Ship construction contract — delays in ship construction and delivery [Part 2]

The second part of the analysis on the ship construction agreement discusses the grounds for the permissible delay in delivery and the differences between the most important contract forms used in the shipbuilding industry. Both definitions of force majeure and notification procedures depend on the effectiveness of the enforcement of the rights of the parties to the contract.

W first part I have presented basic issues concerning delays in ship construction and delivery. Now it is worth looking at how individual contract forms cover acceptable delays and notification obligations of the parties.

The basic contract forms are characterised by significant (although often difficult to see in the first brief analysis) differences in circumstances and events which result in delays in the date of construction and delivery of the ship, but whose nature allows the yard to postpone the contractual delivery date of the ship, without legal or financial consequences.

Article IX of the Norwegian form "SHIP 2000" (Norwegian Standard Form Shipbuilding Contract), generally adopts the scheme of other forms where all such events, collectively referred to as "Permissible Delay", are divided into two categories:

• ‘Force Majeure’ (‘force majeure’) — [Article IX (1)]
• other circumstances — [Article IX (3)].

Force majeure and other conditions for permissible delay

The first events, of the above categories [Art. IX (1)], are an extremely diverse "hybrid" of events of a "force majeure" nature (such as "Act of God, acts of drivers and roulette,... war or war like conditions,... quarantine, flood, typhons,... other extraordinary weather conditions (...)", [translated]. "Divine interference, acts of power of princes and rulers, (...) war and war conditions, (...) quarantine, floods, typhoons, (...) other extraordinary weather conditions (...)" but also "any other extraordinary events beyond the control of the Builder" "any other extraordinary event outside the control of the yard" etc.

Regardless of the generic nature, these causes of delays must all meet certain general requirements, i.e. they cannot be predicted before the date of their formation and cannot be countered by their emergence (and effects), despite taking the necessary preventive or remedial action. On the shipyard However, as a result of such events, expressis verbis is required "to do its utmost to avoid or minimise the "Force Majeure Delay" [citation needed]. "take all necessary measures to avoid or minimise (effects) "delays caused by force majeure". As regards the criterion, the impossibility of predicting a given circumstance of a "force majeure" SOJ form, following the English doctrine of a "force majeure" introduces the possibility of contractually establishing that such circumstances (and therefore, fully to predict the date of the contract) may be regarded as effective legal conditions to which the contracting party may rely, as a basis for exempting the party from liability for delays caused by the condition in question.

The second category of events, constituting the "Permissible Delay", includes a period of delay resulting from the procedure of changing the ship's contract parameters [Art. VI – "Modifications and Changes"], resulting in a postponement of the ship's delivery deadline and "any other delay caused by non fulfilment by the Buyer of the Buyer's liability hereunder or any other delay of a nature which under the terms of this Contract permit postponement or extension of the Delivery date" "any other case of delay, due to the Buyer's failure to perform any obligations (under contract) or any other delay, the nature of which, under the terms of the contract, allows the delivery date (ship) to be postponed or extended."] Admit that such an "open" formula, covering, on the one hand, all cases of delay resulting from failure or inadequate performance by the shipowner ("Buyer"), and on the other hand, all contractually provided circumstances of "permissible delay" (which, under the contractual freedom of the parties, can be significantly expanded), creates the contractually extremely extensive term "Permissible Delay", the concept of highly beneficial to the shipyards and equally unattractive contractually for the shipowner.

Differences between contract forms

The Chinese form "SHANGHAI FORM" ("CMAC" Form), in Articles XV (1) and (4), Article XV (1) of the form, introduces a broad formula "Cause of Delay", bearing the characteristics (but only the characteristics) of the circumstances of "force majeure". Writing editorially imperfect, the most similar to its equivalent in SAJ forms [Article VIII (1)]. The general formula "Permissible Delay" is much more interesting. As we remember, in all other forms considered previously, the term "Permissible Delay" consisted of events of the "force majeure" type (in the form and form in which the form in question was formulated) and "other events" (typically defined, in the definition of "Permissible Delay" itself, or by reference to other contractually foreseen "cause of delays"). Article XV (4) of the SHANGHAI forms, makes a "break", in this common practice, assuming that only the category of events of the "force majeure" constitute the term "Permissible Delay", while other events, although they may (on the basis of the contractual terms received), allow the ship's delivery deadline to be postponed, but not the procedural regime and the material-legal effects thereof, reserved to the "Permissible Delay".

The "procedural regime" mentioned above is one of the more important provisions of each ship building contract. While the contractual provisions already considered in our earlier studies determine which events are of the character of "Permissible Delays", the procedural provisions determine what actions and how long it must take the contracting party to effectively rely on one of the events covered by the term "Permissible Delay" and to exercise the contractual powers which such events cause.

