The Shipyard Lawyer

Written by David Seah, LLB London

Managing Partner

www.Oseah.com

Introduction 

One of the significant activity during an FPSO conversion project is the fabrication, delivery and installation of the topside modules (“modules”) onto the deck of the FPSO. Apart from the installation which is normally within Shipyard’s scope, the fabrication and delivery could be undertaken by the Shipyard, Modules Fabricator or the Owner.

For more click in the link below:

https://www.linkedin.com/pulse/sea-transportation-installation-fpso-topside-modules-david?trk=mp-author-card

Transocean Drilling UK Limited v Providence Resources PLC [2016] EWCA Civ 372

Transocean (Owner of the rig ‘GSF Arctic III’), entered into a drilling contract with Providence for the hire of a semi-submersible drilling rig. The contract was based on a standard industry agreement ‘LOGIC’ form, with agreed adaptions. There was a loss time of over 27 days due to defects in the rig and also a further 10 hour’s delay because of failure of a crew to tighten a blanking plug properly.

Consequently, there were various disputes between the parties pertaining to remuneration payable to Transocean in respect of what became known as the ‘disputed period’. Providence claim against Transocean for spread costs, comprising the costs of personnel, equipment and services contracted from third parties, which it alleged were wasted as a result of the delay.

At first instance, Mr Justice Popplewell (“the Judge”) held that Transocean was in breach of contract and that Providence was entitled to recover the spread costs. Transocean’s appeal against the latter part of the Judge’s decision as they content that spread costs was excluded by virtue of Clause 20 of the contract.

Clause 20 

Clause 20 defined Consequential Loss as “ . . . loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption . . . “.

The closing paragraph of Clause 20 (ii) sub-paragraph 3 provide that the each of party was to “save, indemnify, defend and hold harmless” the other for its own consequential loss.

The Court of Appeal (“CA”) had to decide whether wasted spread costs incurred by Providence as a result of Transocean’s breaches of contract are “consequential losses” within the meaning of clause 20”.

Held

Lord Justice Moore-Bick (with whom the other two Lord Justices agreed) concluded that the language of clause 20 is clear and is apt to exclude liability for wasted costs in the form of the spread costs which Providence seeks to recover in this case.

Main Points of the CA’s decision 

Clause 20 - The starting point in construing clause 20 is the language of the clause itself. Clause 20 is different from a typical exclusion clause as the parties are of equal bargaining power and have mutually agreed to accept the risk of consequential loss flowing from each other’s breaches of contract. The clause is to be seen as an integral part of a broader scheme for allocating losses between the parties as in the knock for knock regime of Clause 18.

Importance of Language chosen by Reasonable Person - Artificial approaches to the construction of commercial contracts are to be avoided in favour of giving the words used by the parties their ordinary and natural meaning [1] given by a reasonable person in their position furnished with the knowledge of the background to the transaction common to them [2]. Particular importance must be given to the language chosen by the parties to express their intentions [3].

Consequential loss - The “courts are more willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents.” It is doubted whether some of the older cases [4] involving “consequential loss” would be decided similarly today.

The rule in Hadley v Baxendale - It was not necessary to discuss whether the clause derogates from one or other or both limbs of the rule in Hadley v Baxendale as the only question was whether its language is apt to encompass the spread costs.

Contra Proferentem Principle - The Judge was wrong to invoke the contra proferentem principle as it was inapplicable in the present case where (a) the meaning of the words in the clause is clear, (b) the mutual clause is between parties of equal bargaining power and it is impossible to distinguish who is the proferens or proferee. By agreeing to clause 20 the parties did intend to give up some of their rights and the only question is whether Providence intended to give up its right to recover damages in the form of wasted or additional spread costs.

Presumption in Mutual Indemnities Clause - The decision in E. E. Caledonia Ltd v Orbit Valve Co. Europe [5] whereby the presumption in mutual indemnities clause is that parties did not intend to release each other from the consequences of negligence is of no assistance as the question is different and one which does not arise in this case.

