Exploring the nuances of charter agreement terms and financing disputes: The covert influence of letters allowing uninterrupted use
In a significant ruling, the Singapore High Court applied English law to a dispute involving ship finance, charterparty negotiations, and mortgagee enforcement rights. The case, known as CHLOE V, has shed light on the role and importance of a Letter of Quiet Enjoyment (LQE) in ship finance.
At the heart of the dispute was the question of whether a financier, or mortgagee, is obligated to issue an LQE to a charterer, even if doing so might compromise the financier's security. The Court affirmed that the financier is under no obligation to issue an LQE, as it would materially curtail the bank's enforcement rights.
An LQE is a contractual undertaking by the financier not to interfere with the charterer's quiet enjoyment of the mortgaged vessel. The decision demonstrates how the Singapore Courts consider the commercial realities and rights of parties against the backdrop of ship finance.
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 financier has complete freedom to issue an LQE at any time, unlike the shipowner. It would be best for financiers to ensure that loan documentation preserves absolute discretion and maintain clear internal policies on LQE issuance.
The judgment underscores the risks of embedding lender-dependent conditions into charterparty negotiations. The owner's failure to secure an LQE can render the charter inoperative. Shipowners should secure the necessary pre-approvals from financiers before concluding charterparty negotiations.
Shipowners must ensure that charterparty performance is not contingent on third-party approvals that are not realistically achievable to avoid overcommitting and underdelivering. The bank stated in the CHLOE V SGHC 142 decision that banks grant a Liner Outturn Quality Endorsement (LQE) to a charterer only when there is sufficient assurance of payment and compliance with contractual obligations.
Charterers should negotiate flexibility in the LQE clause or explore alternative forms of comfort that may be more palatable to lenders. 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 determined that the bank's refusal to issue the LQE was commercially rational, and there was no duty on the financiers to give reasons for refusing to issue an LQE. The decision serves as a reminder to parties involved in ship finance to carefully navigate the complexities of LQEs and ensure clear communication and agreement on their use.
