UK: Prevention Is Not A Cure For Delayed Shipbuilding Contract

Last Updated: 28 June 2011
Article by Jeremy Farr

Adyard Abu Dhabi LLC v SD Marine Services [2011] EWHC (Comm)

The decision in Adyard is significant because it is the first reported case in which land-based construction law principles have been applied in the context of a shipbuilding contract. There is also helpful comment on design obligations and on causation. Ince & Co acted on behalf of the successful Buyer, SDMS.

Background Facts

Adyard contracted to build two 50m Moorings and Special Operations Support Vessels for SDMS. The shipbuilding contracts were based upon an amended standard form and contained many usual, and some unusual, terms. As is usual, the contracts gave the Buyer a right to rescind in the event that the contractual delivery date, as extended by any permissible delay, was missed. Unusually, the same right of rescission was given in respect of fixed dates for keel laying and sea trials. In the event, the sea trials date was missed by seven days on one vessel and one day on the other vessel and the Buyer exercised its right of rescission of both contracts. As is usual also, the proper exercise of a right of rescission obliged the Builder to repay all instalments of the contract price that it had received up to that point and this entitlement was secured by a refund guarantee provided by a bank to the Buyer. The only way to stop the bank paying out was if the Builder commenced proceedings challenging the right to rescind. That is what the Builder did in this case. Two sets of proceedings were issued and, since they gave rise to the same issues, they were dealt with together by the Court.

In order to succeed, the Builder had to show that it was entitled to an extension of time in excess of one day or seven days under the respective contracts. It had to demonstrate that there was additional work ordered by the Buyer or a breach of contract on the part of the Buyer or delay on the part of a third party for which the Buyer was contractually responsible and, in any of these cases, that in excess of one or seven days delay to the sea trials dates was caused. For a very long time, Adyard adopted the broad brush position that the projects were seriously in delay and that it was inevitable that the Buyer was responsible for some of that delay, at least one or seven days.

At trial, Adyard's case was put solely on the basis that it was entitled to an extension of time in consequence of alleged variations prompted by change in the regulatory approach to safety requirements by the MCA as the intended flag authority (the "design items"). Against that background, Adyard argued that the Buyer was not entitled to rescind the contracts, first in reliance upon the prevention principle, such that the Buyer could not insist on strict adherence with the original contractual time limits because of the extra work entailed in the variations and because of the Buyer's failure to obtain agreement (and its refusal to negotiate) as to the consequences of the variations. Second (and originally Adyard's primary case until it changed tack during the trial and gave primacy to the prevention principle), Adyard argued that it was entitled to extensions of time of at least one day and seven days in respect of each of the vessels for similar reasons.

The Buyer denied that the design items were variations and that there had been a change in regulatory approach. The Buyer further asserted that the extension of time claims were barred as a result of Adyard's failure to comply with a notice condition precedent and denied that the prevention principle applied.

The Judgment

Design and Build Contract

Adyard's responsibility for design was as follows:

"The vessel ... shall be designed, constructed, launched, equipped, completed and delivered by the Builder in accordance with the provisions of this Contract and the specifications and General Arrangement Plan ..."

The Judge rejected Adyard's contention that Adyard's design obligation was limited to "filling in the gaps" in the contractual design with more detailed engineering and other drawings but that it had no obligation to change the design contained in the contractual GA plan, and agreed with the Buyer's contention that although the basic design was set out in the specification and GA plan, this was still a design and build contract and that, insofar as the design needed to be developed in order to meet contractual requirements it was Adyard's responsibility to do so. The only design developments which were not the responsibility of Adyard were those specifically set out in the contract, i.e. resulting from variations requested by the Buyer or a change in Class or other regulatory requirements. Insofar as the design had to be developed in order to meet Class or other regulatory requirements which were not the result of any change, that was the risk and responsibility of Adyard.

Findings of Fact

The Judge found that there was no change in the MCA's requirements so Adyard's factual case on variation failed.

The Prevention Principle

The essence of the prevention principle as summarised by Jackson J. in Multiplex v. Honeywell [2007] Bus LR D D109 is that "The promisee cannot insist upon the performance of an obligation which he has prevented the promisor from performing". Thus, if the employer has prevented the contractor from completing by the specified completion date, time becomes at large and there is an implied obligation to complete within a reasonable time.

Taking account of Multiplex and the other authorities, the Judge concluded that (i) in a basic shipbuilding contract which provides for a builder to complete the construction of a vessel or achieve certain milestones within a specific period of time, the builder is entitled to the whole of that period of time to complete the work; (ii) if the buyer interferes with the work so as to delay its completion, this is an act of prevention and the builder is no longer bound by the strict requirements of the contract as to time; (iii) the instruction of variations to the work can amount to an act of prevention; (iv) but the prevention principle does not apply if the contract provides for an extension of time in respect of the relevant events.