Ordinary and Natural meaning of words used - The CA disagree with the Judge that subparagraph (ii) of clause 20 should be construed narrowly to limit its scope to specific categories of loss narrowly defined as “it is an incursion into the territory of the first limb of Hadley v Baxendale”. They added that the courts should not re-shape the contract but ascertain the parties’ intention by construing the words they have used their ordinary and natural meaning

Eiusdem Generis - This was also not a proper case for the application of the eiusdem generis principle of construction [6] as the expression “loss of use” is shaped by its context. The Judge had not given sufficient regard to the words in brackets which follow the expression “loss of use” or to recognise that the purpose of providing specific examples is to flesh out its meaning.

Loss of Use

Lord Justice Moore-Bick emphasized that the critical words are:

 “ … loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption …

Providence’s counsel submitted that:

(a) The words “loss of use” which precede the words in brackets limit the scope of the words that follow, so that they must all be understood to refer only to loss of use in the ordinary sense and

(b) The words in brackets are directed to the cost of equipment and services obtained to mitigate the effects of a breach of contract on the part of the contractor which has deprived the company of the use of equipment or services that would otherwise have been available to it.

Lord Justice Moore-Bick disagree and said inter alia that while “Loss of use” naturally refers to the loss of the ability to make use of some kind of property or equipment owned or under the control of the contractor or the company, as the case may be, the parties have made it clear by the words in brackets that follow that its scope is intended to be wider than that.

The purpose of those words is to explain and expand the simple phrase “loss of use” by examples expressed in the widest possible way (“without limitation”). Also, the mutual nature of clause 20 and its role as part of the provisions for allocating loss favours an intention to give the words a broad meaning to include wasted spread costs.

Cost of use

The CA rejected the Judge’s view that the expression “cost of use” is limited to costs incurred in consequence of, and in order to mitigate, the loss of use of some other property or equipment. They said that clause 20 contains no reference to mitigation and the purpose of sub-paragraph (ii) was clearly to catch consequential losses of all kinds and one obvious example of consequential loss is expenditure on goods or services from which no benefit can be obtained.

 Freedom of Contract

The CA highlighted that the principle of freedom of contract requires the court to respect and give effect to the parties’ agreement. The CA also referred to the distinction between a clause which purports to relieve one party from all liability for breach of any of its obligations and a clause which excludes all liability for certain kinds of loss and damage. In the former case there may well be a dispute about the true scope of the clause, whereas in the latter the court is concerned to identify the kind of loss to which the clause applies.

 Cases referred to:

[1] Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827

[2] Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 A.C. 1101 to Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619

[3] Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619, paras 15-20

[4] Saint Line v Richardsons Westgarth & Co Ltd [1940] 2 K.B. 99, Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 8 B.L.R. 20 and Deepak Fertilisers Ltd v ICI Chemicals and Polymers Ltd [1999] Lloyd’s Rep. 387

[5] E. E. Caledonia Ltd v Orbit Valve Co. Europe [1994] 1 W.L.R. 1515

[6] Eiusdem generis principle of construction is a rule by which general words may be given a limited meaning when they follow a list of specific matters (often causes or events) which can be seen to be of a similar kind.

Some thoughts: 

There is still no unanimous definition in the English law context for the term “consequential or indirect loss” – In this case the ratio of legal minds that differs are 2 to 4 (Transocean’s Counsel + Mr. Justice Popplewell as against Providence’s Counsel and the 3 Lords of Appeal). 

Neon Shipping Inc v (1) Foreign Economic 7 Technical Corporation Co. of China (2) China Chang Jlang National Shipping Group Corporation Jinlin Shipyard [2016] EWHC 399 (Comm)

“The prospect of some heads of [warranty] claim having a 12 month time limit, and other claims having no time limit at all, and uncertainty as to which category specific claims fell into would be a goldmine for lawyers - and far removed from what the parties stated in their shipbuilding contract and what would have reflected their reasonable and objective intentions. Per Messrs Mark Hamsher, Christopher Moss and Lindsay Gordon (Arbitrators).

