UK: Courts Refuse To Help Buyers In Preventing Shipyard Exercising Its Power To Sell Under A Shipbuilding Contract

Last Updated: 6 September 2011
Article by Chris Kidd and Louise McDonald

Stellar Shipping Company LLP – v - Cosco (Dalian) Shipyard Company Limited [2011] EWHC 1278 (Comm)

The Arbitration Act 1996 contains powers for the English courts to make orders where the matter is urgent and the arbitration tribunal has not yet been fully appointed. In this case, the Court had to decide whether to use such powers to prevent a shipyard exercising its contractual right to sell a newbuilding to a third party, after it had rescinded the shipbuilding contract following an alleged default by the buyer.

Background Facts

The Buyers agreed to buy a 79,000 ton deadweight bulk carrier (the "Vessel") which was to be built by the Shipyard. The price of the Vessel was $49.8m and was payable by way of five instalments.

The Shipyard purported to cancel the contract on the basis that the second and third instalments were overdue. The Buyers argued that an agreement had previously been reached between the parties, extending the time within which the instalments were to be paid and that there were deficiencies and shortfalls in construction.

Negotiations subsequently took place between the parties but eventually broke down, whereupon the Buyers alleged that the Shipyard had threatened to sell the Vessel without giving the Buyers the requisite notice or allowing them to make an offer to buy the Vessel, as required by the contract which provided:

"SALE OF THE VESSEL

(a) In the event of cancellation or rescission of this Contract as above provided, the Seller shall have full right and power either to complete or not to complete the Vessel as it deems fit, and to sell the Vessel at a public or private sale on such terms and conditions as the Seller thinks fit without being answerable for any loss or damage occasioned to the Buyers thereby. In the case of sale of the Vessel, the Seller shall give telefax or written notice to the Buyers and the Buyers shall be entitled to bid for the Vessel at a public auction or to make an offer to buy the Vessel if it receives notice from the Seller of its intention to sell it privately."

It was further provided that the proceeds of such a sale would be applied to reimbursing the Shipyard for the expenses they incurred as a result of the Buyers' default and then towards any unpaid instalments. If the proceeds of sale exceeded these amounts, the Shipyard would pay the excess to the Buyers.

The Buyers alleged that the Shipyard had an ulterior motive in that they were intending to sell the Vessel to an associated company, rather than an independent third party and that the right to sell had not arisen because the Shipyard's purported cancellation of the contract was invalid.

By this stage, the Buyers had commenced arbitration proceedings against the Shipyard but the tribunal had not yet been fully constituted. The Buyers sought and obtained an injunction ex-parte and without notice to the Shipyard preventing it from selling the Vessel, pending the outcome of the arbitration.

The Shipyard sought to set aside the injunction, arguing among other things that the case was not one of urgency such as to confer jurisdiction on the court under the Arbitration Act and that the injunction should not have been granted because damages would have been an adequate remedy.

With regard to the adequacy of damages, the Buyers countered that the Vessel had a sufficiently unique quality, in that she was a geared Kamsarmax which can be employed in trades where discharge is made to lighters. They argued therefore that her non-delivery to them could not be adequately compensated in terms of damages.

The Judgment

Mr Justice Steel found in favour of the Shipyard and set aside the injunction. In doing so he disapproved of such applications being made without notice except in cases where the risk of giving the opponents notice of the application would defeat the purpose of the application. In this case, the Buyers had already threatened the Shipyard with an injunction eight days before seeking one. The Shipyard could, therefore, have sold the Vessel in the interim if that was what they had been intending to do.

The judge also dismissed the Buyers' arguments that the Shipyard had been evasive in its correspondence with the Buyers' solicitors as regards its intentions relating to the sale of the Vessel and that this justified the application. Rather, the judge said, the Shipyard had been clear that it considered that there had been a valid cancellation and that it was entitled to invoke the contractual right to sell.

There was also no evidence to support an allegation of dishonesty on the part of the Shipyard as regards selling the Vessel to a connected party at a below market rate and then selling her on at market rate to an independent third party. It was thought inconceivable that the Shipyard would abuse the right to sell in this manner.

The judge also concluded that the Vessel was not unique and followed a previous decision where it was held that a vessel is not unique even where it is urgently required and a replacement might not be available for some time. The mere fact that the quantification of loss might be difficult was not significant. In the present case, there were 43 other geared Kamsarmaxes in operation and some of these may have been available for charter. Even if such a vessel was not available, the Buyers could have used a myriad of smaller geared bulkers or installed cranes on an existing similar un-geared vessel. Consequently, damages would be an adequate remedy for the Buyer.

Comment

The case highlights that the Courts will not be readily drawn into making orders preventing the exercise of a right of sale when disputes are to be arbitrated, even if it is alleged that the power to sell is wrongly exercised. This is likely to be the case even where a tribunal has not been constituted. Buyers looking to gain some tactical advantage by scuppering a sale with an urgent application will find it difficult to get help from the Courts and will have to content themselves with applying to the arbitrators or confining their claim to one for damages. Very often, of course, such a claim will be unsecured and consequently of little comfort.

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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