Cancelling shipbuilding contracts –The dos and don’ts

William CecilPartnerCurtis Davis Garrard LLP

8 October 2012

cancelling shipbuilding contracts - the dos and don'ts

B’s usual contractual cancellation rights

B entitled to cancel if:• The vessel fails to meet specified performance

guarantees • Excessive delay

Usual provisions for delay:• 30 days grace period• Liquidated damages at increasing daily rates up to a

maximum of 210 days• Then B has right to cancel

Consequences of valid cancellation:• Refund of pre-delivery instalments• Interest• Damages for B’s losses

cancelling shipbuilding contracts - the dos and don'ts

Consequences of a wrongful cancellation

• B in repudiatory breach • SY does not have to perform and can claim damages• Refund guarantee of no effect• B should consider whether possible/preferable to

obtain award/judgment confirming that cancelling right has arisen before cancelling

cancelling shipbuilding contracts - the dos and don'ts

Extensions to cancelling date

May be extended due to:• Force majeure events• Other permissible delay• Variations

Cannot cancel before cancellation date even if inevitable that vessel will be late

cancelling shipbuilding contracts - the dos and don'ts

The Prevention Principle

• B cannot insist on strict compliance of the contract if it has prevented SY from performing its obligations

• B’s actions do not need to be a breach of contract• Consequences if no contractual mechanism to

extend time:oTime will be “at large”oB will lose contractual cancellation right

Adyard Abu Dhabi v SD Marine Services [2011]: “A trivial variation may lead to the loss of the right to liquidated damages for a long period of culpable delay and, in this case, loss of the right to rescind as well.”

cancelling shipbuilding contracts - the dos and don'ts

Waiver

B must be careful not to waive its contractual right to cancel as a result of:

• Delay• Actions inconsistent with B’s right to cancel

B should:• Reserve right to cancel as soon as right arises• Any subsequent correspondence or ongoing

approvals should refer to reservation of rights letter• Cancel as soon as possible taking into account safety

margin for possible extensions of time

cancelling shipbuilding contracts - the dos and don'ts

The refund guarantee

• If unable to call on refund guarantee:o Credit risk - B will be an unsecured creditor of SY

for claims for pre-paid instalments plus interesto Difficulties of enforcement of award/judgment in

jurisdiction of SY• Points to check:

o Expiry date of refund guaranteeo Type of guarantee: “see to it” guarantee or on

demand guarantee?o Rule in Holme v Brunskill

cancelling shipbuilding contracts - the dos and don'ts

Form of cancellation notice and demand on refund guarantee

• Contractual requirements• Preserve right to claim damages in cancellation

notice: Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009]

cancelling shipbuilding contracts - the dos and don'ts

Assignment of the shipbuilding contract and the refund guarantee

• Who is entitled to serve the cancellation notice and refund guarantee demand?

• What consents are required to cancel/make demand?• Allow time to obtain bank’s consent

cancelling shipbuilding contracts - the dos and don'ts

Conclusion

Be fully prepared BEFORE you jump!

cancelling shipbuilding contracts - the dos and don'ts

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