Ceto Shipping Corporation v Savory Shipping Inc

A contractual condition requiring payment of all sums due under a charterparty is not confined to sums presently payable directly to the owner. An indemnity may be engaged by an actual claim against the owner or vessel for expenditure which the charterer agreed to bear, even before the owner has paid it. Where a management agreement permits refusal of performance if, in the manager’s reasonable judgment, performance would expose specified persons to sanctions, the judgment must be made in good faith and be objectively reasonable. A serious possibility of sanctions is sufficient; virtual certainty is unnecessary. Contractual termination machinery must be followed, and common-law termination cannot ordinarily be used to bypass it. A conditional title-transfer obligation arising only on charter expiry is an all-or-nothing condition. If the conditions are unsatisfied at expiry, the right to transfer cannot be revived by later payment.

Ceto chartered the vessel Victor I from Savory under a 36-month bareboat charterparty. The charterparty, as amended, required Savory to transfer title on expiry if Ceto had paid all sums due under the charterparty and management agreement. Ceto also entered into a management agreement with Delfi.

Ceto alleged that it had validly terminated the management agreement after Delfi refused to procure performance of a voyage involving Iranian-origin gasoline destined for Venezuela and failed to provide documents concerning additional war-risk insurance. Savory maintained that sanctions risk justified the refusal, that management fees and other sums remained due, and that third-party claims relating to the vessel also defeated the transfer condition.

The principal issues were whether the third-party claims and management liabilities were sums due under the relevant agreements, whether Ceto’s termination was effective, and whether later payment could revive the right to acquire title after the charter expired.

1. Claim dismissed. Savory was entitled to declarations that the conditions for transfer of title were unsatisfied at the expiry of the bareboat charterparty and that the transfer obligation could never thereafter accrue.
2. Clause 10(b) allocated responsibility between Ceto and Savory for the vessel’s operating expenses. A mere third-party liability did not automatically become a sum due under the charterparty. However, the crew claim was within clause 37.1.1 because it was an expense Ceto had agreed to pay and had been claimed against the owner through an in rem claim. The claim therefore defeated the transfer condition. The Arte bunker claim independently fell within the same indemnity because it was an expense Ceto had agreed to pay and had been claimed directly against Savory. The Meck claim, arising later and lacking the same direct claim, was insufficient.
3. The insurance breaches did not validly terminate the management agreement. The termination notice relied principally on the refusal to perform the Imperium Charter, and any clause 5 insurance breach required the contractual ten-day remedy period. The alleged insurance breaches were not repudiatory, and common-law termination could not be used to avoid the contractual machinery.
4. Clause 25.1 permitted Delfi to refuse performance where, in its reasonable judgment, performance would expose the relevant parties or stakeholders to sanctions. Applying [2011] EWHC 2862 (Comm), the judgment had to be made in good faith and be objectively reasonable. The process used to reach it did not itself have to be reasonable, provided the conclusion was objectively reasonable. A serious possibility of sanctions was sufficient. The court found that Savory had made a genuine and objectively reasonable assessment, given the combined Iranian origin, Venezuelan destination, deceptive documentation and sanctions context. Delfi was therefore entitled to refuse performance.
5. Ceto’s purported termination was consequently wrongful and ineffective. The later consensual change of manager generated a 90-day early termination fee of US$720,000, which was itself due under the management agreement.
6. Clause 39.1 operated on an all-or-nothing basis. The conditions had to be met on 1 April 2022. Later payment could not revive the right to transfer title, particularly in light of the contractual consequences of charterer default and the subsequent judicial sale of the vessel.

not stated in the judgment.