UK: Buyer Entitled To Refund Of Advance Payments Under Shipbuilding Contract: Seller’s Claim Time-Barred

Last Updated: 21 February 2011
Article by Chris Kidd and Reema Shour

(1) Nanjing Tianshun Shipbuilding Co Ltd and (2) Jiangsu Skyrun International Group Co Ltd [2011] EWHC 164 (Comm)

In this shipbuilding contract dispute, the Commercial Court judge, Mr Justice Steel, reinforced that "it is vital from the buyer's viewpoint to ensure that the contract incorporates a mechanism by which his advances can be recovered simply and quickly should the builder default on the performance of his obligations".

The contractual background

Shipbuilding contract

The shipbuilding contract was in a typical form and provided, among other things, that the contract price was to be paid in instalments, such payments were to be deemed to be advances to the seller and were to be repayable with interest in the event the contract was cancelled. The seller was also obliged to provide a refund guarantee as security for repayment of these advances. Furthermore, the agreed delivery date could be extended in the event of force majeure and / or permissible delays as defined in the contract. However, in the event of delay in delivery beyond the permitted contractual limits, the buyer was entitled to terminate the contract in accordance with Article X of the contract.

Article X provided that if the buyer terminated the contract, the seller should, on the buyer's demand, refund the amounts paid on account of the vessel and that if no such refund was made, the buyer would be entitled to claim under the refund guarantee. Article X further provided that the seller could dispute the buyer's cancellation or rescission by commencing arbitration within 30 days of the cancellation or rescission in accordance with the arbitration clause. In those circumstances, the seller would not have to refund the buyer until an arbitration award (in favour of the buyer) had been published. Article X.3 provided that upon refund of the relevant amounts, the duties and liabilities of the parties to the shipbuilding contract would be completely discharged.

Refund guarantee

The contractual scheme was echoed in the refund guarantee which provided that the guarantor was entitled to withhold and defer payment to the buyer under the guarantee in the event that the seller challenged the buyer's entitlement to be reimbursed its advance payments and the dispute was submitted to arbitration. The guarantee wording further provided that in the event of arbitration proceedings between the parties to the shipbuilding contract being commenced before expiration of the guarantee, the validity of the guarantee would be automatically extended until 90 days after the date of issue of a final arbitration award or in case of appeal, 90 days after the issue of a final court order in the buyer's favour.

The dispute

The buyer paid the first four instalments under the contract, a refund guarantee having been issued by a Chinese bank in the contractually prescribed form. Subsequently, the buyer gave the seller notice that it was exercising its right to terminate or cancel the contract under Article X by reason of delay in delivery. The seller sought to dispute the buyer's right to do so but did not institute arbitration proceedings until after expiry of the 30 day period prescribed by Article X.

Nonetheless, the seller contended that its failure to institute arbitration proceedings within 30 days did not bar its right to dispute the cancellation but only to obtain its remedy by way of an arbitration award. The seller therefore refused to refund the advance payments made to the buyer. The guarantor bank also refused to repay the advance instalments. The buyer, on the other hand, contended that a failure to comply with the 30 day deadline meant that the seller was barred from the right to dispute the termination or cancellation of the shipbuilding contract.

The Commercial Court

Mr Justice Steel, hearing an appeal from the arbitration award and a challenge to the arbitrators' jurisdiction, found in favour of the buyer. The judge dismissed the seller's argument that if it failed to comply with the requirement under Article X to initiate arbitration within 30 days, it still retained its right to have the dispute resolved by arbitration. The seller contended that if arbitration was not commenced within 30 days, then the guarantor had no defence to a claim under the guarantee but this did not prevent either the guarantor bank or the seller from claiming against the buyer for recovery of money paid under the guarantee in English court proceedings.

However, the judge had little hesitation in finding there would be no commercial purpose in granting the seller an option to either commence arbitration within 30 days or, "whether by choice or indolence", commence English court proceedings after 30 days but within the six year time limit for bringing contractual claims under English law. It was hard to understand why, when the parties troubled to stipulate that all claims should be referred to arbitration, they should go on to provide that a stale claim should be litigated rather than arbitrated. The fact that express words extinguishing the right of suit (for example "the claim shall be deemed to be waived and absolutely barred") were not used was not conclusive.

As regards the refund guarantee, the judge emphasised that the life of the guarantee was dependent on the existence of an arbitration, otherwise it was rendered null and void at a prescribed period after the delivery date. Failure to institute arbitration within the 30 day period would lead to recovery of all instalments under the bank guarantee. Once the instalments had been refunded, all the parties' obligations were discharged. The concept that the 30 day window was merely a period after which the guarantor bank could not resist a refund of the instalments, leaving the seller free to embark on court proceedings to challenge its own obligation to refund was inconsistent with the fact that the bank's liability under the guarantee only arises when the instalments have become repayable by the seller and the seller has failed to repay.

Comment

This decision emphasises the importance of carefully considering dispute resolution clauses in shipbuilding contracts and refund guarantees, in particular any applicable time limits and the procedure to be followed for the valid commencement of arbitration. If it is not intended that the guarantee should pay out immediately on demand following termination of the shipbuilding contract, the wording of the refund guarantee should also be carefully drafted to ensure that it remains valid while any disputes under the shipbuilding contract are resolved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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