Shipbuilding Delays & Extension of time

“… delays in construction are prima facie the responsibility of the Builder, unless they are excused by a provision of the contract.”. Per Leggatt J at para 68.

In the case of Zhoushan Jinhaiwan v Golden Exquisite Inc & 2 others [2014] EWHC 4050 (Comm), Buyer cancelled the shipbuilding contracts as delivery of the vessels were delayed more than 270 days after the delivery date. Shipyard argued that the cancellation was wrongful as some of the delays was caused by Buyer’s own breach of contract which amounted to a repudiatory breach. On appeal from two arbitrations, Mr Justice Leggatt identified three types of delays in the contract. They were permissible delay, non-permissible delay and excluded delay.

Non-Permissible Delay
Under Article III.1 (b) of the contract Buyer could deduct a specified sum from the final instalment for each day that the delivery of the vessel was delayed by more than 30 days but less than 210 days after the Delivery Date specified. 

Permissible Delay
Under Article VIII, the delivery date of vessel will be extended if Shipyard is affected by certain stated events or other causes beyond its control, provided notice is given within 7 days its commencement and cessation respectively. In the absence of such notice, Shipyard will be barred from any relief claimed.

Excluded Delay
Even though not expressly named as such in the contract, the Judge described the following delay events that provide for an extension of the delivery date as Excluded Delays: (a) Changes in the specifications, plans class requirements, Articles V.1 and V.2, (b) Late delivery of Buyer’s supplies, Article V.4, (c) Failure of the Buyer’s representatives or supervisor to attend sea trials, Article VI.1, (d) Buyer’s default in (i) payment of instalment, (ii) failing to provide a guarantee of payment or (iii) failing to take delivery of the vessel under the contract, Article XI.4(a), (e) Mutual agreement by the Parties to proceed with the contract in the event where the vessel becomes a total, Article XII.2 (b), (f) In event of any arbitration between the Parties, Article XIII.7

Cancellation Rights
The contract expressly provided that the Buyer could cancel the contract under the following circumstances:

(a)   the delay in the delivery of the vessel continued for a period of at least 210 days, and/or

(b)   If the total of all accumulated permissible delays is two hundred and twenty five (225) days or more, or the combination of all permissible and non-permissible delays is two hundred and seventy (270) days or more.  

Excluded delays did not counted as delays for the purpose of any right of cancellation as there was no contractual provision that state otherwise.

Under Article IV, the BUYER undertook and assured that its Supervisor would carry out his inspections “in accordance with the agreed inspection procedure and schedule and usual shipbuilding practice and in a way as to minimize any increase in building costs and delays in the construction of the VESSEL.”

The Shipyard alleged inter alia that Buyer was in breach of the above undertaking as the Buyer’s Supervisor worked very short hours, thus delaying the inspection process and imposed unreasonable requirements, beyond those specified in the contract, specification, class rules &  regulations, agreed standards and general practices. All these delayed the construction process.

Also, the Buyer’s supervisor delayed the return of procedures or drawings of the vessel and Shipyard could not carry out further construction of the relevant items. According to the Shipyard such delay caused by Buyer’s breach was the fourth category of delay. (Note: Notice of such alleged breach was not given to Buyer and the Shipyard only made the claim after cancellation of contract).

The Judge pointed out that:

The Yard is only obliged to correct such nonconformity if it agrees with the Buyer. Buyer’s supervisor has no power to delay the construction of the vessel.  If the supervisor points out what he thinks is a failure by the Yard to build the vessel in accordance with the contract, it is up to the Yard to decide whether it agrees with the supervisor, in which case it must of course correct the defect, or whether it is disagrees with the supervisor, in which case it is free to ignore him.

Whilst the supervisor had the right to attend tests and carry out inspections, there was nothing in the contract which required the Yard to wait for him.  Equally, if the supervisor sought to impose unreasonable requirements beyond those specified in the contract, the Yard had no obligation to comply with them.

As for returning procedures or drawings of the vessel (the third form of alleged breach), the specifications for the vessel were all agreed at the time when the contracts were made and were annexed to the contracts, and I can see nothing in the contract terms which required the supervisor’s approval to be sought or obtained for any procedures or drawings. 

The Court said that there was no additional fourth category of delay and Article IV is not considered “Excluded delay” as it did not expressly extend the time for delivery of the vessel due to any breach of Buyer’s undertaking.  After considering various arguments from both counsels, the Court held that the delay caused by Buyer’s breach under Article IV were non-permissible delays. Therefore, such delays could be included in (a) the period of 270 days’ delay  under Article VIII.3 and the period of 210 days’ delay after the Delivery Date under Article III.1(c) either of which entitles the Buyer to terminate the contract.

Source: www.bailli.org

Cases referred to in the Judgement:

BMA Special Opportunity Hub Fund Ltd v African Minerals Finance Ltd [2013] EWCH Civ 416 at [24]

Jackson v Dear [2012] EWHC 2060 (Ch) at [40].

Alghussein Establishment v Eton College [1988] 1 WLR 587

Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm) at para 255.

The “Kriti Rex” [1996] 2 Lloyd’s Rep 171, 196

Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The ‘Nanfri’) [1978] 2 KB 972, 975; Geldof Metaalconstructie NV v Simon Carves Ltd [2011] 1 Lloyd’s Rep 517 at para 43(vi). 

Pioneer Shipping Ltd v BTP Tioxide Ltd (‘The Nema’) [1982] AC 724, 742. 

Some thoughts:

Failure to serve Notice of alleged Buyer’s breach – Was there a proper contract management team at Shipyard? If notice has been served, perhaps Buyer’s Senior Management would have taken notice that all was not well in the Project. Unless...

Unreasonable Representatives: Some contract provides for removal of Buyer’s Supervisor or Shipyard’s Project Manager on account of unreasonable behavior.

Inspection process – Some contract provide for deemed acceptance if Buyer’s representative fails to attend schedule inspection & tests. Regardless, most contract will provide that at the end of the day it is still Shipyard’s duty to ensure the timely delivery of a seaworthy ship that complies with contract and specification.

Unreasonable requirement – As the Judge says, the Shipyard can refuse to comply. What is puzzling – how is it possible for Supervisor to impose unreasonable requirements in respect of class items? Prudent contract will provide that in the event of dispute concerning class requirements, the decision of class shall prevail.

Late return of procedures or drawings – Most contract will provide that Buyer’s approval, deemed approval or omission will not diminish Shipyard’s responsibility to design, construct or deliver a vessel in accordance with the contract and specification. There should be a specified timeframe for submission of such documents. If Buyers fails to return such documents with approval, comment, amendments or reservation, (if any) within the stipulated time, such documents shall be deemed approved - See NEWBUILDCON Clause 20(e).Should Buyer request for subsequent revision, this could be the subject of a Variation Order with time and costs impact.