July, 2022 - Scrap that delivery: THE SHAGANG GIANT

Contracts for the sale or hire of a ship will almost always specify a place of delivery which the ship has to reach before she can be sold or go on-hire. But what if circumstances change so that it becomes impossible for the ship to reach the designated delivery place? Some contracts provide a mechanism to deal with this problem, but even then disputes can still arise.

Such was the case in NKD Maritime Ltd v Bart Maritime (No. 2) Inc [2022] EWHC 1615 (Comm), where the shipowner (Bart) sought to sell the VLOC “Shagang Giant” to NKD for scrapping in India, under the terms of an MOA dated 5th March, 2020.

Contractual terms

As per the terms of the MOA:

1. There was an initial payment of 30% of the purchase price (the “Initial Payment”, around $4.2 million), with the balance (around $9.5 million) to be paid following the ship tendering notice of readiness for delivery;
2. Notice of readiness was to be tendered when the ship reached the “Delivery Location”, defined in Clause 2 as “outer anchorage Alang, West Coast India” (Alang being located in the Indian state of Gujarat, on the Gulf of Khambhat);
3. Clause 2 also contained further wording (the “Further Wording”) providing that “if, on the Vessel's arrival, the Delivery Location is inaccessible for any reason whatsoever … the Vessel shall be delivered and taken over by the Buyer as near thereto as she may safely get at a safe and accessible berth or at anchorage which shall be designated by the Buyer, always provided that such berth or anchorage shall be subject to the approval of the Seller which shall not be unreasonably withheld. If the Buyer fails to nominate such place within 24 (twenty four) hours of arrival, the place at which it is customary for vessel (sic) to wait shall constitute the Delivery Location”;
4. Clause 10 stated that “should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel” due to (among other things) “restraint of governments, princes, rulers or people of any nation”, either party was entitled to terminate the MOA without further liability; and
5. The MOA was subject to English law and English High Court jurisdiction.

The facts

The Initial Payment was made and the ship sailed for India. However, on arrival there in mid-March 2020 she was not able to reach the Delivery Location, because the growing Covid-19 pandemic had prompted the Indian authorities to prohibit any ships from entering the limits of the Gulf of Khambhat, administered by a “vessel traffic service” (VTS).

Consequently, the ship anchored just outside the limits of the Gulf of Khambhat VTS (“Outside VTS”). A dispute then emerged between the parties: Bart’s position was that delivery had taken place as per the Further Wording, whereas NKD’s position was that delivery had not yet taken place.

Various attempts to obtain clearance for the ship to enter VTS were unsuccessful, and on 14th April, 2020 NKD purported to terminate the MOA under Clause 10. Bart did not consider this a valid termination and therefore considered the purported termination a repudiation of the MOA, which it accepted as bringing the MOA to an end.

Legal proceedings

Separate English High Court proceedings were commenced by both parties and then consolidated into one action. NKD sought the return of the Initial Payment, while Bart said it was entitled to retain the Initial Payment, also claiming damages arising from the alleged repudiation by NKD.

The three key issues addressed by the court were as follows:

1. Did “transfer of title” as per clause 10 mean that there had to be a delivery of the ship? (“Issue 1”);
2. If so, had the ship been delivered as per clause 2? (“Issue 2”); and
3. If not, was that failure caused by a “restraint of government” as per clause 10? (“Issue 3”)

The decision

On Issue 1, the court found that delivery was not required for the purposes of clause 10, and therefore NKD could not use any lack of delivery to terminate the MOA. The court noted that the MOA referred to “delivery” and “transfer of title” but not interchangeably - at times they were used in the same clause, to mean different things, and there was no reference to delivery in clause 10.

Consequently, NKD were not entitled to terminate the MOA and Bart were the successful party, although they were only entitled to retain the Initial Payment – as this was larger than their proven damages arising from the repudiation by NKD, no further sums were recoverable. Despite Bart winning, the court went on to consider Issues 2 and 3, which are likely to be of wider interest to the shipping industry.

On Issue 2, the court found as a matter of fact that Outside VTS was not, and therefore the ship had not reached, “outer anchorage Alang”. Those words suggested an anchorage near to Alang, not a sea area 100 nautical miles away, where the ship anchored. Further, the Master had given evidence to the effect that no-one in the industry would consider Outside VTS to be “outer anchorage Alang”.

However, the court found that the Further Wording applied such that Outside VTS was a substitute Delivery Location, because:

1. The ship had “arrived” for the purposes of the Further Wording, because she had got as close to the original Delivery Location as possible given the intervention of the Indian authorities. Even though there might be circumstances where the closest a ship can get is so far away it would not be fair to consider her an “arrived ship”, in the court’s view that did not apply to Outside VTS and so it was fair to consider the ship as having “arrived”;
2. The original Delivery Location (i.e. Alang outer anchorage) was clearly inaccessible, as attempting to reach it would have resulted in breaching local regulations and possibly prompting interception by the Indian authorities; and
3. Outside VTS, while not a “customary waiting place” in the sense that it was habitually or normally used, was an obvious and sensible place to wait given the closure of VTS and so qualified for the purposes of the Further Wording.

The court therefore found that as per the Further Wording the ship had reached a replacement Delivery Location (i.e. Outside VTS) and so had been delivered. Consequently, Bart’s obligations under the MOA had been satisfied and clause 10 was not applicable, meaning that NKD were again unable to use clause 10 to terminate the MOA.

On Issue 3, the court found that even if delivery was required to transfer title (i.e. the court was wrong on Issue 1) and needed to reach outer anchorage Alang for delivery (i.e. the court was wrong on Issue 2), as at 14th April, 2020 the amount of delay and the amount of further delay that could be reasonably expected did not render Bart “unable” to perform the MOA as per clause 10. In this regard, the court noted that other ships awaiting scrapping in the area had arrived at the Alang outer anchorage on 1st May, 2020. Consequently, for a third reason NKD was not entitled to terminate under clause 10.

Discussion

Although the terms of the MOA were bespoke and the decision may not apply to all situations, it does show the court taking what appears to be a sensible and pragmatic view of wording such as the Further Wording, allowing ship owners to benefit from the same.

It is not uncommon for contracts to contain terms similar to the Further Wording, and despite a number of technical legal arguments by NKD the court was prepared to find that (a) the ship had got as close to the original Delivery Location as possible given the circumstances, which was enough to satisfy the Further Wording and (b) a “customary waiting place” does not in fact need to be customary – if an intervening event has made access impossible, an obvious and sensible place as near as can be reached should be sufficient.

This decision brings some welcome clarity to how delivery mechanisms such as Clause 2 operate when subsequent events conspire to make access impossible, and is therefore to be welcomed by all parties to contracts containing similar wording.