Preventing the Prevention Principle applying to shipbuilding contracts
Summary
A shipyard was not entitled to extensions of time as a result of the application of the prevention principle in circumstances where the relevant contract, properly construed, provided for an extension. In any event, the builder failed to notify any claim as required and was therefore unable to claim any extension to the contractual delivery date.
Facts
The case concerns appeals arising out of two arbitration awards in respect of disputes under shipbuilding contracts for 2 vessels, Hulls 21B and 22B. The contracts were on amended SAJ forms[1] and were in all material respects identical. There were 11 arbitrations in all between the parties, concerning contracts for a series of 14 bulk carriers. Briefly, after the first 2 vessels were delivered, the Seller tendered 4 more, Hulls 17B – 20B, which were rejected by the Buyer for defective design and workmanship. The awards under appeal did not deal with the merits of that dispute. The Seller, however, contended that the rejection of those hulls, which it maintains was wrongful, resulted in their being left at berth in the shipyard, thereby delaying the launch and build of Hulls 21B and 22B. The Buyer ultimately terminated the contracts for delay under the relevant provisions for “non permissible delay”. The Seller treated this as a repudiatory breach, which it accepted.
The Seller’s case was that the “prevention principle” applied so that time was set “at large” due to the Buyer’s unlawful rejection of Hulls 17B – 20B which caused occupation of berths in the yard and delay of work on Hulls 21B and 22B. It also contended that the triggering amount of “non permissible delay” had not been reached by the time the Buyer purported to terminate the contracts and that it was entitled to extensions of time for the Buyer’s late payment and on account of investigations and modifications it conducted in relation to the design issues referred to above.
The Buyer, however, argued that there was no room for the prevention principle on the facts. The contracts provided a complete code of circumstances in which the Seller was entitled to extensions of time. The relevant contractual machinery had never been exercised to extend time so the Seller could not claim any such extension, whether or not it was so entitled (which the Buyer denied).
Two issues ultimately came before the tribunal (the parties resolved other matters). The first was whether the Seller was entitled to extend the delivery and/or cancellation date where it failed to operate/exercise any relevant “contractual machinery”. The second was whether there was any scope for application of the prevention principle in light of the express provisions of the contracts, including relevant arguments on implied terms. The tribunal had answered “no” to each question. Permission to appeal to the High Court was duly granted to the Seller.
Decision
Butcher J’s judgment contains careful analysis of the specific drafting of certain clauses of the shipbuilding contracts, which, as said above, were amended from the standard SAJ form. From a shipbuilding contract perspective, the following points are noteworthy.
1 An implied term of non-prevention The judge accepted that a term is to be implied into the contracts that neither party should actively and wrongfully prevent the other from performing its obligations under the contract.
2 The prevention principle The judge considered English law on the prevention principle in some detail, with a review of the leading cases[2]. He held that there was no room for the principle to apply in light of the drafting of the relevant clause (i.e. Article VIII of the shipbuilding contract covering delays and extensions of time for delivery), which he found wide enough to cover this cause of delay.
The Sellers argued that the particular drafting in Article VIII did not make express provision for an extension of time but was effectively a force majeure clause confined to matters beyond the control of the parties. The judge noted, however, that the clause was not drafted in this way – it referred to matters beyond the control of the Seller or of its subcontractors which plainly covered matters caused by the Buyers where they were outside the control of the Seller or its sub-contractors.
The judge pointed out that the court should lean towards a construction which permits the contractor to recover appropriate extensions of time for events causing delay for matters outside its control[3] which militates in favour of a wide interpretation of the phrase “other causes beyond the control of the Seller”. Butcher J noted that the Seller was forced to contend otherwise in order to argue that the prevention principle applied, which the judge felt was not a construction the court should favour.
He recognised that in concluding that “Buyer-induced delays outside the control of the Seller and not the result of conventional force majeure events were within Article VIII.1”, he was differing, as had the tribunal, from the construction given to a similar, though not identical, provision by Leggatt J in Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc [2014] EWHC 4050 (Comm). Butcher J distinguished that case on the basis that the judge in Zhoushan found that all “buyer’s breach delays” which were intended to permit an extension of time were covered elsewhere in the relevant contract (or, where not, that this reflected a commercially sensible agreement), whereas the current case highlighted that there may be other Buyer’s breaches, including of the implied term as to non-prevention, that could not easily be considered as being provided for in other clauses. A wider interpretation of Article VIII was therefore preferable.
In Zhoushan, another point Leggatt J found persuasive in giving Article VIII.1 in the relevant contract a narrower construction, was that if buyer's breaches fell within Article VIII.1, they would be “permissible delays” which would count towards the period of time which may permit the buyer to terminate the contract. The judge in Zhoushan felt that the court should not readily adopt a construction which allows a buyer to rely on its own breach to permit cancellation. Butcher J held that, as the contracts in the current case differed (in that there may be other Buyer’s breaches not expressly catered for by express provisions), the fact that Article VIII.3 excluded delays due to default in performance by the Buyer from the Buyer’s right to cancel for excessive delay, meant that that provision should be regarded as the “primary provision relating to the right to cancel for excessive delay”. Accordingly, nothing turned on the absence of such an exception elsewhere (in Article III), where a right of termination was provided to the Buyer if there were 180 days of permissible and non-permissible delays; he was prepared to read that provision as excluding by implication delays caused by the Buyer’s default from such 180 day period.
3 Notification Importantly the judge upheld the Buyer’s position that, whether or not the causes of the delays in question fell within Article VIII.1, the Seller had to comply with the “notification machinery” specified in Article VIII. If the cause of delay was therefore within Article VIII as the judge thought, the Seller would be precluded from claiming an extension of the Delivery Date in the absence of the Seller giving the relevant notice (save in the case of some specific events, which were not relevant). If he were wrong regarding the construction of Article VIII and a narrower view of the provision was correct (i.e. one which did not cover delays caused by the Buyer which were beyond the Seller’s control), Mr Justice Butcher considered that, in light of the drafting used, notification under the provision in Article VIII would still be required, unless another express term provided otherwise.
Other arguments advanced by the Seller regarding an extension of time for alleged modifications in design and also in respect of a specific provision granting a day for day extension where the Buyer was in default of paying an instalment were dismissed (the latter because the Seller was found to have failed to operate the contractual mechanism).
Conclusion
The judge agreed with the answers given by the tribunal and dismissed the appeals.
Comment
This case emphasises the importance of careful drafting to avoid the potential operation of the prevention principle which would otherwise result in the Builder not being bound by the strict contractual requirements as to time. This would affect the contractual delivery date, any liability to pay liquidated damages for delay in relation to it and any right that may otherwise accrue to the Buyer to terminate its obligations on the Builder passing the longstop date for delivery.
The prevention principle has seldom been raised in reported shipbuilding contract cases. It has been controversial whether it has any place in shipbuilding cases at all as there is no binding authority that it must apply to shipbuilding contracts. In any event, a well drafted maritime construction or conversion contract should incorporate any acts or omissions of prevention by the buyer into the permissible delay regime to put the matter beyond doubt. Recent caselaw has provided clear guidance as to the nature of the principle and illustrations as to how it may be ousted.
A further noteworthy point, especially in current circumstances, is the court’s finding that the Seller failed to operate the contractual machinery regarding notices correctly and that this was fatal to its claim. The importance of strict adherence to contractually agreed notification provisions cannot be over-emphasised.
[1] Shipbuilders’ Association of Japan
[2] e.g. North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744, Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] BLR 195 and Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm). See HT article “Concurrent Delay and the Prevention Principle” (4 October 2018).
[3] Following Multiplex (above) per Jackson J.