Shipbuilding contracts and related ship finance …

1 Shipbuilding contracts and related ship finance issues Chairman: Ian Gaunt Hon. Secretary, LMAA Panellists: Alun Hatfield - Clarksons Financial services Michael Stockwood Ince & Co Simon Curtis - Curtis Davis Garrard LLP Wednesday 28th April 2010 International House, 1 St Katharine s Way, London, E1W 1UN LSLC - MARITIME BUSINESS FORUM International House, 2nd Floor, 1 St Katharine s Way, London, E1W 1UN Tel: 020 7063 9737 ~ E-mail: shipping ~ Fax: 020 7481 2149 Chairman s Tel: 020 7063 9736 ~ Chairman s E-mail: Web-site: Issues for discussion: BIMCO standard Shipbuilding contract Governing law, forum and jurisdiction issues Impact of West Tankers and EU Reg 44/2001 Impact of Cross border Insolvency Regulations Refund Guarantee deficiencies CA decision Stocznia v Gearbulk Holdings Impact of recent developments on the financing of newbuildings PART A Common Issues in Shipbuilding contract Arbitrations Ian Gaunt PART B ship finance A changing environment Alun Hatfield PART C Damages and determination of Shipbuilding contracts Gearbulk v Stocznia Gdynia Revisited Michael Stockwood PART D Enforcing the refund guarantee -Practical problems Simon Curtis PART E CURRICULA VITAE PART A Common Issues in Shipbuilding contract Arbitrations Ian Gaunt London Shipping Law Centre 28 April 2010 Common Issues in Shipbuilding contract Arbitrations Ian Gaunt MA (Cantab)

2 , FCIArb, DiplCArb, Hon Secretary LMAA Summary: The boom in Shipbuilding orders for all classes of ships in the period 2003-2008 has been followed by an equally dramatic fall in freight rates in late 2008 and the termination of many Shipbuilding contracts . This has inevitably resulted in a large number of references to arbitration of Shipbuilding disputes, particularly in 2009. Most of the arbitrations in this field involving international contracts are subject to English law and conducted in London, many of them under the Terms of the London Maritime Arbitrators Association. In the arbitration proceedings preliminary issues often arise as to the correct interpretation of poorly worded arbitration clauses. Common features of disputes include: alleged failures to meet deadlines for stages of construction prescribed by the contract allegations that delays are, or are not, excusable as force majeure or permissible delay allegations that ships when tendered do not comply with the technical specification, and disputes as to the materiality of alleged discrepancies allegations that parties have made representations about their intentions with regard to the exercise of rights of cancellation, which have allegedly been relied on by the other party to their detriment.

3 In the majority of cases the disputes also involve financial instruments such as refund guarantees, and their interpretation. Can a claim be made for a refund of instalments paid, and therefore under a refund guarantee, and also for damages more generally? This issue has recently been considered by the English Court of Appeal in Stocznia Gdynia SA v Gearbulk Holdings Ltd1. Issues relating to cross border insolvency and jurisdiction often need to be considered. This is particularly relevant to the possibility of a stay of proceedings and to the issue of security for costs. Finally, the question of enforcement of an award will be crucial. Where does the unsuccessful party have assets and can the courts of the country where those assets are located be relied on to enforce the award? This is particularly the case in China where there is so far limited experience of enforcement of arbitration awards.

4 Shipbuilding disputes: A typical scenario Owner terminates / rescinds / cancels contract for: 1. Delay 2. Non compliance with specification. Builder gives notice of arbitration and appoints arbitrator but takes no further action: blocks claim under refund guarantee (maybe). Owner appoints arbitrator and serves claim submissions to accelerate recovery under refund guarantee. Shipyard tries to sell ship to limit damage and generate cash Forms of Shipbuilding contract and dispute resolution For orders placed in shipyards in Japan, Korea and China various more or less standard forms of Shipbuilding contracts have developed and it has been usual for owners to contract on these terms, but with modifications introduced as a result of individual negotiations. In Japan, the starting point for most contracts is likely to be the SAJ form which provides for the validity and interpretation of the contract to be governed by the laws of the country where the vessel is built and disputes to be subject to the rules of The Japan Shipping Exchange2.

