Shipbuilding options – worth the paper they’re written on?

Shipbuilding contracts often contain an element of “buy one, get a special offer on another”. In other words, an order for one vessel may well give the buyer an option on one or more further ships to be built at a later date. Unfortunately option provisions of this kind, can be of doubtful value, as Teekay Tankers found to its cost this week. As part of an order for four vessels from Korean builders STX, the parties included a clause aimed at giving an option on a further dozen vessels as follows:

“The Delivery Dates for each [of the] Optional Vessels shall be mutually agreed upon at the time of [Teekay’s] declaration of the relevant option … but [STX] will make best efforts to have a delivery within 2016 for each [of the] First Optional Vessels, within 2017 for each [of the] Second Optional Vessels and within 2017 for each [of the] Third Optional Vessels.”

STX went into Korean-style Chapter 11 bankruptcy, failed to build the original four ships and unsurprisingly repudiated the extra options. For the purpose of establishing its rights in the Korean administration (since recognised in England under the Model Law on Cross-border Insolvency), Teekay with the court’s permission got an arbitration award in respect of the original vessels, and in Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd [2017] EWHC 253 (Comm) sued for damages for the repudiation of the options. It failed in the latter.  Although it was clear that both parties had intended the option provision to have legal effect, and also that the courts disliked striking down a clause for uncertainty, this was simply too vague, since there was no way of establishing what criteria were to apply if Teekay gave notice to exercise the options and the parties could not agree dates. Cutting through a lot of verbiage, the conclusion appears to be simply this: to be sure of being able to enforce options of this kind, there is little alternative to providing for some kind of arbitration or third-party decision to be binding in the absence of some other agreement. Unpalatable, to be sure, especially to the yards, which need to maintain flexibility: but there seems little choice in the matter.

 

 

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