Getting guarantees right: A look at Ocean Clap Shipping Ltd v Global Offshore Services BV EWHC 1591 (Comm)

Ocean Clap involved two claims brought by shipowners, Ocean Clap Shipping Ltd (OCSL) and MT Kailash Sarl (together, Owners), against Global Offshore Services BV (Charterers) for sums due under bareboat charterparties from 2014 for vessels Ben Nevis and Kailash. Two years after entering into the vessel hire agreements, the Charterers encountered significant financial difficulties. Following a series of unsuccessful restructuring negotiations, the Owners initiated legal proceedings, primarily seeking compensation for unpaid hire fees, as well as other liabilities, including expenses related to vessel arrests, repairs, and outstanding crew wages. The Owners also pursued claims against Global Offshore Services Ltd (the Guarantors), the Charterers’ parent company, for the maximum guaranteed sums under two separate guarantee agreements related to the charterparties.

The core dispute: The “General Agreement”

The primary defence raised by the Charterers was the existence of an alleged “General Agreement”. They contended that this agreement, formed by conduct around early 2016, effectively restored possession of the vessels back to the Owners and transitioned the Charterers’ role to technical and commercial management. This was argued to have cancelled the original charterparties, relieving the defendant of historic debts and absolving the Guarantors of their obligations. The Owners denied the existence of such an agreement, arguing there was no clear and unequivocal conduct to establish a contract, especially given inconsistencies in the Defendants' own evidence and the frequent “subject to contract” references in the credit restructuring negotiations.

Referring to the Aramis [1989] 1 Lloyd’s Rep 213, the judge set out what would be required to find that an alternative contract had been entered into by conduct. Namely that the conduct of one party would be reasonably understood as an offer on certain terms and that the conduct of the other would be reasonably understood as acceptance of these terms. If the parties’ might have acted exactly as they did in the absence of a contract, a contract by conduct will not be implied. The conduct must only make sense if only consistent with a new implied contract. Additionally, the judge was eager to point out that even if the conduct is not consistent with the original contract, this does not in itself necessarily imply a new contract. The conduct may have simply been a breach of contract. 

The court found there was no “General Agreement”. Mr Justice Butcher concluded that the conduct relied upon by the defendants, primarily the Charterers ceasing to pay hire and the Owners contributing to some vessel costs, was not “only consistent with the existence of the alleged General Agreement”. Instead, this conduct was more readily explained by the Charterers' lack of funds and the Owners' efforts to maximize cashflow and preserve the possibility of recovery under the existing charterparties. The defendants were not helped by the fact that their own witnesses suggested different dates for when the new contract came into effect (2016 and 2019) and both suggested the contract was formed orally rather than by conduct as per the pleaded case. Consequently, the Charterers were found liable for sums due under the Charterparties ($30 million to Kailash and $46.6 million to Ocean Clap Shipping Limited).

The more contentious dispute: Guarantor liability

Even after the “General Agreement” defence failed, the Guarantors maintained they had no liability under the guarantees. Their argument hinged on the fact that litigation was not commenced until April 2023, well after the expiry of both “Guarantee Periods” (July 2020 for Kailash and June 2021 for Ben Nevis). They argued that since the Guarantees, which were materially similar in content, stated they would “remain in full force and effect... for the duration of the Guarantee Period”, their liability ceased once that period ended. Furthermore, they contended that any liability required a demand and, since no demand was made within the Guarantee Period, no liability could have arisen. 

The court agreed with both of the arguments put forward by the Owners in response to this defence:

1. “See to it” Obligation :  

A traditional guarantee is a promise by the guarantor to be responsible for the debt or obligation of another if that party defaults. Lord Diplock in Moschi v Lep Air Services Ltd [1973] AC 331, at 348 termed these as “see to it” guarantees (sometimes known as surety guarantees) because the guarantor “will see to it that the debtor performed its own obligation to the creditor”. If the debtor is liable for default, the guarantor automatically becomes liable under the guarantee agreement. The guarantor’s liability is secondary because it rests on the continuing default of the debtor’s primary liability but is nevertheless an independent course of action. This can be contrasted with “demand guarantees”, where liability is triggered only once a demand is made on the guarantor, rather than simply upon the primary default. Various conditions may be imposed dictating the nature and form the demand must take. 

In the present case, the judge agreed with the Owners that on a proper construction, Clause 2.1.1(a) of the Guarantees provided for a “see to it” obligation creating immediate liability for the Guarantors upon the Charterers' failure to perform their obligations under the Charterparties. The Owners argued that Clause 2.1.1(a) was a separate and independent obligation from Clause 2.1.1(b) (which obliged the Guarantor’s to pay on demand). The judge agreed with this emphasising that 2.1.1.(a) was grammatically and syntactically expressed as a separate obligation and itself had no demand obligation. Therefore, liability under the guarantee agreements was held not to be conditional on demand. 

2. Post-Period Demand for Accrued Liabilities: Even if a demand was required for liability to arise, the Owners argued that they were perfectly entitled to make a demand after the expiry of the Guarantee Period so long as it related to a liability within the Period. They highlighted that Clause 2.1.1(b) did not specify when the demand had to be made, and commercially, it might be impractical to know the full extent of “Guaranteed Liabilities” within the Guarantee Period. Having found that demand was not needed, the judge did not need to deal with this point. But he agreed with this in any event. The clause specifying a time period for the guarantee was held to mean that the Guarantors will no longer continue to guarantee for liabilities after the Period ends, but liabilities that arose in the Period are not to be extinguished. As such, even if a demand had been needed, it could have been made after the Period had expired if relating to a breach within it. 

This case serves as a reminder to any party entering into a guarantee agreement to ensure clarity in drafting their obligations. It should be clear whether a clause creates a “see to it” obligation (where liability accrues on default) or an “on demand” obligation (where liability is triggered on demand). If both exist, as did here, it should be fully explained in the agreement which applies and in what circumstances. Similarly, if a guaranteeing party wants to limit its guarantee to a certain time period, this ought to be carefully drafted. If the intent is to extinguish all claims upon expiry, regardless of when the underlying default occurred, this must be stated unequivocally in the relevant clause.