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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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Thursday, 28 April 16
PRICES OF POWER-STATION COAL IN INDONESIA IS INCREASING
COALspot.com: Inquiries for Indonesian 4200 - 4400 Kcal/kg GAR thermal coal cargoes from India suddenly increase recent days.
A Jakarta-based ...
Thursday, 28 April 16
KOMIPO TO IMPORT 710K MT OF BITUMINOUS COAL DURING JULY - SEPTEMBER 2016
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 710,000 Metric Tons of Bituminous Coal for its B ...
Thursday, 28 April 16
CAPE: BIT MORE OPTIMISM IN THE MARKET; SUPRAMAX: FORWARD CURVE IS FALLING - FEARNLEYS
Cape
A bit of a slower week. Activity level has dropped, though the rates do still remain firm, says Fearnleys in its latest weekly report.
...
Wednesday, 27 April 16
THE OCEAN SHIPPING EXPERIENCED DRAMATIC VOLATILITY IN THE BEGINNING OF 2016 - PANOS TSILINGIRIS
Shipping’s new (ab)normal
The global economy and ocean shipping experienced dramatic volatility in the beginning of 2016 and as the glob ...
Wednesday, 27 April 16
INDONESIAN COAL MINER KIDECO REPORTED NET PROFIT OF US$138.1 MILLION IN 2015
COALspot.com: Kideco Jaya Agung, one of the Indonesia's leading coal miners has reported net profit of US$138.1 million on revenue of US$1.65 b ...
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- Holcim Trading Pte Ltd - Singapore
- Mjunction Services Limited - India
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- Meralco Power Generation, Philippines
- Altura Mining Limited, Indonesia
- Leighton Contractors Pty Ltd - Australia
- Kalimantan Lumbung Energi - Indonesia
- Sical Logistics Limited - India
- Coalindo Energy - Indonesia
- Sojitz Corporation - Japan
- Kaltim Prima Coal - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Kumho Petrochemical, South Korea
- Port Waratah Coal Services - Australia
- India Bulls Power Limited - India
- Bhatia International Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Bulk Trading Sa - Switzerland
- Indian Oil Corporation Limited
- McConnell Dowell - Australia
- Eastern Energy - Thailand
- CIMB Investment Bank - Malaysia
- Gujarat Mineral Development Corp Ltd - India
- Medco Energi Mining Internasional
- Barasentosa Lestari - Indonesia
- Attock Cement Pakistan Limited
- Alfred C Toepfer International GmbH - Germany
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- Orica Australia Pty. Ltd.
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- Singapore Mercantile Exchange
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- Global Green Power PLC Corporation, Philippines
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- Maheswari Brothers Coal Limited - India
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- Edison Trading Spa - Italy
- Meenaskhi Energy Private Limited - India
- SMC Global Power, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Directorate General of MIneral and Coal - Indonesia
- Binh Thuan Hamico - Vietnam
- Georgia Ports Authority, United States
- Kohat Cement Company Ltd. - Pakistan
- Indonesian Coal Mining Association
- Madhucon Powers Ltd - India
- Thiess Contractors Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Tamil Nadu electricity Board
- IEA Clean Coal Centre - UK
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- Planning Commission, India
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- Petrochimia International Co. Ltd.- Taiwan
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- Vizag Seaport Private Limited - India
- Directorate Of Revenue Intelligence - India
- GN Power Mariveles Coal Plant, Philippines
- Commonwealth Bank - Australia
- Chettinad Cement Corporation Ltd - India
- Economic Council, Georgia
- Baramulti Group, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Standard Chartered Bank - UAE
- Dalmia Cement Bharat India
- Miang Besar Coal Terminal - Indonesia
- Indika Energy - Indonesia
- Cement Manufacturers Association - India
- SN Aboitiz Power Inc, Philippines
- PNOC Exploration Corporation - Philippines
- Antam Resourcindo - Indonesia
- Bhushan Steel Limited - India
- Mintek Dendrill Indonesia
- Essar Steel Hazira Ltd - India
- IHS Mccloskey Coal Group - USA
- Sarangani Energy Corporation, Philippines
