View source for Jiangsu Guoxin Corporation v Precious Shipping Public Co.

DMC/SandT/21/13

''England'''

'''Jiangsu Guoxin Corporation Ltd v Precious Shipping Public Co. Ltd [2020] EWHC 1030 (Comm)'''

'''English Commercial Court: Mr Justice Butcher'''

Andrew Stevens and Gideon Shirazi (instructed by Campbell Johnston Clark Ltd) for the Claimant, Jiangsu Guoxin

Roderick Cordara QC, Adam Board and Andrew Dinsmore (instructed by Watson Farley and Williams LLP) for the Respondent, Precious Shipping 

'''SHIPBUILDING CONTRACT ON AMENDED SAJ FORM: SELLER CONTENDED UNLAWFUL REJECTION BY BUYER: REPUDIATORY BREACH: PARTIAL FINAL AWARDS: APPEAL UNDER S69 OF ARBITRATION ACT 1996: APPLICATION OF THE PREVENTION PRINCIPLE: DEFINITION OF PERMISSBILE DELAYS UNDER ARTICLE VIII.1: NOTICE PROVISIONS FOR EXTENSIONS OF TIME UNDER ARTICLE VIII.2'''

'''Summary'''

This case concerned two appeals by the Claimant, Jiangsu Guoxin Corporation Ltd as Seller, brought pursuant to s 69 of the Arbitration Act 1996, against two partial final awards dated 20 November 2018 awarded by the Tribunal. The Seller contended that it was entitled to rely on the Prevention Principle and to an extension of time due to alleged unlawful rejection by the Buyer, Precious Shipping. This decision determined that, on the facts of the case, the  Prevention Principle did not apply and after examining the relevant provisions in the Articles of the shipbuilding contracts (“the SBC’s”) on amended Shipbuilders Association of Japan (SAJ) forms, the Court dismissed the appeals. 

Case Note contributed by Sri Azali BB (Human Resource Management & Business Law), Paralegal at Penningtons Manches Cooper LLP Singapore

'''Background'''
 
The two appeals related to disputes as to two vessels, namely Hulls 21B and 22B, which the Seller, Jiangsu Guoxin, had contracted to build pursuant to shipbuilding contracts in respect of fourteen hulls made with the Respondent, Precious Shipping as “Buyer”, dated 26 February 2014 (“the SBC’s”) on amended Shipbuilders Association of Japan (SAJ) forms - see Appendix for wording of the key terms of the SAJ form. After the first two Hulls in the series had been delivered, the Seller tendered the next four vessels (Hulls 17B-20B) but these were rejected by the Buyer, due to alleged design defects. The Seller said that the rejection of the four hulls was unlawful as any design defect - in respect of the stern tube bearing - had been rectified before the tender. The Seller contended that the unlawful rejection of those four hulls had resulted in them being left at the Seller’s yard, occupying berths there and delaying the launch and construction of Hulls 21B and 22B. 

151 days after the contractual delivery date for Hulls 21B and 22B, the Buyer stated that it was terminating the contracts for those Hulls under Article III.1 and Article VIII.3 of the SBCs on the basis that the delay exceeded the 150 days of ‘non-permissible delays’ allowed under the SBCs. On 3 February 2016, the Seller accepted the Buyer’s termination as a repudiatory breach and the disputes were referred to arbitration. 

'''Preliminary Issues'''
 
The two preliminary issues before the Tribunal (and later the High Court) were whether:

(i)	the prevention principle applied, as contended by the Seller, and

(ii)	was the Seller entitled to an extension of time of the delivery and/or cancellation date in the circumstances where it failed to and/or did not operate and/or exercise any relevant contractual provisions.  

'''Decision of the Tribunal'''
 
The tribunal found that the prevention principle did not apply, as the allegedly wrongful cancellation of the four hulls and resulting occupation of the berths at the yard, which delayed the launch of Hulls 21B and 22B, fell within Article VIII.1 of the SBCs. The tribunal held that the Seller was not entitled to extend the delivery and/or cancellation date in circumstances where it had failed to exercise its rights under the relevant provisions of the SBCs. Dissatisfied with this outcome, the Seller appealed to the High Court.