All standard contract forms (and following them, all ship construction contracts) shall contain appropriate contractual arrangements concerning the form, mode, time and effect of the notification (or not) of an event of a "force majeure" or more broadly of the "Permissible Delay" nature. At this point, the first significant difference in individual forms (and contracts) should be indicated. If, therefore, they all provide for the obligation of such (usually formalised) notification, in relation to events having the characterisation (or as defined in the contracts) as "force majeure delays", then, as regards other reasons for delay [delays falling within the scope of the term "permissible delay" but not falling within the scope of the basic "definition" — "force majeure" (e.g. "deader payment on the part of the shipowner", adverse weather conditions at sea trials, etc.), then the question of the contractual requirement for appropriate notification (making possible such an occurrence) is dealt with differently in individual contracts.

Meaning of notification in the ship building contract

The agreements attribute high practical importance to notifications. It allows, on the one hand, the shipowner (‘Buyer’) to obtain information on the possibility of delays in the construction and delivery of the ship (with the simultaneous possibility of verifying the circumstances so notified and the appropriate response or opposition). On the other hand, the fact of notification of (and cessation) events of the nature of "permissible delay" is important from the point of view of the calculation of the cumulative length of time of the "force majeure"/"permissible delay" cases, which (in accordance with the relevant contractual provisions) enable the shipowner to withdraw from the contract ("recission of the contract") with the launch of the refund of shipowner's advance payments (whether directly from the yard or in the event that the yard refuses or cannot repay these advances from the issuer "Refound Guarantee”).

Article VIII (2) SAJ forms requires shipyards to notify the circumstances of delay/delay which, according to the yard, entitle it to extend the date of delivery of the ship (Delivery Date), within 10 days of the date of the occurrence of the circumstances in question. Similarly, the yard should, within 10 days of the expiry of the notified delay/delay, inform the yard of the cessation of the impact of that circumstance. It is worth noting that the obligation to notify the shipowner (both the date of the notified event and its cessation) does not include, for example, the requirement to specify in the notification a period of time of postponement of the ship's delivery due to the notified event, according to the yard. Article VIII (2) SAJ forms, on this occasion, are limited to the general record that ‘The BUILDER Shall also notify the BUYER of the period, by which the Delivery Date is postponed by reason of such cause of delay, with all Reasonable despatch after it has been determined’. "The vine, as soon as reasonably possible, shall inform the buyer of the period in which the ship's delivery date will be postponed, due to such a reason for the delay."]

This is a very beneficial record for the shipyards. While the possibility of finding information on an event of a "force majeure"/"permissible delay" nature does not create major practical difficulties, it is also an extremely difficult task to determine the effects of the event, in terms of the time period caused by the event (for sure by the date of the occurrence), but not easy after its immediate completion. The number of days covered by the "power majeure" "permissible delay" does not necessarily (and in fact is not) directly proportional to the period of actual delay/obstruction due to the circumstances of the "force majeure". In such circumstances, the formula of SAJ forms "with all reasonable despatch after it has been determined" [v. "with due speed after this data is established"] seems highly justified and recommended for use (at least on the shipyard side). The shipyard and the shipowner (buyer), despite this principle of the absence of the principle of "proportionality" of the time period of occurrence of the circumstances of the "force majeure" (or broader period of "Permissible Delay") to the delays (floods) resulting from such circumstances in the construction and delivery of the ship, introduce appropriate provisions into the contract records to determine the actual direct temporal effect of the event on the resulting event (so-called "netting" of the delay/delay).

When notification is necessary

Another very significant issue concerning the scope of the notification is whether the notification obligation in question refers to circumstances/events of the nature of the "force majeure cases of delay" or to a broader category of events covered by the collective term "Permissible Delay”?

This has significant practical implications. The above mentioned Article VIII (3), the SAJ form, to others (beyond the "force majeure") events, "which under the terms of the Contract permits postponement of the Delivery Dates" "which, in accordance with the contractual terms, allow the delivery time to be postponed (ship)" does not include such significant events as, for example, the delay in payment by the shipowner [Article XI (3) (a)], adverse weather conditions preventing the carrying out of sea trials [Article VI (2)], amendments to the mandatory classification provisions of the flag, etc. [Article V (2) (a)], the duration of the arbitration proceedings [Article XIII (5)], the delay in shipowner's supplies (Buyer's supply, Article XVII (1)).

SAJ forms, excluding the above mentioned circumstances from Article VIII (3), ‘Permissible Delay shall also exempt them from the notification obligation provided for in Article VIII (2). This means that the yard will be entitled to extend the delivery date of the ship, in those circumstances excluded from Article VIII (3), without appropriate notification, only on the basis of the occurrence of the events in question.

Again, precise contractual determination, whether and what circumstances of the "higher force"/"permissible delay" are subject to a strict notification regime, is extremely important, from the point of view of the possibility and legal effectiveness, to the benefit of the contractual possibilities that a given condition carries.

Further analysis in the next study

Given the importance of the issues discussed here, for the parties to the ship building agreement, but also bearing in mind the editorial restrictions, each publication, we will allow ourselves to continue our analysis of the contract conditions of "a higher force"/"permissible delay", in our next study.

Written by Marek Czernis