Cancelling shipbuilding contracts – The dos and don’ts

1. Cancelling shipbuilding contracts –The dos and don’ts William Cecil Partner Curtis Davis Garrard LLP 8 October 2012

2. B’s usual contractual cancellation rights • B entitled to cancel if: • The vessel fails to meet specified performance guarantees • Excessive delay • Usual provisions for delay: • 30 days grace period • Liquidated damages at increasing daily rates up to a maximum of 210 days • Then B has right to cancel • Consequences of valid cancellation: • Refund of pre-delivery instalments • Interest • Damages for B’s losses cancelling shipbuilding contracts - the dos and don'ts

3. Consequences of a wrongful cancellation • B in repudiatory breach • SY does not have to perform and can claim damages • Refund guarantee of no effect • B should consider whether possible/preferable to obtain award/judgment confirming that cancelling right has arisen before cancelling cancelling shipbuilding contracts - the dos and don'ts

4. Extensions to cancelling date • May be extended due to: • Force majeure events • Other permissible delay • Variations • Cannot cancel before cancellation date even if inevitable that vessel will be late cancelling shipbuilding contracts - the dos and don'ts

5. The Prevention Principle • B cannot insist on strict compliance of the contract if it has prevented SY from performing its obligations • B’s actions do not need to be a breach of contract • Consequences if no contractual mechanism to extend time: • Time will be “at large” • B will lose contractual cancellation right • Adyard Abu Dhabi v SD Marine Services [2011]: “A trivial variation may lead to the loss of the right to liquidated damages for a long period of culpable delay and, in this case, loss of the right to rescind as well.” cancelling shipbuilding contracts - the dos and don'ts

6. Waiver • B must be careful not to waive its contractual right to cancel as a result of: • Delay • Actions inconsistent with B’s right to cancel • B should: • Reserve right to cancel as soon as right arises • Any subsequent correspondence or ongoing approvals should refer to reservation of rights letter • Cancel as soon as possible taking into account safety margin for possible extensions of time cancelling shipbuilding contracts - the dos and don'ts

7. The refund guarantee • If unable to call on refund guarantee: • Credit risk - B will be an unsecured creditor of SY for claims for pre-paid instalments plus interest • Difficulties of enforcement of award/judgment in jurisdiction of SY • Points to check: • Expiry date of refund guarantee • Type of guarantee: “see to it” guarantee or on demand guarantee? • Rule in Holme v Brunskill cancelling shipbuilding contracts - the dos and don'ts

8. Form of cancellation notice and demand on refund guarantee • Contractual requirements • Preserve right to claim damages in cancellation notice: Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] cancelling shipbuilding contracts - the dos and don'ts

9. Assignment of the shipbuilding contract and the refund guarantee • Who is entitled to serve the cancellation notice and refund guarantee demand? • What consents are required to cancel/make demand? • Allow time to obtain bank’s consent cancelling shipbuilding contracts - the dos and don'ts

10. Conclusion • Be fully prepared BEFORE you jump! cancelling shipbuilding contracts - the dos and don'ts

11. CDG Knowledge Centrewww.cdg.co.uk cancelling shipbuilding contracts - the dos and don'ts