Before Havila Kystruten took delivery of its coastal cruise vessels from the Turkish Tersan shipyard, the company had signed contracts with Vigo-based Hijos de J Barreras to build two vessels.
Due to alleged specification changes, the Spanish shipyard eventually terminated the building of the ships.
This led to a complicated legal case heard in an English court, in which Havila Kystruten was represented by Watson Farley Williams (WFW).
In Havila Kystruten AS v Abarca Compania de Seguros AS, the English court provided helpful and very detailed guidance on a number of issues relating to the parties’ rights to terminate shipbuilding contracts, as well as the nature and scope of refund guarantees, WFW said.
The case centred around the Spanish shipbuilding contracts for the construction of two passenger ships intended for coastal service in Norway under long-term charters with the Norwegian Ministry of Transport.
This dispute arose when the Hijos de J Barreras purported to cancel the contracts just two days before petitioning the local Spanish court for its dissolution, no doubt to pre-empt any attempt by the buyer to rely on that filing to cancel the contracts itself, the law firm said.
Around three months later, Havila cancelled the contracts, relying on contractual rights that allowed it to do so where the yard had commenced dissolution proceedings and it was established ‘beyond reasonable doubt’ that the yard would not complete the ships by the ‘drop dead’ delivery date.
Havila also terminated the contracts at common law, relying on the yard’s refusal to continue construction of the ships following its own purported cancellations as a ‘repudiatory breach’ of the contracts. In the ensuing litigation, both yard and buyer claimed to have been the first party validly to terminate the shipbuilding contracts.
The stakes were high, WFW said because if the buyers won, they would obtain judgment for €36.8 mill, plus interest, from the yard and from the refund guarantor, a Portuguese insurance company. If the yard won, it was seeking to recover some €50 mill on top of the €36.8 mill it had received.
This project had been in trouble for some time before the dispute arose. Initially, the buyers had planned to integrate a Spanish tax lease scheme into a Chinese financial lease structure. Havila had no difficulty obtaining a detailed term sheet from a leading Chinese leasing house, but then spent several months over what proved to be complex arrangements, before shelving the double lease concept and approaching different lenders.
For its part, the yard increasingly pressed the buyers to get their financing in place. It claimed in the proceedings that the financing had to be in place before an ECA counter-guarantee for issuance of the refund guarantees could be obtained. Many exchanges, meetings and contract addenda followed.
In the seventh addenda, the buyers agreed to provide a “written, committed statement from the bank/financing institution” by an agreed deadline, failing which, the parties were to meet and negotiate over a two-week period. If at the end of the fortnight they concluded that there was “other alternative financial arrangement” to be provided by the buyers, the yard could cancel the contracts.
Shortly after this agreement, the buyers paid the next instalments due under the terms of the contracts.
Over the course of the next few months, as the deadline for the ‘committed statement’ was extended, the yard indicated to the buyers that to achieve the shallow draught required for the ships’ coastal service, the design needed radical modification, necessitating the lengthening of the midships section by 10 m, at significant extra cost.
Whilst the parties argued over the changes and price increase, the buyer obtained and tabled a committed statement from a new financier. But the yard denied that the letter sufficed or had been provided in time. Construction of both ships stopped.
Further meetings were held in Spain, Norway and at Amsterdam’s Schipol airport, at which, the parties attempted to renegotiate the technical specifications and the provision of interim funding to restart construction work.
Eventually, the technical changes were agreed in the ninth addenda to the contracts. However, by this time, the yard’s financial situation was becoming dire. Unbeknown to the buyer, the yard had incurred cost overruns of some €80 mill on another project. This required a capital increase of at least €50 mill that the yard’s shareholders were unwilling to provide, according to an article appearing in the local Spanish press, WFW said.
Shortly afterwards, the yard filed for pre-insolvency protection. A number of conditions precedent to the ninth addenda still remained unsatisfied. The yard purported to cancel the contracts on the basis that the committed statement had not been provided and that interim funding allegedly due remained unpaid.
Two days later, the yard applied for its judicial dissolution. The tax leases were terminated. The buyers accepted the yard’s refusal to revoke its cancellations as a repudiatory breach and cancelled the contracts, shortly before new contracts with a Turkish yard for construction of the ships became effective.
At court, the buyers’ evidence was that the first of those ships had since been completed in Turkey and had met the draft requirements without design modifications.
In a detailed 159-page decision, the judge reviewed a large number of factual and legal issues.
WFW said that this judgment will be welcomed by practitioners by way of the clarity it has brought to the question of the nature and coverage provided by refund guarantees issued to secure the obligations of shipyards to refund advance instalments on cancellation of shipbuilding contracts.
Buyer cancellations of such contracts are not infrequent, as shipbuilding projects often become significantly delayed and the financial health of yards can be precarious in what is a highly competitive industry that services a volatile market sector.
The decision puts beyond doubt that refund guarantees expressed to secure repayment of the buyer’s instalments can secure a claim in restitution or for reliance loss for such sums following a termination for ‘repudiatory breach’ at common law and not just an express contractual termination, WFW said.
For owners, the case illustrates the potential pitfalls involved when attempts are made to rescue troubled newbuilding projects. The owner’s willingness to provide advance funding in order for construction to resume ended up being relied on by the yard to manufacture a contractual cancellation claim.
Obviously, parties will want to do their utmost to rescue a project for construction of an asset, especially if required for delivery into charter service, as was the case here. But a buyer’s understandable desire to get a project back on track may not be entirely aligned with a yard that knows it may forfeit the buyer’s instalments and retain possession of the ship if it is able to cancel.
Finally, the facts illustrate the difficulties buyers may face if in doubt as to a yard’s financial condition. Here, the buyers did not discover the true state of the yard’s finances until shown an article in the local Spanish press.
When the facts were revealed and the buyers sought to rely on the yard’s application to court for its dissolution as justifying their cancellation of the contracts, they were met with abstruse points of Spanish insolvency law that it took a 159 page judgment to finally to cut through, WFW concluded.