Ceto Shipping Corporation v Savory Shipping Inc (The “Victor 1”)

DMC/SandT/26/03

England

Ceto Shipping Corporation v Savory Shipping Inc (The “Victor 1”)

English Commercial Court: Cockerill J: [2025] EWHC 2033 (Comm): 31 July 2025

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2025/2033.html

Chris Smith KC and Caleb Kirton (instructed by Stephenson Harwood LLP) for Ceto (Bareboat Charterers)

Oliver Caplain KC and Eliza Bond (instructed by Waterson Hicks) for Savory (Registered Owners)

BAREBOAT CHARTER: SHIP MANAGEMENT AGREEMENT: US IRANIAN AND VENEZUELAN SANCTIONS: WHETHER OWNERS OBLIGED TO TRANSFER TITLE IN VESSEL TO CHARTERERS ON EXPIRY OF CHARTER PROVIDED NO SUMS REMAINING DUE AND OWING UNDER CHARTER AND SHIP MANAGEMENT AGREEMENT: WHETHER CHARTERERS ENTITLED TO TERMINATE SHIP MANAGEMENT AGREEMENT WHEN MANAGERS REFUSED TO COMPLY WITH CHARTERERS’ EMPLOYMENT ORDER, RELYING ON SANCTIONS CLAUSE

DMC Rating: Developed

Summary

In finding for Owners, the High Court held that:

(1) the conditions for the transfer of the title to the Vessel in clause 39.1 of the Charter were not met as at the date the Charter expired, sums remaining “due” to Owners because Charterers incurred but did not discharge third party debts (unpaid wages and bunkers) as per their obligations under clause 10(b), so no obligation on Owners to transfer title to Charterers accrued at all; and

(2) on the expiry of the Charter sums also remained “due” to Managers under clause 39.1 of the Charter, Managers having been within their right to refuse to comply with Charterers’ orders, to load and carry Iranian gasoline to Venezuela, under (sanctions) clause 25.1 in the Ship Management Agreement, which Charterers had wrongfully repudiated due to Managers’ refusal.

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 Deputy Editor of DMC’s Case Notes

Background

Owners bareboat chartered their tanker, “Victor 1” (“Vessel”), to Charterers for 36 months as an arrangement to finance the purchase of the Vessel by Charterers, there being an obligation on Owners to transfer the title to the Vessel to Charterers on the expiry of the charter (“Charter”).  The transfer obligation arose, under clause 39.1 of the Charter, so long as there were no sums due and owing on the expiry of the Charter to (a) Owners under the Charter and (b) Managers under the Ship Management Agreement (“SMA”).

During the performance of the Charter, Charterers had caused claims to be brought against the Vessel by third parties for unpaid wages and bunkers, which led to her arrest at Singapore.  Charterers also purported lawfully to terminate the SMA as a result of Managers’ refusal to comply with employments orders for a voyage, ultimately, to Venezuela, to discharge Iranian gasoline, when the Master and crew objected.

Owners refused to transfer the title to the Vessel to Charterers on the expiry of the Charter. This was premised on sums remaining “due” on the expiry of the Charter to Owners under the Charter and to Managers under the SMA.

However, Charterers contended that all hire, and other sums, directly due to Owners had been paid by Charterers and that the claims relied on by Owners were not ones that fell within the ambit of clause 39.1.  Charterers also contended that no sums remained “due” to Managers under the SMA.

The latter contention hinged on the premise that Charterers had validly terminated the SMA because Managers had wrongfully failed to comply with Charterers’ orders to perform a particular sub-charter (“Imperium Charter”).  This aspect raised questions related to US Iranian and Venezuelan sanctions risks.

There were included in the Charter the following, among other relevant terms:

“Box 20

Trading limits (Cl.6): Worldwide range, always excluding war zones, US and US territories, Syria, North Korea, TOC, Papau New Guinea, Australia, New Zealand, Venezuela, Yemen, Israel, Cuba, Iran, ...

…

10. Maintenance and Operation

. . .

(b) Operation of the Vessel. The Charterers shall at their own expenses and by their own procurement man, victual, navigate, operate, supply, fuel and whenever required repair the Vessel during the Charter Party and they shall pay all charges and expenses of every kind and nature whatsoever incidental to their use and operation of the Vessel under this Charter. . . The Master, officers and crew of the Vessel shall be the servants of the Charterers for all purposes whatsoever, even if for any reason appointed by the Owners.

…

39.1 Purchase obligation

On expiration of this charter, and provided that the Charterers have paid all hire and any other sums due under this Charter and provided that the Charterers have also paid all management fees and any other sums due under the Management Agreement to Delfi, it is agreed that Owners will sell the Vessel to Charterers for no further consideration, that title to the Vessel will automatically transfer to Charterers and Charterers will automatically be required to purchase and will be deemed to have purchased the Vessel. The sale will be in accordance with the MOA appended to this contract.”

