Exploring the intricacies of charter agreements and financial obstacles: The understated influence of Letters of Peaceful Possession
In a recent ruling, the court found that a financial institution's refusal to issue a Letter of Quiet Enjoyance (LQE) was lawful and commercially rational. The decision sheds light on the potential risks of embedding lender-dependent conditions into charterparty negotiations.
The case in question involved the financial institution BNP Paribas, which refused to issue an LQE for the vessel CHLOE V. The court drew a clear distinction between the owner's contractual obligations under the charterparty and the lender's rights under the loan documents.
LQEs are a common feature in modern shipping transactions, particularly in long-term time charters. They are contractual undertakings by the financier (mortgagee) not to interfere with the charterer's quiet enjoyment of the mortgaged vessel. However, the court affirmed that issuing an LQE would have materially curtailed the bank's enforcement rights, particularly its ability to arrest and sell the vessel.
The court's decision underscores the importance of negotiating flexibility in the LQE clause or exploring alternative forms of comfort that may be more palatable to lenders. Charterers should secure the necessary pre-approvals from financiers before concluding charterparty negotiations, and consider alternative comfort that a charterer can accept if financier approval cannot be obtained.
In ship financing facilities, it is common for shipowners to require financier approval before entering into certain charter commitments for the vessel. The financier's approval is required for charter commitments that pass possession and operational control of the Ship to another person, last more than 12 months, offer materially less beneficial terms than the open market, or are with another Group Member.
The court also emphasised that the financier has the right to refuse to issue an LQE, and this refusal would not be subject to the Good Faith Term, the Reasonableness Term, the Wednesbury Term, or the Braganza duty. This means that the financier is under no obligation to compromise its security for the commercial benefit of the borrower.
Shipowners must ensure that charterparty performance is not contingent on third-party approvals, especially from mortgagees, to avoid overcommitting and underdelivering. In the case of CHLOE V, the owner's failure to secure the LQE rendered the charter inoperative.
Financiers should ensure that loan documentation preserves absolute discretion and maintain clear internal policies on LQE issuance to prevent situations where in-principle approval may be incorrectly granted. This will help to avoid disputes and ensure that the interests of both parties are protected.
In conclusion, the court's ruling underscores the importance of understanding the risks associated with embedding lender-dependent conditions into charterparty negotiations. Both charterers and financiers should negotiate with flexibility and consider alternative forms of comfort to ensure a smooth transaction.
