Very often the contractual position will provide that an assignment of rights under the shipbuilding contract by either party will require the prior written consent of the other party (this is a position often replicated in the refund guarantee).
An assignment of rights alone, without an accompanying transfer of obligations, does not create a clean break for the seller, who would remain liable under the shipbuilding contract (relying on a counter-indemnity from the buyer). A transfer of the seller’s obligations to a buyer is therefore normally achieved by way of novation of the shipbuilding contract, which will always require the builder’s and refund guarantor’s consent. As such, both being dependent on third party consent, neither assignment nor novation will always be achievable outcomes.
In such circumstances, the parent company of an existing buyer may nevertheless be able to exit by selling the shares in the special purpose company (SPC) who is the contractual counterparty (as buyer) to the shipbuilding contract, to a third party, subject to any change of control provisions in the documents (which are rare), and agreement on the terms of the sale.Such terms are open for negotiation, but would be expected to include the seller giving certain warranties with respect to the condition of the SPC and its assets at the point of sale (implying an element of continuing liability), and might also include (for example) an agreement to return any discount that the purchase price represents on moneys then paid down by the seller under the shipbuilding contract in the event of a claim being paid under the refund guarantee.
Taking on the assets and liabilities of the SPC can be more challenging for a third party than a novation of the shipbuilding contract and associated re-issuance of the refund guarantee, and will require an additional layer of legal and financial due diligence. However, this may well be worth the effort as it allows the sale of the project in circumstances where one would not otherwise be available, and allows a new buyer (who may not be able to secure the same commercial terms with the builder) to take over the seller’s agreed contractual position.
We have included a summary of some of the key differences between (i) a sale by assignment, (ii) a sale by novation, and (iii) a sale of shares in the following table:
| ||Assignment||Novation||Share Sale|
|Is builder or refund guarantor consent required?||Depends on contractual terms||Yes||No (unless a change of control provision is included)|
|Must the refund guarantee be re-issued?||No||Yes||No|
|Must the existing buyer’s performance guarantee (if any) be re-issued?||No (although the seller will require a counter-indemnity)||Yes||No (although the seller will require a counter-indemnity from the buyer)|
|Must the shipbuilding contract be amended?|
(This will generally be limited to informing the builder of administrative changes, e.g. of a new supervisor (if applicable) and contact details – although the buyer may wish to revisit such matters as the specifications, flag choice and classification society)
|Must the refund guarantee be amended?||No||Yes||No|
|What is the new buyer’s recourse to the seller (as outgoing buyer)?||Claims under agreed representations, cross-indemnities (in respect of matters before or after the relevant time, being the effective time of the assignment).||Claims under agreed representations, cross-indemnities (in respect of matters before or after the relevant time, being the effective time of the novation)||Claims under agreed representations and warranties (based on a warranty and disclosure schedule) – the claims period is often limited in duration / may be subject to a cap.|
|Scope of seller’s representations and warranties?||Relating to assigned shipbuilding contract and refund guarantee||Relating to novated shipbuilding contract and refund guarantee||As per novation but there will be additional warranties relating to target’s business, seller’s title to the shares, etc.|
Jason Lemann, Of Counsel
Paul Coggins, Senior Associate
This article does not constitute legal advice. Please note all legal advice provided in Japan by Norton Rose Fulbright Gaikokuho Jimu Bengoshi Jimusho (the Norton Rose Fulbright Tokyo Office, which is an independent operating unit within Norton Rose Fulbright (Asia) LLP) is provided by or under the supervision and control of the registered foreign lawyers (Gaikokuho Jimu Bengoshi), details of whom are available on the Tokyo page at www.nortonrosefulbright.com