A basic civil-law agreement made in the shipyard activity is a contract on the construction of a ship or its specific elements (shipyard contract). Even though both parties execute it in order to produce a ship or its elements for consideration, it is often the case that expectations of parties with respect to their mutual cooperation prove different from the actual course of performing a contract. As a consequence, the performance of a contract in whole turns out to be impossible or excessively hindered. Therefore, it seems reasonable to answer a question about the possibility of shortening the time of binding the parties by the contract and to assess the consequences of its dissolution, despite the failure to perform it in whole.

Preliminary comments

A shipbuilding contract, due to its strictly defined object of obligation, does not constitute a separate type of an agreement named under civil law. It is true that this contract appears in Polish legislation, for example in the Act of 18 September 2001 Maritime Code, in the context of information indicated in the register of ships under construction; however, this does not mean that it constitutes a separate type of a civil-law contract.

Considering elements of a shipbuilding contract such as: the object of obligations of the parties and their scope, the method of remunerating for building a ship or the production of its parts, liability for defects in the produced object, as well as the performance of a contract based on design documentation, it is assumed that a shipbuilding contract is treated as a specific task contract (umowa o dzieło). However, there are some opinions that it would be reasonable to recognise it as a building work contract (umowa o roboty budowlane).

Consequently, it has to be assumed that the option to terminate a contract before ending the construction of a ship or its element will be subject to both regulations that concern total liabilities, including mutual agreements, and special regulations that concern a specific task contract and a building work contract.
It is noteworthy that a ship is often constructed for an entity from the sector of public finance or another entity that is obliged to execute contracts of specific value according to the procedure given in the Act of 29 January 2004 Public Procurement Law, rather than at arm’s length. As regards contracts that are made according to the above-mentioned Act, the legislator, in addition to causes included in the Civil Code, determined additional reasons for withdrawing from a contract; however, due to the narrow scope of entities that are obliged to execute contracts subject to the regime of this Law, such causes will not be discussed in this paper.

In addition to solutions proposed by the legislator, parties may determine the provisions of their agreement, including provisions concerning its early termination, in line with their needs, in accordance with the rules of contract liberty provided for in the Civil Code. The only limitations in this respect remain the requirement of conformity of contract content and its purpose to the characteristics (nature) of the relationship, the Act and the principles of community life.

Withdrawal from a contract

Regulations of the Civil Code provide for an option to withdraw from a contract, both if this reservation is included in the provisions of a contract (contractual right to withdraw) and if statutory conditions are fulfilled, without the necessity to include a clause in the content of the contract about the applicability of the regulation to the legal relationship that is its outcome (statutory right of withdrawal).

Contractual right of withdrawal

With respect to the contractual right of withdrawal, the legislator indicates that for its applicability, in addition to the necessity of including a provision in this respect in the content of the contract, it is necessary to set a deadline by which one of or both parties may exercise this right. Including a clause on the contractual right of withdrawal in the contract without setting a deadline for exercising this right makes this provision invalid. It has to be indicated also that for the withdrawal from a contract under the contractual right of withdrawal according to the mode provided for by the legislator it is not necessary to give any causes and even their occurrence is not necessary either.

The legislator provides for the option to reserve that exercising the right of withdrawal will involve the obligation to make a payment of an amount set forth in the contract (compensation – odstępne). The payment of the compensation is the condition for the effectiveness of a declaration on withdrawal from the contract.

Effects of exercising the contractual right of withdrawal in its model form are as follows:

a) a contract is recognised as not executed (effect Lat. ex tunc – since then), which is understood as the cancellation of the effect of executing a contract by the parties;

b) the duty of the parties to return to the other party the subject of contractual obligation in an unchanged condition, unless the change results from the ordinary management; and

c) the duty to pay remuneration, if the subject of contractual obligation was the rendition of services or using a thing.

It is worth mentioning that the effect in the form of recognising a contract as ineffective from its start means that the parties cannot make claims that result from the content of the contract, due to their expiry, which applies both to basic obligations, for example as to the value of remuneration, and accessory obligations and rights, such as contractual penalties for default or default interest.

Simultaneously, due to the special characteristics of ship building, which is based on the production of a subject that is permanent and made of a large number of ready or custom-made components, it is very hard or sometimes even impossible to return the benefits in kind. A similar mode of settlement will be applied in the situation where in reality it is not possible to return delivered materials. This method results in the obligation of a settlement between the parties otherwise than according to arrangements made in a contract, which may be detrimental to one of the parties.

