Australia: The prevention principle in the context of shipbuilding disputes - delays and cancellation
Shipping newsletter - Legalseas

Introduction

Modern shipbuilding contracts invariably include clauses on the effect of delays caused by the builder, for which the buyer can request liquidated damages, for each day of delay and rescind the contract for excessive delay, beyond the stipulated cancelling date. What is the position, however, where delay is caused by the buyer? The prevention principle, as it is often called, has been with us a long time (Holme v Guppy (1838) 150 ER 1995). It operates to prevent a party from escaping the consequences of his own wrongdoing. This article considers how this common law principle is applied in the shipbuilding context. There are points for both buyers, and builders, to note.

The application and effect of the prevention principle

The prevention principle may apply where an act or omission on the part of the buyer "renders it impossible or impracticable for the [builder] to do his work within the stipulated time" (per Lord Pearson in Trollope & Colls v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601).

The buyer does not need to breach the contract in order for the principle to apply; it may simply delay, for example, in procuring drawings or approving plans, supervising the construction of the vessel, paying an instalment of the price, or taking delivery of the vessel. Failure by the builder to demonstrate a causal link between the buyer's actions and the delay will preclude the prevention principle from applying and the builder will be liable for the delay (Jerram Falkus Construction v Fenice Investments [2011] EWHC 1935).

The effect of the prevention principle, is that the buyer will have no claim in liquidated damages and will not be able to require the builder to deliver the vessel by the delivery date, or by any other date ascertained by reference to the terms of the contract (Multiplex Constructions v Honeywell Control Systems [2007] EWHC 447). Time is "at large", and the builder's obligation to complete and deliver the vessel by the contract-specified date is then replaced by an implied obligation to complete within a "reasonable" time.

Whether time is "at large" is a question of law, depending on the terms of the contract, whereas what constitutes "reasonable" time, is a question of fact to be determined "in the light of all relevant circumstances" (Shawton Engineering v DGP International [2005] EWCA Civ 1359). If the builder fails to complete the project within a "reasonable time", the buyer will have a claim for damages at general law. It is worth noting that an act of prevention by the buyer does not extinguish his right to recover any liquidated damages that have already accrued (Anderson v Tuapeka County Council (1900) 19 NZLR 1).

Extension of time clauses

The parties can exclude the application of the prevention principle by including wording to this effect in the contract (Micklefield v SAC Technology [1990] 1 WLR 1002). The wording usually takes the form of an extension of time (EOT) clause. EOT clauses allow the builder additional time to complete the construction of the vessel in the case of buyer-induced delay or other specified events. Clear words should be used when drafting an EOT clause, since any ambiguities will be construed contra proferentem, that is, against the party whose interests the clause seeks to protect (i.e. the rights of the builder).

A contract which includes an EOT clause may also impose procedural requirements, which the builder must comply with in order to claim an extension of time, such as notifying the buyer upon the occurrence of a "relevant" event. Failure by the builder to comply with the notification requirement can assist the buyer in avoiding the application of the prevention principle, especially when notification is a condition precedent to the builder's entitlement to an extension of time. This will largely depend on the intention of the parties, as evidenced by the agreed contractual language. This approach was adopted in Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848, where the High Court held that the builder's claim for a permissible delay extension failed because the builder had not given prompt notice under the force majeure provisions which were similar to those contained in Article VIII.2 of the standard Shipbuilder's Association of Japan (SAJ) form.

Rescission for excessive delay

It is apparent that the prevention principle can have a serious effect not only on the buyer's ability to claim liquidated damages for delay, but also on its entitlement to rescind for excessive delay.This is more so where it is contended that the buyer's rescission was wrongful, thereby entitling the builder to treat such conduct as repudiatory, and terminate the contract.

In such circumstances, the builder will try to argue that time has been extended through an EOT clause, or (in case the EOT clause does not cover the particular delay) that time has become "at large", so that the buyer's rescission of the contract was premature. The builder would need to make sure that it has complied with all contractual notification requirements and that the EOT has not become inoperable by a subsequent variation of the contract. The buyer will, no doubt, deny that it is liable for any delay and seek to argue that the builder has, in any event, failed to complete the shipbuilding project within a "reasonable time".

In order to avoid the risk of being found that it has rescinded the contract too early, the buyer may consider sending a notice to the builder, prior to rescinding, allowing the builder a reasonable time (having regard to all the circumstances, such as the length of the project and the delays incurred until then) to deliver the vessel. This notice will arguably have the effect of making time "of the essence" so that upon such "reasonable time" lapsing, the buyer can argue that it was justified in rescinding the contract. In our experience, particularly in cases involving refund guarantees from Chinese banks (which often expire very shortly after the cancelling date stipulated in the contract), the buyer, in giving such notice, should ensure that the validity of the refund guarantee obtained from the builder's bank will not expire during any additional period granted.

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.