Shipbuilding - Effective Date of Contract and Contingent Conditions

In shipbuilding contracts, the parties may occasionally agree that the contact will only become effective after signing and provided certain contingent conditions are fulfilled. Common contingent conditions include payment of the first instalment and provision of refund or payment guarantees. Such contingent conditions may be classified into condition precedent or condition subsequent.

Condition Precedent - A condition is precedent if it provides that the contract is not effective until some specified undertakings are fulfilled. See Article 16 of AWES.

Where a party is required to do something before the commencement of a contract, there will be no contract until that condition is met.

Thus in Haugland Tankers v RMK Marine [2005] EWHC 321 (Comm), the term of an Option Agreement provided that Buyer could exercise the Option by the service of notice together with payment of a commitment fee to Seller. The Buyer served notice to declare the Option but did not pay the commitment fee. It was held that simultaneous payment was a condition precedent to or a requirement for the proper exercise of the Option.

Condition Subsequent - Such condition requires something to be done after the date of contract which, if not fulfilled will render the contract void. See SAJ Article XIX, Clause 44 Bimco NEWBUILDCON.

Where contracts are effective as from the date of execution but subjected to condition subsequent, communication between the parties must be carefully managed to prevent possible disputes or litigation.

Thus in Covington Marine Corporation v Xiamen Shipbuilding [2005] EWHC 2912 (Comm), the parties agreed that a shipbuilding contract shall become effective from the date of its execution by the parties provided four conditions were fulfilled. The Seller repudiated the contract and during the arbitration, the Seller raised jurisdiction issues and denied that any binding contracts had been concluded. One of the issues on appeal was whether the parties had reach agreement on the supplier of the main engines. The Buyers contended that the requisite agreement was achieved by exchange of letters between the brokers dated 18 and 19 March 2003. However, the Arbitrators concluded that there was no agreement.

On appeal the Court found that there was, an agreement on the supplier of the main engine and held that Arbitrators’ decision and reasoning are wrong in law. But the Court did commented obiter that it was “an agreement to agree” and that “It would not be a wrong or a breach of duty not to agree on the supplier of the main engine”.

The problem with contingent conditions is that it could easily invalidate an otherwise promising shipbuilding contract from the onset if one of such conditions are not duly complied with or if communications between the parties subsequent to contract signing are not properly managed. At times such contingent conditions can be rather tricky and could be a convenient deal killer when the market condition worsened.

Some areas of concern:

(a) Where the effective date is dependent on an “agreement to agree”,

(b) Where the effective date is dependent upon approval or consent of third parties which may not be forthcoming or available in a timely manner or impossible to perform,

(c) If Seller’s subcontracts with its vendors are not subjected to the effectiveness of the main shipbuilding contract, Seller may inevitably end up with multiple legal suits for breach of subcontracts.