Due to the COVID-19 outbreak, force majeure provisions in shipbuilding contracts have suddenly become extremely relevant. Likely to face claims for force majeure delay, shipowners should take care to analyze the force majeure regime in their shipbuilding contracts, its relationship with other contracts or agreements (hereunder charter parties and financing agreements) and keep track on the factual circumstances related to any alleged force majeure delay.
The recent COVID-19 outbreak has had immense and sudden implications for the world’s business community, including industry players such as shipbuilding yards and their customers, the shipowners. In the first quarter of 2020 we have advised clients on force majeure provisions in a vast amount of shipbuilding contracts with inter alia Chinese, Korean, Turkish and Norwegian builders.
In the following, we will share some practical guidelines based on our experiences during the last couple of months, for the purpose of enabling shipowners to further improve their handling of any alleged force majeure events and delays by their builders.
We will use the force majeure regime under the Norwegian Standard Form Shipbuilding Contract 2000 as basis, since similar force majeure regimes are used in most other recognized standard form shipbuilding contracts. However, as all contracts may include individual variations, every contract should be approached and analyzed on a case by case basis.
Short description of the force majeure regime
The general consequence of a delay being recognized as force majeure delay under a shipbuilding contract is that the builder becomes entitled to extend the delivery date corresponding to the net force majeure delay under the contract, without incurring liquidated damages for this period.
In order to qualify for such permissible delay, an extraordinary event or circumstance beyond the builder’s control has to cause a delay in the delivery of the vessel. It is the builder, as the party invoking the right to force majeure delay, which has the burden of proof to satisfy these conditions.
It is our general view that certain COVID-19 related events will typically qualify as force majeure events, subject always to the specific circumstances and contract in question. The main question is typically what the actual impact is on the progress at the yard, and to what extent COVID-19 causes delays.
No permissible delay will be granted if the delay could have reasonably been foreseen by the builder on the contract date or subsequently be mitigated by the builder. Hence, it is of significance whether the contract was entered into before or after the COVID-19 outbreak.
Even if the yard is entitled to permissible delay, it is important to be aware that most contracts includes a right for the shipowner to cancel the contract if the total accumulated non-permissible delay and force majeure delay exceeds a certain number of days.
In the following we will provide practical guidelines related to the force majeure regime describe above.
Pursuant to the Norwegian standard contract, the builder shall notify the shipowner of the day the force majeure event came to its awareness and the date it ended, both within 10 days of said date. Otherwise the right to claim delay is lost. The builder shall also provide the shipowner with an estimate of the force majeure delay incurred, to which the shipowner shall object within 10 days or be deemed to have waived its right to object.
Upon receipt of the aforementioned first notice, the shipowner should take certain immediate measures, such as:
- Analyzing the shipbuilding contract in question in order to understand the specific force majeure regulation;
- Determine any non-permissible and/or permissible delay already incurred under the relevant contract prior to the alleged force majeure event. This will have a bearing on inter alia when any cancellation rights under the contract may be invoked by the shipowner, which again will affect its position in any future negotiations with the builder;
- Analyzing any contracts related to the newbuilding vessel in question, such as charter parties over the vessel and financing agreements for same, in order to determine whether actions should be taken thereunder, e.g. due to cancelling dates in charter parties or time schedules which will have to be met in order to be able to draw loans; and
- Get an overview of the factual circumstances at the builder’s yard and in the country where it is located, hereunder to which extent the yard is still in operation, the availability of the yard’s workforce and any relevant travelling restrictions in place. Such information is important to obtain in order to be able to later evaluate, and if necessary object to, the force majeure delay claimed by the builder.
The shipowner is not obliged to respond to the first notice from the builder. It may however be advisable to do so in order to get actively involved in the process at an early stage and to start documenting the process. A reply may include all or some of the following elements:
- Acknowledgement of receipt of the notice in order demonstrate a commitment to a due process going forward;
- A statement to the effect that the first notice from the builder does not include sufficient information for the shipowner to evaluate whether i) a force majeure event has occurred and ii) whether any such event causes a delay with respect to the contract in question;
- A statement to the effect that the builder has the burden of proof and that any Force Majeure delay is conditional upon the builder being able to prove same under the terms of the shipbuilding contract;
- A statement to the effect that the builder has an obligation to take measures to mitigate or avoid any force majeure delay and a proposal for specific measures which may be carried out (if any);
- A general request to be kept updated on the process on a running basis; and
- Reservation of all rights under the shipbuilding contract.
The general purpose of the statements listed above is to communicate to the builder that i) the shipowner follows the process closely and ii) that all contractual conditions will have to be met and evidenced for any delay to be granted (to inter alia prevent any excessive claims which will not meet these requirements).
Further, if the evidence for force majeure delay presented by the builder at a later stage is weak, the fact that the conditions and burden of proof were pointed out by the shipowner initially in the process may strengthen an argument that the conditions for force majeure delay have not been met. Similar, if the shipowner has proposed any mitigating actions to the builder, but these have not been acted upon, it may strengthen an argument from the shipowner that the builder has not met its duty to mitigate.
Notwithstanding the above, some shipowners may prefer to be less explicit as to what the requirements under the shipbuilding contract are, and leave this to the builder. Any lack of evidence may still be asserted by the shipowner later on in the process.
In the time period between the first notice and the second notice from the builder regarding the end of the force majeure event, the shipowner should continue to keep track on the factual circumstances, for the same reasons as stated above.
Upon receipt of the second notice, the shipowner should make efforts to assess whether the delay did indeed end at the date informed by the builder, or whether it may have ended earlier. Generally speaking it is to the shipowner’s advantage that the period during which the force majeure event persisted is established as being as short as possible.
Once the estimate of the force majeure delay is received from the builder (together with the second notice or separately thereafter) it is important for the shipowner to respond to this within the relevant time period set out in the shipbuilding contract, to avoid being deemed to have waived its right to object. If the shipowner is not able to determine the legitimacy of the builder’s claim for force majeure delay at this time it should nevertheless object to the claim and request further documentation which substantiates the claim.
After having received the builder’s estimate of force majeure delay, the shipowner may act as follows:
- If not already provided, obtain a detailed account of the force majeure event and how it has delayed the building process from the builder, together with supporting evidence;
- Evaluate the above to ascertain whether all conditions for force majeure delay has been satisfied and evidenced, hereunder the causation between the force majeure event and any delay under the specific building contract in question;
- Evaluate whether all mitigating actions which the builder are obliged to take pursuant to the shipbuilding contract have been carried out; and
- Ascertain whether any other delay which is not a force majeure delay have occurred at the same time as the force majeure delay (as the builder may typically not be entitled to claim force majeure delay during any period in which a non-permissible delay would nevertheless have delayed the building process). As an example, Chinese yards try to argue that the COVID-19 situation results in permissible delays also during the period when the yards were closed in any event due to Chinese New Year.
In light of the above the importance of the shipowner’s legal analysis and fact-finding efforts during the alleged force majeure period becomes evident; having a clear understanding of the facts and legal position will better enable the shipowner to evaluate the legitimacy of the builder’s claim when this shall be finally settled between the parties.
Having kept the above practical guidelines in mind during and after the alleged force majeure period will improve the shipowner’s position in subsequent negotiations, and a potential legal procedure, related to the delay.