Young CMI/ Sjørettsforeningen Shipbuilding – legal and practical problems when taking delivery

1. Young CMI/SjørettsforeningenShipbuilding – legal and practical problemswhen taking delivery Karl Even Rygh 20 November 2013

2. Topics – Part I • Introduction • Shipbuilding contract forms • Force Majeure delays – LDs • Payment procedure at delivery • Disputes as to final instalment • When is the vessel ready? • Yard’s refusal to deliver – blackmailing • Sample case – recent English judgment Nordisk Skibsrederforening

3. Standard contracts • Norwegian Standard Form Shipbuilding Contract 2000 • Newbuildcon 2008 • China • Korea • Japan (JAS) Nordisk Skibsrederforening

4. Liquidated damages • Delayed delivery entitles buyer to a daily reduction in price by way of liquidated damages. Norwegian Standard Form Shipbuilding Contract 2000 – Art. VI 1(a): “If the delivery of the Vessel is delayed beyond the Delivery Date, the Contract Price shall be reduced by deducting therefrom as follows: 1st - 30th day No reduction/alternatively ……………… per day 31st - 60th day ……………… per day 61st - 180th day ……………… per day The maximum reduction in the Contract Price for delayed delivery shall not exceed the total of the above liquidated damages for 180 days of delay.” Nordisk Skibsrederforening

5. Liquidated damages Newbuildcon cl. 13 – Late Delivery for non-permissible delays: “If deliverytakesplace more than 30 daysafterthe Delivery Date then for eachdaythereaftertheContract Price shall be reduced by theamountstated in Box 18 per day as liquidateddamages up to a maximumdelayof 180 days (Comprising a 30 daygraceperiodplus 150 days). If thedelayexceeds 180 daystheBuyershall have theoption to terminatethisContract in accordancewithClause 39(a)(iii) (Suspension and Termination)” Nordisk Skibsrederforening

6. Liquidated damages • Yards typically argue permissible delays as defence to LDs. • Important to ensure that notice provision stipulates waiver effect, preferably for all three notices. • Many yard forms only include waiver wording in respect of Buyers’ obligation to object:DSME Art VIII.3(c):Failure by Buyer to object to Builder's claim for postponement of the Delivery Date within ten (10) days after receipt by Buyer of such notice of claim shall be deemed to be a waiver by Buyer of its right to object to such postponement of the Delivery Date. Nordisk Skibsrederforening

7. Liquidated damages Norwegian Standard Form Shipbuilding Contract 2000 – Art. IV 2: “(a) Within 10 days after the Builder becomes aware or should have become aware of any cause of delay as aforesaid, on account of which the Builder will claim that it is entitled under the Contract to postpone the Delivery Date, the Builder shall notify the Buyer in writing or by telefax, confirmed by registered mail, of the date such cause of delay commenced. Likewise, within 10 days after the date such cause of delay ended, the Builder shall notify the Buyer in writing or by telefax, confirmed by registered mail, of the date when such cause of delay ended. Failure by the Builder to give such notices as aforesaid shall prevent the Builder from subsequently claiming Force Majeure Delay on account of such circumstances. Nordisk Skibsrederforening

8. Liquidated damages (b) The Builder shall notify the Buyer of the period, by which the Delivery Date is postponed by reason of such cause of delay, with all reasonable despatch after it has been determined. Failure by the Buyer to object to the Builder's claim for postponement of the Delivery Date within 10 days after receipt by the Buyer of such notice shall be deemed to be a waiver by the Buyer of its right to object to such postponement of the Delivery Date for the net delay caused by the Force Majeure event, provided always that the Builder's information in respect of the cause of the delay and the consequences thereof were correctly stated in the notice.” Nordisk Skibsrederforening

9. Liquidated damages Newbuildcon lines 740-746: “The Builder shallnotifytheBuyerwithinten (10) runningdaysofwhenthe Builder becomesawareoftheoccurenceofanyeventofdelayonaccountofwhichthe Builder assertsthat it may have the right to cleim an extensionofthe Delivery Date. A failure to so notifyshall bar the Builder from claiming an extension to the Delivery Date. The Builder shallalsoadvisetheBuyer in writing (A) withintwo (2) runningdaysofthe ending ofanyeventnotified under thisClausethattheevent has ended, and (B) as soon as reasonablypossibleafter (A), thelengthofextensionofthe Delivery Date claimed by the Builder.» Nordisk Skibsrederforening

