February 13, 2020

COVID-19 Marine: Shipbuilding contracts issues arising

The rapid spread of COVID-19, a novel coronavirus originating from the Chinese city of Wuhan, is causing significant disruption to a wide range of industries, both in China and internationally. This disruption caused by COVID-19 has been felt particularly acutely in respect of shipbuilding, as an industry dependent on the employment of significant numbers of workers and the supply of materials required for construction.

A number of shipyards have issued force majeure declarations following the spread of COVID-19, in order to seek extensions to the delivery date under their contracts. This article considers the main legal issues concerning force majeure affecting both shipyards and buyers in light of the rapid spread of COVID -19.

Force majeure – summary and requirements

Under English law (and many other legal systems based on common law) there is no general right for parties to rely on force majeure. A party will therefore only be able to rely on force majeure if there are contractual provisions allowing it to do so, and they can show that the events in question fall within those provisions.

In most shipbuilding contracts, such as those on the SAJ and NEWBUILDCON forms, force majeure is treated as a "permissible delay", entitling the shipyard to an extension of time of the delivery date.

Whether a shipyard will be entitled to rely on force majeure and obtain an extension to the delivery date will ultimately depend on the wording of the contract in question. However, it is likely that the shipyard will need to be able to show:

  1. There has been a force majeure event (falling within the meaning of the contractual wording);
  2. That the delay to construction or delivery is caused by the force majeure event;
  3. That any notice requirements set out in the force majeure provisions are satisfied.

As disputes can frequently arise concerning the validity of force majeure declarations, it is worth both shipyards and buyers considering each of these issues carefully.

1. Has there been a force majeure event within the meaning of the contract?

Shipyards adversely affected by the impact of COVID-19 may potentially be able to rely on a number of force majeure events listed in their shipbuilding contracts. The burden will be on the shipyard to prove the occurrence of the force majeure event on which they seek to rely.

The most obvious force majeure event by which a shipyard located in an area affected by COVID-19 may be able to rely on is an "epidemic" (a named event in both the SAJ and NEWBUILDCON forms).

However, depending on the factual background and wording of the contract, shipyards may also be able to rely on other named events, such as "quarantines" or "requirements of government authorities" if their staff have been prevented from working through quarantine restrictions, the shipyard has been subject to enforced closure, or the vessel’s construction is otherwise affected due to the orders of authorities.

Shipyards that are not located in areas directly affected by COVID-19 may also potentially be able to assert force majeure, if COVID-19 has nonetheless affected their operations. If a shipyard has experienced delays in receiving supplies required for construction and this has in turn caused delays to construction, the shipyard may be able to rely on any named events along the lines of the SAJ event “inability to obtain delivery or delays in delivery of materials, machinery or equipment” or the catch all wording “other causes or accidents beyond the control of the BUILDER, its subcontractors or suppliers of the nature whether or not indicated by the foregoing words”.

2. Has the force majeure event caused the delay to construction or delivery?

Generally, shipbuilding contracts containing force majeure provisions will include language which requires the delay to construction or delivery to be "due to" or "caused by" the force majeure event in question.

This is wording which, under the principles outlined in the recent English Court of Appeal case of Classic Maritime Inc v Limbungan Makmur SDN BHD [2019], indicates that the force majeure event in question must have been the cause of the delay to the vessel's construction. There is therefore the potential for disputes between buyers and shipyards as to whether a force majeure event is the cause of the delay in construction. If such a dispute were to arise, the shipyard would likely need to show it has affected the critical path of the vessel’s construction.

Separately, a contract may contain an obligation on a party to exercise "reasonable endeavours" or “reasonable efforts” to avoid or mitigate the effect of a force majeure event. In the case of Seadrill Ghana Operations v Tullow Ghana Ltd [2018] the High Court commented that all matters of relevance can be taken into account in assessing whether it is reasonable to expect a party to take certain steps to avoid a force majeure event. Given that shipyards may have a certain amount of control as to how they respond to COVID-19, it is worth shipyards being mindful of any potential obligations imposed by contract to overcome or mitigate the impact of COVID-19.

3. Notice requirements

Shipbuilding contracts often contain provisions setting out fixed deadlines for notices to be provided (i) by the shipyard to assert force majeure and (ii) by the buyer to challenge any notice of force majeure.

It is important that shipyards and buyers carefully consider the effect of any notice provisions in their contracts. A failure to do so, depending on the contractual wording, risks the shipyard or buyer being barred from either relying on, or challenging a declaration of force majeure.

Implications of COVID-19 and further issues to consider

The full impact of COVID-19 remains to be seen, together with the knock-on effects on the shipbuilding industry.

At this stage, disputes are likely to focus on whether shipyards are entitled to rely on force majeure provisions, and whether any delays to construction are impermissible delays (entitling the buyer to liquidated damages) or permissible delays (in which case the buyer is not entitled to recover damages for delay).

However, in due course, if the impact of COVID-19 worsens, and if there is prolonged disruption to shipyards in China or widespread disruption to the supply of materials required for shipbuilding construction, there is the potential that buyers may seek to rely on cancellation provisions if there are excessive delays in vessel construction. It is therefore important that both shipyards and buyers carefully consider the legal position under their contracts and ensure that their position regarding any delays to vessel construction is sufficiently protected.