Facts:

Shipbuilding contract for the design, build and supply of a 57,000 dwt bulk carrier governed by English law and containing an arbitration clause.  

Clause 13 of the contractual Building Specification provided under “General Description of the Ship” that the vessel was “to be designed and built as a single screw motor driven bulk carrier for normal worldwide service”. Clause 33 “Cargo Handling System” specified the capacity of the deck crane to be as follows: “(for reference only) 30 [tonnes] .. The cranes to be prepared and fitted with all required fittings for working with motor grabs [and] ..to be fully rated for continuous operation”.

The vessel was delivered on 12 November 2009. Article XI of the Contract provided for a Guarantee Period of 12 months, which expired on 12 November 2010.  

Three (3) years after delivery of the vessel, Buyer claimed that that the cargo cranes were faulty. No notice of the defects about the cranes was given within the Guarantee Period of 12 months. The Defendants denied liability in respect of the alleged defects, and further relied upon Article XI of the Contract which provide that:

Article XI

1.    Guarantee

Seller guarantees that Vessel, and all parts thereof that [are] manufactured or supplied by Seller, its sub-contractors and/or vendors under this Contract, will be seaworthy and contractual in all respects, and will be free from all defects which are due to defective design, construction, calculation, material or workmanship (collectively “Guarantee Defects”), upon delivery and for a period of twelve (12) months from the Date and Time of Delivery (“Guarantee Period”).

2.    Notice of Defects

Buyer shall notify Seller by telex or facsimile promptly after discovery of any Guarantee defects for which claim is made.  Buyer’s notice shall be followed by a letter setting forth, insofar as is reasonably possible, the full particulars as to the nature of Guarantee Defects and the extent of the damage. Except as otherwise provided below, Seller shall not be under any obligation for a Guarantee Defect unless notice of such Defect was sent to Seller not later than thirty (30) calendar days after the end of the Guarantee Period.  Telex notice that a claim is forthcoming will be sufficient compliance with the notice requirements.

6.    Limitation of Guarantee and Liability

The guarantee provided in this Article is exclusive for the period after delivery of the Vessel, and Buyer hereby waives all other remedies, warranties, guarantees or liabilities, express or implied, arising by law or otherwise (including without limitation any obligation of Seller with respect to fitness, merchant ability, and consequential damages), whether or not occasioned by Seller’s negligence. …

At the Arbitration the Buyer sought permission to re-amend paragraph 4 of its Claim Submissions as follows: “The contract further contained the following implied terms by operation of law:-

4.3 That the Buyer having expressly or by implication made known to the Seller that the Vessel was to be purchased for a particular purpose, namely utilisation bulk carrier for normal worldwide service including: 4.3.1 the loading, carriage and discharge of heavy cargoes; 4.3.2 continuous use of the Vessel’s cranes (including with grabs); the Vessel would be reasonably fit for such purpose.”

This amendment was opposed, and it was agreed that the Arbitrators should hear and resolve two preliminary issues on the assumed basis that the amendment would be permitted.

First Question: On its true construction, did the Contract contain the implied term as to fitness for purpose alleged by the Claimant in paragraph 4.3 of the re-amended Claim Submissions?

Second Question: On the true construction of the Contract and of Article XI in particular, did the 12 month time-bar provision excluding all of the Respondents’ liability for claims notified later than 30 calendar days after the end of the Guarantee Period apply: (a) to any and all claims whatsoever made after delivery of the Vessel (as the Respondents contend); or (b) only to claims for defective design, construction, calculation, material and workmanship but not to.. claims that the Vessel was not seaworthy or contractual in all respects. .. (as the Claimant contends)?

The Arbitrators answered “No” to the First Question. With regard to the Second Question they concluded that the 12 month time-bar provision excluded all claims not so notified, including the Buyer’s amended claim.  In doing so they also expressed inter alia that “The prospect of some heads of [warranty] claim having a 12 month time limit, and other claims having no time limit at all, and uncertainty as to which category specific claims fell into would be a goldmine for lawyers - and far removed from what the parties stated in their shipbuilding contract and what would have reflected their reasonable and objective intentions”

The Buyer appealed and submitted that Article XI.1 is bifurcated into two separate guarantees or Part 1 and Part 2 claims as follows:.

