May 20, 2020

Shipbuilding Contracts: The Prevention Principle and Importance of Giving Notices

The recent decision of the English Commercial Court in Jiangsu Guoxin Corporation Ltd (formerly known as Sainty Marine Corporation Ltd) v Precious Shipping Public Co. Ltd [2020] EWHC 1030 (Comm) examined the applicability of the prevention principle -  that one party to a contract is not liable for default when it is prevented from performing it by the act of the other -  to delays caused by the Builder in an amended SAJ (Shipbuilders' Association of Japan) Form shipbuilding contract ("SBC"). The Court concluded that the prevention principle would not apply under the SBC, because the wording of Article Vlll.1 of the SBC expressly gave the Seller a right to claim an extension of time for delays beyond their control, which encompassed delays caused by the Buyer. The Court also held that where the Seller had failed to give appropriate contractual notices, the Seller would not be entitled to extensions to the Delivery and Cancellation Date for delays caused by the Buyer. 

The case highlights the risk to shipyards if they do not give notices for extensions of time in accordance with the strict terms of the shipbuilding contracts.

Background facts

Following delivery of the first two out of 14 bulk carriers under a series of SAJ Form SBCs, the Buyer rejected the next four vessels on the basis that they had been designed defectively. The Seller maintained that the result of this rejection, which it deemed to be wrongful, was that the vessels were left occupying berths in the Seller's yard, thereby delaying the construction and launch of the subsequent vessels, Hulls 21B and 22B, beyond the contractual Delivery Date.  Upon the expiry of 151 days after the contractual Delivery Date for Hulls 21B and 22B, the Buyer sought to terminate the contracts for Hulls 21B and 22B due to the lapse of 150 days of "non-permissible" delays. In return, the Seller claimed that this was a repudiatory breach which it then accepted.

On referral to LMAA arbitration and heard as a preliminary issue, the Seller contended that the Delivery Date had been extended because of the Buyer's rejection and cancellation of the preceding four hulls, modifications made to the vessels, and the Buyer's late payments of instalments of the Contract Price, and that such circumstances gave rise to the application of the prevention principle. On the other hand, the Buyer's position was that the Seller had not abided by the contractual requirements to extend the Delivery Date, and the contract was a complete code leaving no room for the prevention principle to apply.

The arbitral tribunal issued partial final awards in favour of the Buyer, finding that the Seller was not entitled to extend the Delivery Date when it had not utilised the applicable contractual mechanisms for such extension, and that there was no scope for the prevention principle to apply given the express terms of the contract. The Seller appealed the partial final awards to the English High Court under Section 69 of the Arbitration Act 1996.

The Decision

Prevention Principle

The SBC was held by the Court to have an implied term that neither party should actively and wrongfully (by breach of contract or being independently wrongful) prevent the other from performing its obligations under the contract. Under the prevention principle, if a buyer wrongfully prevents the seller from delivering on time, the seller is unlikely to be bound by the strict requirements of the contract as to time, with an extension of time generally granted to the seller to perform their obligations, to the extent the delay is caused by the buyer's actions. However, the parties can contract out of this application of the prevention principle by expressly providing for agreed extensions of time on the happening of certain events.

The crux of the matter before the Court was therefore whether the permissible delays provided for under Article VIII.1 of the SBC was wide enough to cover the alleged delays because, if it was, then express provision had in fact been made for an extension of time, and this would take precedence over the prevention principle, which would then no longer apply. The Court agreed with the Buyer and held that Article VIII.1, which accounted for delays "beyond the control of the Sellers or of its sub-contractors", included delays caused by the Buyer itself (provided they remained outside of the control of the Seller or its sub-contractors). The contract therefore contained a complete code of express provisions for extensions of time and cancellation caused by the Buyer's wrongful acts, and it followed that the prevention principle did not apply. The Seller sought to rely on Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc [2014] EWHC 4050 (Comm), which considered similar but not identical provisions, to argue that if the Buyer's default was allowed to constitute permissible delay, then that delay caused by the Buyer itself would count towards the 180 days of permissible and non-permisisble delays set out in Article VIII.3 after which the Buyer was allowed to rescind or terminate the contract. However, the Buyer's right to cancel for delay under Article VIII.3 excluded delays "due to default in performance by the Buyer", which the Court deemed to preclude such a scenario posited by the Seller.

Notification Requirements

In light of its finding that the Seller's delays fell within Article VIII.1 of the SBC, the Court held that the notification requirements under Article VIII.2 were applicable, such that if the Seller failed to issue the contractually specified notices to the Buyer, it would be barred from claiming an extension of the Delivery Date. In fact, the construction of Article VIII.2, which provided for "any delay on account of which the Seller claims that it is entitled under this Contract to an extension of time for delivery…" was held to be wide enough to have the requirement apply to such delays even if they were outside the ambit of Article VIII.1. The Court concluded that it "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."

Modifications

The Court also considered the Seller's claim that the parties had agreed to modifications to the vessels under Article V of the SBC which entitled it to an extension without needing to notify of delay. This was rejected as the contract contained contractual mechanisms which dealt with modifications, requiring any extensions of time for modifications to be agreed between the parties, and without an agreement on this the Seller was entitled to continue construction under the original design without an extension of time.

Default in Payments

The Seller also contended that the Buyer was in default for non-payment of instalments, which entitled the Seller to day-by-day extensions of time under Article XI.4 of the SBC. However, the Court found that the postponement of the Delivery Date under Article XI.4 was expressly stated to be "at the Seller's option", which required the Seller to exercise that option by communicating its election to the Buyer. The Seller did not do so and the Delivery Date therefore remained the same.

Conclusion

Through this judgment, the English Court has continued its line of cases in which the contractual provisions of SBCs have been strictly enforced, according to their terms.

As the unamended SAJ Form carries clauses very similar to the ones examined by the Court in this case, it is important for parties to be aware that the prevention principle will not apply in a SBC which includes express provisions providing for extensions of time on account of delays beyond the control of the shipyard, as this will likely be deemed to include delay caused by the Buyer. It is also useful to recognise that Article VIII.2 of the SAJ Form which provides notification requirements where the Seller claims an extension of time, covers a wider ambit than the permissible causes of delay mentioned in Article VIII.1, thereby underlining that notification and communication of any extensions of the Delivery Date are crucial for shipyards in the performance of SBCs under the SAJ Form.

The key point to draw from the judgment is that the notice provisions of shipbuilding contracts will be strictly enforced, even in circumstances where the buyer is directly responsible for delays. As a result, if there is any potential ambiguity as to whether a shipyard should tender a notice for extension of time, they should err on the side of caution and serve a contractual notice, so as to forestall any argument by the buyer that the delivery date or cancellation date has not been extended through the appropriate contractual mechanisms. Equally, the judgment indicates that Buyers may have opportunities to argue that the original delivery date and cancellation date apply if shipyards do not exercise the contractual machinery to notify extensions of time.