In addition, it is noteworthy that the effect of recognising a contract as not executed is that it is not possible to claim contractual remuneration. The parties may determine the value of remuneration in a contract, which will be considered as adequate if the contract is withdrawn from in the course of fulfilling the obligation. However, in practice, at the time of drawing up a contract it will be difficult to determine specific amounts of the part of remuneration depending on specific stages of work advancement; therefore, it seems reasonable to include provisions about the payment that is proportional to the progress of work determined based on contractual remuneration. If no such provision is included, there is a risk that an ordering party will point out that a contractor should receive consideration based on market prices, which may be on a much lower level than determined by the parties in contractual provisions.

At the same time, both in the judicature and in the doctrine it is indicated that the regulation that governs the above-mentioned consequences of exercising by one of the parties of the contractual withdrawal of the contract is of dispositive nature, which means that parties may change the effects of a submitted declaration of withdrawal intent in the contract by, for example, reserving ex nunc effect (from now on), which would mean that the parties are not bound by the contract in the future, but they are bound by the contract as to the subject of the obligation in the part already exercised. Owing to this, the parties do not have to return the subject of obligation, by making a settlement based on the advancement of work, where its title is transferred to the ordering party and the produced thing is subject to protection within the regime of guarantee for defects as well as warranty. Moreover, parties may make claims freely that are based both on contractual clauses and statutory regulations that concern a specific task contract or a building work contract.

It is also worth indicating that it seems admissible to reserve in the contractual provisions the right to withdraw from a contract if causes that are indicated directly in the contract occur, which is referred to in the doctrine as so-called punitive (sanction) withdrawal. It remains disputable only if a deadline by which a party may exercise the right to withdraw from the contract could not be set in the contract.

Statutory right of withdrawal

The legislator provides for an option of withdrawing from a contract by its party with respect to mutual agreements (contracts that include obligations of both parties, in which both parties are simultaneously bound to fulfil an obligation for the other party and entitled to demand the fulfilment of an obligation by the other party – this group of contracts includes both a specific task contract and a building work contract) in the following instances:

a) delay (delay in the fulfilment of an obligation through fault of an obliged party) in meeting an obligation by the other party – in order to exercise this right, it is necessary to set an additional deadline to the other party for the fulfilment of the obligation with the reservation that if the obligation is not fulfilled by this deadline, the party will be entitled to withdraw from the contract;

b) delay in the fulfilment of an obligation by the other party, provided a reservation is made of the right to withdraw from a contract in its clauses if the obligation is not fulfilled in a timely manner, so-called lex commissoria or if a fulfilment of an obligation by one of the parties after the deadline would be important for the other party due to the characteristics of the obligation because of the intended purpose of the contract, which is known to the party that is delayed, for example the expiration of a deadline for handing over a ship to a third party – in this case, to exercise the right to withdraw from a contract it is not necessary to set an additional deadline for the fulfilment of the obligation;

c) a declaration of a party of an obligation that it will not fulfil an obligation – in this case, the entitled party is not bound to set an additional deadline; and

d) the incapacity to fulfil an obligation due to circumstances that are not attributable to a party obliged.

The withdrawal from a ship construction contract for one of the above-mentioned reasons, alike in the case of a contractual withdrawal from a contract in the model proposed by the legislator, results in the fiction of no execution of the contract (ex tunc effect) and imposes the obligation to return the results of fulfilling the obligations to date.

Importantly, while considering the fact that a party withdrawing from a contract has taken a decision to terminate the contract for reasons that are attributable to his counterparty, the legislator gives him the right to the remedy of loss according to general rules of law. It means that the withdrawing party, in order to receive compensation, has to prove only that the cause underlying the withdrawal from the contract (one of the above-mentioned causes) is in a casual connection with a material loss incurred by the withdrawing party, for example with regards to the necessity to pay contractual penalties to a third party because of delayed commissioning of a ship. Importantly, due to the existing presumption of guilt that results from the regulations of the Civil Code, the party that has an obligation, rather than a withdrawing party, is bound to prove that the default or improper conduct of work results from causes that are out of its control. The scope of damages includes, if no other provisions in this respect exist, both incurred losses and benefits lost due to the default. In order to facilitate making potential claims for compensation, it is advisable for an ordering party to make sure that a copy of a third-party liability insurance policy of a contractor is enclosed to the contract or that contractual provisions include basic data that enable its identification – in this case, a claim for the payment of due compensation may be made directly to an insurance firm.

