SHIP BUILDING CONTRACTS: Theory and Practice

EGEST BARBULLUSHIANTWERPEN, 3 MAY. 2010

Maritime and Seaports Law

What are shipbuilding contracts?

• Standard contract forms made and agreed by either shipbuilder’s associations or shipyards and which constitute a contract of sale between two parties – “Builder” and “Buyer”.

• Most common standard shipbuilding contracts:» SAJ form» BIMCO Newbuildcon» AWES Form» NSA form

Main obligation of the two parties

• The Builder to design, build, launch, equip, complete, sell and deliver to the Buyer at the Builder’s shipyard the “Vessel” as described in the contract and “in accordance with good ship building practise”

• The Buyer to purchase the “Vessel”, take delivery, all in accordance with the terms.

Major Components of Commercial Shipbuilding Contracts

Terms and Conditions

PAYMENTPayment by installments:

• Completion of milestones• Security for payments refund guarantee• Guarantee from Buyer’s parent / third party• Final installment on delivery

TITLE

• The title passes to the purchaser as construction proceeds and the ship is paid for

• Also clauses to pass title of ship equipment purchased before it has even been incorporated into the ship

• Practice title transferred before delivery(builder’s mortgage)

WARRANTIES AND LIMITATION OF LIABILITY

• Ship builders reluctant to unlimited liability• Will the builder warrant his design on matters such as

speed, fuel consumption, length, hold capacity, or tonnage?• Breach of a warranty entitles the injured party to

damages• Warranty against faulty workmanship and material for a

specified period of time

WARRANTIES AND LIMITATION OF LIABILITY

• Clause excluding liability for any consequential damage suffered by the purchase such as damages for loss of use of the vessel.

• Shipbuilders often limit their liability for equipment manufactured by others.

• Transferability of warranties negotiable

EXTRAS AND CHANGE ORDERS• Alterations at the request of the purchaser(delivery

and payment date) • Term which specifies who is authorized to order and

approve extras• Practice price of extras and changes to be

determined by arbitration if the parties fail to reach an agreement

Termination Buyer’s Default• Buyer’s default –failure to pay installments• Builder’s remedy –interest and postponement of

delivery date• Builder’s right to terminate• Remedy Period• Default Notice• Builder’s right to sell incomplete / completed vessel• Application of sale proceeds

Termination Builder’s Default

• Identifies Buyer’s rights of termination in case of Builder default

• Failure to deliver vessel by drop-dead date, failure to provide refund guarantees, etc.

• Termination –refund of installments and interest• Recovery of costs thrown away and losses?• Completion of vessel elsewhere?

Insurance and Indemnity Provisions

• Insurance during construction Institute Builders’ Risk insurance

• Buyer named as co-assured security for Buyer• Rights of parties damage and total loss• Mutual indemnity damage to property, personal

injury or loss of life

DELIVERY

• Contractual delivery date and permissible delays• Delivery documents• Class certificates• Protocol of delivery and acceptance• Passage of title

COMPLETION DATES

• Liquidated damages clause per diem penalty for late delivery

• Bonus for early delivery• “Force majeure” clause the circumstances outside

shipyard’s control that will excuse it for failing to meet the completion date

• Provision allowing for the purchaser to complete the vessel on another shipyard

THANK YOU