Examining the intricacies of charter agreements and financial friction: The subtle yet potent influence of Letters of Peaceful Possession

Ship Finance Court Ruling Highlights Importance of Lender Approval and LQE

In a recent ruling, the Singapore Courts reaffirmed the principle that financiers have the right to protect their security, even if it frustrates the borrower's commercial arrangements. The case in question, CHLOE V, involved the Hellenic Bank, which refused to grant an LQE (Letter of Quiet Enjoyment) to the charterer, leading to the charter becoming inoperative.

The court drew a clear distinction between the owner's contractual obligations under the charterparty and the lender's rights under the loan documents. The owner was required to secure the financier's approval before entering into certain charter commitments for the vessel. This approval was necessary for bareboat or demise charters, charters lasting more than 12 months, charters with materially less beneficial terms, and charters to another Group Member.

An LQE is a contractual undertaking by the financier not to interfere with the charterer's quiet enjoyment of the mortgaged vessel. LQEs provide charterers with a degree of certainty that their use of the vessel will not be disrupted by the mortgagee, even in the event of the owner's default. However, the fact that the charterparty was conditional on an LQE did not, in itself, impose any duty on the lender to issue one.

The court considered that an implied Prevention Term could not be implied into the financier's decision not to issue an LQE. The financier's decision was commercially rational, and there was no duty on the financiers to give reasons for refusing to issue an LQE. The court found that the financier's decision not to issue the LQE was not subject to the Good Faith Term, the Reasonableness Term, and the Wednesbury Term.

The judgment underscores the risks of embedding lender-dependent conditions into charterparty negotiations. 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.

The decision demonstrates how the Singapore Courts consider the commercial realities and rights of parties against the backdrop of ship finance. The court considered the LQE's status as a pre-condition to the charter to be a red herring. The bank, by refusing to issue an LQE, was under no obligation to compromise its enforcement rights, particularly its ability to arrest and sell the vessel.

The case serves as a reminder for shipowners to carefully consider the feasibility of charterparty conditions that depend on third-party approvals, particularly from mortgagees. Financiers should ensure that loan documentation preserves absolute discretion and maintain clear internal policies on LQE issuance.

In conclusion, the CHLOE V case reinforces the importance of securing financier approval before entering into charter commitments and the risks of embedding lender-dependent conditions into charterparty negotiations. It underscores the need for shipowners and charterers to carefully consider the feasibility of such conditions and for financiers to maintain clear policies on LQE issuance.

Examining the intricacies of charter agreements and financial friction: The subtle yet potent influence of Letters of Peaceful Possession