Young CMI/Sjørettsforeningen Shipbuilding – legal and practical problems when taking delivery Karl Even Rygh 20 November 2013

Young CMI/Sjørettsforeningen

Shipbuilding – legal and practical problems

when taking deliveryKarl Even Rygh

20 November 2013

Topics – Part I

• Introduction• Shipbuilding contract forms• Force Majeure delays – LDs• Payment procedure at delivery• Disputes as to final instalment• When is the vessel ready?• Yard’s refusal to deliver – blackmailing• Sample case – recent English judgment

18.04.23 Nordisk Skibsrederforening 2

Standard contracts

• Norwegian Standard Form Shipbuilding Contract 2000• Newbuildcon 2008• China • Korea• Japan (JAS)


Liquidated damages

• Delayed delivery entitles buyer to a daily reduction in price by way of liquidated damages.

Norwegian Standard Form Shipbuilding Contract 2000 – Art. VI 1(a):

“If the delivery of the Vessel is delayed beyond the Delivery Date, the Contract Price shall be reduced by deducting therefrom as follows:

1st - 30th day No reduction/alternatively ……………… per day31st - 60th day ……………… per day61st - 180th day ……………… per day The maximum reduction in the Contract Price for delayed delivery shall not exceed

the total of the above liquidated damages for 180 days of delay.”


Liquidated damages

Newbuildcon cl. 13 – Late Delivery for non-permissible delays:

“If delivery takes place more than 30 days after the Delivery Date then for each day thereafter the Contract Price shall be reduced by the amount stated in Box 18 per day as liquidated damages up to a maximum delay of 180 days (Comprising a 30 day grace period plus 150 days).

If the delay exceeds 180 days the Buyer shall have the option to terminate this Contract in accordance with Clause 39(a)(iii) (Suspension and Termination)”


Liquidated damages

• Yards typically argue permissible delays as defence to LDs.• Important to ensure that notice provision stipulates waiver

effect, preferably for all three notices.• Many yard forms only include waiver wording in respect of

Buyers’ obligation to object:

DSME Art VIII.3(c):Failure by Buyer to object to Builder's claim for postponement of the Delivery Date within ten (10) days after receipt by Buyer of such notice of claim shall be deemed to be a waiver by Buyer of its right to object to such postponement of the Delivery Date.


Liquidated damages

Norwegian Standard Form Shipbuilding Contract 2000 – Art. IV 2:

“(a) Within 10 days after the Builder becomes aware or should have become aware of any cause of delay as aforesaid, on account of which the Builder will claim that it is entitled under the Contract to postpone the Delivery Date, the Builder shall notify the Buyer in writing or by telefax, confirmed by registered mail, of the date such cause of delay commenced. Likewise, within 10 days after the date such cause of delay ended, the Builder shall notify the Buyer in writing or by telefax, confirmed by registered mail, of the date when such cause of delay ended.

Failure by the Builder to give such notices as aforesaid shall prevent the Builder from subsequently claiming Force Majeure Delay on account of such circumstances.


Liquidated damages

(b) The Builder shall notify the Buyer of the period, by which the Delivery Date is postponed by reason of such cause of delay, with all reasonable despatch after it has been determined. Failure by the Buyer to object to the Builder's claim for postponement of the Delivery Date within 10 days after receipt by the Buyer of such notice shall be deemed to be a waiver by the Buyer of its right to object to such postponement of the Delivery Date for the net delay caused by the Force Majeure event, provided always that the Builder's information in respect of the cause of the delay and the consequences thereof were correctly stated in the notice.”


Liquidated damages

Newbuildcon lines 740-746:

“The Builder shall notify the Buyer within ten (10) running days of when the Builder becomes aware of the occurence of any event of delay on account of which the Builder asserts that it may have the right to cleim an extension of the Delivery Date. A failure to so notify shall bar the Builder from claiming an extension to the Delivery Date. The Builder shall also advise the Buyer in writing (A) within two (2) running days of the ending of any event notified under this Clause that the event has ended, and (B) as soon as reasonably possible after (A), the length of extension of the Delivery Date claimed by the Builder.»


Payment procedure at delivery

• Most contracts (not the Norwegian Form) require final instalment to be prepositioned a certain number of days prior to delivery.

