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The English High Court again declines to apply the “prevention principle” to a shipbuilding contract

The “prevention principle” has been a popular argument run by shipyards in English law shipbuilding disputes in recent years. This enthusiasm has not been shared by English Courts and tribunals, and prevention principle arguments rarely, if ever, succeed.

The judgment handed down recently in Jiangsu Guoxin Corp v Precious Shipping Public Co Ltd(1) is a further example of the English Court declining to apply the prevention principle to a shipbuilding contract.

What is the prevention principle?

The prevention principle applies where one party to a contract prevents the other party from complying with the contract timetable and the contract does not contain a mechanism for extending time in those circumstances.

If the prevention principle applies, the preventing party cannot require compliance with the contract timetable. Instead, time is “at large” – the obligation to complete the work by the contractual completion date is replaced by an obligation to complete within a reasonable time.

William Cecil, Partner and Head of the Dispute Resolution practice in Haynes and Boone’s London Office.

The approach to the prevention principle in Jiangsu

In Jiangsu, the Court was deciding an appeal against an arbitration award. One of the issues under appeal was whether there was any scope for the application of the prevention principle.

The buyer had entered into shipbuilding contracts with the shipyard for a series of 14 bulk carriers. The first two vessels were delivered. The shipyard tendered the next four vessels for delivery, but these were rejected by the buyer on the basis that they were susceptible to stern tube bearing failures. The shipyard disputed those rejections. The appeal related to the next two vessels in the series.

The shipbuilding contracts gave the buyer the right to cancel after 150 days of non-permissible delay. The buyer cancelled the shipbuilding contracts for these two vessels for delay under those provisions. The shipyard disputed the buyer’s cancellations.

The shipyard argued that the prevention principle applied. This was because the buyer’s (allegedly) unlawful rejection of the preceding four vessels had resulted in those vessels continuing to occupy berths at the yard, thereby delaying the following two vessels. The shipyard argued that time was set “at large”.

The judge held that the prevention principle did not apply because the delay in question was covered by the extension of time clause in the contract – Article VIII (Delays and Extensions of Time for Delivery). This Article contained general “sweep up” wording providing that the shipyard was entitled to an extension of time for “other events beyond the control of the [shipyard] or of its subcontractors”.
The judge held that this was wide enough to include delays caused by a wrongful rejection by the buyer of the four vessels which in turn caused delay to the next two vessels.

The judge also held that, if that construction was wrong, the requirement in Article VIII.2 that the shipyard must serve a notice on the buyer “Within seven… days from the date of commencement of any delay on account of which the [shipyard] claims that it is entitled under this Contract to an extension of the time for delivery of the VESSEL” applied to any claim for delay under the contract (i.e. not just under Article VIII), unless that claim had a separate notice regime under the contract.

What is of interest is that, in reaching these conclusions, the judge construed (i) the effect of the “sweep up” wording, and (ii) the requirement to serve delay notices, differently to how similar clauses had been interpreted in another well-known recent shipbuilding case, Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc.(2)

The distinctions and the precise reasons for these different interpretations are somewhat forensic, but the overall themes are clear.

First, the Court (or a London tribunal) will, if possible, hold that a shipyard’s claim for an extension of time comes within the extensions of time provisions in the shipbuilding contract, and therefore the prevention principle does not apply. As summarised by the judge in Jiangsu:

“Here, paradoxically, it is the [shipyard] which is contending that a cause of delay is not covered by Article VIII.1 and is therefore not subject to the extension of time prescribed in that Article. It does so in order to argue that the relevant cause of delay is not dealt with by the contract at all, in the sense that no extension is provided for it, and therefore the ‘prevention principle’ is applicable. In my judgment this is not a construction which the court should favour.”

Secondly, the Court will, if possible, construe a contractual requirement on the shipyard to serve a delay notice as applying to all claims for delay, rather than only in respect of some claims for delay. The logic for this was stated by the judge in Jiangsu to be as follows:

“I consider that the parties have clearly attempted to provide for notification of the matters relevant to a claim for an extension of time. I consider that the court should lean in favour of a construction under which there are notification requirements in relation to any, or at least any reasonably foreseeable, causes of delay.”

The message for a shipyard is clear – if it wants to ensure that it preserves its right to claim an extension of time, it should serve a delay notice within any time limits set out in the contract. Otherwise, the shipyard may find that it is precluded from claiming delay later on, when, for example, it has become clear that the shipyard is at risk of a cancellation by the buyer for delay.

In those circumstances, the shipyard’s chances of bringing a claim for an extension of time outside the contractual machinery (and therefore outside the requirement to serve a delay notice) by relying on the prevention principle, are poor.

Other lessons from the Jiangsu judgment

The judgment contained another important lesson for shipyards:

The shipbuilding contract contained the usual provision that, if an instalment of the contract price was paid late, “the Delivery Date shall, at the [shipyard’s] option, be postponed for a period of continuance of such default by the Buyer.”

The Court held that, for the shipyard to claim this extension, it must communicate to the buyer that it is exercising its option to postpone the delivery date before the delivery date arises, otherwise the right is lost.

The judgment also contained an important point for buyers:

A term is to be implied into shipbuilding contracts that neither party should prevent the other from performing its obligations under the contract. This is subject to several limitations, including:

i. that the term is limited to the active prevention of performance;

ii. the act complained of must be wrongful, either as being a breach of the express or implied terms of the contract, or wrongful independently of the contract.

So, where a buyer is seeking to enforce its contractual supervision rights strictly, it must ensure that it does so within the terms of the contract. Otherwise, the buyer risks itself being in breach of contract, potentially entitling the shipyard to claim an extension of time or damages.

Source: Article By William Cecil, Partner and Head of the Dispute Resolution practice in Haynes and Boone’s London Office, Arranged on Behalf of Hellenic Shipping News Worldwide (www.hellenicshippingnews.com)

(1) [2020] EWCH 1030 (Comm)

(2) [2014] EWCH 4050 (Comm)

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