From the pen of Mr Justice S Mohan sitting in the Singapore High Court comes another masterful judgment in a shipping-related case also with banking elements, decided by reference to English law. Gareth Williams summarises UBS AG v Owners of the vessel CHLOE V and Koch Shipping Pte Ltd.

UBS AG v Owners of the vessel CHLOE V and Koch Shipping Pte Ltd. concerned a dispute between UBS (the “Bank”) as mortgagee of the Vessel under a mortgage to secure a Facilities Agreement in favour of the mortgagor Owners (the “Owners”).

Owners wished to enter into a 2-year time charter with Koch. That was a charter which, under the terms of the Facilities Agreement, required UBS’ approval. The issue arose because Koch would only contract on terms that they received from the Bank a “Letter of Quiet Enjoyment” (“LQE”) - essentially a contractual undertaking from the Bank to Koch not to interfere with Koch’s quiet enjoyment of the Vessel for so long as Koch was not in breach of any of its obligations. This, however, the Bank was unwilling to provide because its perception of Owners’ financial circumstances gave cause for concern that they might indeed need to enforce their mortgage rights by arrest at some point during the currency of the proposed charter.

The threshold issue was whether the approval envisaged by the Facilities Agreement encompassed a decision to issue or not issue an LQE. The Court decided that it did not - the bank had no obligation at all in this regard. That really was the end of the case.

However, the Judge nevertheless went on to consider issues of wider significance, and in particular whether any decision with regard to issuance of a LQE involved an exercise of discretion and, if so, whether that discretion had been properly exercised.

The rules governing the exercise of a contractual discretion by one party to a contract affecting the other party are by now well established as a result of the Supreme Court decision in Braganza v BP Shipping. The party with the discretion must follow a proper decision-making process by which he acts honestly and rationally and takes into account only matters relevant to the purpose for which the discretion is conferred and ignores all others. Further that party must arrive at a conclusion which is not so unreasonable that no reasonable person in his position could reach. This does not set an objective standard – the point is not whether the Court finds the decision objectively reasonable (as, for example, when determining a price where none is stated – the price must be objectively reasonable). Essentially this sets a good faith standard of a limited kind – a duty to act honestly and rationally, but not extending to a requirement to actively promote the other party’s interests.

But some cases which appear to involve a discretion for one party to take a decision which will affect the other party do not attract even this limited duty. Thus, if the contract confers on a party an unfettered choice or absolute right as to which course of action to take, even this limited duty does not apply.

That is what the Court decided to be the case here. The Bank could either choose to enter into a contract with a third party charterer on the terms of a LQE, or it could choose not to do so – the freedom not to contract. The Court was impressed by the fact that the purpose of the Braganza duty is to prevent abuse by the decision maker. But where the parties are of equal bargaining power and there is no real risk of a conflict of interest (as was found to be the case in this case – it was as much in the Bank’s interest as the Owners’ to conclude a lucrative charter which would service the loan), there is no reason to limit the exercise of decision-making power.

Finally, of interest in the shipping context, the Court went on to consider the Owners’ argument that had there been a duty to act rationally the Bank had breached it by failing to factor in that the Bank’s rights to arrest were already restricted by the common law as reflected in the decision in The Myrto. A LQE (the Owners argued) could improve their common law position. That case stands for the proposition that a mortgagee is not entitled to interfere with the performance of a charter by exercising its rights under the mortgage if the charter does not prejudice the mortgage and the owner is willing and able to perform the charter. The Court rejected this argument on the ground that, given Owners’ financial circumstances, it was likely that The Myrto would not have precluded arrest, but in any event The Myrto was not universally applied – the Bank would probably have been able to arrest the Vessel somewhere in the world, and the LQE would have deprived them of that important right.