10. Payment procedure at delivery • Most contracts (not the Norwegian Form) require final instalment to be prepositioned a certainnumberofdays prior to delivery. Newbuildconcl. 30(a) – Final Instalment: “The Final Instalment shall be adjusted in accordance with this Contract and notified by the Builder to the Buyer not later than seven (7) Banking Days prior to the notified date of delivery (see Clause 27(d)(Sea Trials – Method of Acceptance or Rejection)). Not later than two (2) Banking Days prior to the notified date of delivery the amount of the Final Instalment, as adjusted, shall be deposited with the Builder’s Bank as set out in Box 12, with irrevocable instructions that, subject to Sub-Clause (c) below, the amount shall be released to the Builder against presentation by the Builder of a copy of the Protocol of Delivery and Acceptance of the Vessel signed by the Builder and the Buyer. Interest, if any, accruing on such deposit shall be for the benefit of the Buyer.” Nordisk Skibsrederforening

11. Payment procedure at delivery • Practical problems as to whensuchpaymentshall be made and howmuch to pay/release • Important to cater for bank financing– mayrequirecountersigning • Money should be automaticallyreturnedifdeliverydoes not takeplaceNewbuildcon lines 677-80:«(c) If theProtocolof Delivery and Acceptance is not so presentedwithinseven (7) daysfollowingthe date for deliveryoftheVessel as notified by the Builder in accordancewithClause 27(d) (Sea Trials Method ofAcceptance or Rejection), theBuyershall have the right to withdrawthesaiddepositplusaccruedinterest.» Nordisk Skibsrederforening

12. Disputes as to final instalment • Almosteverydeliveryof a newbuildinginvolvessomedisagreement as to theamountpayable. • Important to include a mechanism for ensuringdeliveryofthevesseldespitesuchdisputes – most yard contracts do not. • No suchmechanism in Newbuildcon - Cl. 30(b): «If theBuyerdoes not agreetheamountofthe Final Instalment as adjusted and notified by the Builder, theBuyershallnotifythe Builder withinfive (5) runningdays. ThereaftertheBuyermaytakedeliveryoftheVesselonpaymentofthe Final Instalment as adjusted (or suchotheramount as the Builder mayagree) butwithoutprejudice to theBuyer’srights and remedies under thisContract and thedisputeshall be resolved in accordancewithClause 42 (Dispute Resolution).» Nordisk Skibsrederforening

13. Disputes as to final instalment • Norwegian Standard includes a provisionwherebyoneofthepartiesprovidessecurity – Art. III 3: «The Builder may retain the Vessel until full payment has been made in accordance with the agreed payment terms. If the Builder is unable to present a final account at delivery, the Buyer may require the Vessel to be delivered in return for a bank guarantee or other security, satisfactory to the Builder, for the reasonably estimated balance owed to the Builder. Costs of such guarantee to be for Builder's account. In the event of any dispute concerning the payment on delivery of the Vessel, including the question of the Buyer's right to offset any claim it may have, the Buyer may by paying the entire amount demanded by the Builder require the Builder to provide a bank guarantee or other security Nordisk Skibsrederforening

14. Disputes as to final instalment satisfactory to the Buyer for the disputed amount. The Builder cannot in such case refuse to deliver the Vessel. If the Builder does not wish to issue security for the disputed part of the claim, the Buyer is entitled to take delivery of the Vessel against payment of the undisputed amount and provide a bank guarantee or other security satisfactory to the Builder for the disputed part of the claim. Security which has been issued by a party pursuant to this sub-clause terminates automatically unless the other party has brought legal action pursuant to Article XIX below within 3 months from date of issue of the security. The costs of security shall be shared proportionately between the parties according to the final outcome of the dispute.» • Preferably, Buyershall be entitled to choose. • Still room for dispute as to form and amountofguarantee. Nordisk Skibsrederforening

15. When is the vessel ready? • Sea trial – rectification – further sea trial • Buyers’ right to reject – punch list itemsNorwegian Standard Form Shipbuilding Contract Art. VII.4(d)“The Buyer shall not be obliged to take delivery of the Vessel if it is not fully in conformity with the Contract, or if there are any conditions or recommendations imposed by the Classification Society and/or Regulatory Bodies. However, if the deficiencies or the conditions/recommendations are of minor importance, and the Builder is unable to rectify the matter within a reasonable time, the Builder may nevertheless require the Buyer to take delivery of the Vessel, provided:(i) the Builder undertakes for its own account to remedy the deficiency or fulfil the requirement as soon as possible, and (ii) the Builder shall indemnify the Buyer for any loss incurred as a consequence thereof, including loss of time.” Nordisk Skibsrederforening

