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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!