Cancelling shipbuilding contracts –The dos and don’ts

William CecilPartnerCurtis Davis Garrard LLP

8 October 2012

cancelling shipbuilding contracts - the dos and don'ts

B’s usual contractual cancellation rights

B entitled to cancel if:

• The vessel fails to meet specified performance guarantees

• Excessive delay

Usual provisions for delay:

• 30 days grace period

• Liquidated damages at increasing daily rates up to a maximum of 210 days

• Then B has right to cancel

Consequences of valid cancellation:

• Refund of pre-delivery instalments

• Interest

• Damages for B’s losses

cancelling shipbuilding contracts - the dos and don'ts

Consequences of a wrongful cancellation

• B in repudiatory breach

• SY does not have to perform and can claim damages

• Refund guarantee of no effect

• B should consider whether possible/preferable to obtain award/judgment confirming that cancelling right has arisen before cancelling

cancelling shipbuilding contracts - the dos and don'ts

Extensions to cancelling date

May be extended due to:

• Force majeure events

• Other permissible delay

• Variations

Cannot cancel before cancellation date even if inevitable that vessel will be late

cancelling shipbuilding contracts - the dos and don'ts

The Prevention Principle

• B cannot insist on strict compliance of the contract if it has prevented SY from performing its obligations

• B’s actions do not need to be a breach of contract

• Consequences if no contractual mechanism to extend time:

oTime will be “at large”oB will lose contractual cancellation right

Adyard Abu Dhabi v SD Marine Services [2011]: “A trivial variation may lead to the loss of the right to liquidated damages for a long period of culpable delay and, in this case, loss of the right to rescind as well.”

cancelling shipbuilding contracts - the dos and don'ts

Waiver

B must be careful not to waive its contractual right to cancel as a result of:

• Delay

• Actions inconsistent with B’s right to cancel

B should:

• Reserve right to cancel as soon as right arises

• Any subsequent correspondence or ongoing approvals should refer to reservation of rights letter

• Cancel as soon as possible taking into account safety margin for possible extensions of time

cancelling shipbuilding contracts - the dos and don'ts

The refund guarantee

• If unable to call on refund guarantee:o Credit risk - B will be an unsecured creditor of SY

for claims for pre-paid instalments plus interesto Difficulties of enforcement of award/judgment in

jurisdiction of SY

• Points to check:o Expiry date of refund guaranteeo Type of guarantee: “see to it” guarantee or on

demand guarantee?o Rule in Holme v Brunskill

cancelling shipbuilding contracts - the dos and don'ts

Form of cancellation notice and demand on refund guarantee

• Contractual requirements

• Preserve right to claim damages in cancellation notice: Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009]

cancelling shipbuilding contracts - the dos and don'ts

Assignment of the shipbuilding contract and the refund guarantee

• Who is entitled to serve the cancellation notice and refund guarantee demand?

• What consents are required to cancel/make demand?

• Allow time to obtain bank’s consent

cancelling shipbuilding contracts - the dos and don'ts

Conclusion

Be fully prepared BEFORE you jump!

cancelling shipbuilding contracts - the dos and don'ts

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