It is worth mentioning that effects in this respect may be changed by the parties in a contract, for example by reserving the effect for the future or determining specific rules of settlements between the parties.
Moreover, the legislator provides for additional causes of withdrawal from a specific task contract or a building work contract, which includes a shipbuilding contract.

As regards specific task contracts, the Act provides for the following grounds for the withdrawal from a contract by a party:

a) delay of a contractor in the start or completion of work to the extent that makes it impossible for the contractor to complete the work by the end of an agreed time, for example due to the level of complication of work included in the subject of the contract; in this case, an ordering party may withdraw from a contract without setting an additional deadline even before the expiry of the deadline for completing the task;

b) completing a task in a manner that is defective or contrary to the contract; in order to exercise the option of withdrawing from a contract, a contractor has to set an additional deadline for the proper fulfilment of the task, and only after its ineffective lapse may withdraw from the contract, with the reservation that if an ordering party has delivered materials for the fulfilment of the task, he may demand the return of materials and the hand-over of any started work; and

c) no cooperation of an ordering party with a contractor, which is necessary to fulfil the task, for example by the failure to deliver materials necessary to fulfil the task or design documentation; in order to exercise the right to withdraw from the contract, it is necessary to set an additional deadline with the reservation of withdrawing from the contract if it expires ineffectively.

It is noteworthy that the withdrawal from a contract for the above-mentioned reasons has also a retrospective effect, which means that the contract is considered as not executed, the parties are obliged to return the obligations that have been fulfilled before, while accessory claims, for example due to interest, expire. The doctrine emphasizes that parties to a contract may formulate the effect of a submitted declaration of intent about the withdrawal from the contract for the above-mentioned reasons differently, for example by changing it in the future. In addition, it seems admissible to grant the parties the right to withdraw from a contract in the part that has not been performed (if it is possible to distinguish a relatively independent stage of work, which is to be assessed on the case-by-case basis).

Moreover, the legislator grants the right to an ordering party to withdraw from a contract for convenience (without giving reasons). A cut-off point to exercise this right is the time of completing a task. However, then an ordering party is obliged to pay a contractor the remuneration set forth in the contract in whole, with the simultaneous right to set off any amounts the contractor has saved due to the failure to fulfil the task, for example costs of materials that have not been purchased finally for the fulfilment of task or the costs of personnel salaries. It is also noteworthy that the way of regulating mutual settlements between the parties in the Act arouses doubts in the judicature as to whether a contract is deemed to be not executed (ex tunc effect) or if legal effects occur only for the future (ex nunc effect). As a consequence, it is worth agreeing on this issue already at the stage of drawing up a contract.

As regards a building work contract, whose regulations may be referred to, according to some opinions, to a shipbuilding contract, the legislator provides for an option of withdrawing from a contract, in addition to causes indicated in the context of a specific task contract (except for an option to withdraw from a contract due to no cooperation of an ordering party with a contractor – the possibility of withdrawing from a construction work contract for this reason is disputable), if a contractor does not receive from an investor any payment guarantees (granted in the form of a bank guarantee, an insurance guarantee, a bank letter of credit or bank surety) by a set deadline, which has to be minimum 45 days. It has to be stressed that the withdrawal from a contract for this reason is considered to be a withdrawal through fault of the investor and is effective as of the day of withdrawal, while the lack of any guarantees constitutes an obstacle to the conduct of building work for reasons that are attributable to an investor.

The effect of the withdrawal from a contract in this mode is the acquisition by a contractor of a claim for payment of the remuneration set forth in a contract, net of what the contractor has saved due to not performing all work. The opinion that is dominant in the doctrine is that the withdrawal in this mode has a statutory result of legal effects for the future (ex nunc), contrary to the other causes of withdrawal mentioned before in this study, without depriving parties of any claims that result from a contract and not determining the obligation to return the subject of obligations fulfilled before. It has to be noted that the right to withdraw from a contract thereunder is held also in a relationship between a subcontractor and a contractor.

