The panel on a l to r: Max Lemanski, Nicholas Vineal, The Honourable Mr. Justice Picken and Alexander McCooke
The complexities, pitfalls and consequences of terminating shipbuilding contracts (SBCs) were considered at a London Shipping Law Centre seminar on December 3rd, the 10th seminar in the Centre’s 2015 programme. Under the chairmanship of the Hon Mr. Justice Picken, three experts addressed an audience of 100 or so shipping lawyers and other maritime professionals.
Nicholas Vineall QC, of 4 Pump Court, highlighted the contractual relationships between the vessel buyer, the shipbuilding yard and the yard’s bank. The latter provides the refund guarantee in the event of the buyer’s invoking his entitlement to cancel the contract.
The Hon. Mr. Justice Picken
The interrelationship of the parties’ obligations under their contacts was set out in the context of the yard’s compliance with the building specification and its obligation to obtain a clean Class certificate; and in the context of the buyer’s obligation to make prompt payment of the purchase price as the instalments become due.
Buyers have a right to terminate the contract, either under the express terms of the SBC, or under the common law principle of repudiatory breach—not being dependent on express contractual terms. Unless the latter right is expressly excluded, the former right will not generally prevent resort to the common law right. The courts have confirmed that a party to the contract can exercise both rights at the same time—unless the consequences of exercising the one are inconsistent with the consequences of the other. Upon a valid termination, both parties are released from their primary obligations which are not yet due for performance.
Nicholas Vineal QC from 4 Pump Court
Depending on the wording of the refund guarantee, there can be a risk that a common law termination of the shipbuilding contract would not trigger a liability on the bank to repay, for example, if the refund guarantee is drafted to respond to a contractual termination. “Do not fall into the trap of terminating only at common law, only to find there is no claim under the refund guarantee, ” advised Mr. Vineall.
Contractual termination usually arises by reason of the Yard’s failure to meet specified performance criteria; missing the ‘drop dead’ date for delivery; or the tender for delivery of a vessel not conforming to the original or negotiated changed specification.
Not all yard failures lead to termination. There is established practice for contracts to provide margins to accommodate minor and circumstantial changes. For example, failure to meet fuel consumption or deadweight capacity stipulations may be corrected if they do not exceed permitted margins. Failure to meet the contractual delivery date is normally mitigated by a grace period, e.g. of 30 days. The next step is the provision of a period of, say, 180 days in which the yard will incur damage payments or be obliged to reduce the price. Finally, there will be a cancellation date, the so-called drop-dead date, say 210 days beyond the original scheduled delivery. This constitutes ‘non-permissible’ delay.
A view of the left side of the auditorium
To allow for force majeure events (‘permissible’ delays), SBCs almost invariably provide some machinery to grant leeway to the yard for factors beyond its control, e.g. weather disruption or ‘warlike’ events. If such delays exceed 225 days, the buyer can cancel but there is no right of a price reduction.
The combined total of permissible and non-permissible delays is normally stated to be in excess of 270 days for the right of cancellation to arise.
Further, a judge recently raised the concept of “excluded delay” to cover buyer-induced delays not otherwise covered by the SBC (including a referral to arbitration). The effect of this would simply be to extend the delivery date but there is no right to cancel.
“Near miss” provisions are designed to respond to very slight variations in delivery or specifications and are of such marginal significance that the buyer ought not be entitled to treat the contract as repudiated at the point of delivery. Similarly, judges have considered the role of the prevention principle in shipbuilding cases in order to provide further leeway in circumstances where the buyer’s actions were deemed to have prevented the yard from tendering the vessel in time. Beware of a possible trap where the buyer grants extra time to the Yard to deliver without simultaneously extending the date of the refund guarantee.
Nicholas Vineall then examined the contractual problems arising from delivery trials and the condition of the vessel at those times. He considered the parties’ common law rights and the criteria by which the courts would determine whether an SBC’s express terms excluded the right to terminate the contract on the basis of a repudiatory breach.
Max Lemanski, partner at Stephenson Harwood LLP
Max Lemanski, a Partner with Stephenson Harwood, dealt with a range of likely outcomes arising from cancelling SBCs. He focussed on the practicalities of the enforcement of refund guarantees and the vital importance of their dovetailing with the SBC in question. He emphasised the importance of the cancellation notice and the demand for repayment made to the yard, followed by the demand on the bank under the refund guarantee (necessarily complying with the form required under the requisite contract(s).
Buyers would generally seek ‘on demand’ guarantees to ensure the prompt refund of stage payments following the yard’s non-performance. The bank will take its own view of such obligations then arising, extending to a detailed consideration of the parties’ rights under the SBC.
Mr Lemanski referred to the American Home Assurance judgment, relating to the interpretation of a refund guarantee, and considered whether it amounted to a primary liability (a demand bond) or a secondary liability (or guarantee) instrument. A key aspect lay in determining that “the essential distinguishing feature of a contract of guarantee is that the liability of the guarantor always remains ancillary, or secondary, to that of the principal, who remains primarily liable to the creditor. There is no liability on the guarantor unless and until the principal has failed to perform his obligations.”The recent Spliethoff judgment on the type of instrument, where there was an arbitration clause providing for a “pause mechanism” pending the arbitral decision, was that the refund guarantee remained an ‘on demand’ bond under which liability was “nevertheless still triggered by a document, namely an award or court order, not by reference to the merits of any underlying dispute between [the contracting parties]……the question is one of timing, not substance.”
Remedies beyond the return of instalments might be available under common law in respect of consequential losses arising for example from the additional cost of obtaining a replacement vessel on a rising market or the loss of employment of the vessel.
Alexander McCooke FD&D Manager, The Shipowners’ Club
Alexander McCooke, an FD&D Claims Manager with The Shipowners’ Club, summarised the development of the cover available to its members in respect of legal fees, with particular regard to those incurred in the course of a vessel’s construction.
He outlined his Club’s approach to lawyer selection, cover thresholds, deductibles, the Club’s exposure to its member’s opponents’ costs and the desirability of having FD & D and Protection & Indemnity cover from the same organisation.
In a typical claim, The Shipowners’ Club would look for a contract on a standard form or otherwise clearly drafted and containing all relevant provisions. Which yard would build the ship? Where and what was its experience of building similar vessels? Which bank would be the refund guarantor and how was the agreement drafted? What was the forum and jurisdiction for resolving disputes?
Questions continue at the networking drinks and dips reception
Throughout a dispute, said Mr. McCooke, FD&D managers often played a major advisory role.
The London Shipping Law Centre is grateful to two of its members for this event: 4 Pump Court Chambers, who selected the panellists, and Stephenson Harwood, who hosted the event at their offices in Finsbury Circus.
