SY Roro 1 & Anor v Onorato Armatori & Ors (The “Alf Pollak” and “Maria Grazia Onorato”)
DMC/SandT/24/10
England
SY Roro 1 Pte Ltd & Another v Onorato Armatori S.r.l. & Others (The “Alf Pollak” and “Maria Grazia Onorato”)
English Commercial Court: Sir William Blair: [2024] EWHC 611 (Comm): 21 March 2024
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2024/611.html
James Leabeater KC and Edward Jones (instructed by Stephenson Harwood LLP) for SY Roro 1 & Another (Head Owners)
Michael Collett KC and Malcolm Jarvis (instructed by Hill Dickinson LLP) for Onorato Armatori & Others (Charterers’ Group)
BAREBOAT CHARTERS: WHETHER CHARTERS VALIDLY TERMINATED BY OWNERS FOR BREACH BY CHARTERERS’ GROUP GUARANTORS: WHETHER SUB-CHARTERERS AND SUB-SUB-CHARTERERS ENTITLED TO RELIEF FROM FORFEITURE (THAT IS, NOT TO LOSE POSSESSION AND CONTROL OF THE VESSELS, WHICH WOULD REQUIRE THE COURT TO IMPOSE NEW CHARTERS BETWEEN HEAD OWNERS, SUB-CHARTERERS AND SUB-SUB-CHARTERERS): IMPACT OF NON-COMPLIANCE BY HEAD CHARTERERS WITH ARBITRAL TRIBUNAL’S ORDER TO REDELIVER VESSELS TO HEAD OWNERS
(N.B. permission to appeal was refused following applications to and an oral hearing before Males LJ in the Court of Appeal on 19 April 2024.)
Summary
In finding for Head Owners, and in ordering the vessels’ immediate redelivery in accordance with Head Owners’ instructions, the High Court held that:
(1) Head Owners had validly terminated the two head bareboat charters because Guarantors had put Charterers’ Group in breach by triggering a change in control event, by selling 49% of the shares in Sub-Charterers to a third-party, as a result of which all of the bareboat charterers, in effect, had come to an end; and
(2) Assuming that there was jurisdiction to exercise discretion to grant relief against forfeiture, Sub-Charterers and Sub-Sub-Charterers were not entitled to relief because commercial certainty in transactions was very important and proportionality dictated that parties would usually be held to their bargain.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes
Background
The roll-on/roll-off ferry vessels “Alf Pollak” and “Maria Grazia Onorato”, owned by Head Owners, SY Roro 1 Pte Ltd and SY Roro 2 Pte Ltd (part of the Siem group of companies who also owned the yard where the vessels were built), were chartered for a period of 12 years via a series of back-to-back bareboat charters entered into by way of the financing of the acquisition of the vessels by Head Charterers, F.lli Onorato Armatori S.r.l., a special purpose vehicle created for the sole purpose of entering into the financing and purchase transactions for the vessels. The Head Charters were subject to London arbitration and English law.
Head Charterers were guaranteed by Guarantors, Onorato Armatori S.r.l. (the holding company of the Onorato group of companies). Head Charterers in turn bareboat sub-chartered to Sub-Charterers, Moby S.p.A., who in turn bareboat sub-sub-chartered to Sub-Sub-Charterers, Compagnia Italiana di Navigazione S.p.A., who in turn time chartered the vessels to a ferry company, DFDS, for operation in Italy.
Guarantors owned, directly or indirectly, the majority of shares in, and controlled, Head Charterers, Sub-Charterers and Sub-Sub-Charterers. The bareboat charters chain was entered into because Sub-Charterers were prevented by accounting or financial reasons from entering into a bareboat charter of 12 years’ duration (the period required by Head Owners’ financiers to agree to the transactions).
Under the Head Charters, Guarantors were obliged to maintain, directly or indirectly, 77.4% of the shares or voting rights in Sub-Charterers. A change to the Sub-Charterers’ shareholdings, because Guarantors sold 49% of the shares in Sub-Charterers to SAS (part of the MSC group of companies), in return for a capital injection by MSC into Sub-Charterers (due to financial difficulties), was the subject of Head Owners’ alleged right to terminate the Head Charters.
Owners’ case was that the Head Charters had been validly terminated, since the material change of control event clauses had been triggered by the share sales to SAS, and that they were entitled to have the vessels redelivered to them. An arbitral tribunal under the Head Charters made orders for the vessels to be redelivered to Head Owners but Head Charterers did not comply with the orders.
The High Court proceedings were brought by Head Owners under Multipartite Agreements and Guarantees to which all the parties to the transaction (excluding DFDS) were parties, to seek urgent injunctive relief under section 44(3) of the Arbitration Act 1996 in the form of an order requiring Head Charterers to redeliver the vessels which were the subject of the Head Charters. The Multiparty Agreements and Guarantees were subject to the jurisdiction of the English High Court, and all relevant contracts were subject to English law.