It was therefore essential for Adyard to be able to show that the contract did not contain a mechanism for an extension of time in respect of changes required by the MCA. The key provision on which Adyard relied was Article V, Clause 2.1(b) under which the Buyer has a choice in relation to changes required by the MCA either to "first agree to reasonable adjustments required by the Builder in the Contract Price, the Delivery Date and other terms and conditions of this Contract and the Specifications occasioned by or resulting from such alterations or changes" or to instruct the Builder "otherwise", that is not to incorporate the changes required by the MCA into the construction of the vessel. There was, Adyard argued, no other choice and no other applicable mechanism to deal with adjustments. Adyard said that since the Buyer had failed to either accept the changes and agree reasonable adjustments or give notice "otherwise", it had thereby prevented Adyard from completing the vessel in accordance with the contract and had left the parties "in limbo".

The Judge found, however, that Article V, Clause 2.1(b) should not be viewed in isolation and that Article II, Clause 3.2 addressed the situation of a failure to agree an adjustment. This clause provided that where the parties failed to agree on adjustments to the contract price before delivery, the disputed amount shall be submitted for resolution to the High Court and that this would not extend or postpone the delivery date of the vessel. Clause 3.3, in specifying a right to rescind, subject to delays caused by the Buyer's default or any permissible delay, was further illustrative of the parties' intention to deal with (and overcome) the possible application of the prevention principle.

In rejecting Adyard's arguments based upon the prevention principle, the Judge also had in mind the potentially extreme circumstances of the application of the prevention principle where a trivial variation might lead to the loss of the right to liquidated damages for a long period of culpable delay and also the loss of the right to rescind (as explained by Colman J. in Balfour Beatty v. Chestermount Properties) (1993) 62 BLR 1, 27).

Causation

Adyard's approach was that causation is established by showing that the duration of the relevant event or act of prevention extended beyond the original contractual sea trials date regardless of what other events may have been delaying the works and regardless of whether the variation would have any impact on the actual progress of the works. The Judge rejected this variation on a "gross entitlement" approach and agreed with Colman J in Balfour Beatty that the net basis is the correct approach, in other words delay to the completion date must be assessed by reference to the progress of the works to the then-projected completion date.

The Judge also held that notional or theoretical delay is insufficient. What is required is prevention in fact. He relied on a number of authorities including Henry Boot Construction (UK) Limited v. Malmaison Hotel (Manchester) Limited (1999) 70 Con LR 33, where Dyson J made it clear that it is a question of fact whether a relevant event has caused or is likely to cause delay to the works beyond the completion date. In other words, the act relied upon must actually prevent the contractor from carrying out the works within the contract period, that is must cause some actual delay to the progress of the works.

Where there are two or more concurrent events causing delay to the progress of works, then, as per Malmaison, the contractor will be entitled to an extension of time for the period of delay of the relevant event of prevention. However, the delaying effect of the two events must be felt at the same time.

In this case, as to causation in fact, Adyard's delay expert agreed in cross examination that there was no actual delay, whether viewed prospectively or retrospectively, caused by any of the alleged variations.

Extension of Time

At the start of the trial, this was Adyard's primary case but by the end Adyard was positively averring that there was no basis for claiming an extension of time in order to support its prevention principle argument. The Judge held that the contract did provide a mechanism for an extension of time but that any such claim would fail in the present case because Adyard failed to give notice of its claim pursuant to Article VIII, Clause 2. Adyard argued that the notice provision in Article VIII only applied to force majeure, and indeed the title of the article was "DELAYS AND EXTENSIONS OF TIME FOR DELIVERY (FORCE MAJEURE)". However, the Judge held that the wording of the notice provision was sufficiently broad to encompass not only force majeure but any other claim for an extension of time.

Thus, Adyard's case failed, the Buyer's rescissions were found to be lawful such that the contracts came to an end, and the Buyer was entitled to recover all instalments paid together with contractual interest. The judgment has not been appealed.

Comment

This judgment is an important statement of the requirement to establish causation when seeking an extension of time in a shipbuilding contract due to a buyer risk event. It also emphasises the importance of ensuring that a shipbuilding contract contains mechanisms for adjusting the delivery (and any other applicable) date in all circumstances where that may be required, in order to avoid the application of the prevention principle and time becoming at large. Finally, it serves as a warning that a builder seeking extra time must be sure to give notices where these are contractually required.

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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