 was not subject to the penalty rules. So, the defence was rejected.

Forfeiture Relief

The Judge first determined, in applying The “Jotunheim” (fn.3), that he had, in principle, jurisdiction to grant relief from forfeiture, because under bareboat charters that amount to a hire purchase agreement the intention is, if all goes well, for the ownership of the vessel to be transferred to charterers on receipt of the final payment.

However, having assessed the wider factual evidence about Charterers’ conduct in relation to the legal proceedings before the Court, the Judge concluded that the equitable jurisdiction he had, which was to be applied on a discretionary basis, should not be exercised in Charterers’ favour, because the connection between the misconduct complained of by Owners (Charterers’ reprehensible behaviour, such as failing to comply with orders and undertakings of the Court and dishonesty, in and in relation to the legal proceedings) and the relief sought by Charterers was sufficiently close to debar Charterers from such relief.

Further, the Judge was not prepared to accept that Owners were able to perform the CPs, to receive hire payments in US dollars, to lawfully transfer the vessels to Charterers in due course or, alternatively, make restitutionary payments in lieu thereof to Charterers, in light of the agreed evidence of the US law experts about the risks faced by Owners, and those US persons associated with their beneficial ownership and operation, in contravention of the US sanctions regime – in circumstances where no licence was likely be granted by the US authorities, based on policy or national security interests, to allow the prohibited activities to continue.

Accordingly, the Judge held that Owners were entitled to terminate the CPs and repossess the vessels. Their right to repossession was not an unenforceable penalty and Charterers were not entitled to the relief from forfeiture they had sought.

Comment

This judgment provides a further interesting and timely consideration of the impact of US sanctions on shipping contracts where US persons are involved.

Whilst not covered above, the judgment went into detail on what happened after Mr Mallah was listed and blocked, and his purported divestment of the Charterers.

This was done in an attempt to get around the US sanctions, as an entity owned less than 50% by a sanctioned person is not a blocked asset of that person.

But the US Office of Foreign Asset Control urges caution with such purported divestments, which may become subject to future designation or enforcement.

As such, the fact that Mr Mallah and his associates had made the pretence of a divestment was a factor in them being unable to obtain equitable relief.


Footnote 1:

Clause 28, headed "Termination":

"(a) Charterers' Default

The Owners shall be entitled to withdraw the Vessel from the service of the Charterers and terminate the Charter with immediate effect by written notice to the Charterers if:

(i) The Charterers fail to pay hire in according with the provisions of this Charter …

(ii) The Charterers fail to comply with the requirements of:

(1) Clause 6 (Trading Restrictions)

(2) Clause 13(a) (Insurance and Repairs)

provided that the Owners shall have the option, by written notice to the Charterers, to give the Charterers a specified number of days grace within which to rectify the failure without prejudice to the Owners' right to withdraw and terminate under this Clause if the Charterers fail to comply with such notice;…".

Clause 29, headed "Repossession":

"In the event of the termination of this Charter in accordance with the applicable provisions of this Charter Clause 28, the Owners shall have the right to repossess the Vessel from the Charterers at her current or next port of call or at sea. or at a port or place convenient to them without hindrance or interference by the Charterers, courts or local authorities. Pending physical repossession of the Vessel in accordance with this Clause 29, the Charterers shall hold the Vessel as gratuitous bailee only to the Owners and continue to maintain, class and insure the vessel as required by the terms of this Charter notwithstanding the termination of the chartering of the Vessel. … All arrangements and expenses relating to the settling of wages, disembarkation and repatriation of the Charterer's Master, officers and crew shall be the sole responsibility of the Charterers….".

Clause 46, headed "Owners' Rights":

"(a) At any time after any circumstances described at Clause 45 (Events of Default) have occurred and are continuing, the Owners may, by notice to the Charterers, (aa) … and (bb) in all other cases immediately or on such date as the Owners shall specify, terminate the chartering by the Charterers of the Vessel under this Charter, whereupon the Owners may at their option (but with no obligation so to do):

(i) declare by notice given to the Charterers the aggregate amount of (i) the then Outstanding Principal and (ii) the Indemnity Sum to be immediately due and payable whereupon the same shall become immediately due and payable and the Charterers shall be obliged to pay the actual balance of the same to the Owners together with any interest in accordance with Clause 35(d) and then the applicable payment premium payable pursuant to Clause 34(i) as if the Outstanding Principal was being prepaid on the date of the Owners' notice; and/or

(ii) take any action at law and under the Relevant Documents to collect the full amount as mentioned in Clause 46(a)(i) above; and/or

(iii) unless the Charterers have paid to the Owners the full amount as mentioned in Clause 46(a)(i) above, by their agent or otherwise without further legal process, re-take the Vessel (wherever she may be)…

(iv) unless the Charterers have paid to the Owners the full amount as mentioned in Clause 46(a)(i), declare by notice given to the Charterers that the Vessel should be promptly re-delivered by the Charterers to the Owners whereupon the Charterers shall be obliged to cause the Vessel to be re-delivered to the Owners …

(v) unless that [sic] Charterers have paid to the Owners the full amount as mentioned in clause 46(a)(i), with or without retaking possession of the Vessel … to sell, lease or otherwise dispose of the Vessel …

(d) No remedy referred to in this Clause 46 … is intended to be exclusive, but each shall be cumulative. Save as expressly stated in this clause 46 …, the exercise or purported exercise of any one remedy shall not prevent the simultaneous or later exercise of any other remedy nor shall it prevent the later exercise of the same remedy. ….

(f) The Owners and the Charterers each agree that the payment of the Outstanding Principal and the Indemnity Sum as set out at Clause 46(a)(i) above is a reasonable pre-estimate of the damages that will be suffered by the Owners from the termination of the chartering of the Vessel and represent liquidated damages and not a penalty …".

Footnote 2:

[2013] UKSC 76

Footnote 3:

[2004] EWHC 671 (Comm)