Should a party fail to comply with the contractual limitation period for challenging the cancellation of a contract by way of arbitration, it will also be precluded from challenging the cancellation before the English court.

Where a contract sets out a clear mechanism for settling disputes, the parties must ensure that they follow it to the letter – this is the lesson from a recent judgment of the English Commercial Court (Nanjing Tianshun Shipbuilding Co. Ltd, Jiangsu Skyrun International Group Ltd v Orchard Tankers PTE Ltd).

Buyers had entered into a shipbuilding contract with sellers. In the usual way, the contract price was payable in instalments by way of advances to the sellers.

The buyers had paid the first four instalments and, in accordance with the shipbuilding contract, were issued a refund guarantee by a Chinese bank. However on 2 February 2010, following a delay in delivery, the buyers notified the sellers that they were exercising their contractual right to cancel. Under the shipbuilding contract (and terms of the refund guarantee), the sellers then had 30 days to commence arbitration to dispute the buyers' cancellation. Provided arbitration was commenced within those 30 days, the sellers would not have to repay the instalments paid to them by the buyers until an arbitration award in favour of buyers was issued.

The sellers failed to institute the arbitration proceedings until shortly after the prescribed 30-day period, and consequently the buyers contended that the sellers' claim was time-barred. In response, the sellers argued that their failure to commence proceedings within time did not bar their right to dispute the cancellation of the contract; it merely barred the remedy from being obtained by way of an arbitral award. Therefore, they argued, although the arbitration tribunal did not have jurisdiction to hear the dispute they remained entitled to bring their claim before the English court.

The court held in favour of the buyers and concluded that the sellers' failure to institute proceedings within the 30-day period was "claim-barring" rather than merely "remedy-barring". The sellers' failure to scrutinise the shipbuilding contract and honour the contractual limitation periods meant that their claim was time-barred.

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