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Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization

Mainbrace (July 2019 - No. 2)

In complex long-term charters for vessels or finance leases in respect of vessels under the U.S. Uniform Commercial Code (“UCC”) and its Article 2A (governing commercial matters relating to finance leases) and under other similar law, a charterer’s or lessor’s damages under a charter or lease—both generally upon a payment default or in the event of a casualty—are often liquidated in stipulated loss value (“SLV”) provisions. These provisions ensure that the lessor/­charterer gets the benefit of its bargain. It insulates the lessor/­charterer, in part, from unusual market downturns impacting vessel value or casualties.

A typical SLV calculation enables the present value recovery of the charterer’s/lessor’s unrecovered investment, residual value in the vessel, and the recapture of tax benefits and certain fees and costs, less a credit for the value of the vessel, if the stipulated loss value is repaid by the charter party/lessee, a net proceeds measure. Schedules to identify the stipulated loss are a common feature of such charters and leases. Now, any SLV provision under Article 2A of the U.S. U.C.C., for example, must be reasonable as of lease/charter commencement. Oftentimes, these kinds of charters and leases are backed by absolute, unconditional guaranties of such loss value from affiliates of the charter parties. Read More »

This article by Michael B. Schaedle, partner at Blank Rome, and Jose F. Biblioni, associate at Blank Rome, is one in a series of articles written for Blank Rome Maritime's quarterly Mainbrace newsletter. To view the other articles in the July 2019 edition of Mainbrace, please click here.