'''Decision of the High Court'''
 
The Judge accepted that it was an implied term of the SBCs that neither party should actively and wrongfully (in the sense of being a breach of contract or independently wrongful) prevent the other from performing its obligations under the contract). Following the decisions in North Midland Building and Multiplex v Honeywell cases - see footnotes for case references - the prevention principle is not an overriding rule of public or legal policy. It will not apply if the contract has provided for an extension of time in the relevant event(s). Further, even in circumstances in which it might be applicable, there is no reason why the parties should not contract out of some or all of its effects. 

The judge considered whether there was scope for the application of the prevention principle in regard to the delay allegedly caused by the Buyer’s wrongful termination of the four hulls and the consequent occupation of the berths necessary for the construction of the relevant vessels. The Court held that the wording in Article VIII.1 (which defined permissible delays) - “other causes beyond the control of the SELLER or of its sub-contractors” was wide enough to cover this cause of delay and that express provision had been made for an extension of time in such a case. Therefore, the prevention principle could not be applied. 

The Court then went on to examine Article VIII.2 and found that it was important for the Seller to follow the contractual notice provisions within this article in order to claim an extension of time for delays caused by the Buyer. In the event it failed to do so, it would not be entitled to claim an extension of time. 

With regard to the modification of the stern tube bearing, the Seller contended that the parties had agreed to modify the construction and design of the vessels and as a result, construction had been delayed. However, there was no agreement in writing as to the extension of time, which the Seller would be allowed. The Court noted that Article V of the SBCs dealt with modifications and under this article, there was no possibility of an extension of time without a written agreement. 

The Seller also contended that the Buyer was in default in failing to pay the third, fourth and fifth instalments of the purchase price and hence, the Seller was entitled to a day-by-day extension of time under Article XI.4 without the requirement to do anything else to postpone the delivery date. The Court rejected this argument and found that the Seller had to communicate to the Buyer that it was exercising its option to postpone the delivery date (which did not have to be by way of notice under Article VIII.2). Given the fact that there had been no such communication, the appeals were dismissed. 

'''Comment'''
 
This decision makes clear that if the shipbuilding contract contains a provision for an extension of time which covers the delay in question, it will be almost impossible for the Seller or yard to rely on the prevention principle in respect of that delay. It is noted here that the wording of the definition of permissible delays in the SBC, such as Article VIII.1 of the SAJ form, is very important in determining whether the yard would be able to rely on the prevention principle since, as in this case, the definition is most likely wide enough to include delays caused by the Buyer. On the other hand, another popular form used for newbuilding contracts such as BIMCO’s NEWBUILDCON, may give more possibility for the prevention principle to apply due to the more restrictive nature of clause 34(a)(i)(10) - see footnote for the wording of this provision - which might not include some delays by the Buyer. This recent decision also highlights the importance of complying with the notice requirements under the SBC – such as the notice to be provided to the Buyer for a time extension claim by the yard under Article VIII.2 of the SAJ form. 

Footnotes: 

North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744

Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC) 

BIMCO NEWBUILDCON 

34(a)(i)(10) any other cause of a similar nature to the above beyond the control of the Builder or its Sub-contractors 

APPENDIX

ARTICLE VIII DELAYS & EXTENSION OF TIME FOR DELIVERY

1 CAUSE OF DELAY

If, at any time before actual delivery, either the construction of the VESSEL, or any performance required hereunder as a prerequisite of delivery of the VESSEL, is delayed due to war, blockade, revolution, insurrection, mobilization, civil commotions, riots, strikes, sabotage, lockouts, local temperature higher than 35 degree centigrade and lower than minus 15 degree centigrade, local continuous raining lasts 5 days or more, Acts of God or the public enemy, terrorism, plague or other epidemics, quarantines, prolonged failure or restriction of electric current from an outside source, freight embargoes, if any, earthquakes, tidal waves, typhoons, hurricanes, storms or other causes beyond the control of the SELLER or of its sub-contractors, as the case may be, or by force majeure of any description, whether of the nature indicated by the forgoing or not, or by destruction of the SELLER or works of the SELLER or its sub-contractors, or of the VESSEL or any part thereof, by fire, flood, or other causes beyond the control of the SELLER or its sub-contractors as the case may be, or due to the bankruptcy of the equipment and/or material supplier or suppliers, or due to the delay caused by acts of God in the supply of parts essential to the construction of the VESSEL, then, in the event of delay due to the happening of any of the aforementioned contingencies, the SELLER shall not be liable for such delay and the time for delivery of the VESSEL under this Contract shall be extended without any reduction in the CONTRACT PRICE for a period of time which shall not exceed the total accumulated time of all such delays subject nevertheless to the BUYER's right of cancellation under Paragraph 3 of this Article and subject however to all relevant provisions of this Contract which authorize and permit extension of the time of delivery of the VESSEL.