Part 1 claims

That the vessel was not “seaworthy and contractual” within Article XI.1, and a failing or inadequacy in the cranes supplied by third party suppliers, leading to inadequate performance and unfitness for purpose. Buyer argued that the comma after “in all respects” signifies the end of reference to Part 1 claims. They argued that “and” after the comma is disjunctive.

Part 2 claims

That the vessel was not “free from all defects which are due to defective design, construction, calculation, material or workmanship”, which requires notification to be made within the Notice period of 30 days after the end of the Guarantee Period.

As their claim was in respect of Part 1 claims, Buyer argued that the notice provisions in Article XI.2 (including the provisions in XI.4 and 5) was not applicable. Also, the Assistance provision in XI.10 relating to the guaranteed period is irrelevant.

However, the Court considers the bifurcation of Article XI.1 as wholly artificial as there was no real dichotomy between two different claims.  Further, there was no commercial or other justification for the two different schemes. They added that “the argument is constructed as a tabula in naufragio for a Buyer who has not given notice”.

During the course of the judgment, the Court also considered the question “Whether s.14(3) of the Sale of Goods Act 1979* (“SOGA”) is inapplicable to a shipbuilding project in which the vessel is built for use in standardised trades, or whether s.14(3) applies in any case where goods have been ordered for their normal purpose?”

They held that the answer was the latter as there is no need, for the purpose of s.14 (3) for there to be a particular purpose identified. Normal use in accordance with the contractual specification will suffice.

Also, the Court did not accept that a passage from an industry shipbuilding law book (referred to during the Arbitration) correctly reflect the law.

The Passage:

“Section 14(3) will not, however, normally assist the purchase of a new building in a quality dispute.  The subsection is designed to cover the situation in which the goods are required for a specific purpose made known to the seller before the contract is signed; it is as such likely to be inapplicable in the overwhelming majority of shipbuilding projects, in which the vessel is built for use in standardised trades which are well known to, and understood by, both the buyer and the builder.”

According to Mr. Justice Burton, perhaps what the author “meant was that reliance upon the implied term was unlikely to be necessary in a shipbuilding contract which makes express provisions for a specification which is agreed by both parties to be applicable to the purpose for which the vessel was required.”  

Held:

The Court upheld the Arbitrators’ decision, added that the 12-month time-bar provision in Article XI of the Contract applies to any and all claims whatsoever and dismissed the Buyer’s appeal.

Statute referred to:

*Section14 (3) of the Sale of Goods Act 1979 (“SOGA”): “Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known.. any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the Buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller.”

Cases referred to:

Britain Steamship Co Ltd v Lithgows Ltd [1975] S.C. 110 (newbuilding)

Preist v Last [1903] 2 KB 148 (the hot water bottle case)

The Mercini Lady [2011] 1 Lloyd’s Law Rep 442 (sale of gasoil on standard FOB terms),

Air Transworld Limited v Bombardier Inc [2012] 1 Lloyd’s Law Rep 349 (Aircraft)

The Union Power [2013] 1 Lloyd’s LR 509 (paragraph 24) (Ship sale on the Norwegian Sale Form)

Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441

Comment:

Even though Shipyard prevail, it may only be a pyrrhic victory for them and their Suppliers considering possible lost business opportunity for repeat orders, referrals and track record. They and Crane Suppliers should consider analysing why the cranes failed after only 3 years as the lessons learnt will assist them achieve a better quality product (assuming that the faulty cranes in questions were properly maintained and not misused). The consequence for Buyer is that shipyards has been put on notice that they are potential litigious partners.

While the standard warranty period is usually 12 months from delivery, it is commercially possible to negotiate or purchase extended warranty for 24 months.  For contract clarity on defects warranty provision and /or to avoid an evergreen warranty, parties could consider something along the language in Clauses 35 and 37 (a) to (d) of Bimco, NEWBUILDCON.

