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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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- Timah Investasi Mineral - Indoneisa
- Formosa Plastics Group - Taiwan
- Kapuas Tunggal Persada - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Edison Trading Spa - Italy
- Semirara Mining Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- SMC Global Power, Philippines
- Port Waratah Coal Services - Australia
- Iligan Light & Power Inc, Philippines
- Kideco Jaya Agung - Indonesia
- Electricity Authority, New Zealand
- Meralco Power Generation, Philippines
- Savvy Resources Ltd - HongKong
- Wood Mackenzie - Singapore
- PTC India Limited - India
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- Anglo American - United Kingdom
- Barasentosa Lestari - Indonesia
- CIMB Investment Bank - Malaysia
- LBH Netherlands Bv - Netherlands
- CNBM International Corporation - China
- Gujarat Sidhee Cement - India
- Global Business Power Corporation, Philippines
- Global Coal Blending Company Limited - Australia
- Sindya Power Generating Company Private Ltd
- Mercuria Energy - Indonesia
- Rio Tinto Coal - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Karaikal Port Pvt Ltd - India
- Vizag Seaport Private Limited - India
- Energy Link Ltd, New Zealand
- India Bulls Power Limited - India
- Economic Council, Georgia
- Jaiprakash Power Ventures ltd
- Maheswari Brothers Coal Limited - India
- Simpson Spence & Young - Indonesia
- Xindia Steels Limited - India
- ASAPP Information Group - India
- Latin American Coal - Colombia
- Kobexindo Tractors - Indoneisa
- Krishnapatnam Port Company Ltd. - India
- Ministry of Mines - Canada
- Bhatia International Limited - India
- VISA Power Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Baramulti Group, Indonesia
- Eastern Energy - Thailand
- Samtan Co., Ltd - South Korea
- Larsen & Toubro Limited - India
- Makarim & Taira - Indonesia
- Sree Jayajothi Cements Limited - India
- Manunggal Multi Energi - Indonesia
- Salva Resources Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Africa Commodities Group - South Africa
- Central Electricity Authority - India
- Agrawal Coal Company - India
- Australian Commodity Traders Exchange
- Aboitiz Power Corporation - Philippines
- Marubeni Corporation - India
- Grasim Industreis Ltd - India
- Trasteel International SA, Italy
- Cigading International Bulk Terminal - Indonesia
- Minerals Council of Australia
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- Videocon Industries ltd - India
- Alfred C Toepfer International GmbH - Germany
- Gujarat Electricity Regulatory Commission - India
- Aditya Birla Group - India
- Antam Resourcindo - Indonesia
- The Treasury - Australian Government
- Siam City Cement - Thailand
- Jindal Steel & Power Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Bulk Trading Sa - Switzerland
- Bukit Makmur.PT - Indonesia
- Dalmia Cement Bharat India
- Mercator Lines Limited - India
- New Zealand Coal & Carbon
- Essar Steel Hazira Ltd - India
- Vedanta Resources Plc - India
- Bukit Baiduri Energy - Indonesia
- Merrill Lynch Commodities Europe
- Madhucon Powers Ltd - India
- Ministry of Transport, Egypt
- Indian Energy Exchange, India
- SMG Consultants - Indonesia
- Sical Logistics Limited - India
- Ceylon Electricity Board - Sri Lanka
- Pipit Mutiara Jaya. PT, Indonesia
- Kumho Petrochemical, South Korea
- Sarangani Energy Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Wilmar Investment Holdings
- Heidelberg Cement - Germany
- Bank of Tokyo Mitsubishi UFJ Ltd
- International Coal Ventures Pvt Ltd - India
- Coal and Oil Company - UAE
- Altura Mining Limited, Indonesia
- ICICI Bank Limited - India
- Singapore Mercantile Exchange
- Bharathi Cement Corporation - India
- Kohat Cement Company Ltd. - Pakistan
- San Jose City I Power Corp, Philippines
- Oldendorff Carriers - Singapore
- Renaissance Capital - South Africa
