Shipbuilding Contracts Law Essay

In Stocznia Gydnia SA v Gearbulk Holdings Ltd [2008] EWHC 944 Burton J overturned an arbitration award of Sir Brian Neill, subsequent to leave to appeal granted by Cooke J. The shipyard had contracted with Gearbulk to build three bulk carriers but the hulls were not delivered at all. The arbitrator found that the shipyard was in repudiatory breach of contract. Gearbulk had terminated the contracts under contractual provisions and enforced the Refund Guarantees, recovering the pre-delivery instalments it had paid. Gearbulk also sought damages at large and were initially awarded them by the arbitrator.  

The contract terms run to many pages but the decision can be considered without referring to them in any great detail here. It is sufficient to say that the contract provided at Article 10 for price reductions for delay in delivery but after a delay of 150 days, Gearbulk had the right to terminate the contract and upon such termination the shipyard were to repay all the contractual instalments paid to date by Gearbulk with interest thereon. 

Three questions, which Gearbulk needed to address to maintain their award of damages, were considered by the court: 

  1. Did the contractual termination provisions constitute a complete code thus excluding common law rights of termination for these events?
  2. Did the contract exclude a claim for damages in respect of these events? and
  3. Whether Gearbulk were precluded from claiming to having terminated at common law given its reliance on the contractual termination provisions? 

As to the first issue, the test to apply in deciding whether parties intended to “oust” common law remedies such as to form the contract into a complete code can be found in Gilbert-Ash (Northern) ltd v Modern Engineering (Bristol) Ltd (1974) in which Lord Diplock held: 

“In construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption.” 

Burton J found that the words of this contract had not ousted the rights of Gearbulk to accept repudiation at common law.  

The second question arose from a provision that said: 

“The Purchaser shall not be entitled to claim any other compensation and the Seller shall not be liable for any other compensation for damages sustained by reason of events set out in this Article and/or direct or indirect consequences of such events other than liquidated damages specified in this Article.” 

On this issue, Burton J said it would flout business common sense if that provision extended to exclude liability for repudiatory breach which on his finding on the first issue stood outside the code formulated in the Article. The Article in question provided for deductions and repayment in the event of delayed or non-delivery and did not exclude damages for repudiatory breach. 

It is the third issue that is the most interesting. The shipyard’s case on this was that having expressly referred to specific contractual rights to terminate in letters sent at the time, Gearbulk had affirmed the contracts and elected to terminate in accordance with the contract rather than by accepting the shipyard’s repudiation and as such Gearbulk were prevented from claiming damages at large. 

The letters were phrased as follows: 

“We hereby give you notice that we hereby exercise our rights of termination…and call upon you, in accordance with the provisions of Article…to repay to us immediately the predelivery instalment that we have paid to you…” 

Significantly, Gearbulk then went on the claim under the Refund Guarantees. 

 The Judge made it clear that Gearbulk’s failure to expressly accept the shipyard’s repudiation did not prevent it from later arguing retrospectively it had done so. As per Clarke J in Dalkia Utilities Services plc v Celtech International Ltd [2006] EWCH 63: 

The same conduct may be such as to give rise to a contractual right to terminate and a common law entitlement to accept a repudiatory breach … In such a case, the innocent party can exercise either his contractual or his common law right of termination. Prima facie he can rely on both. He is not disentitled to rely on the latter on the ground that recourse to the former constitutes an affirmation of the contract since in both cases he is electing to terminate the contract for the future (i.e. to bring to an end the primary obligations of the parties remaining unperformed) in accordance with rights that are either given to him expressly by contract or arise in his favour by implication of law. If he can rely on both there is no reason in principle why, if he terminates the contract without stating the basis on which he does so, he cannot be treated as doing so under any clause which entitles him to do and in accordance with his rights at common law … Even if he refers to a particular clause upon which he relies, that would not inevitably mean that he was only relying on that clause. If that were so, an innocent party who, in the face of a repudiatory breach, terminated the contract by reference to a clause which was in fact inapplicable, might, on that account, find himself disentitled to terminate at all..” 

Up to this point Gearbulk’s claim to damages at large seemed to be maintained.  

However Gearbulk had affected a recovery of the predelivery instalments under the Refund Guarantee. Gearbulk had thus enforced a provision in the contract enabling it to obtain a secured sum against a third party, the Refund Guarantor, which right was only available to it under the contract. That guarantee was termed such that it could only be enforced should Gearbulk terminate the contract in accordance with any provisions thereof. 

Burton J reviewed United Dominions Trust (Commercial) Ltd-v Ennis [1968] 1 QB 54. In that case, the Court of Appeal found that a hire purchase agreement had been terminated, not, as asserted by the hire purchase company, by the hirer pursuant to clause 10 of the contract but rather by the hire purchase company under clause 8, which entitled the company, in accordance with the provisions of another clause of the contract, clause 11, to a minimum payment by the hirer (which in the event the Court of Appeal found to have been a penalty.) The hire purchase company sought in the alternative to contend that its termination of the contract was an acceptance of the hirer's repudiation. Even though, either way, the contract was terminated, the Court of Appeal held that the hirer had affirmed the contract, electing against acceptance of repudiation, by enforcing its terms (the minimum payment provision under clause 11), by treating the contract as "still continuing" or "binding". 