Finally, as shipbuilding contracts are complex and scope for disputes could be market driven (especially during the lull time), it must be managed and negotiated by experienced professionals.

Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999 (Comm)  

Shipbuilding Refund Guarantees governed by English law – Chinese Court prohibits Bank and its overseas branch from making any payment to Buyer under the Bank’s guarantees – English Court recognised Chinese Court judgement but ruled that Bank must pay Buyer.  

Buyer claim against the Bank of China (BOC) under two refund guarantees issued by BOC to secure repayment obligations of a Builder (Chinese Shipyard) and Co-Seller (together “Sellers”) in respect of two shipbuilding contracts for construction of two new ships identified as Hulls 38 and 39.  

Proceedings in London: Buyer terminated the contract in respect of Hull 38 as the ship were not delivered on time and claimed repayment of the instalments. Sellers commenced Arbitration in London, disputed Buyer’s right to cancel and contended that Buyer’s cancellation was a repudiatory breach of the Hull 38 Contract.

Delivery of Hull 39 was also late and in view of the arguments raised by Sellers in the Hull 38 proceedings, Buyer applied for a declaration that it was entitled to cancel the Hull 39 contract, whereupon Sellers are obliged to refund the instalments paid, failing which Buyer would be entitled to demand repayment from BOC.  

Buyer also applied to the English High Court for a declaration (a) that Sellers was obliged to refer its main engine claims (see below) to arbitration, (b) for anti-suit relief and © damages for breach of the arbitration clause.  

Proceedings in China: Separately, Sellers sued Buyer and Wartsila (engine manufacturers and suppliers) in Qingdao Maritime Court (QMC) for conspiring to supply and passing off as new second-hand and defective refurbished engines to the Sellers for installation in the ships. (Buyer challenged the jurisdiction of the Chinese Courts and but failed. Thereafter Buyer proceeded to defend the action).  

Award, Injunction and QMC Orders

Arbitral awards was given in Buyer’s favour and the Sellers was ordered to refund the instalments paid by Buyer in respect of both ships. An anti-suit injunction was granted against the Sellers but they continue to pursue the proceedings in QMC. QMC found Wartsila and Buyer liable for fraud and (a) ordered Buyer to provide a specified cash or other guarantee, (b) prohibited BOC and any domestic Chinese or overseas branch of BOC from making any payment anywhere under the guarantees to Buyer.  

Call on the Guarantees

Buyer called on the two Guarantees issued by BOC. BOC refused to pay on the grounds that it had been served with the QMC orders. Subsequently, it also included a defence that the demand in respect of Hull 39 was invalid.  

Court Decision

Having concluded that the Guarantees were demand guarantees in the nature of a performance bond, and not by way of surety, the Court considered BOC’s defences (a) on the validity of the Hull 39 demand, (b) based on the orders of QMC and if required, whether the QMC orders justify a stay.

 Mrs Justice Carr concluded that (a) BOC’s objection to the validity of the Hull 39 demand was misplaced, (b) the parties have agreed that BOC’s obligations would not be affected or prejudiced by any extraneous matters, including a finding of fraud against Buyer in favour of the Sellers under the Contracts and © the rule in Holme v Brunskill that any material variation of the terms of the principal contract ( between the creditor and the principal) will discharge the surety was not applicable in the present case.  Accordingly she ruled in favour of the Buyer under both guarantees.    

Stay of Execution

The Judge also refused to grant BOC’s application for stay of execution as she was not satisfied that there are special circumstances which make it inexpedient to enforce the judgments against BOC.  She stated inter alia that Chinese legal experts called on behalf of the Parties agreed that BOC would not be at any real risk of criminal prosecution, given the lack of the necessary intention on the part of BOC to flout the QMC orders. One of the expert, Mr Li Hui also expressed his written opinion that “any payment by BOC made as a result of a compulsory enforcement measure by a foreign court should not be considered as violating the XXK notices of assistance and should not be subject to any legal liabilities, criminal, civil or of any other kind. As such the Judge did not accept that “BOC would face any real risk of criminal or civil sanction or double jeopardy if it were to make payment (or be subject to enforcement) pursuant only to an order of this Court.”

