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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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Tuesday, 17 May 16
CHINA THERMAL-POWER OVERSUPPLY TO WORSEN - FITCH
COALspot.com: The overcapacity in thermal-power generation in China is likely to worsen in 2016 to 2017, Fitch Ratings says in a new report.
F ...
Tuesday, 17 May 16
ON YOUR MARKS: TRACKING CHINESE TRADE - CLARKSONS
One of the major drivers behind the challenges currently facing many of the shipping markets has been slower demand growth. World seaborne trade gr ...
Monday, 16 May 16
INDONESIAN WEEKLY COAL INDICES AT POSITIVE LEVELS - CS (I) COAL INDEX
COALspot.com: Average 5000 GAR coal index of Indonesian origin up 0.31 percent week over week to averaging $38.94 per ton this past week, shows CS ...
Monday, 16 May 16
OPEC SEES RIVAL OIL PRODUCTION DECLINING
Crude Oil Price Movements
The OPEC Reference Basket averaged $37.86/b in April, a gain of $3.21 or 9.3%. This was 40% higher than the lows reache ...
Monday, 16 May 16
THE FREIGHT MARKET WAS WEAK AND ALL SEGMENTS EXCEPT PANAMAX WERE DOWN
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities decline this week.
The freight market was weak and a ...
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- Carbofer General Trading SA - India
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- Jindal Steel & Power Ltd - India
- Jaiprakash Power Ventures ltd
- Formosa Plastics Group - Taiwan
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- Edison Trading Spa - Italy
- Kumho Petrochemical, South Korea
- TNB Fuel Sdn Bhd - Malaysia
- Essar Steel Hazira Ltd - India
- Cement Manufacturers Association - India
- GAC Shipping (India) Pvt Ltd
- SMC Global Power, Philippines
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- Ministry of Transport, Egypt
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- Kohat Cement Company Ltd. - Pakistan
- Straits Asia Resources Limited - Singapore
- The University of Queensland
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- Global Coal Blending Company Limited - Australia
- SN Aboitiz Power Inc, Philippines
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- Commonwealth Bank - Australia
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- Energy Link Ltd, New Zealand
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- Posco Energy - South Korea
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- Samtan Co., Ltd - South Korea
- Metalloyd Limited - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Therma Luzon, Inc, Philippines
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- Ceylon Electricity Board - Sri Lanka
- Romanian Commodities Exchange
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- Global Business Power Corporation, Philippines
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- Minerals Council of Australia
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- Sindya Power Generating Company Private Ltd
- Chamber of Mines of South Africa
- Africa Commodities Group - South Africa
- Billiton Holdings Pty Ltd - Australia
- Ministry of Finance - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Interocean Group of Companies - India
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- Trasteel International SA, Italy
- Gujarat Electricity Regulatory Commission - India
- Goldman Sachs - Singapore
- Rashtriya Ispat Nigam Limited - India
- Miang Besar Coal Terminal - Indonesia
- PowerSource Philippines DevCo
- Leighton Contractors Pty Ltd - Australia
- Vedanta Resources Plc - India
- Pipit Mutiara Jaya. PT, Indonesia
- TeaM Sual Corporation - Philippines
- Videocon Industries ltd - India
- IHS Mccloskey Coal Group - USA
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- Eastern Coal Council - USA
- South Luzon Thermal Energy Corporation
- Economic Council, Georgia
- Madhucon Powers Ltd - India
- Sinarmas Energy and Mining - Indonesia
- ASAPP Information Group - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Energy Development Corp, Philippines
- Ind-Barath Power Infra Limited - India
- Coalindo Energy - Indonesia
- The Treasury - Australian Government
- Dalmia Cement Bharat India
- Bhatia International Limited - India
- Malabar Cements Ltd - India
- Ministry of Mines - Canada
- Orica Mining Services - Indonesia
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- Central Electricity Authority - India
- Intertek Mineral Services - Indonesia
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- Sarangani Energy Corporation, Philippines
- ICICI Bank Limited - India
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- Simpson Spence & Young - Indonesia
- Electricity Generating Authority of Thailand
- Xindia Steels Limited - India
- Sakthi Sugars Limited - India
- Wilmar Investment Holdings
- Thai Mozambique Logistica
- Toyota Tsusho Corporation, Japan
- Bulk Trading Sa - Switzerland
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Oldendorff Carriers - Singapore
- Central Java Power - Indonesia
- Bayan Resources Tbk. - Indonesia
- Sical Logistics Limited - India
- Aboitiz Power Corporation - Philippines
- Wood Mackenzie - Singapore
- Medco Energi Mining Internasional
- McConnell Dowell - Australia
- Indogreen Group - Indonesia
- Tamil Nadu electricity Board
- Attock Cement Pakistan Limited
- Deloitte Consulting - India
- Borneo Indobara - Indonesia
- Kideco Jaya Agung - Indonesia
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- Heidelberg Cement - Germany
- IEA Clean Coal Centre - UK
- Directorate General of MIneral and Coal - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Australian Coal Association
- Alfred C Toepfer International GmbH - Germany
- Bahari Cakrawala Sebuku - Indonesia
- Rio Tinto Coal - Australia
- Indonesian Coal Mining Association
- San Jose City I Power Corp, Philippines
- Karaikal Port Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- PTC India Limited - India
- Lanco Infratech Ltd - India
- Standard Chartered Bank - UAE
- Directorate Of Revenue Intelligence - India
- OPG Power Generation Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Vizag Seaport Private Limited - India
- PNOC Exploration Corporation - Philippines
- CNBM International Corporation - China
- Salva Resources Pvt Ltd - India
- Altura Mining Limited, Indonesia
- VISA Power Limited - India
- Georgia Ports Authority, United States
- Independent Power Producers Association of India
- Baramulti Group, Indonesia
- Meenaskhi Energy Private Limited - India
- Agrawal Coal Company - India
- New Zealand Coal & Carbon
- Coal and Oil Company - UAE
- Bharathi Cement Corporation - India
- Makarim & Taira - Indonesia
- Larsen & Toubro Limited - India
- International Coal Ventures Pvt Ltd - India
- Antam Resourcindo - Indonesia
- Mjunction Services Limited - India
- Merrill Lynch Commodities Europe
- Globalindo Alam Lestari - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Savvy Resources Ltd - HongKong
- Tata Chemicals Ltd - India
- Thiess Contractors Indonesia
- Electricity Authority, New Zealand
- Parry Sugars Refinery, India
- Orica Australia Pty. Ltd.
- Semirara Mining Corp, Philippines
- GVK Power & Infra Limited - India
- Parliament of New Zealand
- London Commodity Brokers - England
- Petron Corporation, Philippines
- Port Waratah Coal Services - Australia
- Sree Jayajothi Cements Limited - India
- Aditya Birla Group - India
- Karbindo Abesyapradhi - Indoneisa
- Mercuria Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- Indika Energy - Indonesia
- European Bulk Services B.V. - Netherlands
- Mercator Lines Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Anglo American - United Kingdom
- SMG Consultants - Indonesia
- Bukit Baiduri Energy - Indonesia
- Siam City Cement PLC, Thailand
- Global Green Power PLC Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Indian Oil Corporation Limited
- Planning Commission, India
- Pendopo Energi Batubara - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Power Finance Corporation Ltd., India
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- The State Trading Corporation of India Ltd
- Gujarat Sidhee Cement - India
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