16. When is the vessel ready? Newbuildcon 27(d)(iv)“If the Delivery Defects are of minor importance and do not affect Class of the operation of the Vessel in its intended trade but the Builder is unable to rectify the matter within a reasonable time and in any event before the accrual of the Buyer’s right to terminate in accordance with Clause 39 (Suspension and Termination), the Builder may nevertheless require the Buyer to take delivery of the Vessel on the condition that Builder first:(1) undertakes to remedy the Delivery Defects for its own cost and expense as soon as possible; and(2) agrees in writing to indemnify the Buyer for any loss incurred as a consequence thereof, including loss of time; and(3) provides the Buyer with a guarantee issued by the party named in Box 32 (or if Box 32 is not filled in, a bank guarantee from a first class bank) substantially in the form and substance as set out in Annex A(iv) for a sum which the Buyer reasonably request to cover (1) and (2) above, failing agreement such sum to be resolved in accordance with Clause 42 (Dispute Resolution);whereupon the Buyer shall accept delivery of the Vessel.” • Agreements re defects at delivery Nordisk Skibsrederforening

17. Yard’s refusal to build/delivery – Black mailing tactics • Topical issue when markets were high prior to the financial crisis • Buyers can typically only cancel a long time after the agreed delivery date (210 days). Norwegian Standard Form Shipbuilding Contract Art. IV.1 d) “If it can be established beyond any reasonable doubt that the Vessel will be delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above, the Buyer shall have a right forthwith to cancel the Contract.” • Buyers are only entitled to refund of instalments paid with a fixed interest. Nordisk Skibsrederforening

18. Yard’s refusal to build/delivery – Black mailing tactics Norwegian Standard Form Shipbuilding Contract Art. XII.1“Upon cancellation the Builder shall refund all sums paid by Buyer to the Builder under Article 111 hereof, including interest thereon at the rate of ………… % (per cent) per annum from the date of payment to the date of refund. The Builder shall also return Buyer's Supplies, or if they cannot be returned, the Builder shall pay to the Buyer an amount equal to the Buyer's costs for such equipment. Save for the Builder's obligation to refund amounts as set out above, the Builder shall have no liability for any other loss suffered by the Buyer caused by a cancellation pursuant to this Article XII, clause 1, first paragraph.” Nordisk Skibsrederforening

19. Yard’s refusal to build/delivery –Black mailing tactics • Buyers may argue that wilful misconduct and/or intentional breach by the yard has the effect that such limitations of liability cannot be relied uponNewbuildcon Clause 37(e)“Mutual exclusion Clauses(e) Liability following terminationIn the event of termination in accordance with the provisions of Clause 39 (Suspension and Termination), neither Party shall have any liability to the other whatsoever or howsoever arising, except as expressly provided in that Clause.In the event, however, that a Party fails to perform the Contract, or unequivocally indicates its intention not to perform it, in a way which thereby permits the other Party to treat the Contract as at an end other than under the terms of the Contract, any such claim that the other party may have shall not be limited or excluded by the terms of this Contract.” • Must consider carefully how to claim refund under refund guarantees in combination with claiming additional losses from the yard – Stocznia Gdynia v Gearbulk Supreme Court 2009 Nordisk Skibsrederforening

20. Recent English judgments: Wuhan Ocean Economic v “Hansa Murcia” - [2012] EWHC 3104 (Comm) • Refund guarantees typically include an expiry date • Important to ensure sufficient flexibility • Recommend provisions whereby forthcoming expiry triggers a separate right to cancel and refund • Recent case illustrates the difficulties for a buyer in a situation where delayed delivery has been accepted, without at the same time obtaining an extended guarantee“This Letter of Guarantee shall remain in force until the Vessel has been delivered to and accepted by [the buyers] or refund has been made by the Seller or ourselves (the Export Import Bank of China) or until 30 June 2010, whichever occurs earliest, after which you are to return it to us by airmail for cancellation. In case arbitration initiated by either Seller or Buyer before delivery of the Vessel, the validity of this guarantee shall be extended to 60 calendar days after the final arbitration award is issued.” Nordisk Skibsrederforening

21. Arbitration to Extension Buyers’ Termination Extended RG Expiry RG Expiry SBC Extension 31/5-12 30/6-10 22/12-09 28/6-10 29/6-10 8/1-04 Nordisk Skibsrederforening