Manifold Impact
June 13, 2008, Tradewinds

The UK High Court recently ruled that shipping company Gearbulk could not sue for repudiation when a shipyard defaulted on a contract for new ships because Gearbulk had already cashed in its refund guarantees.  Someera Khokhar, a partner in the Energy, Infrastructure and Project Finance Practice with White & Case in New York stated the verdict "just doesn’t make sense" and could have "manifold impact" for shipbuilding and other construction industries, if the case is upheld on appeal.

"The rationale for having the support – the guarantee – was there to assist in a particular circumstance. It wasn’t there to take away from any other rights you might have," Khokhar said, and continued to say the case would make it possible "for yards to get out of contracts to consider selling slots at better prices as vessel values have soared."

"If you are a struggling shipyard, then there is a great advantage at looking at what you've got and saying, 'Can I sell this vessel at a price that is far in excess at the price that has been agreed, and what are the consequences for me to get out of this contract?’" she said.

"If the case is upheld on appeal, owners will have to pay careful attention to the terms of contracts with yards," Khokhar says, "and move more cautiously if a builder does not deliver."  She also stated the case could have implications for other construction-related contracts that include a refund guarantee.