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The interplay between a time charter for a newbuild and the shipbuilding contract

07.06.2019 Maritime

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Partner

David Choy

David Choy Senior Associate

London Arbitration 8/19
London Arbitration 9/19 

A recent maritime arbitration has highlighted the need for parties to a time charter for a newbuild vessel to carefully consider the interplay between the time charter and the shipbuilding contract.

The background facts

The parties entered into a four-year time charterparty for a vessel that was under construction. The Owners had previously entered into the shipbuilding contract for the Vessel.

The construction of the Vessel was delayed and the shipbuilding contract provided the Owners with express rights to cancel it in the event of delays (including a “drop dead” date).

The charterparty, at line 38, contained the following provisions concerning delivery:

“[1] Each vessel to be delivered to the charterers at the time it actually has been delivered to the Owners.

[2] The charterers are obliged to take delivery of the vessel as long as the Owner is obliged to accept delivery under the building contract.

[3] If Owners are forced to cancel the Shipbuilding Contract in accordance with the relevant provision of the same, the Owner shall also have the right to cancel the respective t/c without any obligations, duties, liabilities for the Owners towards the Charterer, whatsoever.”

Although the Owners took delivery of the Vessel under the shipbuilding contract, the Charterers purported to cancel the charterparty pursuant to a notice of cancellation. The grounds relied on by the Charterers were that: i) the delays in the construction gave the Owners the right to terminate the shipbuilding contract and they were no longer obliged to take delivery of the Vessel under the charterparty; and/or ii) the Owners were in repudiatory breach. The Owners treated the Charterers’ conduct as itself repudiatory and the dispute was referred to arbitration.

The Tribunal’s decision

 The Tribunal had to determine two preliminary issues concerning the grounds for termination under line 38 of the charterparty and the timing of the Charterers’ notice of cancellation exercising such rights.

Preliminary Issue No. 1

The Tribunal had to answer the following two questions:

  1. “Does line 38 of the charterparty mean that as long as owners have not cancelled the shipbuilding contract or refused delivery of the vessel…, charterers could not refuse to take delivery of the vessel; or
  2. Does line 38 of the charterparty mean that the charterers were no longer obliged to take delivery of the vessel where owners become entitled under the shipbuilding contract to refuse delivery of the vessel or to cancel the shipbuilding contract…?”

The Owners argued that line 38 distinguished between two scenarios: i) where the Owners had actually cancelled the shipbuilding contract (or had, in fact, refused to take delivery from the yard); and ii) where the Owners were entitled either to cancel the shipbuilding contract or to take delivery, but had chosen to do neither.

The Vessel was to be delivered to the Charterers at the time that it was delivered by the yard. This, the Owners argued, showed that line 38 was concerned with the position at the time the Owners had tendered delivery under the charterparty. If, therefore, the Owners were obliged to accept delivery under the shipbuilding contract, the Charterers were obliged to accept delivery under the charterparty. Accordingly, the Owners argued that the time that the Tribunal had to be concerned with was the time of delivery under the shipbuilding contract.

In contrast, the Charterers’ analysis (and its purported termination) concerned the position prior to the Owners’ tender of delivery under the charterparty. The Charterers’ construction of line 38 meant that the Charterers not only had the right to refuse delivery, but also to terminate the charterparty at any point prior to delivery, if it could be shown that the Owners had themselves, at that point in time, accrued a right to terminate the shipbuilding contract. The Charterers submitted that it would be illogical for the Charterers’ right only to arise after the Owners had cancelled the shipbuilding contract, as there would be no vessel to deliver in any event and the issue of the Charterers refusing to take delivery would never arise. 

The Tribunal agreed with the Charterers and held that if the Owners’ approach was correct, there was little or no point to line 38(2): this could not be pointing to the time of delivery under the shipbuilding contract because, at that time, the Owners would have lost any rights that they might otherwise have to refuse delivery and were, therefore, bound to accept the Vessel. At the very least, the latest point in time that the position could be considered was when delivery was or might be tendered under the shipbuilding contract, rather than at the moment of actual delivery under the shipbuilding contract. 

With regard to the meaning of “obliged” (or “obligated”) in line 38, the Tribunal agreed with the Charterers that this had to mean when the Owners had no choice as to whether to perform the shipbuilding contract or not. Accordingly, if the Owners had acquired a contractual or common law right to terminate the shipbuilding contract, they were not “obliged” to take delivery of the Vessel at that point. 
 
Applying the ordinary and natural meaning of the words, the Tribunal decided that: i) line 38 did not mean that as long as the Owners had not cancelled the shipbuilding contract or refused delivery of the Vessel, the Charterers could not refuse to take delivery of the Vessel; but ii) line 38 did mean that the Charterers were no longer obliged to take delivery of the Vessel where the Owners became entitled under the shipbuilding contract to refuse delivery of the Vessel or to cancel the shipbuilding contract (irrespective of whether or not the Owners had actually cancelled the shipbuilding contract). 
 
Preliminary Issue No. 2
 
The Tribunal then considered whether the Charterers were entitled to send the notice of cancellation dated 20 July 2011, by reason of line 38 of the charterparty. 
Under the shipbuilding contract, the Owners were entitled to terminate if delay in the delivery of the Vessel continued for a period of 180 days after the delivery date, or if the total accumulated time of all permissible delay aggregated to 180 days or more. 
 
The parties agreed that the terms of the shipbuilding contract meant that the Vessel had to be delivered by 31 December 2010, and that the “drop dead” provision (referred to above) referred to a date 180 days after the delivery date, which period expired at the end of June 2011. 
 
The Owners took delivery of the Vessel from the yard on 15 July 2011 (196 days after 31 December 2010). The Charterers sent their notice of cancellation on 20 July 2011 (201 days after 31 December 2010). At least 21 days of the delay constituted “permissible delay” under the contract. 

The Owners submitted that, pursuant to the definition under the shipbuilding contract, the delivery date was not fixed but could be extended in the event of permissible delay and this would extend the drop dead date accordingly. Given that the parties had agreed a minimum of 21 days of permissible delay, this meant that the Owners’ right to cancel the shipbuilding contract could not arise until the very end of 20 July 2011 (at the earliest). 

Accordingly, as at 15 July 2011 (when the Owners took delivery) and 20 July 2011 (when the Charterers sent their notice of cancellation), there was no right to terminate the shipbuilding contract. This also meant that the Charterers had no right to terminate the charterparty as they purported to do on 20 July 2011

The Charterers argued that, under the terms of the shipbuilding contract, the only consequence of permissible delay was that there would be no price reduction and that permissible delay would not result in the extension of the 180 day drop dead date. 
 
The Tribunal had difficulty with the Charterers’ argument and thought that it would strip the permissible delay provisions of any effect. In the Tribunal’s view, it was clear from the provisions (which were commonplace in most shipbuilding contracts) that if there was a mix of permissible and non-permissible delays, the drop dead date could fall anywhere after 180 days following the original delivery date (and before the long-stop date after 360 days) – as was also the case under most shipbuilding contracts. The Tribunal acknowledged that this may give rise to evidential issues, but commented that it was common for such disputes to arise in relation to shipbuilding contracts. 

Comment

This dispute highlights the need to ensure that the terms of the underlying shipbuilding contract are aligned with the terms of the charterparty for a newbuild. Care must also be taken by the charterer when cancelling a charterparty on the basis that a right for the owner to terminate the newbuild contract has arisen. Whether or not an owner has a right to terminate a newbuild contract for delay often requires a detailed analysis of the cause of the delay before it can be determined whether or not the right has arisen. 
 


Article authors:

Chris Kidd David Choy