Shipbuilding Contracts - COVID-19 and Excessive Delays

In an ideal scenario, shipbuilders will be entitled to relief because of the impact of COVID-19 provided they fulfil the following conditions; (a) Quarantines, epidemics, pandemics, infectious disease, requirements of governmental authorities, shortage of supply and manpower, for example, are covered in the force majeure clause of their shipbuilding contracts, (b) Shipbuilders have done everything right and comply with notice requirements in the force majeure clause to gain protection, and (c) Shipbuilders has done everything possible to mitigate such delays.

However, such relief will only be temporary if the delays are protracted as the buyer may still have the right to terminate the shipbuilding contract for excessive delays.

Bimco NEWBUILDCON. Clause 39(a) Buyer’s Termination, The Buyer shall have the right to terminate this Contract forthwith upon giving notice in the event that (iii) (1) the delivery of the Vessel is delayed by more than 180 days by virtue of events that fall within Clause 34(a) (i) (Permissible Delays - Force Majeure events); or (2) the delivery of the Vessel is delayed by more than 180 days by virtue of events which do not fall within Clause 34 (a) (i) or Clause 34(a) (ii) (Permissible Delays);  or (3) the aggregate of delays to the delivery of the vessel in (1) and (2) above is more than 270 days.

SAJ Article VIII.4. Right to Rescind for Excessive Delay. If the total accumulated time of delays on account of the cause specified in Paragraph 1 of this Article, excluding delays of a nature which under the term of this Contract permits postponement of the Delivery Date amount to Two Hundred and Ten (210) days or more, then, in such event, the Buyer may rescind this Contract…”  (Paragraph VIII.1 contains a list of force majeure events).

In such an event, shipbuilder will have to refund all sums paid with interests and return or pay for buyer’s supplies under Bimco NBC, Clause 39 (e) or under SAJ Article X.2, refund all sums paid by the buyer, with interests.

The deciding factor on who wins all will be market-driven. If the charter for the vessel is still open or if the vessel is a tanker, the situation may not be too bad for such shipbuilders. With potential legal wrangling looming, the ultimate winners in this saga will still be the shipbuilding litigation lawyers, claim consultants and the court-appointed receivers.

End Note: Currently, it seems that some countries, notably China are issuing “force majeure” certificates to shield companies from damages resulting from COVID-19. Where shipbuilding contracts are governed by English law, it remains to be seen whether such a certificate will prevail over the relevant termination clauses in such contracts for excessive delays.

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