Shipbuilding Contracts: The Prevention Principle And Importance Of Giving Notices

• Published date: 01 June 2020
• Author: Mr Sapna Jhangiani, Paul Collier and Kevin Au
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Transport, Contracts and Commercial Law, Marine/ Shipping, Arbitration & Dispute Resolution
• Law Firm: Clyde & Co

The recent decision of the English Commercial Court in Jiangsu Guoxin Corporation Ltd (formerly known as Sainty Marine Corporation Ltd) v Precious Shipping Public Co. Ltd [2020] EWHC 1030 (Comm) examined the applicability of the prevention principle - that one party to a contract is not liable for default when it is prevented from performing it by the act of the other - to delays caused by the Builder in an amended SAJ (Shipbuilders' Association of Japan) Form shipbuilding contract ("SBC"). The Court concluded that the prevention principle would not apply under the SBC, because the wording of Article Vlll.1 of the SBC expressly gave the Seller a right to claim an extension of time for delays beyond their control, which encompassed delays caused by the Buyer. The Court also held that where the Seller had failed to give appropriate contractual notices, the Seller would not be entitled to extensions to the Delivery and Cancellation Date for delays caused by the Buyer.

The case highlights the risk to shipyards if they do not give notices for extensions of time in accordance with the strict terms of the shipbuilding contracts.

Background facts

Following delivery of the first two out of 14 bulk carriers under a series of SAJ Form SBCs, the Buyer rejected the next four vessels on the basis that they had been designed defectively. The Seller maintained that the result of this rejection, which it deemed to be wrongful, was that the vessels were left occupying berths in the Seller's yard, thereby delaying the construction and launch of the subsequent vessels, Hulls 21B and 22B, beyond the contractual Delivery Date. Upon the expiry of 151 days after the contractual Delivery Date for Hulls 21B and 22B, the Buyer sought to terminate the contracts for Hulls 21B and 22B due to the lapse of 150 days of "non-permissible" delays. In return, the Seller claimed that this was a repudiatory breach which it then accepted.

On referral to LMAA arbitration and heard as a preliminary issue, the Seller contended that the Delivery Date had been extended because of the Buyer's rejection and cancellation of the preceding four hulls, modifications made to the vessels, and the Buyer's late payments of instalments of the Contract Price, and that such circumstances gave rise to the application of the prevention principle. On the other hand, the Buyer's position was that the Seller had not abided by the contractual requirements to extend the Delivery Date, and the contract was a complete...