- PNOC Exploration Corporation - Philippines
- Ambuja Cements Ltd - India
- Coalindo Energy - Indonesia
- MS Steel International - UAE
- Indonesian Coal Mining Association
- Chamber of Mines of South Africa
- The University of Queensland
- Bangladesh Power Developement Board
- Maharashtra Electricity Regulatory Commission - India
- Billiton Holdings Pty Ltd - Australia
- McConnell Dowell - Australia
- TeaM Sual Corporation - Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Electricity Generating Authority of Thailand
- Globalindo Alam Lestari - Indonesia
- European Bulk Services B.V. - Netherlands
- Romanian Commodities Exchange
- Central Java Power - Indonesia
- Tamil Nadu electricity Board
- PowerSource Philippines DevCo
- Semirara Mining and Power Corporation, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kalimantan Lumbung Energi - Indonesia
- Global Green Power PLC Corporation, Philippines
- Parliament of New Zealand
- Commonwealth Bank - Australia
- Standard Chartered Bank - UAE
- Price Waterhouse Coopers - Russia
- Karbindo Abesyapradhi - Indoneisa
- Petron Corporation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Orica Mining Services - Indonesia
- Metalloyd Limited - United Kingdom
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Malabar Cements Ltd - India
- GVK Power & Infra Limited - India
- Lanco Infratech Ltd - India
- Pendopo Energi Batubara - Indonesia
- Ind-Barath Power Infra Limited - India
- Eastern Coal Council - USA
- Carbofer General Trading SA - India
- GAC Shipping (India) Pvt Ltd
- Attock Cement Pakistan Limited
- Mintek Dendrill Indonesia
- Georgia Ports Authority, United States
- Tata Chemicals Ltd - India
- Thiess Contractors Indonesia
- Independent Power Producers Association of India
- Therma Luzon, Inc, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Australian Coal Association
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Chettinad Cement Corporation Ltd - India
- IHS Mccloskey Coal Group - USA
- Bhushan Steel Limited - India
- Ministry of Finance - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Power Finance Corporation Ltd., India
- Miang Besar Coal Terminal - Indonesia
- Mjunction Services Limited - India
- Energy Development Corp, Philippines
- Cement Manufacturers Association - India
- TNB Fuel Sdn Bhd - Malaysia
- Asmin Koalindo Tuhup - Indonesia
- SN Aboitiz Power Inc, Philippines
- Toyota Tsusho Corporation, Japan
- Goldman Sachs - Singapore
- GMR Energy Limited - India
- Sojitz Corporation - Japan
- Star Paper Mills Limited - India
- Binh Thuan Hamico - Vietnam
- Bayan Resources Tbk. - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Kartika Selabumi Mining - Indonesia
- Indo Tambangraya Megah - Indonesia
- Siam City Cement PLC, Thailand
- White Energy Company Limited
- South Luzon Thermal Energy Corporation
- Indika Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- AsiaOL BioFuels Corp., Philippines
- Planning Commission, India
- Sakthi Sugars Limited - India
- Indian Oil Corporation Limited
- Vijayanagar Sugar Pvt Ltd - India
- Coastal Gujarat Power Limited - India
- Interocean Group of Companies - India
- The State Trading Corporation of India Ltd
- Banpu Public Company Limited - Thailand
- Deloitte Consulting - India
- Meenaskhi Energy Private Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Directorate Of Revenue Intelligence - India
- Intertek Mineral Services - Indonesia
- Thai Mozambique Logistica
- Indogreen Group - Indonesia
- Kepco SPC Power Corporation, Philippines
- Riau Bara Harum - Indonesia
- London Commodity Brokers - England
- Uttam Galva Steels Limited - India
- Posco Energy - South Korea
- OPG Power Generation Pvt Ltd - India
- Medco Energi Mining Internasional
- IEA Clean Coal Centre - UK
- Borneo Indobara - Indonesia
- Kaltim Prima Coal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Gujarat Mineral Development Corp Ltd - India
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