PROFESSIONAL SERVICES
BEWARE HIDDEN TRAPS IN CONTRACTS
We are often asked to advise clients on ship-building contracts. Many of these contracts are based on standard documents which ship-builders have been using for many years and in some cases, have modified with their own 'standard amendments'. Sometimes these amendments can lead to traps being set for an unwary buyer.
In a recent transaction, for the construction of a passenger transfer vessel used for carrying engineers and equipment to and from UK offshore wind turbines, we were asked to review a ship-building contract tendered by a shipyard. Most of the clauses were relatively uncontroversial but the payment terms included a first instalment of 20% of the price.
REFUND GUARANTEE
In fairness to the builder it had also included, in its document pack, a draft refund guarantee (‘the Refund Guarantee’), to be issued by the parent company of the yard, (‘the Guarantor’) to cover the refund of the first instalment in the event the contract was terminated by virtue of the yard's default.
This sounds reasonable enough but, as with so many things the devil is in the detail.
In order to obtain payment under the Refund Guarantee the buyer had to present a final unappealable arbitration award (an ‘Award’). The arbitration provisions in the ship-building contract made for ICC arbitration. ICC arbitration is really designed for very significant disputes both in terms of value and complexity. The procedural rules mean that arbitrations proceed at a very slow speed and are very expensive, from a claimant's point of view, since the claimant has to pay an initial deposit to the ICC to commence the arbitration procedure. This deposit is often in the sum of tens of thousands, simply to commence the arbitration.
THE FINER DETAIL The Refund Guarantee provided that if an Award had not been served on the Guarantor within 12 months after the date on which the legal proceedings commenced, the Guarantee would lapse.
It would be virtually impossible to start an ICC arbitration and obtain a final Award within 12 months. It might just be possible with a tremendous amount of co-operation on both sides.
It is unlikely that the yard would co-operate in circumstances where it stood to gain from the ICC arbitration procedure moving slowly i.e. the Refund Guarantee would lapse. Essentially the yard was offering a Refund Guarantee but it would be almost impossible for the Buyer to ever successfully claim against it. We therefore recommended that amendments were sought to the wording of the Refund Guarantee and that a more streamlined arbitration procedure be included in the Agreement.
Having received our advice on these points the buyer negotiated amendments to the Agreement and the Refund Guarantee.
LESSONS LEARNED
The lesson to be taken from this relatively simple example is that even contracts which appear to be reasonable need to be carefully checked, as the detailed provisions can reveal hidden traps.
Dominic Ward Andrew Jackson Solicitors Click to view more info
www.windenergynetwork.co.uk
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