Examining contracts in shipping agreements and financial obstacles: The silent yet potent impact of Letters of Quiet Possession

In a significant ruling that sheds light on ship finance, charterparty negotiations, and mortgagee enforcement rights, the Singapore High Court handed down its decision in the case of The CHLOE V [2025] SGHC 142. The case centred around the refusal of the Changsha Bank to issue a Letter of Quiet Enjoyment (LQE), a contractual undertaking by a financier (mortgagee) not to interfere with the charterer's quiet enjoyment of the mortgaged vessel.

The court considered the LQE's status as a pre-condition to the charter to be a red herring. It drew a clear distinction between the owner's contractual obligations under the charterparty and the lender's rights under the loan documents. The fact that the charterparty was conditional on an LQE does not, in itself, impose any duty on the lender to issue one.

The financier, unlike the shipowner, has complete freedom to contract and is at liberty to issue an LQE at any time. However, the court found that the bank had legitimate concerns about the borrower's financial health, the sufficiency of charter hire, and the risk of a security shortfall. As such, the bank's refusal to issue the LQE was commercially rational.

The court also determined that the financier's discretion in approving charter commitments would not be subject to the Good Faith Term, Reasonableness Term, Wednesbury Term, or the Braganza duty. Furthermore, the court could not imply a Prevention Term into the financier's decision not to issue an LQE.

The Singapore Courts are known for considering commercial realities and rights of parties against the backdrop of ship finance. In this case, the court recognised the feasibility of embedding lender-dependent conditions into charterparty negotiations as questionable, as it can lead to overcommitting and underdelivering by the shipowner with potentially catastrophic consequences.

The decision in The CHLOE V highlights the importance of shipowners ensuring that charterparty performance is not contingent on third-party approvals that are not realistically achievable. Shipowners should secure the necessary pre-approvals from financiers before concluding charterparty negotiations.

Charterers should negotiate flexibility in the LQE clause or explore alternative forms of comfort that may be more palatable to lenders. Financiers should ensure that loan documentation preserves absolute discretion and maintain clear internal policies on LQE issuance.

LQEs are common in modern shipping transactions, particularly in long-term time charters, and provide charterers with a degree of certainty that their use of the vessel will not be disrupted by the mortgagee. Issuing an LQE can materially curtail a bank's enforcement rights, especially its ability to arrest and sell the vessel.

In conclusion, the Singapore High Court's decision in The CHLOE V provides valuable insights into the complex interplay between ship finance, charterparty negotiations, and mortgagee enforcement rights. It underscores the need for parties to navigate these intricacies with care and foresight to avoid potential disputes and ensure smooth operations.

Examining contracts in shipping agreements and financial obstacles: The silent yet potent impact of Letters of Quiet Possession