In the current economic climate, we read all too often of shipyards suffering from scarcity of new orders and existing orders becoming suspect, as buyers struggle to obtain sufficient funding. However, buyers under shipbuilding contracts also continue to suffer as a result of the effect of the economic climate on shipyards. This can result in severe delays to delivery of the vessels which buyers have contracted to purchase and buyers are evaluating all of their contractual options arising out of such delays.
“Permissible” delays
Extension of time for delivery
Many shipbuilding contracts provide that the delivery date set out within the contract can be postponed if one of a number of listed events occurs. Such events are often referred to as force majeure events and tend to be events considered as outside the Builder’s control, for example, Acts of God, and as suggested by the catchall in the SAJ form “other causes or accidents beyond the control of the BUILDER, its subcontractors or suppliers whether or not indicated by the foregoing words.”
One of the commonly cited force majeure events is described in the SAJ form as: “delays in the Builder’s other commitments” caused by the listed events, which in turn delay the construction of the contract vessel. If, for example, another vessel is being built at the yard and a fire during construction causes delay, so that the contract vessel, the next in the series is in turn delayed, that would extend the delivery date of the contract vessel.
“Permissible Delays” are commonly defined in the shipbuilding contract as the specified force majeure type events as well as “other delays of a nature which under the terms of this Contract permits postponement of the Delivery Date” (SAJ form), for example, delays caused by the Buyer. These are distinguished from unauthorised delays on account of which the contract price is usually subject to adjustment (discussed further below).
Issues can arise depending on the timing of a particular force majeure event. The Builder may find it difficult to rely on force majeure if the event occurs when the Builder is already in breach of contract, unless the Builder is expressly entitled to do so under the particular contract provisions. If there are two concurrent delay causing events, one of which is a permissible delay event and one of which is Builder’s default, then the delivery date is likely to be extended, but this depends on the wording of the particular contractual provisions. It is worth noting that, if the Builder claims a postponement for a force majeure event, he must be able to show that he took all available steps to mitigate the effect of that event.
Force majeure notices
If the Builder wishes to extend the delivery date on the basis of a stipulated delay, he must normally notify the Buyer within a specified time period of an occurrence causing delay, for example 10 days in the SAJ form. The Builder must then notify the Buyer; (i) within a stipulated period after the end of delaying event; and (ii) of the extent of postponement “with all reasonable despatch after it has been determined” (SAJ). The Buyer normally has the right to object within a stipulated period and, if he fails to do so, he is deemed to have waived his right to do so. It is not clear in some of the standard form contracts whether the extension to the delivery date should be by the duration of the delaying event or the duration of the consequent delay to the building programme, so parties may wish to consider specifying this in the contract.
The notices served in relation to force majeure events are very important. The time limit provisions exist both to allow the Buyer to challenge the Builder’s assertions and so that the parties can keep a total of the number and duration of claims for extension of the date in order to establish when the Buyer’s right to rescind arises. Failure to comply with the provision regarding notices expressly bars the Builder from claiming that the delivery date should be extended under the NEWBUILDCON form. Even where this is not expressed in some of the other shipbuilding contract forms, (e.g. SAJ) the effect is probably the same.
The Buyer’s right to rescind for permissible delay
Some shipbuilding contracts contain a ‘drop dead date’ upon which the Buyer can rescind the contract, if delivery has not occurred, regardless of the cause of the intervening delay. More commonly, though, as in the SAJ form, there is a right to rescind if the accumulated time of all delays on account of the specified causes “excluding delays of a nature which under the terms of this Contract permit postponement of the Delivery Date” amounts to 210 days or more. This wording is somewhat confusing since all specified causes extend the delivery date. It should therefore probably be read as only excluding from the accrual of time types of permissible delay other than the stipulated force majeure delays e.g. those caused by Buyer’s default.
In short, if the Builder claims for extension of the delivery date in respect of the specified force majeure events add up to 210 days or more, then the Buyer may rescind the contract.
Under most contracts, the Buyer is obliged to either elect to rescind the contract or continue with it and consent to the postponement of the delivery date
Unauthorised delays
Liquidated damages
In most shipbuilding contracts, the Builder impliedly promises to deliver the vessel by the delivery date defined in the contract (which is adjusted to reflect occurrence of permissible delays as discussed above). The Builder is usually permitted a grace period beyond the delivery date within which he can deliver the vessel without incurring financial liability. Following the expiry of the grace period, the Builder becomes liable to pay liquidated damages for each further day’s delay up to a maximum, for example 180 days in SAJ and NEWBUILDCON.
Where the delay in delivery reaches the maximum period, the Builder’s liability to pay further liquidated damages ceases, but the Buyer becomes entitled to rescind the contract and to recover the amount of advance instalments.
A liquidated damages provision generally means that no more damages are allowed for late delivery, regardless of the Buyer’s actual losses (this is expressly set out in the AWES form).
It is clear from Holme v Guppy (1838) 3 M. W. 387, that the Builder will be excused from liability for liquidated damages in circumstances where the delay in completion has been caused by the Buyer. However, there are limited circumstances in which, given the relationship, the Buyer’s actions will cause delay to the build.
Rescission
As with rescission for accumulated permissible delays, shipbuilding contracts usually provide that the Buyer either has to elect to exercise the right of rescission or waive the right and maintain the contract on the basis of a revised agreed delivery date.
Where delay in delivery in excess of cancelling date is so excessive as to constitute an effective repudiation by the Builder of his contractual obligations, the Buyer may, upon accepting such breach as terminating the contract, be entitled to claim substantial damages including for loss of bargain. However, it is unlikely that the parties would ever get to this stage if the shipbuilding contract includes a provision that the Buyer has to elect either to rescind or maintain the contract.
Where the Buyer rescinds the contract for excessive delay (permissible or unauthorised), the Builder’s obligation is usually completely discharged by the repayment of the Buyer’s advance instalments with interest. This excludes any entitlement of the Buyer to claim what could be substantial damages for loss of the contract. It is, of course, open to the parties to amend the standard provisions to allow the Buyer to claim all of their losses and not just the advance instalments.
Practical suggestions:
The key point at which the parties should consider how best to protect themselves is at the contract negotiation stage. In light of current economic conditions, new buyers with available finance find themselves in a strong bargaining position and they may be able to negotiate amendments to the standard form contracts that are favourable to them, for example by expressly stating that damages on rescission for delay will not be limited to repayment of advance instalments.
The effect of genuine force majeure delays is significant and therefore it is fundamental for the Buyer to keep a close eye on these delays. In particular, the Buyer should monitor whether the Builder is complying with the relevant time limits for notices. The Buyer should also demand documents in support of any claim for force majeure delay and collect his own evidence, as far as possible, if he is in any way unsure of the voracity of the claim. Any objections should be made within the time limits stipulated in the contract.
Given that the Buyer’s recovery, if he rescinds a shipbuilding contract for excessive delay, is likely to be limited to the advance instalments, securing comprehensive and valid refund guarantees prior to entering into the shipbuilding contract is imperative. Various recent cases, which are outside the scope of this article, have clarified or impacted on the status of refund guarantees and therefore it is important to ensure that guarantees comply with the latest legal requirements in order that they are effective.