She concluded:

“Finally, even if there were real risks in this regard, these are matters inherent in the risks which BOC agreed to undertake when entering into the Guarantees on the terms that it did. BOC is an international commercial organisation in the business of providing external guarantees in return for the taking of fees and security.  The clear scheme under the Guarantees …in respect of obligations under the Contracts (which are also governed by English law and the subject of English arbitration agreements) is that the obligation on the part of BOC to pay on demand should not be affected by extraneous matters such as the XXK orders (or judgments in fraud or otherwise against SBV in separate proceedings in China).  

This  conclusion is  not  to disrespect  in  any way  the  Chinese courts  (or principles of international comity) but rather to give effect to the contractual bargain between SBV and BOC and to recognise the commercial purpose behind that arrangement.”  

*(XXK notices/orders – Notices or Orders issued in Builder’s favour by the QMC)  

Cases cited:

Holme v Brunskill [1878] 3 QBD 495.

Marubeni Hong Kong and South China Ltd v Mongolia [2005] 2 Lloyd’s Rep 231.

Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629.

Caja de  Ahorros v  Gold  Coast Ltd  [2002]  CLC 397  para  16.

Meritz Fire & Marine Insurance Co Ltd v Jan de Nul NV [2011] 2 Lloyd’s Rep 379.

WS Tankship II BV v The Kwangju Bank Ltd and another [2011] EWHC  3103  (Comm).

Gold Coast Ltd v Caja de Ahorros Del Mediterraneo and others [2002] 1 All ER (Comm) 142.

AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust-Kamenogorsk Hydropower Plant JSC [2012] 1 WLR 920 (at paragraph 150).

Philip Alexander Securities & Futures Ltd v Bamberger and others [1996] CLC 1757 Per Waller J (at pages 22 and 23).  

Altimo Holdings and Investment Ltd and others v Kyrgyz Mobil Tel Ltd and others [2012] 1 WLR 1804  at page121.

Kydon Compania Naviera SA v National Westminster Bank Ltd and others) (“The Lena”) [1981] 1 Lloyds Rep 61.

WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] WGHC 104, (Singapore High Court).

HIH Casualty and General Insurance v Chase Manhattan Bank [2003] 1 All ER (Comm) 349.

Society of Lloyd’s v Wilkinson (No 2) [1997] 6 Re LR 289.

WRM Group Ltd v Wood [1998] CLC 189.  

Skipskreditforeningen v Emperor Navigation [1998] 1 Lloyds Rep 66.

Deutsche Bank (Suisse) SA v Khan [2013] EHWC 482.

Deutsche Bank AG v Unitech Global [2014] 2 All ER (Comm) 268.

The Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co [1992] 2 Lloyds LR 365.

National Westminster Bank plc v Riley [1986] BCLC 268 (“Riley”) May LJ at 275 i).

Blest v Brown [1862] 4 DE G.F. & J 367.

Ralli Brothers v Compania Naviera Sota y Aznar [1920] KB 614.

Field J in Bankhaus Wolbern & Co (AG & CO KG) v China Construction Bank Corporation [2012] EWHC 3285 (Comm).

AES-3C Maritza East IEOOD v Credit Agricole Corporate and Investment Bank [2011] BLR 249.

Kleinwort Sons and Company v Ungarische Baumwolfe Industrie Aktiengesellschaft [1939] 2 KB 678. Libyan Arab Foreign Bank v Bankers Trust Co [1998] 1 Lloyds Law Rep 259.

Toprak Mahsulleri Ofisi v Finagrain Compagnie Commercial Agricole et Financiere SA [1979] 2 Lloyds Rep 98.    

Statute s. 32 of the Civil Jurisdiction and Judgments Act 1982.

Books cited:

Andrews and Millett: The Law of Guarantees (6th ed 2012) (at paragraphs 1-015 and 16-001).)

