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Ukraine/Russia: how this may impact shipbuilding contracts

News / / London

As developments in Ukraine unfold, the international response to the situation is evolving on a daily basis.

In recent articles, we have reported on sanctions that have been introduced (read herehere and here) as well as the potential implications for shipping contracts (read here).

This article focuses on the particular implications that the shipbuilding industry may face, especially as more sanctions are imposed and adopted against Russia (including by countries with large shipbuilding industries). The impact of financial restrictions and, in particular, Russian banks being frozen out of the SWIFT international payment system (through which payments relating to shipbuilding contracts are often made) is likely to have a significant effect on the shipbuilding industry and its supply chain. 

Indeed, the web of international restrictions raises a number of important issues for parties involved in shipbuilding contracts to consider, including:

  • Force Majeure and Permissible Delay: whether any recent events may be caught by the force majeure mechanism in the shipbuilding contract and/or entitle the shipbuilder to claim permissible delay. For example, it is not unusual for force majeure events to include events that have occurred or will occur in the coming weeks and months. Consideration would need to be given to whether such an event has arisen and what the requirements are for relying on this.
     
  • Illegality: whether performance of the shipbuilding contract would be illegal under local law and, if so, what effect this would have on a shipbuilding contract that is subject to English law.
     
  • Frustration: whether recent events mean that the performance of the shipbuilding contract is impossible, such that parties can potentially rely on the doctrine of frustration to be discharged from the shipbuilding contract.
     
  • Buyer’s failure to pay or take delivery: whether Russian banks being excluded from the SWIFT payment system could affect a buyer’s ability to make payment or take delivery of a ship under a shipbuilding contract and what implications this may have on the parties’ position under the shipbuilding contract.
     
  • Rights to suspend and/or terminate: indeed, whether a delay or failure by the buyer in making payment under the shipbuilding contract (or taking delivery) would entitle the shipbuilder to suspend construction and/or terminate the shipbuilding contract, and call upon any guarantees provided by or on behalf of the buyer. Where a buyer terminates for excessive force majeure delay issues may also arise as to whether performance guarantees remain effective.
     
  • Change in law clause: whether the shipbuilding contract contains a change in law clause that a party can rely on, in the event that a change in law makes it impractical or impossible for a party to perform the shipbuilding contract, and what the consequences of relying on such a clause would be.

A party’s ability to rely on any of the above points in relation to existing contracts will, of course, depend on the specific circumstances and the particular wording of the shipbuilding contract. It is, however, important for the parties to bear these points in mind when considering the implications of recent (and future) developments, especially as a number of these potential rights/issues may not arise until a later point in time. For those negotiating new contracts, additional protections may need to be incorporated in addition to those typically included in contracts to date.

If you have any queries concerning the above, please contact the authors or your regular Ince contact.
Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

David Choy

David Choy Managing Associate

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