12 April 2024
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It's too late to bail now: key considerations for lenders, owners and charterers when sub-chartering ships and yachts

To The Point
(3 min read)

A recent case has highlighted key considerations for lenders, owners, and charterers of ships and yachts (SY Roro 1 Pte Ltd v Onorato Armatori Srl). It involved the termination of a head charter, the subsequent demand for re-delivery of vessels and the failure to do so by sub-charterers on the basis that their sub-charters remained in place notwithstanding the termination of the head charter. The court ruled that the sub-charters automatically ended when the head charter terminated. Key takeaways include the importance of detailed documentation, serving separate re-delivery notices to each sub-charterer, serving these notices as soon as possible, clarity on whether a sub-charter can extend beyond a head charter, and clear dispute resolution processes. The judgment is seen positively, but does not set a blanket rule for all charter chains, emphasising the need for clear contractual terms.

This note summarises some key considerations for lenders, owners and charterers of ships and yachts to protect their positions following the recent judgment delivered in relation to SY Roro 1 Pte Ltd v Onorato Armatori Srl, and not least to be certain of lenders' and owners' right to re-delivery when terminating a charter.

In this case, the owners of two ferries (the "Owners") entered into 12 year head charters with the first charterer (the "First Charterer") as part of a financing arrangement for the First Charterer to purchase the ferries. As such, the head charters included purchase options. In turn, the First Charterer sub-chartered and sub-sub-chartered the vessels through a series of back-to-back 12 year sub-charters with various group companies (the "Sub-Charterers"). These were bareboat sub-charters (i.e. no crew or provisions included), did not include purchase options but ultimately resulted in the final Sub-Charterer operating the vessels as daily ferries on time charters (i.e. a charter for a fixed period of time, as opposed to a voyage charter) in Italy.

Some time later the head charters with the First Charterer were automatically terminated as a result of a change of control in the charterers' shareholder that triggered an automatic termination event and the Owners demanded re-delivery of the vessels. The Sub-Charterers did not return the ferries and argued that the various sub-charters should remain in place notwithstanding that the head charter with the First Charterer had terminated.

After prolonged arbitration, the legal dispute was brought before the courts, who determined that the sub-charters automatically terminated when the head charter with the First Charterer terminated on the basis that:

  • a) the chain of sub-charters were expressed by all parties to sit "back-to-back" with the head charter; and
  • b) the head charter required the First Charterer to re-deliver the vessels free from any sub-charter upon termination.

The judgment is long, however the key takeaways for all owners, lenders and charters are:

  • 1) as is always the first message for any of these matters) document in detail in the charter documents what will happen upon the termination of any head/sub-charter (and lenders/owners should confirm the same when consenting to any new sub-charters);
  • 2) when serving notice for re-delivery on any charterer, serve separate re-delivery notices on each sub-charterer (in the above case, the court did not think that serving notice of re-delivery only on a head charterer and copied to sub-charterers was enough);
  • 3) serve the re-delivery notices to all charterers and sub-charterers as soon as reasonably possible (in the above case, there was an argument that the Owner delayed in serving the re-delivery notices and therefore the Sub-Charterers should therefore assume that re-delivery was not required);
  • 4) it should be made clear if it is intended that any sub-charter can extend beyond the period of a head charter, even if would otherwise appear obvious (for example, it may not be enough just for the term of a sub-charter being longer than the term of the head charter without express wording confirming that such sub-charter should outlive any head charter); and
  • 5) be clear about how disputes are settled through arbitration or otherwise to ensure speedy resolutions. This case was expedited through the courts as there were concerns that the insurance covering the vessels would terminate upon the termination of the sub-charters (as insurance typically automatically terminates upon a change of flag). These are time critical considerations and it is vital to always consider the impact of any charter / termination on a vessel's insurance.

This judgment is viewed positively by most parties, however the cautionary note is that the case was decided on its own facts and does not set out a blanket rule that will automatically apply to all charter chains – clear contractual terms are the only way to ensure that there are no subsequent surprises.

Next steps

You can speak to us about properly documenting charters, as well as all other shipping arrangements such as acquisitions and finance – get in touch with one of our specialists.

To the Point 

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