THE High Court has found for a Norwegian shipowner in a dispute with a Spanish shipyard, in a case that sets important precedents for the law relating to the termination of shipbuilding contracts, according to the lawyer who represented the winning side.


In particular, the decision establishes that refund guarantees can secure a claim in restitution or for reliance loss following termination for repudiatory breach at common law, and not just express contractual termination.


Havila Kystruten v Abarca Compania de Seguros centred on contracts for construction of two passengerships intended for coastal service in Norway under long-term charters to that country’s ministry of transport.


Vigo-based shipyard Abarca purported to cancel the contracts just two days before petitioning the Spanish court for dissolution, probably in a bid to pre-empt any attempt by the buyer to rely on that filing to cancel the contracts itself.


Around three months later, Havila cancelled the contracts, relying on contractual rights that allowed it to do so where the yard commenced dissolution proceedings.


Havila also terminated the contracts at common law, relying on the yard’s refusal to continue construction of the ships as a ‘repudiatory breach’ of the contracts.


In the ensuing litigation, both yard and buyer claimed to have been the first party validly to terminate the shipbuilding contracts.


If the buyers won, they would obtain judgment for €36.8m ($39.1m) plus interest from the yard and the refund guarantor, a Portuguese insurance company. If the yard won, it was looking to recover some €50m on top of the €36.8m it had received.


Initially, the buyers had planned to integrate a Spanish tax lease scheme into a Chinese financial lease structure, and had even obtained a detailed term sheet from a leading Chinese leasing house.


But this proved unduly complex, and several months later, Havila shelved the double lease concept and began to approach different lenders.


The yard pressed strongly for the buyers to get their financing in place, claiming in the proceedings this condition had to be met before an export credit agency counter-guarantee for issuance of the refund guarantees could be obtained.


In an addenda to the contract, the buyers agreed to provide a “written, committed statement from the bank/financing institution” by an agreed deadline, failing which the parties were to meet and negotiate over a two-week period.


If at the end of that fortnight they concluded that no “other alternative financial arrangement” in place, the yard was able to cancel the contract. Shortly after this agreement, the buyers paid the next instalments. Over the next few months, the deadline for the committed statement was extended.


Meanwhile, the yard told the buyers that to achieve the shallow draught needed for coastal service, the design required radical modification, including elongation of the midships section by 10m, at significant extra cost.


As the parties wrangled over the changes and price increase, the buyer obtained and tabled a committed statement from a new financier. But the yard denied that the letter sufficed or had been provided in time.


Construction work on both ships stopped. Ever-more heated meetings took place in Spain, Norway and Amsterdam’s Schipol airport, in which the parties attempted to renegotiate the technical specifications and the provision of interim funding to restart construction work.


Eventually, the technical changes were agreed. However, by this time, the yard’s financial situation had deteriorated.


Unbeknown to the buyer, the yard had incurred cost overruns of some €80m on another project. This required a capital increase of at least €50m that the yard’s shareholders were unwilling to provide.


Shortly afterwards, the yard filed for pre-insolvency protection, with a number of conditions precedent to contractual addenda still unsatisfied.


Ultimately, the tax leases were terminated. The buyers accepted the yard’s refusal to revoke its cancellations as a repudiatory breach and cancelled the contracts, placing new contracts with a yard in Türkiye for construction of the ships.


In a detailed 159-page decision, Mr Justice Renshaw accepted that the commitment letter obtained by the buyers constituted a “committed statement” of finance.


He also accepted the evidence of the buyers’ former chief executive that the issue by a bank of a term sheet, even if not strictly legally binding, “in general represents an important degree of commercial commitment to the proposed transaction”.


The judge found that that the yard could not itself terminate the contracts unless the parties had concluded, having negotiated in good faith, that there was no alternative financial arrangement to be provided by Havila sufficient to avoid termination of the contracts. On the facts, the parties had not reached such a conclusion.


Further, although the committed statement had been provided after the agreed deadline, the yard had waived any right to terminate on this ground by continuing to negotiate with the buyer, including over modifications to the ships’ design.


He rejected the yard’s claim that the additional payments of €5m per ship had fallen due, despite a number of the conditions precedent had been met. The yard contended that not all of these conditions precedent applied to the buyer’s obligation to pay these sums, but the court disagreed.


Nor could the buyers be said to be in repudiatory breach of the contracts, even if they had failed to comply with the terms of the addenda as the yard alleged, especially in circumstances where the buyers were in a position and had expressed themselves willing to pay instalments and continue with the project.


Having rejected the yard’s termination of the contracts, the judge considered the buyers’ termination. The yard’s primary contention was that the buyers, having terminated for repudiatory breach, could claim damages only but not restitution of its instalments. Abarca argue there had not been a total failure of consideration, because there had been substantial construction work.


The buyers’ answer was that, even were the yard’s argument correct, they could recover their instalments by electing to claim for reliance loss instead of expectation loss.


The yard nevertheless contended that reliance losses cover only expenditure to third parties and not payments to a contractual counterparty. The judge rejected this and held that any wasted expenditure may be recovered as reliance loss, provided the value of any partial performance is taken into account.


The judge upheld the buyers’ right to cancel the contracts under a bespoke right exercisable if “it can be established beyond any reasonable doubt that the vessel will be delayed…” beyond the drop dead date.


He also upheld the buyers’ cancellation by reason of the yard having commenced proceedings for its dissolution. The yard had argued that the Spanish court had later rejected its petition, a rejection claimed to have had retrospective effect under Spanish law.


Watson Farley & Williams partner Charles Buss highlighted the importance of refund guarantees, which provide security to buyers who usually fund a significant proportion of the price of newbuildings during the construction phase.


Down payments are generally at least 40%, with the balance being paid on completion and delivery of the ship.


If the buyer cancels the contract during the construction phase the yard will retain title to and possession of the partially completed ship.


Such cancellations usually occur due to the yard’s insolvency or failure to complete by the deadline, which often results from the yard being in financial difficulty.


Recourse to a creditworthy guarantor is therefore vital for any buyer to obtain a refund of its investment. Sometimes, the yard’s breach will be so serious that the buyer may also wish to terminate the shipbuilding contract under its general common law rights by accepting the yard’s breach as ‘repudiatory’.


This might happen where the yard abandons or refuses to continue with the project, for example, following a purported cancellation of the contract.


https://lloydslist.maritimeintelligence.informa.com/LL1143434/High-Court-ruling-sets-precedent-for-shipbuilding-refund-guarantees