Shipbuilding contracts and force majeure

Shipbuilding contracts and force majeure

Overview

The spread of the COVID-19 virus has led to shipyards claiming ‘force majeure’. This article looks at key issues shipowners should be aware of when it comes to shipbuilding contracts and force majeure.

Unlike many codified legal systems, there is no general concept of force majeure under English law permitting a party to a contract to relief where it cannot comply with its obligations under a contract due to an event beyond its control - such as COVID-19.

The party affected by the event will only be able to invoke force majeure if the contract expressly permits it to do so and only to extent expressly provided for in the contract.

The BIMCO NEWBUILDCON form and the Shipbuilders´ Association of Japan (“SAJ”) form, two of the most commonly used forms in the shipbuilding industry, contain express force majeure provisions permitting shipyards to claim so-called ‘permissible delay’, postponing the delivery date under the contract, if a named event occurs which is beyond their reasonable control.

The circumstances in which a shipyard can invoke force majeure and the consequences that follow will depend on the individual terms of the shipbuilding contract. However, these clauses generally have the following common features:

  1. In order to invoke force majeure, the shipyard must prove that an event has occurred which falls within the list of named events in the force majeure clause and is beyond the reasonable control of the parties;
  2. The shipyard must prove that the force majeure event has caused a delay in the construction of the vessel. Recent case law indicates that the force majeure event must have been the cause of the delay to the ship´s construction which might make it more difficult for shipyards to enforce their force majeure declarations;
  3. The shipyard must comply with the contractual regime for notifying the shipowner of the occurrence of the force majeure event, its likely impact and its cessation in order to claim permissible delay; and
  4. If the delivery date is postponed by reason of permissible delay for a stated period, the shipowner may be entitled to cancel the contract.

In the context of COVID-19, the force majeure provisions in both BIMCO’s NEWBUILDCON form and the SAJ form list a number of events which may permit the shipyard to invoke force majeure in consequence of the impact of the virus, most pertinently “epidemic”, “quarantines” and “requirements of government authorities” where their workers have been prevented from travelling to the shipyard or material could not be delivered.

In China governmental authorities have been prepared to issue notices relating to COVID-19 in order to assist shipyards to evidence the effect of COVID-19 and claim force majeure under their contracts with shipowners.

If shipyards can prove the existence of a named force majeure event in consequence of COVID-19, one can expect them to claim postponements of the delivery date for any delays to construction that have been caused by it.

BIMCO’s members are reporting several incidents of shipyards in China and elsewhere seeking to invoke the force majeure provisions in their shipbuilding contracts in consequence of COVID-19.

It is important to emphasise that the burden of proof is on the shipyard to prove that COVID-19 has triggered a force majeure event under a particular contract and the delay occasioned by it; the shipyard must comply strictly with the notice regime in the contract in order to be able to claim any postponement of the delivery date.

The shipbuilding contract may also contain an obligation on the part of the shipyard to take reasonable measures to minimise the effects of force majeure which may ameliorate any delay in delivery for the shipowner.

Points to Take Away

Going forward, as more information on COVID-19 and its spread becomes available, the level of disruption to existing shipbuilding contracts and the projects and charter contracts which are dependent upon them will be more apparent.

However, it may come to a point where the duration of delays claimed by shipyards comes close to triggering shipowners’ rights to cancel for excessive delay.

In the meantime, shipowners would be well advised to carefully check the terms of their shipbuilding contracts, take legal advice if they receive force majeure notices from the shipyard under those contracts and to seek (so far as possible) to invoke any force majeure provisions in any onward contracts which are affected.

Nina Stuhrmann
in Copenhagen, DK

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