Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc

Shipbuilding contracts must be interpreted as a coherent whole. Delays caused by the buyer’s alleged breach of inspection obligations were not a separate category of delay and were not permissible delays under the contracts. They therefore counted towards the buyer’s contractual cancellation thresholds. Alternatively, if such delays could fall within the force majeure provision, the builder’s failure to give the contractually required notice prevented it from treating them as permissible delays. A valid contractual cancellation was not itself a breach capable of founding the builder’s damages claim. Equitable set-off depends on the close connection between claim and cross-claim, not the claimant’s solvency or special-purpose status.

The builder appealed under section 69 of the Arbitration Act 1996 against majority arbitration awards concerning four materially identical shipbuilding contracts. The buyers had cancelled after delivery delays exceeding the contractual thresholds. The builder alleged that delays were caused by breaches of the buyers’ inspection obligations and argued that those delays should be excluded from the cancellation calculations.

The buyers appealed the finding that cancellation under one contractual provision was unavailable and that interest was consequently not payable. The issues concerned the classification of buyer-caused delays, the effect of failing to give notice, the validity and consequences of cancellation, and equitable set-off.

1. Cancellation. The buyers were entitled to cancel each contract and recover the instalments paid. The contract created three categories of delay: permissible, non-permissible and excluded delays. It contained no separate category of buyer’s breach delays. Delays caused by breach of the inspection undertaking were not excluded delays because the contract did not provide that such breaches extended the Delivery Date. They were therefore non-permissible delays and counted towards cancellation under Articles III.1(c) and VIII.3.
2. The phrase “default in performance by the Buyer” in Article VIII.3 referred to the buyer defaults which extended the Delivery Date under Article XI. It did not exclude inspection-related delays from the cancellation calculations. The contractual scheme, read as a whole, supported that construction.
3. Permissible delay and notice. Buyer’s breach delays did not fall within Article VIII.1. Alternatively, if they potentially did, Article VIII.2 required notice within seven days. The contractual consequence of non-compliance was that the builder was not entitled to any relief claimed. The delays therefore remained non-permissible and counted towards both cancellation thresholds. Cancellation under Article III.1(c) carried the stipulated interest entitlement.
4. Own-breach principle. The presumption against construing a contract so that a party benefits from its own breach did not justify the builder’s interpretation. The buyer’s supervisor had no contractual power to stop construction, and the proposed fourth category of delay was inconsistent with the contractual scheme.
5. Set-off. The builder’s counterclaim was misconceived because the alleged loss depended on the buyers’ lawful exercise of a contractual cancellation right. In any event, the tribunal had applied the correct equitable set-off test and its conclusion disclosed no error of law or decision that no reasonable arbitrator could reach. The buyers’ financial status could not create manifest injustice. Article X.2 did not clearly exclude set-off.
6. The builder’s appeals were dismissed. The buyers’ appeals concerning Hulls J0051 and J0052 were allowed, the awards were varied to allow interest, and those awards were remitted for calculation of interest. The awards concerning Hulls J0119 and J0120 were confirmed.

• Arbitration tribunals: Majority awards held that cancellation under Article VIII.3 was valid and justified, but differed on whether cancellation under Article III.1(c) and interest were available.
• High Court (Commercial Court): Permission to appeal was granted by Cooke J on 13 October 2014. The court dismissed the builder’s appeals, allowed the buyers’ appeals concerning Hulls J0051 and J0052, and confirmed the awards concerning Hulls J0119 and J0120.