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Friday, 20 May 16
SHIPBUILDING CONTRACTS: CAN I CANCEL? SHOULD I CANCEL? - THE SHIPOWNER CLUB
 KNOWLEDGE TO ELEVATE
There are many circumstances in which a buyer of a new-build vessel might want to terminate or cancel their contract with the yard. Perhaps the building work has been delayed. Maybe the market has dropped and the deal which looked like a good one a couple of years ago, when the contract was signed, no longer looks so favourable. Maybe the yard’s performance is lacking and another instalment is about to fall due, which means the buyer will have to decide between paying up and hoping the problems can be put right, or terminating and attempting to recover instalments that have already been paid.
Cancelling contracts isn’t straightforward; there are many traps for the unwary buyer who attempts to bring the contract to an end. If you get it wrong, you might lose the instalments you have already paid or you might face a claim from the yard for damages. Even if you get it right, you might find yourself having to deal with expensive and long running court or arbitration proceedings. This article aims to help you understand some of the pitfalls which face buyers who want to cancel shipbuilding contracts.
Termination, cancellation and rescission – what’s the difference?
Termination
‘Termination’ is a common law right. If a party breaches a condition of a contract or unequivocally communicates (by words or conduct) an intention not to perform, this is called a repudiatory breach. The innocent party can accept the repudiatory breach as terminating the contract and can claim damages. They also have the option of affirming the contract and continuing to perform, provided they have a legitimate interest in doing so.
But watch out! A condition is an important contractual term. If a party breaches a warranty – a less important term and not to be confused with the yard’s warranties regarding the quality of the build – the innocent party can only claim damages. They do not have the right to terminate. If the breach is of an innominate term (neither a condition nor a warranty) then the innocent party can claim damages but may only terminate if the breach goes to the root of the contract.
The contract may also explicitly allow a party to terminate in certain situations.
Cancellation
‘Cancellation’ is a contractual right. The contract may provide that a party may cancel in certain situations which means they can bring the contract to an end. The contract might also set out the consequences of that cancellation.
Rescission
Most standard-form shipbuilding contracts give both parties the right to ‘rescind’ in certain circumstances. Rescind means to bring the contract to an end and revert the parties back to the position they were in before the contract was signed. For example, a shipbuilding contract might provide that if the yard exceed their permissible and non-permissible delays to the delivery date, you can rescind the contract and you will therefore be put back in your original position by the yard, who will refund the installments you have already paid or allow you to claim under the refund guarantees.
Can I rescind?
Many shipbuilding contracts define a number of events which entitle the buyer to rescind. The most common are:
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Delays in delivery beyond a certain number of permissible and/or non permissible delays.
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Failure of the vessel to meet the technical requirements of the contract.
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Insolvency of the yard.
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Total loss of the vessel before delivery.
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Failure to meet certain milestones.
But watch out! If you wish to terminate for the yard’s repudiatory breach, you must be confident that you can prove the yard has breached a condition or has indicated an intention not to perform. This is not always obvious. You also need to be very careful and strictly follow any procedure for rescission or cancellation. If you get it wrong (because, for example, the contract says that you must give ten working days written notice sent by courier to a particular address, and you give five days’ notice and send it by fax), you might find that the yard terminates the contract for your repudiatory breach and brings a damages claim against you!
What are the consequences of rescinding the contract?
Often, shipbuilding contracts provide that if the buyer rescinds, the yard must refund their instalments ‘promptly’ or otherwise start arbitration to suspend that obligation until an award has been published. Once the refund is made, all of the parties’ obligations to each other under the contract come to an end. If the refund is not paid and the yard does not start arbitration, the buyer can claim from the yard’s bank under the refund guarantees.
Can I claim under the refund guarantee?
There are two broad types of guarantee. Under an ‘on demand’ guarantee, the guarantor is the primary debtor and payment is made against a written demand by the buyer certifying that they are entitled to a refund. Provided the documents are in order and the demand is made in good faith, the bank must pay. Under a ‘performance’ or ‘see to it’ guarantee however, the guarantor’s liability is secondary. This means that you must first prove that the yard is liable under the shipbuilding contract before you can claim from the bank.
