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20 May 2020
Jiangsu Guoxin Corporation v Precious Shipping Public Co Ltd,(1) a High Court appeal of certain aspects of an arbitration award, relates to two hulls (21B and 22B) which the seller had contracted to build pursuant to shipbuilding contracts (SBCs) made with the buyer, dated 26 February 2014. The SBCs were on amended Shipbuilders' Association of Japan (SAJ) terms widely used in the market.
The dispute arose in the context of 11 arbitrations between the seller and the buyer concerning a series of 14 bulk carriers of Shanghai Merchant Ship Design and Research Institute (SDARI) 64k design which were to be designed and constructed by the seller in China.
After the first two vessels were delivered, the seller tendered a further four vessels which were rejected by the buyer on the basis that the vessels contained a design flaw or had been built in a defective manner, such that they were susceptible to stern tube bearing failures under navigation. This is an issue which is well known within the industry and has affected multiple owners and operators of the SDARI Dolphin 64k design.
The seller contended that the rejection and cancellation of those earlier hulls, which it contends was wrongful, resulted in occupying berths at the seller's yard, delaying the launch and construction of hulls 21B and 22B (the alleged buyer-induced delay).
On 29 January 2016, 151 days after the contractual delivery date, the buyer stated that it was terminating the contracts for hulls 21B and 22B under Articles III.1 and VIII.3 of the SBCs by reason of the lapse of more than 150 days of "non permissible delays".
The seller treated this as a repudiatory breach of the SBCs which it accepted on 3 February 2016, thereby, in any view, bringing the contracts to an end.
The appeal concerned essentially whether:
The buyer's position was that the SBCs provided a complete code of the circumstances in which the seller was entitled to claim extensions of time such that there was no room for the prevention principle. As a result, notice was required to be given as the relevant contractual machinery had never been exercised to extend time and therefore the seller was not entitled to an extension.
The judge accepted, as a starting point, that a term is to be implied into the SBCs (as into many contracts) that neither party should prevent the other from performing its obligations under the contract (eg, through breach of contract).
However, addressing the relevant clause in this case, the judge concisely noted that:
the central issue which arises here is whether Article VIII.1 is wide enough to cover this cause of delay. If it is, then express provision has been made for an extension of time, and the 'prevention principle' will not apply.
The judge considered that the wording of Article VIII.1 was wider than a force majeure clause and the phrase "or other causes beyond the control of the SELLER or its sub-contractors as the case may be" should be given a natural and wide meaning so as to cover any alleged buyer-induced delay, thereby ruling out the application of the prevention principle.
The judge recognised that he had reached a different conclusion from the construction given to a similarly worded provision (Article VIII.1 in both cases) by Justice Leggatt in Zhoushan Jinhaiwan Shipyard v Golden Exquisite Inc ( EWHC 4050 (Comm)). He sought to reconcile this departure on the basis that there may be other buyer breaches, including of the implied term as to non-prevention, which cannot readily be considered as being provided for elsewhere in the contract and his was the best interpretation of the phrase identified above. Justice Butcher's decision effectively concludes that there is no room for the application of the prevention principle in SBCs where similar wording exists. While not a decision that assists the seller in this case, it is a positive development as it makes clear that such wording provides a mechanism by which a seller can look to extend the delivery date for any buyer-caused delay, thereby providing more contractual certainty.
However, although a pragmatic solution to an issue which has persisted since Zhoushan, it is unlikely to provide the final word (given the different contractual wording and background facts in each case). Perhaps recognising this and that the position was decided differently previously, it is understood that Butcher granted the seller permission to appeal his decision. The Court of Appeal will therefore consider these issues again in the near future and will hopefully finally determine the point.
As the cause of delay fell within Article VIII.1, then the notice regime under Article VIII.2 would be triggered.
As Butcher noted, if notice is not correctly given in accordance with Article VIII.2 then the seller cannot claim an extension to the delivery date. Interestingly, the judge noted that even if he was wrong about the broad interpretation of Article VIII.1, such that there can be cases of buyer-induced delay which do not fall within Article VIII.1 or other specific regimes in the SBCs, then as an ancillary point he would have afforded Article VIII.2 a wide interpretation, to allow a notification of extension, covering such buyer-induced delays which did not fall within Article VIII.1; he was able to do so on account of the reference in the clause to "any delay on account of which the SELLER claims that it is entitled under this Contract to an extension of the time for delivery".
Indeed, the judge stated that in circumstances where parties have tried to provide for a scheme for notification of matters relevant to a claim for an extension of time a court should:
lean in favour of a construction under which there are notification requirements in relation to any, or at least any reasonably foreseeable, causes of delay. In my judgment, a construction of the SBCs whereby, if the alleged cause of delay is not within Article VIII.1, nevertheless Article VIII.2 is applicable is available on the words of Article VIII.2, and is clearly preferable to a construction whereby such delays are not covered by any notification requirement.
The practical guidance from these comments is clear: both reinforcing the need for good contractual management and emphasising that if a party is in doubt as to whether to issue a notice in accordance with Article VIII.2, it is important to do so and seek to argue the position later.
As an additional point, the seller contended that the parties had agreed to modify the construction and design of the vessels and that delays arose because of this agreement; however, the seller did not contend that there had been an agreement as to an extension of time. Rather, the seller contended that it was entitled to an extension of time in any event under Article V.1 and was not required to serve notification as to the delay in making such modifications.
The judge dismissed this argument in short order, noting that if there were no agreement on consequential amendments, the seller was entitled to proceed without making the modification (and thus incurring additional time and cost). The judge found that the SBCs did not contemplate a request for a non-agreed extension of time following a modification. Consistently with that, the contract did not provide for a notification regime relating to such a request. Again, this reinforces the need for robust contract management and, for the seller, is a reminder of the importance to undertake any modifications within the framework of the contractual scheme.
The seller also alleged that the buyer was in default in failing to pay the third, fourth and fifth instalments of the purchase price, such that the seller was entitled to a day-by-day extension under Article XI.4 without being required to take any further steps to postpone the delivery date. The buyer contended that the seller must serve a default notice under Article XI.2 as to the relevant delay and that the seller must exercise its option to extend time for delivery under Article XI.4(a).
The judge did not consider that a notice under Article XI.2 is a prerequisite for a postponement of the delivery date pursuant to Article XI.4(a). However, the judge considered that the phrase in Article XI.4(a) "at the Sellers option" meant that the seller may choose that the delivery date should be postponed (a common addition in multiple-vessel orders), but that it was implicit that there must be clear communication (but not necessarily a formal notice in accordance with Article VIII.2) from the seller to the buyer that the delivery date will be postponed. However, it should be noted that the standard SAJ form does not include the "at the Sellers option" caveat and so it is important to ensure that the parties' agreement as to the approach to be adopted in such circumstances is properly reflected in the underlying shipbuilding contract.
There are five key takeaways from this judgment for both future contract drafting and active contract management where extensions and delays are contemplated:
For further information on this topic please contact Rob Jardine-Brown or Alex Hookway at Wikborg Rein by telephone (+44 20 7367 0300) or email (email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
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