Ferries: SNP Minister knew refund guarantees would be “very limited protection in reality”

The Ferry ‘scandal’ story runs on typically ill-informed. The Herald today headlines supposed neglect in securing a contract refund guarantee or pledge as they put it.

US corporate law firm Haynes Boone reveal the often worthless nature of these:

The buyer’s position is made worse by the fact that many shipbuilding contracts provide that, where the buyer terminates the shipbuilding contract for delay, the buyer is entitled to a refund of the pre-delivery instalments of the contract price, plus interest, but the yard has no further
liability to the buyer. In circumstances where, after cancellation of the shipbuilding contract, the buyer will have to find another much later slot at another yard for a higher price, a refund of the pre-delivery instalments plus interest will not compensate the buyer for its losses arising out of the yard’s breach.

And:

As explained above, in a rising market, the buyer may be very reluctant to terminate the contract, particularly if the buyer will only receive a refund of the pre-delivery instalments of
the contract price, plus interest. This will not compensate the buyer for the additional costs it will incur placing another order at another yard for a higher price, and the profit that the buyer will lose as a result of the very significant delay in obtaining the ship. In these circumstances, the termination right provided to the buyer may provide very limited protection in reality.

https://www.haynesboone.com/-/media/project/haynesboone/haynesboone/pdfs/practice-group-pdfs/shipping/hb_affinity_shipbuilding_booklet.pdf?rev=2f7369434c5941c98fe3501e061b74ac&hash=BCCA9A9CD842A5F8D039B02ACF0C8419

The Herald has not, of course, fully researched this matter.

3 thoughts on “Ferries: SNP Minister knew refund guarantees would be “very limited protection in reality”

  1. Yet what possible relevance is there to McColl recalling Derek Mackay at all let alone “guidance” written over a decade ago ?

    Recall that this is the man who on live radio lied that he had NOT signed the Contract which began this unfortunate debacle; Even when that lie was exposed, not a single journalist asked what the Audit Report had actually pinpointed as crucial – Why the Contractor FMEL (McColl) signed up to providing guarantees should FMEL be a successful bidder in full knowledge he could not do so.

    It’s pretty clear this latest Herod of Free Enterprise articles is an arse covering exercise in hopes this “scandal” propaganda can be kept afloat, presumably McColl’s participation in it is on a no-win no fee basis…
    “Eau de Latrine”

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  2. So The Herald is reporting that: ‘… contract refund guarantees were not mandatory to win building work’ according to FMEL’s McColl.’ Having read the relevant Audit Scotland report, this is puzzling.

    Audit Scotland clearly viewed a Builder’s Refund Guarantee (BRG) as a MANDATORY requirement in the context of this tender. Indeed, we learn in its report that FMEL offered one in its winning bid. Was it ‘volunteering’ one? When FMEL altered it position on this during later negotiations, it still offered CMAL a partial BRG-type guarantee; and later still it was content to exchange this form of guarantee for another type, viz. surety bonds.

    Source: https://www.audit-scotland.gov.uk/uploads/docs/report/2022/nr_220323_vessels.pdf

    Here are what seem to be the key bits of the Audit Scotland report:

    Para 14: ‘CMAL advertised the contract notice for … the two vessels in October 2014. ….. This REQUIRED POTENTIAL BIDDERS TO DEMONSTRATE THAT THEY COULD MEET CERTAIN MANDATORY REQUIREMENTS, which included offering a Builder’s Refund Guarantee (BRG) from an accredited bank for each vessel.’ (my emphasis)

    Para 15: ‘In December 2014, CMAL issued an Invitation to Tender (ITT) to a short-list of potential bidders, including FMEL. … CMAL used the standard BIMCO New Build Contract (NEWBUILDCON) which is used throughout the shipbuilding industry. …. THE CONTRACT STIPULATES THAT THE FULL RISK FOR THE DESIGN AND BUILD REMAINS WITH THE BUILDER throughout the construction of vessels.’

