We are seeing an uptick in enquiries relating to new ship orders placed in pre-pandemic times. At one time, those orders looked well placed given the frothy market conditions prevailing in the post-pandemic era, but now, as a global recession looms, some sectors (in particular the container sector) look to be set for big falls. This has caused many ship owners to seek advice on how to potentially extricate themselves from what now look like increasingly bad bargains. We recently discussed this issue in the context of refund guarantees and effective date clauses.
This situation could of course get worse as many of the ships ordered in the frothy market conditions of late 2020/early 2021 command high prices and are not set to be delivered until 2023/24. What we are seeing, however, is a problem in relation to pre-pandemic orders that are now approaching delivery at the very same moment that the market for certain ships is declining. In some cases, the problem is compounded by charterers reluctant to take on these ships at pre-fixed high rates of hire when the freights available in the market are declining.
Against this background, it is worth reminding our followers that most shipbuilding contracts only allow for a certain period of permissible delay. Once that permissible delay has run out, then the contract can be legitimately cancelled. The buyer can then obtain a refund of instalments from the shipyard or, as is more likely, from the refund guarantor who provided the relevant refund guarantees.
Most of the recent questions received centre around whether delays are permissible or not. The major shipbuilding nations – Korea, China and Japan – have all experienced problems when it comes to keeping up with building schedules. China is still subject to periodic lockdowns due to Covid-19 outbreaks in a largely unvaccinated populace. Korea has seen strikes and labour shortages at some yards which has put back the construction schedule. Japan has experienced delays on some vessels due to supply chain issues. This has spawned a series of “force majeure declarations”, some of which are legitimate and some of which are illegitimate.
In the case of yards, it is vital that they take early legal advice on potential issues with construction caused by extraneous events to the extent that these cannot be solved by alternative means, or they risk the potential cancellation of lucrative contracts leaving them with partly constructed vessels which they then have no alternative but to complete and sell for a loss. For buyers who are faced with twitchy charterers, it is vital that they take early legal advice on how to deal with declarations of force majeure and how they might use delay to their advantage by potentially cancelling or threatening to cancel contracts that have become unprofitable.
Many of the legal issues arising are resolved by negotiation and/or by some discount on the price but some will undoubtedly make their way through to arbitration in due course.
The BDM team has been advising clients on shipbuilding matters for many years. We have lived through many market cycles, so these recent issues are not new to us. That said, the problems caused by Covid-19 and the, arguably, resulting global recession, do present a unique set of circumstances. That may lead to some interesting legal issues arising.
Nick Burgess
Partner
Constantin von Hirsch
Trainee Solicitor