Termination of a contract

The termination of a contract as a method of its early dissolution has not been provided for in statutory regulations of any of the contracts that applies to a shipyard contract, i.e. a specific task contract or a building work contract. The legislator indicates that the termination of a contract applies to obligations of a continuous nature, which in principle do not include a specific task contract or a building work contract, because the volume of obligations, including the value of due remuneration, is not affected by the lapse of time, as is the case, for example, in a lease contract, but rather by an achieved result.

Consequently, it has to be assumed that in the model structure of a result contract, such as a shipbuilding contract, a way of dissolving a contract by a unilateral declaration of intent is the withdrawal from a contract, rather than its termination.

However, this does not mean that the provisions on terminating a shipbuilding contract would be invalid under law in every case. It cannot be excluded that according to the applicable rule of the freedom of contracts, the contractual provisions have been formulated in the manner that gives a party the right to terminate a shipbuilding contract subject to a determined notice period, provided the provision in this respect is not contrary to the principles of community life as well as the nature of the obligation, which in the event of a shipbuilding contract seems to be hard to achieve. It needs to be pointed out that the reservation of the right to terminate a contract, in which the timely and proper performance of its subject in whole is its core, seems to be contrary to its nature. Terminating the existence of a contract of this type before the completion of work should be only an exception that takes place in extraordinary and reasonable circumstances, rather than being a right used in a manner that is arbitrary and independent of the progress of performing a contract, with the breach of the principles of contractual loyalty and merchant integrity. The reservation of the right to terminate a contract may expose a party, whose contract is terminated, to serious financial effects, due to the value of the obligation.

However, if the parties succeed in achieving a balance between the nature of the institution of contract termination and a purpose of a shipbuilding contract, for example through the introduction of an obligation to remedy damage resulting from the default by the terminating party, it has to be pointed out that contractual provisions in this respect should indicate the period of termination, i.e. the time after which the contract will be dissolved. Unlike in the case of withdrawal from a contract, the effect of a submitted declaration does not occur when the other party becomes acquainted with the content of the submitted declaration of intent, but rather after the lapse of a notice period set in the contract. It means that the termination leads to consequences as to the obligation only in its unfulfilled part.

Declaration of intent model

Both the withdrawal from a contract and its termination is given based on a declaration of intent of one of the parties to the other party in the manner that makes it possible to become acquainted with its content.
As regards a shipbuilding contract, which, due to the volume of the subject of obligation, in most cases is made in a written form, a declaration of intent on the withdrawal from or termination of the contract should be made in a documented form, unless the Act or the contract provide for another form. A documented form is preserved if a declaration of intent is recorded on a data storage device that makes it possible to become acquainted with its content. It means that it is admissible and effective to make a declaration of intent that is written down not only on paper but also in the content of an e-mail or text as well as during a phone conversation (provided the call is recorded). However, for the purpose of evidence, it is important that a declaration of intent should be made in the manner that makes it possible to confirm that the other party has had a chance to become acquainted with its content, because from that moment effects occur related to the withdrawal from the contract or the start of a notice period.

Summary

Both the withdrawal from a contract and its termination have the effect in the form of dissolving a contract made between parties thereto. It is noteworthy, however, that due to the legal nature of a shipyard contract, which is understood as a contract on the construction of a ship or its element, that is a contract of result, a suitable institution aimed at the dissolution of a contract as a consequence of a declaration of intent of one of the parties is the withdrawal from a contract.

However, when exercising this right, one has to bear in mind not only a number of restrictions that are related to causes of a withdrawal from a contract and requirements that concern activities that have to be taken before the submission of a relevant declaration of intent, but also effects due to the withdrawal from a contract. It is noteworthy that in most cases the submission of a declaration of intent about the withdrawal from a contract cancels its existence retrospectively, introducing the fiction of contract non-existence.

Consequently, parties of a contract, which are often conflicting at this stage, due to losing of the binding effect of the contract that has been binding for them before, have to make new arrangements as to the settlements and possible rights for the future, for example with respect to warranty claims. Considering the tension that exists already at that stage, it may prove difficult to conduct negotiations resulting in arrangements that will be satisfying for both parties. Therefore, it is important that already at the stage of executing a contract, the parties should provide for an option of its termination even if the subject of the obligation is not completed in whole and should formulate effects in this respect in the manner that will meet the needs of both parties best.

Legal Counsel Mateusz Romowicz

http://www.prawo-korporacyjne.pl/

www.facebook.com/Legal.Marine.Mateusz.Romowicz