Shipbuilding delays (Shipyard’s Perspective)

Prelude – Jubilation at the yard following the signing of Shipbuilding Contracts for a series of identical proto-type offshore supply vessels was short-lived. A fast track; 18 months multi-million dollars fixed lump sum shipbuilding project soon degenerated into perennial delays. The aftermath: delays of more than 2 years, losses of millions of dollars and loss of goodwill. The causes were multifold; the results predictable and avoidable.

Even though the personnel involved in the contract negotiation were highly experienced in technical and commercial matters, there was no evidence to suggest that they had the required expertise to fully comprehend legal complexity of shipbuilding contract.  Thus adequate contract risk management was overlooked.  Consequently, shipyard accepted a stringent loop-sided "adhesion" contract.

Basic design was developed by Designers originally employed by the Owner. However shipyard agreed to and thus assumed full responsibility and all risks associated with the design. Having inherited a partially developed design, shipyard could either assume design risk after it had satisfied itself of the technical feasibility or allocate responsibility for design errors from a defined design freeze period. Shipyard chose the former and paid a very high price subsequently. Lack of timely/accurate information and approval (from Owner or Designer or Classification) resulted in delays and significant rework to correct errors. As there was no contractual provision for cost and time adjustment, such delays were for shipyard’s account

Project budget was ineffectively managed resulting in unrealistic costing and under-pricing. Despite having insufficient details to plan its schedule shipyard created an illusion of on-time delivery by developing a schedule with the completion date as reference point and working backwards. The subsequent rush to accelerate the project resulted in construction shortcomings with further delays.

Essential terms in equipment suppliers’ contract were not adequately negotiated to address or allocate risk fairly and appropriately. The end result is three-fold losses comprising of additional overheads, liquidated damages under the main contract and extra expenses for vendors services (inclusive commissioning and start-up) and replacement or correction of defective equipment/parts.

Apathy best describe the efforts of the quality control in place. Sloppy works were offered to the Classification Society and Owners representative for inspection. This resulted in unnecessary rectification, substantial costs and time impact. As the vessel design and scope (specifications, or performance or deliverables) were novel to the yard’s project team, interpretation of quality, acceptance or rejection of work were left entirely to the Owner representatives' discretion. Owner’s representative had a field day with extras and rework. Weakness in this area was never adequately addressed due to unexplained constraint thus rendering any swift turnaround impossible to achieve.

End-Note: “We can choose to learn from our own mistakes or those made by others”

David Seah © All Rights Reserved

Hold Harmless Indemnity – Subsidiary and Affiliate

Farstad, chartered their vessel to Asco UK Ltd, (a wholly owned subsidiary of ASCO plc). Under the charterparty, both Companies agreed to indemnify and hold each other harmless in relation to certain liabilities. Farstad further agreed to indemnify Asco UK Ltd’s “Affiliates”.

Enviroco (another wholly owned subsidiary of ASCO plc) was contracted to clean the oil tanks of the vessel. In the process of such work, a fire occurred causing the death of one of Enviroco’s employees and substantial damage to the vessel. Farstad sued Enviroco for the losses it allegedly suffered. Enviroco relied on the indemnity clauses in the charterparty on the basis that it was an “Affiliate” of Asco UK Ltd because each of them was a subsidiary of ASCO plc.

Before the incident, ASCO plc had given the Bank of Scotland security over its shares in Enviroco by registering the shares in the name of the bank (or its nominee).

The Court of Appeal held that as the shares in Enviroco were registered in the name of the bank’s nominee company at the time of the fire, ASCO plc was not a member of Enviroco. As Enviroco was not a subsidiary of ASCO plc it could not rely upon the indemnity clauses. Recently, the Supreme Court have unanimously dismisses Enviroco’s appeal.  

Source:

Farstad Supply A/S (Respondent) v Enviroco Limited (Appellant) [2011] UKSC 16

http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2010_0008_Judgment.pdf

Contract concluded in the course of email exchanges

In the case of Immingham Storage Co Ltd v Clear PLC (1), the court of appeal had to decide whether a contract was made in the course of email exchanges between the parties.

Through a series of email, the parties had negotiated about availability of commingled storage space for ultra low sulphur diesel at the claimant’s terminal. In due course, claimant sent a two page quotation with all essential commercial terms to the defendant via email attachment, with the word headed in bold capitals “Subject to board approval and tankage availability”.  The final sentence of the document was “A formal contract will then follow in due course”.  There was a space for defendant’s signature under the words “we hereby accept the terms of your quotation subject to your Board approval”. A copy of the General Storage Conditions was also attached.

On 5 January 2009, defendant faxed a signed copy of the quotation to claimant. On 9 January 2009, Claimant emailed defendant under the subject heading “Contract confirmation” accepting defendant’s offer and stating further that “our full contract for this business will now be raised over the next few days by our Head Office and sent for your signature and return.”

Subsequently, claimant sent the full contract to defendant. However, Defendant did not return the contract or utilize the storage facility.  It failed to pay claimant for the monthly storage charges and further denied the existence of any contract alleging that “the acceptance of the quotation in principal [sic] does not constitute a formal contract which was never signed by an officer of this company and therefore no agreement exists between us.”

The claimant’s case was that a contract had been concluded by the acceptance in its email of 9 January 2009. The defendant disputed this and contended that the return of the quotation was not an offer capable of acceptance so as to form a contract, because of reference in the quotation that “A formal contract will then follow in due course”. Further, even if such was an offer, claimant had not accepted the same, as it had stated that “our full contract for this business will now be raised …and sent for your signature and return”.

The court of appeal agreed with the judge of first instance that a contract was concluded by the claimant’s email of 9 January 2009. It was of the view that:

a)        The quotation contained all essential commercial terms and was expressly subjected only to board approval by the respondent and confirmation of tank availability. These requirements were certain and required no further discussion or negotiation between the parties. Once claimant has fulfilled these requirements and indicated its acceptance, the contract was effective. Also, the absence of a condition such as “subject to contract” was relevant.  The terms on which the quotation was signed (“We hereby accept the terms of your quotation subject to your Board approval”) made clear the limited conditionality.

b)        These factors point, overwhelmingly to an intention to create a contract if the claimant accepted the defendant’s offer.  The provision that a “formal contract will then follow in due course” does not indicate that the claimant’s acceptance of the signed quotation was subject to contract. It was “a mere expression of the desire of the parties as to the manner in which the transaction already agreed to, will in fact go through”.

c)        The reference, “full contract” did no more than carry forward the provision in the quotation that “a formal contract” would follow in due course.  It did not introduce a variation to the terms of the offer, but corresponded with them.

d)        Just as the provision for “a formal contract” did not prevent the signed quotation from being an offer to contract, so the reference to a subsequent “full contract” did not prevent the email of 9 January 2009 from being an acceptance of the offer which immediately created a contract.

e)        Further, the reference to a full contract must be read in the context of the entire email, which strongly supports the conclusion of a contract at that stage. 

       

(1)    [2011] EWCA Civ 89