Newbuildcon cl. 30(a) – Final Instalment:“The Final Instalment shall be adjusted in accordance with this Contract and notified by

the Builder to the Buyer not later than seven (7) Banking Days prior to the notified date of delivery (see Clause 27(d)(Sea Trials – Method of Acceptance or Rejection)). Not later than two (2) Banking Days prior to the notified date of delivery the amount of the Final Instalment, as adjusted, shall be deposited with the Builder’s Bank as set out in Box 12, with irrevocable instructions that, subject to Sub-Clause (c) below, the amount shall be released to the Builder against presentation by the Builder of a copy of the Protocol of Delivery and Acceptance of the Vessel signed by the Builder and the Buyer. Interest, if any, accruing on such deposit shall be for the benefit of the Buyer.”


Payment procedure at delivery

• Practical problems as to when such payment shall be made and how much to pay/release

• Important to cater for bank financing – may require countersigning

• Money should be automatically returned if delivery does not take placeNewbuildcon lines 677-80:«(c) If the Protocol of Delivery and Acceptance is not so presented within seven (7) days following the date for delivery of the Vessel as notified by the Builder in accordance with Clause 27(d) (Sea Trials Method of Acceptance or Rejection), the Buyer shall have the right to withdraw the said deposit plus accrued interest.»


Disputes as to final instalment

• Almost every delivery of a newbuilding involves some disagreement as to the amount payable.

• Important to include a mechanism for ensuring delivery of the vessel despite such disputes – most yard contracts do not.

• No such mechanism in Newbuildcon - Cl. 30(b):«If the Buyer does not agree the amount of the Final Instalment as adjusted

and notified by the Builder, the Buyer shall notify the Builder within five (5) running days. Thereafter the Buyer may take delivery of the Vessel on payment of the Final Instalment as adjusted (or such other amount as the Builder may agree) but without prejudice to the Buyer’s rights and remedies under this Contract and the dispute shall be resolved in accordance with Clause 42 (Dispute Resolution).»



• Norwegian Standard includes a provision whereby one of the parties provides security – Art. III 3:

«The Builder may retain the Vessel until full payment has been made in accordance with the agreed payment terms. If the Builder is unable to present a final account at delivery, the Buyer may require the Vessel to be delivered in return for a bank guarantee or other security, satisfactory to the Builder, for the reasonably estimated balance owed to the Builder. Costs of such guarantee to be for Builder's account.

In the event of any dispute concerning the payment on delivery of the Vessel, including the question of the Buyer's right to offset any claim it may have, the Buyer may by paying the entire amount demanded by the Builder require the Builder to provide a bank guarantee or other security



satisfactory to the Buyer for the disputed amount. The Builder cannot in such case refuse to deliver the Vessel. If the Builder does not wish to issue security for the disputed part of the claim, the Buyer is entitled to take delivery of the Vessel against payment of the undisputed amount and provide a bank guarantee or other security satisfactory to the Builder for the disputed part of the claim. Security which has been issued by a party pursuant to this sub-clause terminates automatically unless the other party has brought legal action pursuant to Article XIX below within 3 months from date of issue of the security. The costs of security shall be shared proportionately between the parties according to the final outcome of the dispute.»

•Preferably, Buyer shall be entitled to choose.•Still room for dispute as to form and amount of guarantee.


When is the vessel ready?

• Sea trial – rectification – further sea trial

• Buyers’ right to reject – punch list items

Norwegian Standard Form Shipbuilding Contract Art. VII.4(d)“The Buyer shall not be obliged to take delivery of the Vessel if it is not fully in conformity with the Contract, or if there are any conditions or recommendations imposed by the Classification Society and/or Regulatory Bodies. However, if the deficiencies or the conditions/recommendations are of minor importance, and the Builder is unable to rectify the matter within a reasonable time, the Builder may nevertheless require the Buyer to take delivery of the Vessel, provided:(i) the Builder undertakes for its own account to remedy the deficiency or fulfil the requirement as soon as possible, and

(ii) the Builder shall indemnify the Buyer for any loss incurred as a consequence thereof, including loss of time.”


When is the vessel ready?

