Shandong Shipyard’s Lesson: Don’t Rock a Bank; A shipbuilder stung by European clients has spent years fighting a major bank, so far in vain

09.26.2013 19:33

Shandong Shipyard’s Lesson: Don’t Rock a Bank

A shipbuilder stung by European clients has spent years fighting a major bank, so far in vain

By staff reporters Pang Jiaoming and Wu Jing

(Beijing) — What was initially billed as a lucrative order from a European customer has pushed a Shandong Province shipbuilding company to the brink of bankruptcy and ruined its relationship with one of China’s biggest banks. Rushan City Shipbuilding Co. is fighting for survival after filing a lawsuit recently against the Rushan branch of the Agricultural Bank of China (ABC) – the latest in a series of ugly legal battles involving the bank and shipping companies that began in 2010.The province’s highest judicial authority, the Shandong High Court, agreed early August to review Rushan’s case but gave no timetable for a decision.

The shipbuilder, a local government-backed company with 500 million yuan in total assets and 500 employees, wants the court to invalidate financing agreements with ABC tied to a 2007 contract for two ships ordered by an Italian client.

Rushan asked the court for permission to wash its hands of an ABC-backed repayment guarantee and a letter of credit, as well as all debts, obligations and responsibilities related to the defunct contract worth more than 80 million euros.

The contract was not only flawed, the shipbuilder claims, but figured into a conspiracy by European ship owners to undermine its business – a conspiracy that ABC, at least indirectly, supported and still supports by holding the shipbuilder to nearly 97 million euros tied to the guarantee plus interest and taxes.

Rushan, whose shipyard has been idle since late 2011, says it can’t pay the bank without going out of business.

Rushan’s court filing charged that “the (Italian) ship buyer, with the help and cooperation of a (ship) design company, duped Rushan Shipbuilding into signing a production contract and obtained a repayment guarantee from ABC by providing fraudulent information.”

The shipyard also slammed ABC for “from beginning to end, not reflecting the sincerity it should,” as well as “obstructing the shipbuilder’s efforts to protect its legal rights,” “helping foreign ship owners squeeze out shipbuilding companies,” and “signing irresponsible letters of guarantee contracts with foreign banks.”

ABC, one of China’s four largest state banks, has flatly rejected all of the charges leveled by its troubled customer Rushan. And it’s holding the shipbuilder to not only the European contract but the rest of its debts, estimated at about 1 billion yuan.

Contract Games

Rushan dates its ongoing travails to a March 2007 order for two 13,600 deadweight ton, stainless steel tanker ships placed by the Italian shipping company Marnavi S.P.A.

Two months later the buyer, apparently as per its contract rights, radically adjusted the specifications. According to a contract addendum signed by the two sides, the shipyard was to enlarge the vessels to 15,900 dwt for the so-called Ship 510 and 17,000 dwt for Ship 511.

Meanwhile, Marnavi shifted legal responsibility for the purchase contract to a shipping subsidiary called Hambleton Gesto Enavegacao.

A Rushan source said the shipyard was almost finished building Ship 510 in April 2010 when the ship’s designer and Marnavi received a certification from an Italian ship classification society RINA for the vessels Rushan was building. But the certificates were for 19,000 dwt and 21,000 dwt vessels – ships far larger than the revised contract’s specifications.

Rushan officials were stunned: Vessels with these new specs could not be delivered under the contract terms unless the shipbuilder swallowed a significant loss. But the client said that adjusting the tonnage requirements was “an unavoidable technical consequence of the shipbuilding contract revision work.”

Shipyard industry experts in China said Rushan was apparently trapped as a consequence of its own inexperience.

A Jiangsu Province shipbuilder’s legal affairs manager said that a smart shipbuilder “should sign a supplemental agreement with a buyer, agreeing that if the buyer makes any changes to a ship, resulting in changes to deadweight tonnage, the buyer cannot hold the shipbuilder accountable.” This is something Rushan apparently failed to do.

“Without experience,” a bank source familiar with Rushan’s dilemma said, “you have to accept possible risks.”

Rushan and Marnavi initially agreed in the contract to arbitrate any main contract dispute in Britain and any ship design disputes in France. So in August 2010, after Rushan concluded that it might be unable to deliver the ships on time, the Italian client filed for contract settlement arbitration with the London International Arbitration Commission.

In its claim, Rushan said the global financial crisis of 2008 and subsequent European debt crisis had pushed Marnavi to seek a way out of its purchase agreement. Indeed, the Chinese company said, many ship owners had used contract loopholes to break shipyard contracts between 2008 and 2010, leaving companies across the Chinese shipbuilding landscape in the lurch.

Results of the arbitration commission were released two months later: If Rushan failed to deliver the vessels according to the contract’s schedule, it ruled, the ship buyer would have the legal right to refuse delivery and deny payment.

The commission refused to hear Rushan’s claim that the buyer and ship designer had collaborated to defraud the Chinese company, saying the charges were beyond the scope of arbitration. The shipbuilder replied that the arbitrator should have looked into possible contract fraud before its final ruling.

Meanwhile, also in August 2010, Rushan filed claims against Marnavi and the designer in China with the Qingdao Maritime Court in Shandong. The claim accused the Europeans of “collusive fraud.”