Insolvency of Spanish Shipyard and Its Effects on Shipbuilding Contracts

Candela Zarauza Casas.

06/05/2009 International Law Office


Introduction

A Spanish shipyard or its creditors may file for the shipyard's insolvency if it is unable to comply with its contractual obligations in a timely and regular manner.

Every insolvency proceeding involving a Spanish shipyard is subject to the terms and provisions of the Insolvency Act.(1) This is the case regardless of the governing law established by the shipowner and shipyard in the relevant shipbuilding contract.

This update looks at the power granted to insolvency judges regarding the termination of a shipbuilding contract when, at the time the insolvency proceedings are initiated, obligations of both parties are still pending (ie, the shipyard for construction of the vessel and the shipowner for the payment of instalments). 

In insolvency cases the Spanish courts are granted significant powers of intervention to (i) cure breaches of contract and order the parties to perform the shipbuilding contract, and (ii) declare the early termination of an ongoing shipbuilding contract (even in the absence of default by the parties), in the interests of the insolvency proceedings. Furthermore, in certain types of contract, excluding shipbuilding contracts, the courts' powers are extended to restore contracts which have been lawfully terminated early.

Termination of Shipbuilding Contracts

Shipowner's right to terminate contract upon shipyard being declared insolvent

According to the act, the shipowner may request the termination of the shipbuilding contract according to the contract's terms and conditions. However, the right to terminate a shipbuilding contract early is subject to certain limitations (eg, the prohibition stated in Article 61.3) and the insolvency judge's supervision (Article 62).

Shipbuilding contracts usually include the commencement of insolvency proceedings as part of an early termination. However, according to Spanish law, and in particular Article 61.3, early termination clauses triggered by the mere declaration of insolvency are null.

The law intends to grant continuity to the debtor's activity and the general rule is that contracts with reciprocal obligations for both parties pending performance at the time of the declaration of insolvency will continue in force and effect despite the shipyard being declared insolvent.

The cancellation of a shipbuilding contract where the shipyard has become insolvent will be based only on the shipyard's breach of contract, which may have arisen either before or after the declaration of insolvency.

In insolvency situations, the right to terminate the shipbuilding contract is supervised by the insolvency judge.

Thus, the shipowner's right to terminate the contract is limited if insolvency proceedings have started. Even if the shipowner is entitled to cancel the contract according to a provision (eg, permissible and non-permissible delays in delivery of the vessel exceeding the dead drop line established in the shipbuilding contract and therefore giving rise to the termination of the contract according to the relevant clause of the shipbuilding contract), the insolvency judge may uphold the continuation of the contractual relationship in the interests of the estate.

Termination by trustees or shipyard

Article 62.2 of the act deals with the role of the Spanish courts. In this situation, the insolvency judge may declare that the shipbuilding contract be terminated early, even if both parties are duly complying with their contractual obligations. At the request of the insolvency debtor or the trustees, the judge may terminate the contract if this is advisable in the interests of the estate.

Right to restore shipbuilding contract

The power of the courts to compel the parties to comply with a shipbuilding contract, despite the fact that there is a cause for termination (under Article 62.3), is limited in time to the insolvency proceedings (ie, such power does not affect shipbuilding contracts that were lawfully terminated before the insolvency proceedings). A joint interpretation of Articles 62.2 and 62.3 leads to this conclusion:

The termination action will be brought before the insolvency judge and will be decided according to insolvency incident rules (Article 62.2). Despite the fact that there is a cause for termination, the insolvency judge may, in the interest of the insolvency proceedings, order the parties to fulfil the contract.”

Therefore, the courts cannot restore a shipbuilding contract which was terminated by the shipowner before the insolvency proceedings began based on a breach of contract which gave the shipowner the right to terminate.

The law expressly allows the courts to restore certain contracts which lawfully terminated early before the commencement of insolvency proceedings have started. However, a strict approach will be taken when interpreting this power. It affects only those contracts expressly set out in law. According to Articles 68 and 69 of the act, credit agreements and agreements for the acquisition of goods where payment is postponed (eg, hire purchase agreements) lawfully terminated before the commencement of insolvency proceedings may be restored by the courts in certain circumstances.

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(1) Law 22/2003.