Musings on cancellation, delay and default

Zhoushan Jinhaiwan Shipyard Co Ltd -v- Golden Exquisite Inc & Others [2014] EWHC 4050

Both the construction and the shipping industries have long been bellwethers for the state of the economy worldwide and shipping construction contracts are no exception to this. In tough economic times and sensitivity around the price of oil, buyers’ forbearance with delays in delivery of orders runs short given the potentially more attractive option of cancelling altogether. As Nicholas Phillips discusses, in this climate, the interpretation of cancellation clauses in contracts can become a matter of dispute, as the case of Zhoushan Jinhaiwan Shipyard Co Ltd -v- Golden Exquisite Inc & Others [2014] EWHC 4050 demonstrates.

Background

This case arose out of two separate arbitrations relating to the purchase of four vessels under four separate, but  substantially identical contracts with four distinct buying companies which together formed part of the Golden Ocean Group. There were delays in delivering all four hulls and the buyers exercised what they believed to be their contractual rights to cancel. The case centred on identifying the cancellation rights invoked which involved unpicking both the express and, potentially implied, terms of a series of complex, but interrelated articles in the contracts.

Principal among these was Article VIII which defined ‘permissible delays’ - most of which related to force majeure or other circumstances beyond the control of the builder - under which the builder, on giving appropriate notice, was entitled to an extension of time without financial penalty. This ‘permissible delay’ remained, however, subject to the buyer’s right of cancellation should the delay exceed a specified number of days (Article VIII.3). This in turn was subject to excluded categories of delay, one of which was for delays ‘.... due to default in performance by the buyer.’

The chronology of the buyer’s cancellation in each case was identified by the court as follows:

  • Delivery of the vessel exceeded the agreed delivery date (Article VII)
  • Up to this point, the builder had failed to issue any notice that part or all of that delay had been caused either by breach of contract by the buyer or any other ‘permitted’ delay.
  • Once that accumulated delay exceeded 270 days being the period after which cancellation rights could be invoked (Article III), the buyer duly gave notice of cancellation.

Only at this point did the builder attempt to argue that delays of up to 100 days had, in fact, been caused by breaches of contract by the buyer (default in performance) i.e. in that the buyer’s supervisor had worked only limited hours and also made unreasonable stipulations relating to the build (Article IV).

The consequence of this argument by the builder, if accepted, would render the cancellations unlawful allowing the builder to keep all instalments paid by the buyer to that date and sell the vessels on. The realised purchase price payable to the buyer would be subject to deduction of the builder’s reasonable expenses.

Decision

The original tribunal found that the builder was precluded from claiming any relief for failing to give notice to the buyer of delays caused by their purported default and, as the delay was not a ‘permissible’ delay under Article VIII, the builder was also required to pay accrued interest on the instalments already received from the buyer.

The matter for interpretation before the court revolved around this question of interest payable, which in turn revolved around the interpretation of ‘buyer’s default’. This was covered by Article XI and specified three events which would qualify as such:

  1. failure to pay an instalment of the contract price on time;
  2. failure to provide a guarantee on time; and
  3. failure to take delivery of the vessel when duly tendered.

In his judgment, Mr Justice Leggatt referred to recent precedent: BMA Special Opportunity Hub Fund Ltd -v- African Minerals Finance Ltd [2013] EWCA 2060 (Ch) which summarised the principles applicable to the interpretation of contracts.

‘The court’s job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created... If there are two possible constructions of the document the court is entitled to prefer the construction which is more consistent with “business common sense” if that can be ascertained.’

In order to find for the builder, the judge was compelled to identify the types of delay contemplated by the contract. These he ruled to be of three types: ‘permissible’ delays, ‘non-permissible’ delays and a further category of ‘excluded delays’. He did not find there was any further and separate category of ‘buyer’s breach delays,’ but that any such delays must fall within the categories of ‘permissible’ or ‘nonpermissible’ or ‘excluded’ delays.

Had the actions of the buyer’s inspector caused the element of the delay claimed by the builder (and the judge found that it had not), could it be classed as a delay of any kind under the interpretation of Article IV or must the builder be forced to rely on an alternative proffered interpretation to be found within Article VIII: ‘default in performance by the buyer’?

In fact, it was argued by the buyer that the long list of causes set out in Article VIII conspicuously failed to include any such specific breach of contract by the buyer. This was the argument the court found more acceptable.

The relevant issue in terms of interpretation and construction of the contract was one of commercial sense. The judge looked at the various explicit provisions relating to the giving of notice and calculation of delays and determined that it would be ‘wholly illogical to attribute to the parties the intention that one category of delay - being one particular kind of buyer’s breach delay - uniquely falls outside this scheme.’

The finding was, therefore, that the buyer was entitled to cancel the contract and to receive repayment of the instalments of the price paid by them with interest and without any setoff by the builder.

Comment

The lesson to be taken from this case for both buyers and shipyards alike is that in agreeing circumstances under which delays are to be calculated and agreed together with appropriate notices - terms which are often subject to significant amendment by the parties in standard form shipbuilding contracts - where a dispute arises, the tribunal charged with interpreting those terms is likely to take a generally exact and literal if commercial reading of these and will be unwilling to find broader, implied conditions beyond those express terms.