5 In Korea and China various basic forms have been used, often subject to a good deal of modification through negotiation. Many foreign purchasers from Korean, Chinese or Japanese shipyards will wish to require the contract to be governed by the law of a neutral jurisdiction and for disputes to be resolved in a neutral forum. Many, indeed probably a substantial majority of, international Shipbuilding contracts contain clauses including English law as the express law of the contract references to English arbitration, whether or not explicitly to the LMAA Terms. The advantages of arbitration are of course well known, in particular confidentiality, certainty (particularly where appeals to the courts are restricted or excluded) and the ability to enforce an award in any of the 150+ countries which are parties to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

6 Defects in arbitration clauses In dealing with Shipbuilding disputes referred to arbitration, it is remarkable to discover how many arbitration clauses are in some way defective. Whilst the law and jurisdiction clauses may be the last item of a Shipbuilding contract to be focussed on by the parties and their lawyers, the proper drafting of these clauses can often avoid unnecessary preliminary disputes as to the proper seat of the arbitration and the way in which the arbitration tribunal is to be constituted and/or to conduct its proceedings. It is quite rare to find an explicit reference to the seat of the arbitration notwithstanding the fact that this will determine which courts will have the power to supervise the proceedings. It is quite common to find references to arbitral bodies which don t exist or at least to find their names misstated.

7 The procedures for the appointment of arbitrators may be unworkable and frequently there are references to umpires rather than arbitrators where it is clear that those drafting the provision do not really understand the difference. The point is that it is worth the parties and their lawyers making sure that their arbitration agreement is really workable, that the seat has been identified and that a suitable set of arbitral rules has been properly referred to - whether it be the Terms of the LMAA or other body which is correctly identified. The parties should also give consideration whether they want to retain or exclude rights of appeal to the courts and what express language they need to include to achieve the desired result. Cancellation for Delay All Shipbuilding contracts will include an express right of cancellation (often expressed as termination or rescission usually meaning the same thing) which the buyer can exercise if the ship is not tendered for delivery within a designated period after the scheduled contractual delivery date, as extended by permissible delays.

8 For this purpose, in an English law contract , permissible delays and the circumstances in which the shipyard can rely on them, need to be spelled out in detail as there is no general concept of force majeure under English law (unlike the laws of most continental European countries and others whose civil law is based on such systems). The SAJ form of contract is quite explicit in describing permissible delays and sets a period of 210 days, excluding permissible delays, as the limit after which the buyer can rescind the contract if the ship has not been tendered for delivery. The most significant delays are likely to be the result of strikes, fires, crane damage, design defects or catastrophes such as earthquakes. They may however also be the result of poor planning or a shipyard taking on more orders than it is really able to fulfil or be the result of defects in components supplied by subcontractors or delays in delivery of subcontracted components which lie on the critical path for construction.

9 Where the cancellation clause does allow the shipyard to take permissible delay into account, a dispute over the buyer s right to cancel is likely to involve one or both of the following questions: Is the delay is really within the strict terms of the permissible delay definition and has any relevant prescribed notification has been given by the shipyard? Has the delay alleged actually been caused by the permissible delay or by something else. Many, indeed in my recent experience most, international Shipbuilding contracts now include a further provision for an ultimate drop dead date3. This means that if the ship is delayed beyond a certain point (say, 365 days) after the scheduled contractual delivery date, the buyer may cancel the contract even if the delay is wholly or partly caused by permissible delay.

10 A third type of clause dealing with delay is found in many contracts This seeks to give the buyer greater control over the construction process in the form of a right of cancellation if the keel has not been laid or another major milestone reached by a given date or, more generally, if progress on the construction of the ship is halted for a given period. Failure to meet such interim dates may give the buyer a warning that the ship will not finally be tendered by the scheduled delivery date and an opportunity to take action without having to wait until the scheduled delivery date before giving notice of cancellation. The last provision I would draw attention to in connection with delays is the right contained in some contracts for the shipyard to put the buyer to an election as to the exercise of its right of cancellation.