Concept and rationale of interpellation rights
Timely delivery is of the utmost importance in shipbuilding projects. Nevertheless, for various reasons, delays often occur, thus creating a need for clear regulation of the parties' rights and obligations. Standard contracts such as the Norwegian Standard Form Shipbuilding Contract 2000 (SHIP 2000) (article IV) and the Shipbuilding Contract of the Shipbuilders Association of Japan (SAJ form) (article VIII) grant the buyer a right to claim liquidated damages in addition to a right to cancel the contract if delivery of the newbuild is delayed beyond a pre-agreed period.
The "interpellation right" entitles the builder to require the buyer to elect to either accept delivery of the delayed newbuild on a specified, new date or cancel the contract forthwith. If the buyer does not respond, this may result in the buyer losing the right of cancellation. The builder may not like the buyer's decision but by using the interpellation right, the builder can obtain clarity as to the fate of the delayed project.
Concept and rationale of interpellation rights
The rationale for granting the builder an interpellation right becomes evident in cases where the buyer has a right to cancel the contract for delay, but instead does nothing and awaits further action while reserving their rights. This creates a challenge for the builder, who must honour their contractual obligations and continue construction while facing the risk of significant losses if the contract is eventually cancelled by the buyer.
The builder will want clarity as to whether they should proceed with the construction or prepare for the contract's cancellation. Such clarity may be achieved by using the builder's interpellation right, which becomes relevant both when the delivery is delayed beyond the agreed cancellation date and when it is anticipated that the delivery will be delayed beyond this date.
Article IV(1) of SHIP 2000 contains provisions governing the situation where the project is delayed beyond the agreed cancellation date. If the buyer has not provided a notice of cancellation following the passing of the cancellation date, the builder may, by written notice, demand that the buyer either cancels the contract forthwith or accepts delivery of the newbuild on a specific date reasonably estimated by the builder. If the buyer fails to notify the builder of their choice within 15 days, the buyer's cancellation right may be suspended and the estimated future date specified by the builder may be deemed as accepted as the new delivery date.
If the buyer elects not to cancel the contract, the builder will proceed and aim to deliver the newbuild by that new date. If the date is successfully met, the buyer must take delivery of the newbuild (provided that the newbuild complies with the contract's specifications). However, if the future date is not met, the buyer will (again) have the right to cancel the contract. Article VIII of the SAJ form includes similar provisions.
During the construction phase, but before the cancellation date, the builder may realise that delivery of the newbuild will be delayed to the extent that the buyer has or will have a right to cancel the contract due to the anticipated delay. The buyer's right to cancel for anticipated delay is included in article IV(1)(d) of SHIP 2000. Thus, a builder will also want a right of interpellation during this phase of the build to address anticipated delay.
Unlike in situations of actual delay (ie, delay beyond the cancellation date), the standard wording of article IV(1) of SHIP 2000 does not explicitly grant the builder an interpellation right for anticipated delay. Under Norwegian law, in such cases, the builder can rely on the background law principles of interpellation as set out in section 24 of the Norwegian Sale of Goods Act. This provision states as follows:
If the seller. . . notifies the buyer that he will deliver within a stated time, but the buyer fails to reply within a reasonable time after receiving the notice, he cannot cancel if performance is effected within the stated time.
Faced with the decision of whether to submit such a notification to the buyer, the builder must consider that by admitting that there is a significant delay in the shipbuilding project, they are also giving the buyer a right to cancel the contract. The risk of loss of contract in this context must be weighed against the builder's need for clarity on the way forward and the chance to mitigate potential losses.
Where there is a risk of cancellation by the buyer, the builder should carefully consider the circumstances causing the delay before using an interpellation right. The relevant circumstances to consider are the extent and nature of the actual or anticipated delay, including the existence of force majeure or other circumstances for which a delay is permitted under the contract.
The builder should also be reasonably certain that they can deliver the newbuild on the specified date. If they fail to do so, the buyer will be entitled to cancel the contract. In addition, the builder should take note that once the buyer has been requested to elect between cancelling the contract or accepting delayed delivery, the builder may be deemed to have waived any potential rights to dispute the buyer's grounds for cancellation.
For further information on this topic please contact Øyvind Axe, Stian Holm Johannessen or Håvard Njølstad at Wikborg Rein by telephone (+47 22 82 75 00) or email ([email protected], [email protected] or [email protected]). The Wikborg Rein website can be accessed at www.wr.no.