Zhoushan Jinhaiwan Shipyard v. Golden Exquisite Inc. [2014] EWHC 4050 (Comm)

A recent decision in the Commercial Court offers helpful guidance to both shipyards and buyers facing and considering possible cancellations of shipbuilding contracts due to delayed delivery.

The background facts

The Court heard appeals from four arbitration awards in relation to disputes regarding the interpretation of four shipbuilding contracts between a Chinese shipyard (the “Yard”) and four buyers (“Buyers”, all part of the same group). The contracts were materially identical and, in each case, the Buyers relied on a contractual right to cancel the contract for delayed delivery of the vessel.

In arbitration, the Tribunals found that the Buyers’ cancellations were valid. The issue on appeal was whether the Buyers had lawfully cancelled the contracts, or whether, as the Yard alleged, cancellation was unlawful because the Buyers had themselves caused part of the delays to the delivery of the vessels.

Right to cancel

The contracts provided the Buyers with the right to cancel the contracts in the following circumstances:

  • Under Article III.1(c): after 210 days of “non-permissible delays” to the contractual delivery date; and
  • Under Article VIII.3:
  1. after 225 days of “permissible delays”, which were specific causes beyond the Yard’s control and which were enumerated in Art VIII.1; and
  2. after 270 days of combined “permissible” and “non-permissible” delays.

The Buyers gave notice of cancellation of the contracts more than 270 days after the contractual delivery date, and claimed a refund of the instalments paid. If, as the Buyers claimed, the contracts were cancelled under Article III.1(c), the Yard would also have to pay interest. There would be no obligation to pay interest if the contracts were cancelled under Article VIII.3.

After the Buyers gave notice of cancellation, the Yard alleged that the Buyers were in breach of Article IV of the contracts, which provided for inspection of the vessel by a supervisor appointed by the Buyers. Although the Yard had not previously issued any notice of such delays under the contracts, the Yard alleged that the Buyers were in breach of their obligation to “..carry out inspections in accordance with the agreed inspection procedure and schedule and usual shipbuilding practice...”. The Yard alleged that the Buyers’ supervisors had worked insufficient hours, imposed extra-contractual requirements and taken unreasonable amounts of time to return crucial documentation.

The Yard therefore sought a finding that on a true construction of the contracts, the delays caused by these so-called “Buyers’ breach delays” of at least 90-100 days’ each should not count towards the delay thresholds relied upon by the Buyers. If the days lost to “Buyers’ breach delays” did not count towards the thresholds, the Buyers’ cancellation of the contracts was premature and unlawful.

If the Yard was correct that the cancellations were unlawful, the Buyers would have been in repudiatory breach of the contracts, and the Yard would have been entitled to keep the instalments paid and re-sell the vessels, crediting the Buyers only with the balance of the proceeds of sale after the Yard had recouped its expenses.

The Commercial Court decision: types of delay

The Court rejected the Yard’s arguments and found in favour of the Buyers. The Court found that there were only three types of delay provided for in the contractual scheme:

  1. Permissible delays:  delays defined in Article VIII.1 and deemed to be outside the control of the Yard. They allowed the Yard an extension of time for delivery of the vessel and, if they persisted, gave the Buyers a right to cancel the contracts and recover the instalments (without interest).
  2. Non-permissible delays: delays which did not allow the Yard any extension of time for delivery but which, if they persisted, allowed the Buyers to cancel the contracts and recover the instalments of the price paid with interest.
  3. Excluded delays: delays excluded from consideration when determining whether the Buyers were entitled to reduce the contract price or cancel the contract because of delayed delivery, but which delays may, under the terms of the contract, have allowed the Yard an extension of time for delivery of the vessel.

The Court rejected the Yard’s argument that the “Buyers’ breach delays” constituted a separate, fourth category of delays.

The Court found that the wording of Article IV did not contain any provision that permitted the time for delivery to be extended because, as a matter of contractual interpretation, the Buyers’ supervisor had no power to delay the construction of the vessel: in fact, the Yard was not required to wait for the Buyers’ supervisor to attend tests and carry out inspections. “Buyers’ breach delays” were not, therefore, excluded delays.

Buyers’ breach delays”  also did not fall within the scope of Article VIII.1, and so were not permissible delays, and did not allow the Yard an extension of time for delivery. Even if “Buyers’ breach delays” were permissible delays, the Yard’s failure to comply with the contractual requirement to give notice meant that the Yard could not rely on these delays to claim an extension of time for delivery. The delays were therefore non-permissible delays that did not allow the Yard an extension of time for delivery.

At the time of the notices of cancellation, the Buyers had the right to cancel the contracts under both Article III.1(c) and Article VIII.3. The Buyers were entitled to cancel the contract under Article III.1(c), obtain a refund of paid instalments and claim interest at the rate of 5% per annum.

Comment

The decision presents valuable assistance to parties considering or facing possible cancellations under shipbuilding contracts. Parties should be wary of stretching the meaning of the contractual terms: the Court described the Yard’s arguments as “untenable” and cautioned against an over-reliance on “commercial common sense” to justify interpretations that were “inconsistent with the language of the contract”.

As a practical tip, parties with genuine concerns over issues causing delays to the construction of the vessel should issue notices of delay under the contract to ensure they are not precluded from relying on such delays at a later stage.