Shipyard liable for failing to obtain extension of refund guarantee within a reasonable time

A shipyard’s failure to procure a renewal of a refund guarantee (two days before its expiry), was held to be a breach of an implied term of the shipbuilding contract that the shipyard must procure an extension within a reasonable time. However, this breach was not of itself repudiatory in nature. It was merely breach of an innominate term of the contract which did not deprive the innocent party (the buyers in this case) of “substantially the whole benefit of the contract”. As a result, Mr Justice Cooke, on appeal from an arbitration award, held that the buyers were wrong to terminate the shipbuilding contract when they did, two days before the actual expiry date of the refund guarantee.

The buyers had entered into the shipbuilding contract with the shipyard on 8 January 2004, before the financial crisis. By an addendum to the shipbuilding contract dated 22 December 2009 (“Addendum No. 4”), the parties agreed to a delayed delivery of the vessel. Addendum No. 4 extended the delivery date until 31 October 2011 and required the shipyard to procure an extension of the refund guarantee until 31 May 2012 (the refund guarantee had been due to expire on 30 June 2010). Crucially, Addendum No. 4 omitted to set a deadline for extension of the refund guarantee…

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