Delayed Delivery: The Right To Cancel Shipbuilding Contracts

Zhoushan Jinhaiwan Shipyard v. Golden Exquisite Inc. [2014] EWHC 4050 (Comm)

A recent decision in the Commercial Court offers helpful guidance to both shipyards and buyers facing and considering possible cancellations of shipbuilding contracts due to delayed delivery.

The background facts

The Court heard appeals from four arbitration awards in relation to disputes regarding the interpretation of four shipbuilding contracts between a Chinese shipyard (the "Yard") and four buyers ("Buyers", all part of the same group). The contracts were materially identical and, in each case, the Buyers relied on a contractual right to cancel the contract for delayed delivery of the vessel.

In arbitration, the Tribunals found that the Buyers' cancellations were valid. The issue on appeal was whether the Buyers had lawfully cancelled the contracts, or whether, as the Yard alleged, cancellation was unlawful because the Buyers had themselves caused part of the delays to the delivery of the vessels.

Right to cancel

The contracts provided the Buyers with the right to cancel the contracts in the following circumstances:

Under Article III.1(c): after 210 days of "non-permissible delays" to the contractual delivery date; and Under Article VIII.3: after 225 days of "permissible delays", which were specific causes beyond the Yard's control and which were enumerated in Art VIII.1; and after 270 days of combined "permissible" and "non-permissible" delays. The Buyers gave notice of cancellation of the contracts more than 270 days after the contractual delivery date, and claimed a refund of the instalments paid. If, as the Buyers claimed, the contracts were cancelled under Article III.1(c), the Yard would also have to pay interest. There would be no obligation to pay interest if the contracts were cancelled under Article VIII.3.

After the Buyers gave notice of cancellation, the Yard alleged that the Buyers were in breach of Article IV of the contracts, which provided for inspection of the vessel by a supervisor appointed by the Buyers. Although the Yard had not previously issued any notice of such delays under the contracts, the Yard alleged that the Buyers were in breach of their obligation to "..carry out inspections in accordance with the agreed inspection procedure and schedule and usual shipbuilding practice...". The Yard alleged that the Buyers' supervisors had worked insufficient hours, imposed extra-contractual requirements and taken unreasonable amounts of time...