Paget’s Law of Banking.

Briggs & Rees: Civil Jurisdiction and Judgments (5th Ed 2009).

Dicey, Morris & Collins: The Conflict of Laws (15th Ed 2012).  

The Law Relating to Estoppel by Representation (4th Ed 2004 at paragraph 1.2.3).

Chitty: Contracts (31st Ed) (“Chitty”) at paragraph 3-090).

The Modern Contract of Guarantee (2nd English Ed 2010) at paragraphs 8-17 and 8-18.

Chinese Statutes cited:

Article 29 of the Provisions of the Supreme People’s Court on Seal-Up, Detainment, or Freezing of Property in the Civil Enforcement by People’s Courts.

Chapter III of the Special, Maritime Procedure Law of the People’s Republic of China. Articles 12 and 16.

Civil Procedure Law of the People’s Republic of China, Chapter 9: Property Preservation and Advance Execution, Articles 92 and 94.

Article 168 of the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (2015).

Article 105 of the Opinion of the Supreme People’s Court on Certain Issues Concerning the Application of the Civil Procedure law of the People’s Republic of China (“the Judicial Interpretation”).

Provisions of the Supreme People’s Court on Certain Issues Related to the Application of Laws to Unsettled Cases after the Implementation of the Amended Civil Procedure Law.  

Article 1. Article 114 (4) of the CPL 2013 or Article 313 of the Criminal Law of the People’s Republic of China.

Article 37 of the Regulations of the Supreme Court about enforcement by People’s Court.  

“The point of the words I have emphasised is that delays in construction are prima facie the responsibility of the Builder, unless they are excused by a provision of the contract.  The basic default position under the contract, in other words, is that delay is “non-permissible” unless a term of the contract classifies it as permissible (or, in the case of excluded delays, deems it not to be delay at all)”. Per Leggatt J at para 68.

In the case of Zhoushan Jinhaiwan v Golden Exquisite Inc & 2 others [2014] EWHC 4050 (Comm), Buyer cancelled the shipbuilding contracts as delivery of the vessels were delayed more than 270 days after the delivery date. Shipyard argued that the cancellation was wrongful as some of the delays was caused by Buyer’s own breach of contract which amounted to a repudiatory breach. On appeal from two arbitrations, Mr Justice Leggatt identified three types of delays in the contract. They were permissible delay, non-permissible delay and excluded delay.

Non-Permissible Delays – Under Article III.1 (b) of the contract Buyer could deduct a specified sum from the final instalment for each day that the delivery of the vessel was delayed by more than 30 days but less than 210 days after the Delivery Date specified. 

Permissible delay – Under Article VIII, the delivery date of vessel will be extended if Shipyard is affected by certain stated events or other causes beyond its control, provided notice is given within 7 days its commencement and cessation respectively. In the absence of such notice, Shipyard will be barred from any relief claimed.

Excluded delay - Even though not expressly named as such in the contract, the Judge described the following delay events that provide for an extension of the delivery date as Excluded Delays: (a) Changes in the specifications, plans class requirements, Articles V.1 and V.2, (b) Late delivery of Buyer’s supplies, Article V.4, © Failure of the Buyer’s representatives or supervisor to attend sea trials, Article VI.1, (d) Buyer’s default in (i) payment of instalment, (ii) failing to provide a guarantee of payment or (iii) failing to take delivery of the vessel under the contract, Article XI.4(a), (e) Mutual agreement by the Parties to proceed with the contract in the event where the vessel becomes a total, Article XII.2 (b), (f) In event of any arbitration between the Parties, Article XIII.7

Cancellation Rights - The contract expressly provided that the Buyer could cancel the contract under the following circumstances:

(a)   the delay in the delivery of the vessel continued for a period of at least 210 days, and/or

(b)   If the total of all accumulated permissible delays is two hundred and twenty five (225) days or more, or the combination of all permissible and non-permissible delays is two hundred and seventy (270) days or more.  

Excluded delays did not counted as delays for the purpose of any right of cancellation as there was no contractual provision that state otherwise.