    Para 17: ‘ALL BIDDERS WERE REQUIRED TO ACCEPT THE TERMS OF THE DRAFT CONTRACT OR TO PROVIDE COMMENTS OR AMENDMENTS TO THE DRAFT. Some of the bidders provided comments. FMEL DID NOT, THUS IMPLYING THAT IT ACCEPTED THE CONTRACT TERMS.’

    Later we learn of an FMEL complaint:

    Para 18: ‘In early 2017, 18 MONTHS AFTER CMAL HAD AWARDED THE CONTRACT, FMEL complained to CMAL and to Scottish ministers about the procurement process. … In response, the Scottish Government’s procurement directorate conducted an independent, high-level review of CMAL’s procurement procedure. ….
    – There was no evidence to suggest that the tender documentation was not understood by all bidders. PRE-CONTRACT DOCUMENTATION, INCLUDING FMEL’S BID, SUGGESTED THAT FMEL WAS AWARE OF THE RISKS IT WAS ACCEPTING AT THE POINT OF CONTRACT AWARD.
    – Neither the volume of clarification questions submitted by bidders, nor their content, suggested a fundamental lack of understanding of the requirements.’

    Para 21: ‘During the negotiations, and CONTRARY TO WHAT WAS INCLUDED IN ITS BID, FMEL STATED THAT IT WAS UNABLE TO OFFER CMAL THE MANDATORY BUILDER’S REFUND GUARANTEES (BRGS) due to financing restrictions.’

    Here Audit Scotland notes: ‘CMAL had been aware that FMEL, as a newly established organisation, would potentially find it difficult to secure the BRGs. However, CMAL BELIEVED THAT CLYDE BLOWERS CAPITAL (CBC) WOULD HAVE MET THE GUARANTEE REQUIREMENTS ON FMEL’S BEHALF. CBC REPORTED HOWEVER THAT IT DID NOT CONSIDER ANY INVOLVEMENT IN PROVIDING A GUARANTEE FOR FMEL.’

    It’s worth noting at this point the corporate structures involved, as best as I can discover. FMEL appears to have been a subsidiary of FMEL (Holdings) Ltd. In the ‘Report and Group Consolidated Financial Statement, 31 December, 2016’ for FMEL (Holdings), lodged with Companies House on 17 December 2018, we read this:

    Para 29 ‘Ultimate Parent Company: The ultimate parent undertaking is Clyde Blowers Capital Fund III LP ….. The Directors consider that James A McColl OBE is the Group’s ultimate controlling party by virtue of his share holding in Clyde Blowers Capital Gp III Limited the General Partner of Clyde Blowers Capital Fund III LP.’

    Recall the Audit Scotland contention regarding the BRG and Clyde Blowers Capital: (from Para 21) ‘CBC REPORTED HOWEVER THAT IT DID NOT CONSIDER ANY INVOLVEMENT IN PROVIDING A GUARANTEE FOR FMEL’.

    The Audit Scotland report sets out in detail mitigation measures taken and contract amendments made by the parties in the light of the change in risk due to FMEL no longer providing a 100% BRG. It explains ‘reassurances’ given by Transport Scotland/Scottish Government to CMAL over the latter’s unanticipated exposure to higher risk. All of the foregoing actions eventually resulted in this:

    ‘The CMAL BOARD ACCEPTED THOSE ASSURANCES and, on 16 October 2015, awarded the contracts for vessels 801 and 802 to FMEL for a combined fixed price of £97 million.’

    Given all of the above, it is certainly a surprise to read that ‘ contract refund guarantees were not mandatory to win building work’ in the context of this CMAL tender! Is this saga about to get more murky?

    Liked by 1 person

    1. Excellent synopsis Stewart, the Herod and notably the BBC have been instrumental in obfuscating what the Audit report actually said, political scalp-hunting rather than journalism is not a good look….

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