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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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Friday, 22 April 16
U.S WEEKLY DOMESTIC COAL OUTPUT UP 8.2 PER CENT - EIA
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 11.1 million short tons (mm ...
Thursday, 21 April 16
PANAMAX: A VERY HEALTHY NORTH ATLANTIC FOR BOTH ROUNDS AND FRONTHAUL
Capesize
Correcting after last week's quadrupling.
This year's highest daily average of USD 8000 came on the back of substantial pro ...
Wednesday, 20 April 16
2017 IS EXPECTED TO BE A MUCH BETTER YEAR FOR THE SHIPPING INDUSTRY - INTERMODAL
Some months ago we noted that all projections anticipated 2016 to be a better year from a macroeconomic point of view when compared to 2015. As we ...
Tuesday, 19 April 16
STARS STILL SHINING? KEY IMPORTERS THROUGH THE TELESCOPE - CLARKSONS
As the pace of growth in Chinese seaborne imports has slowed, and prospects for a return to stronger rates of expansion appear to have diminished, ...
Monday, 18 April 16
INDONESIAN 5000 GAR COAL INDEX DECLINE 1.43 PERCENT WEEK OVER WEEK - CS (I) COAL INDEX
COALspot.com: Average 5000 GAR coal index of Indonesian origin fell 1.43 percent week over week to averaging $38.65 per ton on this past Friday, ac ...
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- Sinarmas Energy and Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- Cement Manufacturers Association - India
- Bayan Resources Tbk. - Indonesia
- Orica Mining Services - Indonesia
- Larsen & Toubro Limited - India
- Bharathi Cement Corporation - India
- IEA Clean Coal Centre - UK
- Ministry of Transport, Egypt
- Medco Energi Mining Internasional
- Xindia Steels Limited - India
- Africa Commodities Group - South Africa
- Parliament of New Zealand
- TNB Fuel Sdn Bhd - Malaysia
- Baramulti Group, Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Rio Tinto Coal - Australia
- Edison Trading Spa - Italy
- Grasim Industreis Ltd - India
- SN Aboitiz Power Inc, Philippines
- Romanian Commodities Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Essar Steel Hazira Ltd - India
- Siam City Cement - Thailand
- Deloitte Consulting - India
- GVK Power & Infra Limited - India
- Orica Australia Pty. Ltd.
- Indonesian Coal Mining Association
- Samtan Co., Ltd - South Korea
- Globalindo Alam Lestari - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Energy Development Corp, Philippines
- Vizag Seaport Private Limited - India
- Sree Jayajothi Cements Limited - India
- TeaM Sual Corporation - Philippines
- Krishnapatnam Port Company Ltd. - India
- Barasentosa Lestari - Indonesia
- Simpson Spence & Young - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Iligan Light & Power Inc, Philippines
- Port Waratah Coal Services - Australia
- SMC Global Power, Philippines
- Attock Cement Pakistan Limited
- Australian Commodity Traders Exchange
- Offshore Bulk Terminal Pte Ltd, Singapore
- Agrawal Coal Company - India
- CIMB Investment Bank - Malaysia
- Eastern Energy - Thailand
- Central Electricity Authority - India
- Lanco Infratech Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Petron Corporation, Philippines
- Riau Bara Harum - Indonesia
- Savvy Resources Ltd - HongKong
- Jaiprakash Power Ventures ltd
- Asmin Koalindo Tuhup - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Banpu Public Company Limited - Thailand
- Kobexindo Tractors - Indoneisa
- Meralco Power Generation, Philippines
- Anglo American - United Kingdom
- Bhatia International Limited - India
- Videocon Industries ltd - India
- Kumho Petrochemical, South Korea
- London Commodity Brokers - England
- Neyveli Lignite Corporation Ltd, - India
- Ceylon Electricity Board - Sri Lanka
- New Zealand Coal & Carbon
- McConnell Dowell - Australia
- Kideco Jaya Agung - Indonesia
- Heidelberg Cement - Germany
- Mintek Dendrill Indonesia
- Ind-Barath Power Infra Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Goldman Sachs - Singapore
- Eastern Coal Council - USA
- Kapuas Tunggal Persada - Indonesia
- Uttam Galva Steels Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Coastal Gujarat Power Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Timah Investasi Mineral - Indoneisa
- PNOC Exploration Corporation - Philippines
- Malabar Cements Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Georgia Ports Authority, United States
- Leighton Contractors Pty Ltd - Australia
- Karaikal Port Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Wood Mackenzie - Singapore