With the vessels being stuck in a legal limbo, the High Court was satisfied that the redelivery issue needed to be determined quickly. The vessels’ insurance was adversely affected, since it would be automatically terminated on a change of flag state registration, with the Head Charterers’ registry (Malta) needing to be informed of the terminations of the Head Charters, which in turn would then remove the vessels’ sub-registration in Italy where they were being operated.
Judgment
Having dealt with the background, material facts, charter terms and parties’ submissions, the Judge addressed the issues and found and held as follows:
(1) Legal consequences of termination of the Head Charters on the Sub-Charters and Sub-Sub-Charters
It was common ground that a termination event had occurred under the Head Charters and that Head Owners had lawfully terminated the Head Charters.
The Judge accepted Head Owners’ submissions that, when the Head Charters were terminated, the rest of the charter chain should be treated as coming to an end too, because the foundation on which the possessory rights created by the Sub-Charters and the Sub-Sub-Charters was built had gone. That conclusion, said the Judge, best reflected the particular contractual arrangement between the parties here.
(2) Claim for relief against forfeiture
Head Charterers’ claim for relief against forfeiture was subject to detailed consideration in the arbitration reference and refused by the arbitral tribunal. Sub-Charterers and Sub-Sub-Charterers, who were not parties to the Head Charters’ arbitration agreement, made the same claim for relief in the present proceedings.
Like the arbitral tribunal, the Judge distinguished between the questions of (a) whether the court had jurisdiction to be able to grant such relief, and (b) whether the court should exercise its discretion to grant such relief.
As to question (a), the Judge held on an obiter (i.e. non-binding) basis that the claim for relief against forfeiture did fall within the present proceedings arising because these were back-to-back bareboat charters, with the jurisdiction of the High Court arising and being invoked under the Multipartite Agreements.
The Judge noted that relief against forfeiture involved the adjustment of contractual rights. However, he considered, unlike in the land or land-based chattels (i.e. physical assets) leasing context, the imposition by the High Court of new charters between Head Owners and Sub-Charterers or Sub-Sub-Charterers raised some difficult questions and, in his view, was unlikely to be ordered whatever the view taken as to the power to grant relief.
As to question (b), Sub-Charterers and Sub-Sub-Charterers’ case was that the High Court should exercise its discretion to relieve them from forfeiture on the grounds that it would be unconscionable not to do so, in circumstances where the consequences would be drastic for them, and Head Owners would gain a significant benefit out of all proportion to any legitimate benefit they would have enjoyed if Guarantors had not ceased to hold 77.4% of the Sub-Charterers’ shares.
However, the Judge considered that Head Owners had a legitimate interest in Sub-Charterers’ shareholding and it could not be said that reduction in the controlling shareholding from 77.4% to 51% was immaterial. The proportionality of the result had to be measured against what the parties had agreed would be the result. The Judge agreed with the arbitral tribunal’s view that commercial certainty was very important and that the case law demonstrated relief from forfeiture would (rightly) rarely be granted in bespoke contracts negotiated between experienced commercial counterparties.
Accordingly, on the assumption there was jurisdiction, the Judge was not prepared to exercise that discretion; thus he refused Sub-Charterers and Sub-Sub-Charterers’ application for such relief. Therefore, for the reasons given, the Judge concluded, in support of the arbitral tribunal’s orders, that the vessels must be redelivered immediately in accordance with Head Owners’ instructions.
Comment
This judgment reflects the potential difficulties of grappling with disputes arising under high-value, long-term and cross-border chattel (moveable asset e.g. vessel or aircraft) lease and purchase financing arrangements which may, by necessity, have to use complex and multiparty contracts to facilitate the transaction.
The outcome of this judgment has, in effect, been affirmed by the Court of Appeal refusing permission to appeal. It is also reflective of a similar outcome the High Court more recently reached under four “JOLCO” (Japanese Operating Lease with Call Option) aircraft lease and purchase financing transactions (fn.1).
While the Judge took the view that certainty in commercial transactions is needed, as highlighted by The “Scaptrade” (fn.2), so that exercising discretion to relieve from forteiture in the maritime and aviation contexts may rarely be forthcoming, there appears to be good sense in ensuring that, if London arbitration is agreed in a head bareboat charter, the terms of any chain of related bareboat sub-/sub-sub-, etc charters are drafted so as to make the outcome in the head arbitration reference binding on all parties involved, thus avoiding the possibility of satellite litigation.
Footnote 1:
FW Aviation (Holdings) 1 Ltd v VietJet Aviation JSC [2024] EWHC 1945 (Comm), available at https://www.bailii.org/ew/cases/EWHC/Comm/2024/1945.html, which cited the judgment which is the subject of this present case note
Footnote 2:
Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 1 QB 529 (CA) at 540; affirmed by the House of Lords: [1983] 2 AC 694 (HL)
