Introduction
One of the most important terms of a shipbuilding contract is the date of completion of the vessel. Not only will this affect when the vessel is ready to deliver to the buyer, but also impact the financial risks to be borne by the parties. To manage such risks, it is important to regulate the parties’ rights and liabilities in the event of delayed performance of a shipbuilding contract. A common mechanism is the inclusion of a liquidated damages clause, that is, an agreed measure of damages (such as a specified sum or method of calculation) payable by the builder on its failure to deliver the vessel on the agreed completion date.   This has the advantage of saving a buyer’s time in proving its loss due to the delay.  Another common mechanism is the inclusion of a cancellation clause allowing the buyer to cancel the shipbuilding contract if the builder fails to deliver the vessel to the buyer on or before the agreed date. This may allow the buyer to control the risks of market fluctuation in adverse economic climate. 

Yet, it is often overlooked that the builder may rely on the “prevention principle” to discharge its duty to pay liquidated damages and prevent the buyer from cancelling the shipbuilding contract. 

The “Prevention Principle”
The essence of the prevention principle is that a promisee cannot insist on the performance of an obligation which it has prevented a promisor from performing (Multiplex v Honeywell [2007] EWHC 447 (TCC) at para. 43). Under this principle, if a buyer’s conduct has in fact delayed the completion of the contract works, the buyer will generally not be entitled to claim liquidated damages. Further, the shipbuilder will no longer be bound to deliver the vessel on the completion date, and instead shall do so within a reasonable time. In such an event, the buyer will have to overcome more obstacles, namely to prove “reasonable time” and its loss on the balance of remoteness, before it can claim damages or cancel the shipbuilding contract. 

In The Cape Hatteras [1982] 1 Lloyd’s Rep 518, a ship repairer failed to complete the repair works covered by the repair contract until 92 days after the agreed date of completion, because the progress of the repairs was delayed by the shipowners’ decision not to permit the repairer to deliver the crankshaft for repair. The repair contract provided for liquidated damages in the event of delay, but did not contain any extension of time clause. The prevention principle was applied by the court and the repairer was held to be wholly discharged from its liability to pay liquidated damages. 

Extension of time clause
In The Cape Hatteras, even though the liquidated damages clause was inserted into the contract for the repair, it did not take effect to protect the shipowner. Such an outcome may be avoided by inserting an extension of time clause, which shall provide, expressly or by necessary inference, for extension of time in certain events including those arising from the shipowner’s conduct, or such faults or breaches on the part of the shipowner.  An extension of time clause may take the form of permissible delay provisions, which provide for delays which under the terms of a shipbuilding contract permit an extension of time; or in the form of provisions for adjustment to the date of completion in the event of modifications to specifications of the vessel. 

In Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848, the shipbuilder failed to complete the vessels for sea trials by the agreed date, but argued that (1) the delay was caused by the buyer’s failure to promptly exercise its contractual right to decide whether to implement modifications to the vessel, and (2) the shipbuilding contract did not provide for any mechanism for time extension in such situation. As such, it was argued that the prevention principle shall apply depriving the buyer of its right to cancel the contract. However, the English High Court held that the permissible delay provisions in the shipbuilding contract did provide for extension of time in such situation subject to the shipbuilder giving notice of delay to the buyer (which the shipbuilder failed to do). Accordingly, the prevention principle did not apply. 

Conclusion
As seen from the above, if there is a delay in the delivery of the vessel and such delay was occasioned by the buyer’s conduct “preventing” the shipbuilder from performing their obligations, the shipbuilder may rely on the prevention principle to resist any claim for liquidated damages or the buyer’s cancellation of the contract. To prevent the shipbuilder from relying on the prevention principle, the buyer may insert extension of time clauses to take into account any possible delays that may be caused by buyer’s conduct. On the other hand, shipbuilder who wishes to rely on the prevention principle to resist any claim for liquidated damages or the buyer’s cancellation of the contract should observe any contractual requirement to give notice of delay in order to obtain an extension of time for delivery of the vessel. In most standard shipbuilding contracts, such as clause 34(a)(i) of BIMCO Standard Newbuilding Contract (NEWBUILDCON) and Article VIII of Shipbuilding contract of the Shipowners Association of Japan (SAJ), there are standard clauses providing for adjustments to the delivery date. It is suggested that the parties should adopt such standard clauses with further amendments to address all kinds of possible delays the shipbuilder may encounter during the terms of the contract.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.