- GN Power Mariveles Coal Plant, Philippines
- Central Java Power - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Indo Tambangraya Megah - Indonesia
- Formosa Plastics Group - Taiwan
- VISA Power Limited - India
- Sojitz Corporation - Japan
- Gujarat Sidhee Cement - India
- Tamil Nadu electricity Board
- Australian Coal Association
- Commonwealth Bank - Australia
- Directorate General of MIneral and Coal - Indonesia
- Bhushan Steel Limited - India
- Electricity Generating Authority of Thailand
- Toyota Tsusho Corporation, Japan
- Jindal Steel & Power Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Kaltim Prima Coal - Indonesia
- European Bulk Services B.V. - Netherlands
- Kepco SPC Power Corporation, Philippines
- Indika Energy - Indonesia
- Altura Mining Limited, Indonesia
- Energy Link Ltd, New Zealand
- GAC Shipping (India) Pvt Ltd
- Antam Resourcindo - Indonesia
- LBH Netherlands Bv - Netherlands
- Rashtriya Ispat Nigam Limited - India
- Siam City Cement PLC, Thailand
- India Bulls Power Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- GMR Energy Limited - India
- Thai Mozambique Logistica
- Therma Luzon, Inc, Philippines
- Carbofer General Trading SA - India
- Borneo Indobara - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Thiess Contractors Indonesia
- Mercator Lines Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Coal and Oil Company - UAE
- Economic Council, Georgia
- Global Business Power Corporation, Philippines
- ASAPP Information Group - India
- Intertek Mineral Services - Indonesia
- Electricity Authority, New Zealand
- Parry Sugars Refinery, India
- Minerals Council of Australia
- Madhucon Powers Ltd - India
- Meenaskhi Energy Private Limited - India
- Sindya Power Generating Company Private Ltd
- Oldendorff Carriers - Singapore
- International Coal Ventures Pvt Ltd - India
- Standard Chartered Bank - UAE
- Bulk Trading Sa - Switzerland
- Semirara Mining Corp, Philippines
- Bangladesh Power Developement Board
- Trasteel International SA, Italy
- MS Steel International - UAE
- Makarim & Taira - Indonesia
- PTC India Limited - India
- Coalindo Energy - Indonesia
- Aditya Birla Group - India
- Vedanta Resources Plc - India
- Miang Besar Coal Terminal - Indonesia
- San Jose City I Power Corp, Philippines
- Renaissance Capital - South Africa
- Global Green Power PLC Corporation, Philippines
- Mercuria Energy - Indonesia
- Sical Logistics Limited - India
- IHS Mccloskey Coal Group - USA
- Indian Energy Exchange, India
- Kartika Selabumi Mining - Indonesia
- Directorate Of Revenue Intelligence - India
- CNBM International Corporation - China
- Indian Oil Corporation Limited
- Straits Asia Resources Limited - Singapore
- Ministry of Finance - Indonesia
- South Luzon Thermal Energy Corporation
- Dalmia Cement Bharat India
- Wilmar Investment Holdings
- Merrill Lynch Commodities Europe
- Karbindo Abesyapradhi - Indoneisa
- Pendopo Energi Batubara - Indonesia
- Chamber of Mines of South Africa
- Indogreen Group - Indonesia
- SMG Consultants - Indonesia
- Alfred C Toepfer International GmbH - Germany
- White Energy Company Limited
- PowerSource Philippines DevCo
- Gujarat Electricity Regulatory Commission - India
- Interocean Group of Companies - India
- The State Trading Corporation of India Ltd
- Global Coal Blending Company Limited - Australia
- Marubeni Corporation - India
- Independent Power Producers Association of India
- Price Waterhouse Coopers - Russia
- Jorong Barutama Greston.PT - Indonesia
- Power Finance Corporation Ltd., India
- Tata Chemicals Ltd - India
- Ambuja Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Bukit Baiduri Energy - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Maharashtra Electricity Regulatory Commission - India
- Singapore Mercantile Exchange
- Metalloyd Limited - United Kingdom
- Star Paper Mills Limited - India
- The University of Queensland
- ICICI Bank Limited - India
- Planning Commission, India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kalimantan Lumbung Energi - Indonesia
- Maheswari Brothers Coal Limited - India
- Sakthi Sugars Limited - India
- Mjunction Services Limited - India
- Sarangani Energy Corporation, Philippines
- The Treasury - Australian Government
- Salva Resources Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Latin American Coal - Colombia
- Chettinad Cement Corporation Ltd - India
- OPG Power Generation Pvt Ltd - India
- Posco Energy - South Korea
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