 Under Article IV, the BUYER undertook and assured that its Supervisor would carry out his inspections “in accordance with the agreed inspection procedure and schedule and usual shipbuilding practice and in a way as to minimize any increase in building costs and delays in the construction of the VESSEL.”

The Shipyard alleged inter alia that Buyer was in breach of the above undertaking as the Buyer’s Supervisor worked very short hours, thus delaying the inspection process and imposed unreasonable requirements, beyond those specified in the contract, specification, class rules &  regulations, agreed standards and general practices. All these delayed the construction process.

 Also, the Buyer’s supervisor delayed the return of procedures or vessel drawings and shipyard could not carry out further construction of the relevant items. According to the Shipyard such delay caused by Buyer’s breach was the fourth category of delay. (Note: Notice of such breach was not given to Buyer and the Shipyard only made the claim after cancellation of contract).

However, the Judge pointed out that the Yard is only obliged to correct such nonconformity if it agrees with the Buyer. Buyer’s supervisor has no power to delay the construction of the vessel.  If the supervisor points out what he thinks is a failure by the Yard to build the vessel in accordance with the contract, it is up to the Yard to decide whether it agrees with the supervisor, in which case it must of course correct the defect, or whether it is disagrees with the supervisor, in which case it is free to ignore him.

Whilst the supervisor had the right to attend tests and carry out inspections, there was nothing in the contract which required the Yard to wait for him.  Equally, if the supervisor sought to impose unreasonable requirements beyond those specified in the contract, the Yard had no obligation to comply with them.

As for returning procedures or drawings of the vessel (the third form of alleged breach), the specifications for the vessel were all agreed at the time when the contracts were made and were annexed to the contracts, and I can see nothing in the contract terms which required the supervisor’s approval to be sought or obtained for any procedures or drawings. 

The Court said that there was no additional fourth category of delay and Article IV is not considered “Excluded delay” as it did not expressly extend the time for delivery of the vessel due to any breach of Buyer’s undertaking.  After considering various arguments from counsels, the Court held that the delay caused by Buyer’s breach under Article IV were non-permissible delays. Therefore, such delays could be included in (a) the period of 270 days’ delay  under Article VIII.3 and the period of 210 days’ delay after the Delivery Date under Article III.1© either of which entitles the Buyer to terminate the contract.

Source: www.bailli.org Cases referred to in the Judgement: BMA Special Opportunity Hub Fund Ltd v African Minerals Finance Ltd [2013] EWCH Civ 416 at [24] Jackson v Dear [2012] EWHC 2060 (Ch) at [40]. Alghussein Establishment v Eton College [1988] 1 WLR 587 Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm) at para 255. The “Kriti Rex” [1996] 2 Lloyd’s Rep 171, 196 Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The ‘Nanfri’) [1978] 2 KB 972, 975; Geldof Metaalconstructie NV v Simon Carves Ltd [2011] 1 Lloyd’s Rep 517 at para 43(vi).  Pioneer Shipping Ltd v BTP Tioxide Ltd (‘The Nema’) [1982] AC 724, 742. 

Some thoughts: Failure to serve Notice of alleged Buyer’s breach – Was there a proper contract management team at Shipyard? If notice has been served, perhaps Buyer’s Senior Management would have taken notice that all was not well in the Project. Unless…

Unreasonable Representatives: Some contract provides for removal of Buyer’s Supervisor or Shipyard’s Project Manager on account of unreasonable behaviour or act or omission that could jeopardise the project.

Inspection process – Some contract provide for deemed acceptance if Buyer’s representative fails to attend schedule inspection & tests. Regardless, most contract will provide that at the end of the day it is still Shipyard’s duty to ensure the timely delivery of a seaworthy ship that complies with contract and specification.

Unreasonable requirement – As the Judge says, the Shipyard can refuse to comply. What is puzzling – how could the Supervisor impose unreasonable requirements in respect of class items? Prudent contract will provide that in the event of dispute concerning class requirements, the decision of class shall prevail.