Assignment of insurance: Obligation of the guaranteed lender to obtain a good recovery

In a judgment at the end of 2020 (Aegean Baltic Bank SA v Renzlor Shipping Ltd and Ors [2020] EWHC 2851 (Comm)), the High Court provided important guidance on a bank’s position under guarantee documents relating to a loan agreement, and its obligations in exercising its rights as assignee insurance policies on a ship. The case also highlights the intricacies of litigation involving multiple applicable laws and the difficulties faced by a party in breach of its disclosure obligations and being the subject of an order under which it is not authorized to produce or be based on factual or expert evidence.

Facts

Baltic Aegean Bank (“Bank”) had entered into a maritime loan facility agreement (“Loan agreement”) with the owners of the M / T “Starlet” (“The owners” and “Ship”, respectively) as borrowers. The loan agreement was governed by English law.

In return, the Bank received a security package, which included:

  1. An assignment of the Vessel’s insurance, which was governed by English law (“Mission”). As is customary in such agreements, the Assignment included a power of attorney in favor of the Bank, enabling the latter to collect, collect, settle and discharge all claims arising from these insurances;
  2. A company guarantee from the managers of the Vessel (“Managers”), which was governed by Greek law; and
  3. A personal guarantee from the Managing Director of the Managers (“Personal guarantor” and, together with the Owners and Managers, the “Accused”), which was also governed by Greek law.

The Vessel was insured against H&M risks under two different policies for a total amount of US $ 10.75 million. Under the first policy, governed by Italian law, Generali Italia SpA (“General”) has subscribed 20% of the risk (“General policy”). The remainder of the risk was taken out by various Lloyd’s syndicates under a second policy governed by English law (“Lloyd’s Policy”).

On July 31, 2015, the vessel suffered water infiltration in Yemen. The Owners did not serve a notice of abandonment on Generali until June 10, 2016 (“NOA”). Having received the NOA, Generali rejected the waiver also on the grounds that the NOA was prescribed under Italian law.

The Bank settled the claim against Generali on the basis of a partial loss and signed the settlement agreement in its own name (as assignee of the Generali Police) and that of the Owners (by virtue of the power of attorney in cession). The settlement amount was just under half of Generali’s liability for a CTL under Generali policy.

The Bank then claimed the outstanding balance under the Loan Agreement against the Owners and Guarantors.

The jugement

Mr. Adrian Beltrami QC (“the judge”), sitting as a judge of the High Court, delivered judgment on behalf of the Bank.

The defendants did not dispute that the debt was due under the loan agreement and guarantees. Instead, they sought to defend the Bank’s claim on a number of grounds, including the following:

  1. The Bank’s settlement with Generali was unreasonable: the Bank should have either settled on the basis of a CTL or sued Generali in court. In addition, the Bank had not effected any recovery under the Lloyd’s policy, either at all or within a reasonable time. Consequently, the Bank’s action should fail due to circuitry and / or it has given the Owners the right to damages and / or a deposit which could be deducted from the amount claimed by the Bank.
  2. Under Greek law, private guarantors and guarantors were exempt from all liability because the Bank:
    1. By his own gross fault, caused the inability of the Owners to repay the debt; and
    2. Has handled H&M insurance claims in a manner contrary to good faith, morals and / or the purpose for which these rights were granted.
  3. It should be noted that the defendants were prevented from producing or relying on factual or expert evidence due to a violation of a disclosure order “unless”. The judge stressed that it was seen as a choice not to produce such evidence on the part of the defendants, and the Court must ensure that the loopholes did not benefit the defendants – that is, it should draw unfavorable conclusions where appropriate. In matters of disclosure, the Judge knew that he had to remember that the file was not complete and that the Bank and the Tribunal had been prevented by the Defendants from knowing whether there were documents which could be unfavorable to the position of these latter.

In granting the Bank’s request, the judge drew the following important conclusions:

  1. As a starting point, the assignment of the Vessel’s insurance to the Bank meant that the Bank owed the following equitable duties to the Owners when it exercised its powers to settle the assigned claim:
    1. Exercise in good faith its powers with a view to obtaining reimbursement;
    2. Take reasonable precautions to achieve a good recovery.
  2. In particular, there is no obligation as to when to exercise these rights, although the timing of exercise or non-exercise may result in loss or damage to borrowers (owners in this case).
  3. Liability under the above equitable obligations had been authorized by a clause of the assignment in circumstances in which the Bank had shown willful misconduct. Such willful misconduct was not alleged by the defendants and, therefore, the defendants’ defense must necessarily fail.
  4. The defenses of Greek law have not been established.

What can we learn from the judgment?

The judgment serves as a useful guide for maritime lenders and borrowers on the following points:

  1. The starting position is that when rights are assigned to a lender on the condition that they are reassigned upon repayment, equity will impose various types of obligations on the lender in exercising those rights. This means that it is not necessary to formulate implicit terms. These duties will be modeled on the duties owed by a mortgagee, but how they adapt to the nature of an assignment as security will likely be subject to judicial review in the future.
  2. When negotiating security documents, parties should pay particular attention to the wording of disclaimers, to ensure that these fair obligations are (or are not) waived to the extent desired.
  3. In an old customer alert, we had suggested that the parties pay attention to the particularities of Greek law when they involve both English law and Greek law in their financing agreements. Greek law is considerably more borrower friendly than English law and is less favorable to waivers than the latter. Applying multiple laws to different security documents can lead to situations where the same conduct is permitted under one agreement but not under another. Determine if proper wording can harmonize inconsistencies.

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