2 NOTICE OF DELAY

Within seven (7) business days from the date of commencement of any delay on account of which the SELLER claims that it is entitled under this Contract to an extension of the time for delivery of the VESSEL, the SELLER shall advise the BUYER by telefax or e-mail confirmed in writing, of the date such delay commenced, and the reasons therefore.

Likewise within seven (7) business days after such delay ends, the SELLER shall advise the BUYER in writing or by telefax or e-mail confirmed in writing, of the date such delay ended, and also shall specify the maximum period of the time by which the date for delivery of the VESSEL is extended by reason of such delay. In case of failure of the BUYER to object the SELLER's notification of any claim for extension of the Contract Delivery Date within seven (7) business days after receipt by the BUYER of such notification, the time of delivery will be automatically extended according to the SELLER's notification.

Failure of the SELLER to give the BUYER notice of delay as provided in this Article except in the case of entire power failure or cut-off of the communication facilities shall preclude the BUILDER from claiming extension of the Delivery Date by reason of such failure.

3 RIGHT TO CANCEL FOR EXCESSIVE DELAY

If the total accumulated time of all non-permissible delays on account of the causes specified in Paragraph 1 of the Article III aggregate more than One Hundred and Fifty (150) days, or if the total accumulated time of all permissible days on account of the causes specified in Paragraph 1 of this Article and all non-permissible delays as described in Paragraph 1 of Article III aggregate to One Hundred and Eighty (180) days, in any circumstances, excluding delays due to arbitration as provided for in Article XIII hereof or due to default in performance by the BUYER, or due to delays in delivery of the BUYER's supplied items, and excluding delays due to causes which, under Article V, VI, XI and XII hereof, permit extension or postponement of the time for delivery of the VESSEL, then in such event, the BUYER may in accordance with the provisions set out herein cancel this Contract by serving on the SELLER telefaxed or e-mailed notice of cancellation in writing and the provisions of Article X of this Contract shall apply. 
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4 DEFINITION OF PERMISSIBLE DELAY

Delays on account of such causes as provided for in Paragraph 1 of this Article excluding any other extensions of a nature which under the terms of this Contract permit postponement of the Contract Delivery Date, shall be understood to be (and are herein referred to as) permissible delays, and are to be distinguished from non-permissible delays on account of which the CONTRACT PRICE of the VESSEL is subject to adjustment as provided for in Article III hereof.

ARTICLE XI BUYER'S AND SELLER'S DEFAULT

1 DEFINITION OF DEFAULT

The BUYER shall be deemed in default of its obligation under the Contract if any of the following events occurs:
(a) The BUYER fails to pay any of the First, Second, Third and/or Fourth Installment to the SELLER within three (3) Banking Days after the expiry of the payment period (5 Banking Days) for such installment under the provisions of Article II hereof, or
(b) The BUYER fails to pay the final installment to the SELLER in accordance with Paragraph 2(e) and 4a(ii) of Article II hereof; or
(c) The BUYER fails to take delivery of the VESSEL, when the VESSEL is duly tendered for delivery by the SELLER under the provisions of Article VII hereof within fourteen business days from the tendered date and without any justifiable reason thereof under this Contract; or
(d) The BUYER becomes bankrupt.
(Such bankruptcy shall be informed by the BUYER to the SELLER in written form within five working days after the BUYER becomes bankrupt.)

2 NOTICE OF DEFAULT

If the BUYER is in default of payment or in performance of its obligations as provided hereinabove, the SELLER shall notify the BUYER to that effect by telefax or e-mail after the date of occurrence of the default as per Paragraph 1 of this Article and the BUYER shall forthwith acknowledge by telefax or e-mail to the SELLER that such notification has been received. In case the BUYER does not give the aforesaid telefax or e-mail acknowledgment to the SELLER within five (5) business days it shall be deemed that such notification has been duly received by the BUYER.
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4 DEFAULT BEFORE DELIVERY OF THE VESSEL

(a) If any default by the BUYER occurs as defined in Paragraph 1 of this Article, the Delivery Date shall, at the SELLER's option, be postponed for a period of continuance of such default by the BUYER.
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