- Heidelberg Cement - Germany
- VISA Power Limited - India
- Merrill Lynch Commodities Europe
- Uttam Galva Steels Limited - India
- Bayan Resources Tbk. - Indonesia
- Semirara Mining Corp, Philippines
- Tata Chemicals Ltd - India
- Independent Power Producers Association of India
- Ministry of Finance - Indonesia
- Africa Commodities Group - South Africa
- San Jose City I Power Corp, Philippines
- Straits Asia Resources Limited - Singapore
- Bhoruka Overseas - Indonesia
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- Vijayanagar Sugar Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Intertek Mineral Services - Indonesia
- GAC Shipping (India) Pvt Ltd
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- Carbofer General Trading SA - India
- London Commodity Brokers - England
- Posco Energy - South Korea
- Indogreen Group - Indonesia
- Grasim Industreis Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Energy Link Ltd, New Zealand
- Coal and Oil Company - UAE
- Mercator Lines Limited - India
- Bangladesh Power Developement Board
- Samtan Co., Ltd - South Korea
- SMG Consultants - Indonesia
- Bharathi Cement Corporation - India
- Asmin Koalindo Tuhup - Indonesia
- The Treasury - Australian Government
- Trasteel International SA, Italy
- Formosa Plastics Group - Taiwan
- AsiaOL BioFuels Corp., Philippines
- Therma Luzon, Inc, Philippines
- Aditya Birla Group - India
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- Deloitte Consulting - India
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- Parliament of New Zealand
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- Global Coal Blending Company Limited - Australia
- Thai Mozambique Logistica
- Iligan Light & Power Inc, Philippines
- Timah Investasi Mineral - Indoneisa
- TeaM Sual Corporation - Philippines
- Ceylon Electricity Board - Sri Lanka
- Kepco SPC Power Corporation, Philippines
- Ministry of Mines - Canada
- Anglo American - United Kingdom
- Banpu Public Company Limited - Thailand
- GMR Energy Limited - India
- Karaikal Port Pvt Ltd - India
- Romanian Commodities Exchange
- Global Business Power Corporation, Philippines
- PTC India Limited - India
- Electricity Authority, New Zealand
- Vedanta Resources Plc - India
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- Makarim & Taira - Indonesia
- MS Steel International - UAE
- Krishnapatnam Port Company Ltd. - India
- ICICI Bank Limited - India
- Gujarat Electricity Regulatory Commission - India
- Rashtriya Ispat Nigam Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Eastern Coal Council - USA
- Ambuja Cements Ltd - India
- Metalloyd Limited - United Kingdom
- Australian Coal Association
- Interocean Group of Companies - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Electricity Generating Authority of Thailand
- White Energy Company Limited
- Central Electricity Authority - India
- New Zealand Coal & Carbon
- European Bulk Services B.V. - Netherlands
- The University of Queensland
- Australian Commodity Traders Exchange
- Minerals Council of Australia
- Bahari Cakrawala Sebuku - Indonesia
- LBH Netherlands Bv - Netherlands
- GVK Power & Infra Limited - India
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- Wilmar Investment Holdings
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- Renaissance Capital - South Africa
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- The State Trading Corporation of India Ltd
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- Chamber of Mines of South Africa
- Gujarat Sidhee Cement - India
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- Semirara Mining and Power Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- Ministry of Transport, Egypt
- Riau Bara Harum - Indonesia
- Sindya Power Generating Company Private Ltd
- Goldman Sachs - Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kideco Jaya Agung - Indonesia
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- Dong Bac Coal Mineral Investment Coporation - Vietnam
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- Indian Energy Exchange, India
- OPG Power Generation Pvt Ltd - India
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- Price Waterhouse Coopers - Russia
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