But watch out! Refund guarantees will not always respond to every event by which the contract is brought to an end. For example, if the refund guarantees require a valid rescission under a particular provision of the contract that does not necessarily mean that the bank must pay if you terminate for the yard’s unrelated repudiatory breach. If you can’t claim under the refund guarantees, think carefully about how you will enforce your claim against the yard.
Can I recover other losses?
Even if you get your instalments back, you might have also suffered other losses such as expenditure thrown away as a consequence of the ending of the project (called ‘reliance loss’) or, if you need to find an alternative vessel and the market has risen, the difference between the contract price and the market price of an equivalent newbuilding (called ‘loss of bargain’).
But watch out! It is usual for shipbuilding contracts to exclude such losses and limit the yard’s obligation to repayment of the pre-delivery instalments plus interest. It is possible to terminate for the yard’s repudiatory breach and claim damages as well as exercising your contractual right to rescind and claim repayment of your instalments of the contract price. This was decided by the Court of Appeal in Stocznia Gdynia S.A. v. Gearbulk Holdings Ltd (2009). However, this decision has been criticised and the relationship between contractual and common law rights is a complicated and developing one.
Should I rescind or terminate?
Ultimately, the decision to bring the contract to an end is the nuclear option. As well as irreparably damaging your commercial relationship with the yard, you might find yourself on the receiving end of expensive litigation if you get it wrong, and sometimes even if you get it right. As well as working out whether a right to rescind or terminate has arisen, you also need to consider carefully whether you can claim under the refund guarantees to recover your instalments and whether you can obtain the evidence needed to prove your other losses. For example, you might need expert evidence on market prices if you want to claim for loss of bargain.
Sometimes, terminating a contract is the best, or only, option. However, the law of shipbuilding is complex and fraught with ambiguities and the sums at stake are often large. Ending the contract is a drastic step and good legal advice is essential before you make the decision to terminate or rescind.
Source: The Shipowner Club (By Helen McCormick, Associate Director, CTRL Marine Solutions Ltd) | Hellenic Shipping News
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Monday, 27 June 16
THE BDI UP 3.75 PERCENT ; BCI FELL 1.51% WEEK OVER WEEK
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities rose this past week. The BDI was up 3.75 percent from las ...
Monday, 27 June 16
INDONESIA BANS (AGAIN) SHIPS SAILING TO THE PHILIPPINES FROM INDONESIA
COALspot.com: The Indonesian Transport Ministry strictly prohibited harbour masters issuing permits to all Indonesian-flagged vessels bound for the ...
Friday, 24 June 16
U.S WEEKLY COAL PRODUCTION UP MARGINALLY
COALspot.com – U.S, world’s one of the largest coal producers has produced approximately totalled an estimated 13.4 million short tons ...
Wednesday, 22 June 16
SMALL RISE IN SHIPPING CONFIDENCE - MOORE STEPHENS
In May 2016, the average confidence level expressed by respondents in the markets in which they operate was 5.1 on a scale of 1 (low) to 10 (high). ...
Wednesday, 22 June 16
SHIPPING MARKET INSIGHT - NASSOS SOULAKIS
Stagnation- With the BDI stuck in the low 600 points for almost a month now, if we had to choose a word to describe the state of the Dry Bulk freig ...
