In a new case, Jiangsu Guoxin Corporation Ltd v Precious Shipping Public Co Ltd  EWHC 1030 (Comm), the High Court has departed from key elements of its previous decision in Zhoushan Jinhaiwain Shipyard Co Ltd v Golden Exquisite (and others)  EWHC 4050.
While the particular decisions are addressed below, if there is one lesson to take from the decision of Mr Justice Butcher, and indeed the underlying LMAA Tribunal, it is that where parties amend SAJ form contracts based on individual projects or yards, the English law authorities provide guidance as to principles, but no hard and fast binding authority as to how clauses must be interpreted. In this case, both the Tribunal and the Judge felt free to distinguish the previous decision from 2014, or even hold that parts of it were wrong. Parties to any shipbuilding contract are therefore reminded that the wording of their particular contract is key, and that small changes could have significant consequences in the event of a dispute.
The Precious Shipping case involved a series of bulk carriers. The Buyer refused delivery of the early vessels in the series, which had knock on effects on the later vessels, delaying them and leading to the Buyer terminating pursuant to the contract for excessive delay under the usual, but amended,
articles III and VIII.
In considering the validity of the termination, and the possible application of the Prevention Principle, the Judge made a number of headline findings:
- First, that it was an implied term of the Contract that neither party should actively and wrongfully prevent the other party from performing its obligations.
- That the scope of Article VIII and the wording extending Article VIII.1 to any events “beyond the control of the Seller and/or its subcontractors” was a catch all (as held in Adyard Abu Dhabi v SD Marine) but that contrary to the finding in Zhoushan, that wording DID extend the scope of Article VIII.1 to breaches of contract by the Buyer.
- That even if Article VIII.1 did not extend to breaches by the Buyer, the notice regime in Article VIII.2 did still apply.
- That breaches of Contract by the Buyer were, on this wording “excluded delays” for which termination would not be permissible. In other words, Buyer breaches were not “permissible delays”, but “excluded delays” as defined in Zhoushan.
- That separate agreement between the parties (for example to defer agreement on the cost/time consequences of a change order) fell outside the regime of foreseeable delays, and so Article VIII.2 would NOT apply.
- That where a default in payment gave the Builder the option to extend the delivery date, notice was required that the Builder was exercising that option.
The Judge considered that Buyer breaches fell outside the regime of Article VIII, but that for anything within Article VIII, the notice provisions were fundamental, and the lack of notices meant that no right to permissible delay could arise.
Much of this was based on the wording of Article IV, which allowed the Builder to proceed with design if the Buyer did not respond to drawings within 14 days, allowing the Judge to find that the Buyer cannot have delayed the project as alleged. This was important because otherwise, on the judgment, the Buyer could have been able to rely on its own breaches in order to cancel the contract. That is a situation which the judges in both Zhoushan and Precious Shipping were clear should be avoided.
The recent decision raises some interesting and important points for those involved in shipbuilding projects.
First, notices remain key. The position for a Builder should, in effect be that if in any doubt, a notice of delay should be served in accordance with Article VIII. The application of the Article VIII.2 notice regime to breaches by the Buyer will depend heavily on particular contracts and will not work in many cases. It goes well beyond what the clause actually claims to achieve (being applicable on its face only to the Article VIII claims). The problem also arises that a Buyer might therefore be in breach of contract and escape liability (or even benefit considerably) purely on the technicality of a lack of notice. However, in terms of risk, it makes sense for a Builder now to give notice for EVERY delay event. What this means in practical terms is not clear, but it the contract is to be interpreted and a “list of rights” as opposed to a cooperative project to achieve delivery, then it may well involve Builders devoting increased resources to such notices and “claims management” as opposed to the project itself. The risk is that judgments on these lines decrease the cooperation essential to any shipbuilding or offshore project.
Second, depending on the particular wording, any default by a Buyer, subject to notices, may give rise to an “excluded” delay, and not a permissible delay for which cancellation may still be possible under the Article VIII drop dead date. However it is worth noting that the finding in this case was based on a separate provision being made in Article VIII for Buyer Defaults. Where that wording is not present, the reasoning would collapse and Buyer breaches would logically no longer be covered by Article VIII.
Third, the decision expressly does not apply to situations arising out of ad hoc agreements between the parties during the project – an agreement to defer the consequences of a change being the example taken. The Court in this case recognised with far more clarity than in Zhoushan how a shipbuilding project will actually work on the ground.
Finally, the case continues the reluctance of courts to apply the Prevention Principle in shipbuilding contracts and to find that the Contract covers all manner of delays. On the wording of this contract that is understandable, but where amendments are made that leave categories of delay outside the contract regime, the position will remain open to argument.
This decision obviously also means that aspects of the delay and termination regime in English law are in flux, with potentially competing decisions on some issues. The answer to this may come from the Court of Appeal in the Precious Shipping case, but is in any event that each contract must be considered on its particular wording, and based on amended wording a Tribunal may well depart from previous authority. That is something for shipyards and Buyers to keep in mind when agreeing their contracts where those contracts depart from the SAJ form or those considered by the English courts. In the meantime, the advice would remain that if there is any doubt, serve a notice of delay.