Exploring the nuances of charterparty terms and financing disagreements: The covert influence of Letters of Peaceful Possession

In a recent ruling, the Singapore Court of Appeal shed light on the risks of embedding lender-dependent conditions into charterparty negotiations, as demonstrated in the CHLOE V case. This dispute arose from a mortgagee's refusal to issue a Letter of Quiet Enjoyment (LQE), which led to the collapse of a charterparty and the arrest and judicial sale of a vessel.

The charterparty in question was conditional on an LQE, but this condition did not, in itself, impose any duty on the lender to issue one. The financier had the right to refuse issuing an LQE, a decision that would not be subject to the Good Faith Term, the Reasonableness Term, or the Wednesbury Term.

The financier expressed legitimate concerns about the borrower's financial health, the sufficiency of charter hire, and the risk of a security shortfall. These concerns were taken into account by the Court, which found that the bank's refusal to issue the LQE was commercially rational. There was no duty on the financiers to give reasons for refusing to issue an LQE.

An LQE is a contractual undertaking by the financier (mortgagee) that it will not interfere with the charterer's quiet enjoyment of the mortgaged vessel. Issuing an LQE would have materially curtailed the bank's enforcement rights, particularly its ability to arrest and sell the vessel.

The court drew a clear distinction between the owner's contractual obligations under the charterparty and the lender's rights under the loan documents. This decision underscores the importance for financiers to ensure that loan documentation preserves absolute discretion and maintains clear internal policies on LQE issuance.

Shipowners should secure necessary pre-approvals from financiers before concluding charterparty negotiations. Owners must ensure that charterparty performance is not contingent on third-party approvals that are not realistically achievable to avoid overcommitting and underdelivering.

Charterers should negotiate flexibility in the LQE clause or explore alternative forms of comfort that may be more palatable to lenders. This approach can help mitigate the risks associated with lender-dependent conditions in charterparty negotiations.

The CHLOE V decision demonstrates how the Singapore Courts consider the commercial realities and rights of parties against the backdrop of ship finance. This ruling serves as a valuable reminder for all parties involved in ship finance transactions to carefully consider the potential implications of embedding lender-dependent conditions into charterparty negotiations.

Exploring the nuances of charterparty terms and financing disagreements: The covert influence of Letters of Peaceful Possession