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- Central Java Power - Indonesia
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- Binh Thuan Hamico - Vietnam
- Semirara Mining and Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- San Jose City I Power Corp, Philippines
- Ambuja Cements Ltd - India
- White Energy Company Limited
- Jindal Steel & Power Ltd - India
- Indian Oil Corporation Limited
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- Minerals Council of Australia
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- India Bulls Power Limited - India
- Bukit Baiduri Energy - Indonesia
- Commonwealth Bank - Australia
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- Renaissance Capital - South Africa
- Bayan Resources Tbk. - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Barasentosa Lestari - Indonesia
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- VISA Power Limited - India
- Samtan Co., Ltd - South Korea
- Xindia Steels Limited - India
- Simpson Spence & Young - Indonesia
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- Thai Mozambique Logistica
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- Edison Trading Spa - Italy
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- European Bulk Services B.V. - Netherlands
- South Luzon Thermal Energy Corporation
- International Coal Ventures Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Energy Link Ltd, New Zealand
- Ministry of Finance - Indonesia
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- Therma Luzon, Inc, Philippines
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- Makarim & Taira - Indonesia
- The University of Queensland
- Grasim Industreis Ltd - India
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- Asmin Koalindo Tuhup - Indonesia
- Formosa Plastics Group - Taiwan
- SMC Global Power, Philippines
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- Alfred C Toepfer International GmbH - Germany
- PowerSource Philippines DevCo
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coalindo Energy - Indonesia
- Kideco Jaya Agung - Indonesia
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- AsiaOL BioFuels Corp., Philippines
- Parliament of New Zealand
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- LBH Netherlands Bv - Netherlands
- Borneo Indobara - Indonesia
- Chettinad Cement Corporation Ltd - India
- Thiess Contractors Indonesia
- Semirara Mining Corp, Philippines
- Coal and Oil Company - UAE
- Tamil Nadu electricity Board
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- Metalloyd Limited - United Kingdom
- Antam Resourcindo - Indonesia
- Bhatia International Limited - India
- Chamber of Mines of South Africa
- IEA Clean Coal Centre - UK
- Sojitz Corporation - Japan
- Mintek Dendrill Indonesia
- Sical Logistics Limited - India
- Maheswari Brothers Coal Limited - India
- Australian Coal Association
- Ind-Barath Power Infra Limited - India
- Globalindo Alam Lestari - Indonesia
- Price Waterhouse Coopers - Russia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Miang Besar Coal Terminal - Indonesia
- Ministry of Mines - Canada
- Planning Commission, India
- Vedanta Resources Plc - India
- Kumho Petrochemical, South Korea
- Orica Australia Pty. Ltd.
- Anglo American - United Kingdom
- Africa Commodities Group - South Africa
- Holcim Trading Pte Ltd - Singapore
- GVK Power & Infra Limited - India
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Uttam Galva Steels Limited - India
- Romanian Commodities Exchange
- Australian Commodity Traders Exchange
- Pendopo Energi Batubara - Indonesia
- PNOC Exploration Corporation - Philippines
- Eastern Coal Council - USA
- Indian Energy Exchange, India
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- Deloitte Consulting - India
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- Ministry of Transport, Egypt
- Madhucon Powers Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Kaltim Prima Coal - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Toyota Tsusho Corporation, Japan
- Aditya Birla Group - India
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- Karaikal Port Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Orica Mining Services - Indonesia
- McConnell Dowell - Australia
- Georgia Ports Authority, United States
- Electricity Authority, New Zealand
- Power Finance Corporation Ltd., India
- OPG Power Generation Pvt Ltd - India
- CNBM International Corporation - China
- Sarangani Energy Corporation, Philippines
- Electricity Generating Authority of Thailand
- Parry Sugars Refinery, India
- MS Steel International - UAE
- Aboitiz Power Corporation - Philippines
- Marubeni Corporation - India
- Coastal Gujarat Power Limited - India
- CIMB Investment Bank - Malaysia
- Rio Tinto Coal - Australia
- Sindya Power Generating Company Private Ltd
- Iligan Light & Power Inc, Philippines
- Vizag Seaport Private Limited - India
- Trasteel International SA, Italy
- Siam City Cement - Thailand
- Savvy Resources Ltd - HongKong
- Cement Manufacturers Association - India
- Banpu Public Company Limited - Thailand
- ICICI Bank Limited - India
- Cigading International Bulk Terminal - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Bharathi Cement Corporation - India
- Carbofer General Trading SA - India
- GMR Energy Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mercator Lines Limited - India
- IHS Mccloskey Coal Group - USA
- Goldman Sachs - Singapore
- Port Waratah Coal Services - Australia
- Ceylon Electricity Board - Sri Lanka
- Medco Energi Mining Internasional
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Vijayanagar Sugar Pvt Ltd - India
- Indonesian Coal Mining Association
- Central Electricity Authority - India
- Singapore Mercantile Exchange
- Krishnapatnam Port Company Ltd. - India
- GAC Shipping (India) Pvt Ltd
- Attock Cement Pakistan Limited
- New Zealand Coal & Carbon
- Standard Chartered Bank - UAE
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Bhoruka Overseas - Indonesia
- Economic Council, Georgia
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- Videocon Industries ltd - India
- Agrawal Coal Company - India
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- Intertek Mineral Services - Indonesia
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- Mjunction Services Limited - India
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- Jaiprakash Power Ventures ltd
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- Asia Pacific Energy Resources Ventures Inc, Philippines
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