By doing as it did, Gearbulk had affirmed the contract and elected against acceptance of repudiation. It could not therefore claim damages at large, having already recovered the instalments and interest under the Refund Guarantee. Gearbulk has been granted leave to appeal to the Court of Appeal.

Shipbuilding contract, which is the contract for the complete construction of a ship, concerns the sales of future goods, so the property could not pass title at the time when the contract is concluded. The aim of shipbuilding contract is to regulate a substantial and complex project which the builders and buyers assume long-term obligations to other and bear significant commercial risks.

Shipbuilding contract is a non-maritime contract and not within the Admiralty jurisdiction because it is insufficiently related to any rights and duties pertaining to sea commerce and/or navigation. The property passes to the buyer when the ship has been completed. To avoid difficulties, provision can be made for the property to pass in stage in the process of development and construction. It is different from most hire-purchase agreements where the seller has ownership of the property until the payment of the final installment.

Under the Sale of Goods Act 1979, this kind of agreement to sell ‘future’ goods may be a sale either by description or by sample. The sale of new building ship, which is large manufacturing project, is obviously undertaken by description. It is a condition to comply with the agreed description when performing the contract.

Standard forms of contract[edit]

Shipbuilding contract are constructed within the framework of standard contract forms amended by the contractual parties to meet their particular requirements. The choice of form will be based on the influence of trade association which the builders belong to.

Principal Form
  • SAJ Form
    It is published by the Shipbuilders’ Association of Japan in January 1974 and the framework of this form is commonly used in South Korea, China, Singapore and Taiwan.
  • AWES Form
    It is the standard shipbuilding contract of the Association of European Shipbuilders and Shiprepairers which revised and reissued in May 1999.
National Form
  • The Norwegian Shipowners’ Association and Norwegian Shipbuilders’ Association
  • MARAD Form (The Maritime Administration of the United States Department of Commerce)
    It is used in relation to American newbuildings financed under Federal Ship Financing Program authorized by Title XI of the Merchant Marine Act 1936.

Formation of contract[edit]

There is no requirement that a shipbuilding contract should be concluded in writing, it will be also legally enforceable in oral provided that necessary formal elements are present. The main terms of an agreement, such as expenditure, timescale and risks involved in shipbuilding, are better to record in written form.

In order to create an enforceable agreement, the essential elements for an agreement to form a legally binding contract must be presented, they are:

Where all these elements are present, a legally binding contract comes into effect. Otherwise, if any of the elements are missing, there is no legally binding contract.

Duties of a builder[edit]

The duty of a builder is to complete the new building ship in accordance with the design and specification given by the buyer. He must ensure the materials he uses are fit for the purpose required and must carry out the building works with general standard of skills expected for a shipbuilder since the buyers rely on the builder’s skills and judgment when contract is being performed. He should also comply with the safety requirement laid down in the Merchant Shipping Act.

Passing of risk[edit]

Within the shipbuilding contract, the risk does not pass from builder to buyer until delivery of the completed ship. It is suggested that builder should take out an insurance cover before the delivery of ship.

What are the builder’s remedies?[edit]

If the buyer cannot fulfill the payment, the builder may:

a) exercise his possessory lien;
b) resell as a result, exercising his lien;
c) exercise a common law right of stoppage in transit; and
d) sue for the price

The buyer may want to exit from the contract due to change in market situation or financial situation. When the builder had made use of his contractual remedy to cancel the contract for the future, the buyer’s default indeed will trigger the guarantor’s liability and make the letter of guarantee operative. Moreover, if the buyer fails to take delivery, the builder may sue him for failure to accept. The builder has remedies available when the buyer breaches the contract.

What are the buyer’s remedies?[edit]

If the builder fail to deliver the ship, the buyer may:

a) seek specific performance; or
b) sue for non-delivery

There may be an express term in the contract that the property is to pass in whole or partly by stages to buyer before delivery, this does not mean that the buyer has the right to reject the ship if it fails to meet up with the required standard.

The buyer has the right to examine the complete property before he is obliged to signify acceptance. He has no right to reject after accepting the delivery, but only to redress if he discovers fault is by way of damage.

The builder must notify the buyer the ship’s readiness for trials which will be taken place at the agreed place of delivery. The buyer may choose any place to take the delivery and the costs are for his account.

The time of delivery is normally stated and treated as an essential term of the contract. If it is not mentioned or it is not an essential term, the builder should deliver the completed ship within a reasonable time. “Reasonable” will be determined case by case.

Summary[edit]

Shipbuilding contract is different from the general sales contract in terms of nature of contract, time frame and passing of risks. Each shipbuilding contract is tailor made where there are different requirement from each buyer.

Shipbuilding contract needs very careful drafting of provisions in contemplation of the likely event of damage before completion.

See also[edit]

References[edit]

  1. Hill, C. (1998), Maritime Law, 5th ed, LLP Reference Publishing, London.
  2. Simon, C. (2002), The Law of Shipbuilding Contracts, 3rd ed, Informa Professional UK, London.

External links[edit]

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