BMBF (No. 12) LTD. v. HARLAND & WOLFF SHIPBUILDING & HEAVY INDUSTRIES LTD. [2001] EWCA Civ 862

Where a shipbuilding contract gives the owner an alternative contractual right to take possession of an unfinished vessel and complete it, that right may require completion in accordance with the contract and specifications. The owner cannot treat the option as an unqualified right to take possession while avoiding the contractual accounting scheme.

The contract may remain in force for payment purposes. The delivery instalment can become due notwithstanding completion away from the builder’s yard, where the contractual delivery formalities can still be performed. The owner may deduct the cost of completion from outstanding instalments, while the builder remains liable for any excess completion cost.

The builder contracted to construct a drill-ship. Following delay and disputes over whether the vessel was ready for delivery, the owner exercised, or purported to exercise, its contractual right under clause 15.2(ii) to take possession of the unfinished vessel and complete it elsewhere.

The arbitrators held that the owner remained liable for the delivery instalment, subject to completion costs and other contractual adjustments, and made a provisional award. Tomlinson J set aside that award and declared that the owner had no obligation to complete the vessel in accordance with the contract and would not become liable for the delivery instalment.

The central issue was the legal consequence of a valid exercise of clause 15.2(ii), including whether completion was obligatory and whether the delivery instalment remained payable.

The appeal was unanimously allowed. The arbitrators’ award was restored, with costs. The application for permission to appeal to the House of Lords was refused.

1. Clause 15.2(ii) created a package of obligations. The owner had to choose between cancellation under clause 15.2(i) and taking possession under clause 15.2(ii). If it chose clause 15.2(ii), it had to take possession and complete the vessel in accordance with the contract and specifications. The word “and” was conjunctive. The words “at Owner’s sole option” concerned the choice between completion at the builder’s yard or elsewhere.
2. The contract remained operative. The owner’s payment obligations continued, including the delivery instalment under clause 8.3.5. The contractual scheme contemplated that the builder would fund completion costs exceeding the outstanding instalments, while the owner could deduct completion costs where they were less than those instalments.
3. Delivery was not precluded by completion elsewhere. Clause 12.1 concerned the time and place of physical delivery for the bonus and liquidated-damages provisions. Delivery for the purposes of clause 8.3.5 was defined by clause 12.2, whose certification formalities did not require completion at the builder’s yard. Whether those formalities could be performed was substantially a matter for the experienced arbitrators.
4. The court declined to remit the award. Sections 69(7)(c) and 70(4) of the Arbitration Act 1996 did not permit an interim award, properly made on the evidence then available, to be reconsidered merely because later events supplied more accurate completion costs. Section 39 permitted provisional relief subject to adjustment in the final award.

• Commercial Court, Queen’s Bench Division: Tomlinson J, on 17 November 2000, set aside the arbitrators’ award and declared that the owner was not obliged to complete the vessel in accordance with the contract and would not become liable for the delivery instalment.
• Court of Appeal (Civil Division): the appeal was allowed unanimously, the arbitrators’ award of 14 September 2000 was restored, and permission to appeal to the House of Lords was refused.