Newbuildcon 27(d)(iv)“If the Delivery Defects are of minor importance and do not affect Class of the operation of the Vessel in its intended trade but the Builder is unable to rectify the matter within a reasonable time and in any event before the accrual of the Buyer’s right to terminate in accordance with Clause 39 (Suspension and Termination), the Builder may nevertheless require the Buyer to take delivery of the Vessel on the condition that Builder first:

(1) undertakes to remedy the Delivery Defects for its own cost and expense as soon as possible; and(2) agrees in writing to indemnify the Buyer for any loss incurred as a consequence thereof, including loss of time; and(3) provides the Buyer with a guarantee issued by the party named in Box 32 (or if Box 32 is not filled in, a bank guarantee from a first class bank) substantially in the form and substance as set out in Annex A(iv) for a sum which the Buyer reasonably request to cover (1) and (2) above, failing agreement such sum to be resolved in accordance with Clause 42 (Dispute Resolution);

whereupon the Buyer shall accept delivery of the Vessel.”

•Agreements re defects at delivery


Yard’s refusal to build/delivery – Black mailing tactics

• Topical issue when markets were high prior to the financial crisis

• Buyers can typically only cancel a long time after the agreed delivery date (210 days).

Norwegian Standard Form Shipbuilding Contract Art. IV.1 d)“If it can be established beyond any reasonable doubt that the Vessel

will be delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above, the Buyer shall have a right forthwith to cancel the Contract.”

• Buyers are only entitled to refund of instalments paid with a fixed interest.


Yard’s refusal to build/delivery – Black mailing tactics

Norwegian Standard Form Shipbuilding Contract Art. XII.1“Upon cancellation the Builder shall refund all sums paid by Buyer to the Builder under Article 111 hereof, including interest thereon at the rate of ………… % (per cent) per annum from the date of payment to the date of refund. The Builder shall also return Buyer's Supplies, or if they cannot be returned, the Builder shall pay to the Buyer an amount equal to the Buyer's costs for such equipment.

Save for the Builder's obligation to refund amounts as set out above, the Builder shall have no liability for any other loss suffered by the Buyer caused by a cancellation pursuant to this Article XII, clause 1, first paragraph.”


Yard’s refusal to build/delivery –Black mailing tactics

• Buyers may argue that wilful misconduct and/or intentional breach by the yard has the effect that such limitations of liability cannot be relied upon

Newbuildcon Clause 37(e)“Mutual exclusion Clauses(e) Liability following terminationIn the event of termination in accordance with the provisions of Clause 39 (Suspension and Termination), neither Party shall have any liability to the other whatsoever or howsoever arising, except as expressly provided in that Clause.

In the event, however, that a Party fails to perform the Contract, or unequivocally indicates its intention not to perform it, in a way which thereby permits the other Party to treat the Contract as at an end other than under the terms of the Contract, any such claim that the other party may have shall not be limited or excluded by the terms of this Contract.”

• Must consider carefully how to claim refund under refund guarantees in combination with claiming additional losses from the yard – Stocznia Gdynia v Gearbulk Supreme Court 2009


Recent English judgments:

Wuhan Ocean Economic v “Hansa Murcia” - [2012] EWHC 3104 (Comm)

•Refund guarantees typically include an expiry date•Important to ensure sufficient flexibility•Recommend provisions whereby forthcoming expiry triggers a separate right to cancel and refund•Recent case illustrates the difficulties for a buyer in a situation where delayed delivery has been accepted, without at the same time obtaining an extended guarantee

“This Letter of Guarantee shall remain in force until the Vessel has been delivered to and accepted by [the buyers] or refund has been made by the Seller or ourselves (the Export Import Bank of China) or until 30 June 2010, whichever occurs earliest, after which you are to return it to us by airmail for cancellation. In case arbitration initiated by either Seller or Buyer before delivery of the Vessel, the validity of this guarantee shall be extended to 60 calendar days after the final arbitration award is issued.”18.04.23 Nordisk Skibsrederforening 20


SBC

8/1-04 22/12-09 28/6-10 29/6-10 30/6-10 31/5-12

ExtensionBuyers’Termination

Arbitration toExtension RG Expiry

ExtendedRG Expiry

Documents

Young CMI/Sjørettsforeningen Shipbuilding – legal and practical problems when taking delivery Karl Even Rygh 20 November 2013