Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization
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.
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“Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization,” by Michael B. Schaedle and Jose F. Bibiloni was published in the October 2019 edition of Pratt’s Journal of Bankruptcy Law, an A.S. Pratt Publication, LexisNexis. Reprinted with permission.
This article was first published in the June 2019 edition of Mainbrace, Blank Rome’s quarterly maritime newsletter.