Cancellation, notices and the prevention principle in shipbuilding contracts30 April 2020

The SBCs, as is usual, allowed for permissible delay to postpone the delivery date and set out delays which constituted such permissible delay at Article VIII.1. That included delays “beyond the control of the Seller or of its sub-contractors”. The SBCs also referred to non-permissible delay, which would not extend time for the seller. Article III, Article VIII and Article X referred to the buyer’s right to rescind or terminate the SBCs if delivery were delayed. Article VIII.3 stated that such right arose if there was non-permissible delay for 150 days after the Delivery Date (as defined) or if delivery were delayed by a total of 180 days, inclusive of all permissible and non-permissible delay, but “excluding delays … due to default in performance by the Buyer”.

As the judge noted, this was a case in which the seller was arguing that certain types of alleged delay by the buyer did not fall within the definition of permissible delay and that, since the contract did not therefore provide for an extension of time in respect of the alleged delay, the prevention principle should apply. The judge considered that the court should not favour an interpretation which concluded that the SBCs did not provide for an extension. Instead “the construction to which the court should lean is that which tends to give the Seller the benefit of the extension of time”. Accordingly, the natural and wide meaning of delays “beyond the control of the Seller or of its sub-contractors” covers matters caused by the buyer (provided they are outside the control of the seller or its sub-contractors).

The seller relied on the judgment by Leggat J in Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc⁵ which considered similarly (but not identically) worded provisions. One argument was that if the contract were interpreted to allow buyer’s default to constitute permissible delay, then such buyer’s default permissible delays would go towards the 180 days delay after which the Buyer had the right to cancel and demand refund of instalments paid. That, the seller argued, cannot be right. The express exclusion in Article VIII.3 of delays due to buyer’s default from the 180 days was only a reference, the argument went, to defaults set out in Article XI.1 (concerning failures to make payment or take delivery without justifiable reason, or buyers’ bankruptcy). Further, the Article III.1 cancellation right makes no reference to any exclusion from the 180 days of delay caused by buyer’s default.

Butcher J agreed with the buyer. He found that Article VIII.3 expressly excluded buyer’s default permissible delay from the calculation of the 180 days and that there was no reason to limit such exclusion to only those buyer’s defaults set out in Article XI. “Any delays caused by a default in performance by the Buyer” would not, therefore, count towards the 180 days. As regards the Article III.1 cancellation right, the judge found that it “is intended to be the equivalent of that in Article VIII.3” and that the Article VIII.3 right “should be regarded as the primary provision relating to the right to cancel for excessive delay”. The right to cancel under Article III.1 should therefore be read “as implicitly excluding delays caused by the Buyer’s default from the period of 180 days” so that buyer’s default delays “cannot be relied upon by the Buyer for the purposes of cancelling the contract under Article III.1(d) or Article VIII.3”.

As such, the contracts contained a complete code for extension of time and cancellation. The SBCs provided for an extension of time caused by buyer’s wrongful acts, including the alleged wrongful acts leading to the occupancy of the berths. Therefore, the prevention principle did not apply on the occurrence of the alleged delays.

Default in payments

The seller alleged that the buyer was in default in not paying the 3^rd, 4^th and 5^th instalments (whether or not the buyer was obliged to pay those instalments was not the subject of this appeal).  The seller argued that in such circumstances the seller is entitled to a day-by-day extension of time under Article XI.4 without the need for the seller to do anything to postpone the Delivery Date.

In contrast to the conclusion on the Article VIII.2 notice requirement, the judge found that Article XI.2 does not require a notice to be given for there to be a delay to the Delivery Date. However, the postponement of the Delivery Date under Article XI.4 is expressly stated to be “at the Seller’s option”. Accordingly, for the Seller to exercise that option it must elect to do so and communicate that election to the buyer (except in exceptional circumstances which do not apply here). If the seller fails to communicate that it has chosen that the Delivery Date should be postponed, then the Delivery Date remains the same.

Conclusion

This judgment provides welcome clarity on a number of issues which can arise under shipbuilding contracts and allows for sensible and practical guidance on the key areas of delay, notices and cancellation. Since such disputes are usually determined by arbitration out of the public gaze, this judgment should assist the industry as a whole to understand with greater certainty the pre-delivery / pre-cancellation position under an SBC based on the SAJ form. It will also doubtless play a role in future arbitrations on these points for any similarly worded SBCs. Finally, it is heartening (if unsurprising) that the English Commercial Court has agreed with the findings of three experienced and highly regarded commercial arbitrators in the underlying LMAA arbitrations, who were found to have properly interpreted the SBCs on the relevant points when they found that the contracts contained a complete code for calculating extensions. English law and London arbitration continues to lead the field.