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The Prevention Principle and other drafting considerations by Campbell Johnston Clark

In the case of Jiangsu Guoxin Corporation Ltd (formerly known as Sainty Marine Corporation Ltd) – v – Precious Shipping Public Co. Ltd. [2020] EWHC 1030 (Comm), Campbell Johnston Clark, together with Hisun Law firm, acted on behalf of a Chinese shipyard in two appeals to the English High Court under s69 of the Arbitration Act 1996.

Led by Kirsty MacHardy, the CJC team comprised of Angeliki Panera, Debo Fletcher, Christopher Chane and Samuel Jones.

Background

The Appeals related specifically to two Hulls, 21B and 22B, which formed part of a wider order for 14 bulk carriers. These contracts were concluded with the Buyer on amended SAJ forms.

Following delivery of the first two Hulls, 09B and 10B, the Seller tendered Hulls 17B, 18B, 19B and 20B for delivery. These vessels were rejected by the Buyer on the grounds that the vessels were designed and/or built in a defective manner, such that they were susceptible to stern tube bearing failures. The Seller argued that the Buyer’s rejection was unlawful as any design defect relating to the stern tube bearing had been rectified before tender of delivery of those vessels.

The merits of these disputes were not the subject of the Appeals; rather the Seller contended that the wrongful rejection of Hulls 17B – 20B had caused the delay of the construction and launch of Hulls 21B and 22B where the  berths did not become available following the rejection of the other vessels.

Hulls 21B and 22B were due to be delivered on 31 August 2015, but on 29 January 2016 (the 151st day after the Contract Delivery Date) the Buyer sent a notice informing the Sellers that it was terminating the contracts. In cancelling the Contracts, the Buyer relied on Article III.1 and Article VIII.3, on the basis that more than 150 days of ‘non permissible delays’ had passed. The Seller accepted this cancellation as a repudiatory breach of contract on 3 February 2016, thereby bringing the contracts to an end.

Decision

The issues before the Court were as follows:

  1. Whether the ‘Prevention Principle’ applies to these SAJ form contracts; and
  2. Whether the Seller must give notice of delay events, or do anything, as a pre-condition for the Seller to rely on delay events when the Buyer purports to terminate for accumulated delay.

Issue 1: Application of the ‘Prevention Principle’

Butcher J noted that the central issue in this case was whether Article VIII.1 is wide enough to cover delay occasioned by the Buyer’s wrongful termination of previous contracts and wrongful occupation of berths. If it did, then express provision will have been made for an extension of time, and the ‘Prevention Principle’ will not apply. On this issue, he considered that the argument that such delay was not covered by the Article, was an unsuitable restriction, effectively rendering the provision as a force majeure clause confined to matters beyond the control of either party.

Butcher J concluded that Buyer-induced delays outside the control of the Seller and not the result of conventional force majeure events are within Article VIII.1. Its terms specified matters and events beyond the control of the Seller only, and not those beyond the control of the parties. It followed therefore, that the Article would apply only to the noted causes and to any other causes beyond the Seller’s control, which on a natural reading, would cover matters caused by the Buyer (assuming they are outside the control of the Seller or its sub-contractors).

This ruled out the application of the Prevention Principle on any alleged Buyer-induced delay as an express provision has been made for an extension of time, including for the Buyer’s wrongful acts.

Departing from the construction given to a similarly worded provision in Zhoushan[1], Butcher J resolved that in the present case, there may have been breaches by the Buyer which could not be considered as having been provided for elsewhere in the Contract; this included the implied term as to non-prevention. By contrast, in e Zhoushan, Leggatt J considered that all Buyer-induced delays which were intended to permit a postponement of delivery, were dealt with elsewhere in the contract.

Issue 2: Notification

Butcher J held that if the cause of delay was within Article VIII.1, then the notice regime in Article VIII.2 would apply. As such, if no relevant notice was given by the Seller to the Buyer, the Seller is precluded from claiming an extension of the Delivery Date.

Butcher J however went further and looked to interpret Article VIII.1 in a context wider than that of Leggatt J in Zhoushan. He held that the notification obligation extended to circumstances where instances of Buyer-induced delay falling outside Article VIII.1 or any other regime was foreseeable, even if it fell outside the scope of Article VIII.1. This is in addition to the requirement of notification for cases falling within Article VIII.1.

Comment

Jiangsu presents an interesting case where, paradoxically, it is the Seller that is contending that a cause of delay is not covered by Article VIII.1. The key issues resolved by the Court can be summarised as follows:

  1. Parties should be aware of the express wording of any clause which extends the delivery date in a shipbuilding contract. In this case, the wording of Article VIII.1 was held not to be a force majeure clause. In particular, it was wide enough to cover buyer-induced delay. The scheme of the shipbuilding contract was such that there was no scope for the prevention principle to apply.
  1. The case made clear that the written notice clause in Article VIII.2 would apply to require the Seller to give notice of any delay. Therefore, for a Seller to be able to rely on delay events, including acts of prevention, prompt notice must always be given to the Buyer, irrespective of whether the delay falls within any clause dealing with delay., Failure to give such a notice will likely be a bar to the extension of time

The CJC team was led by Kirsty MacHardy with Angeliki Panera, Debo Fletcher, Christopher Chane and Samuel Jones.