There was included in the SMA the following, among other relevant terms:

“25. LEGALITY

25.1 The Parties shall not be obliged to comply with the provisions of this Agreement if in the reasonable judgment of the Parties it will expose them or their insurers, re-insurers, crew, registered owners, to any sanction or prohibition or restriction imposed by any State, Supranational or International Governmental Organization.…”

This case note focuses on the SMA sanctions aspect, which the Judge described as “the centre of gravity of the trial”.

Judgment

Having dealt with the background, material facts, Charter and SMA terms and parties’ submissions, the Judge addressed the issues and found and held as follows on the SMA sanctions aspect.

The Judge concluded that Charterers were not entitled to terminate the SMA because of Managers’ and the Master’s refusal to perform the Imperium Charter.  That would have required the Vessel to carry Iranian origin gasoline to Venezuela, contrary to US sanctions applicable to both countries at that time.

Both countries were subject to Executive Orders (“EOs”) blocking or embargoing oil and petroleum products trades and authorised the US Office of Foreign Assets Control (“OFAC”) to designate those who directly or indirectly materially facilitated such trades irrespective of nationality.  The experts’ opinion and the US Congressional Research Service’s published evidence suggested there was a high risk of OFAC designating those who contravened the EOs.

The Imperium Charter would, in principle, have involved the carriage of Iranian gasoline from Sohar, Oman OPL to Trinidad and Tobago OPL.  However, the latter place was understood, in truth, to be a proxy for the cargo likely being intended for discharge at El Palito, Venezuela.  That led the Master and crew to refuse, after the cargo had been loaded, to perform the rest of the voyage.  Managers in turn refused to comply with Charterers’ order.

Charterers purported to terminate the SMA on the grounds that Managers had wrongfully refused to oblige the Vessel to perform the voyage.  Managers and Owners denied and contested Charterers’ allegations and their actions in seeking to replace Managers with another ship management company.

The Imperium Charter was, in the event, never performed, but Owners, in an act of pragmatism, eventually allowed other ship managers to be appointed by Charterers, and the cargo was, instead, discharged at Khor Fakkan, UAE.

Whether or not, on the expiry of the Charter, any sums were left outstanding to Managers, which would, if they were, deny Charterers the right to have the title to the Vessel transferred to them, depended on whether or not Charterers’ purported termination of the SMA was lawful or repudiatory.

As the Judge identified, clause 25 of the SMA permitted Managers to refuse to comply with any order, which, in Managers’ reasonable judgment, would expose them, or one of the other named entitles, to having a sanction imposed upon them. That begged the question, what needed to be established to prove a reasonable judgment had been exercised.

The Judge considered that what mattered was whether the judgment was objectively reasonable, not whether the process of reaching it was reasonable or sensible. That was because, if an objectively reasonable decision were reached, it would not matter how that result was achieved.

The Judge also considered that Managers were not obliged to show there was a “virtual certainty” of them, or the Vessel’s crew or P&I club, being designated.  That was for two reasons.  First, clause 25 was not a “result” wording (i.e. requiring that the act would result in sanctions being imposed).  Second, such a level of certainty was inapt for civil commercial events.  So, the Judge concluded that a serious possibility of sanctions resulting would entitle Managers to reasonably form the view that the Vessel was exposed to sanctions.

The evidence as a whole led the Judge to draw the clear conclusion that Managers had made a reasonable assessment that there was a serious (high) possibility, or risk, of them being exposed to sanctions if they were to comply with Charterers’ order to discharge the Iranian cargo in Venezuela.

As a result, Managers were entitled to refuse compliance with the order. Charterers were accordingly in repudiatory breach of the SMA, and therefore were not entitled to have the Vessel’s title transferred to them, because there remained sums due to Managers under the SMA on the expiry of the Charter.

Comment

This judgment, unlike The Catalan Sea (fn.1), is a good example of a party being able to rely on a sanctions clause to refuse charterers’ employment orders.

Relying on a sanctions clause in the context of a case like The Catalan Sea could, in principle, be far more problematic, because of the need promptly to factually investigate and establish the probability of the specific party (e.g. shipper) being subject indirectly to sanctions, via ownership or control by a sanctioned party.

By contrast, sanctions on a trade, commodity or country, as arose in the present case, could, in principle, be less problematic to research and to determine the probability of their applicability and the chance of a real exposure to sanctions.

This significant difference arises because the former type of case can depend on getting quick access to corporate records in jurisdictions where they may not be publicly accessible (at all or in full) or up to date (due to delayed filing) – a standard third-party corporate due diligence report alone may be inadequate.

The above suggests that those who may need to rely on sanctions clauses, to refuse orders, may wish to amend them to be less stringent in order to recognise the limitations in being able to quickly and robustly investigate factually the status of a party that is not itself designated but, by reason of ownership or control, may be indirectly sanctioned.

Footnote 1:  Tonzip Maritime Ltd v 2Rivers Pte Ltd [2025] EWHC 2036 (Comm)