Ship Building Contracts: Theory and Practice

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  • Regulate issues such as terms of payment, registration, title and risk, delivery, and proper law and jurisdiction Principal Form SAJ Form It is published by the Shipbuilders’ Association of Japan in January 1974 and the framework of this form is commonly used in South Korea , China , Singapore and Taiwan . AWES Form It is the standard shipbuilding contract of the Association of West European Shipbuilders which revised and reissued in May 1999. NSA: Norwegian There are three aspects of shipbuilding contracts and specifications that are central to the interests of technically oriented persons r: (a) formation of the contract; (b) formation of the specifications and plans,the central technical components; and (c) management of the contract during ship construction. Clarke, M. A., Shipbuilding Contracts, Comité Maritime International Purpose: To define the entirety of the temporary relationship between the Contractor and the Shipowner. It establishes the rights, responsibilities, rules of conduct and assignment of risks between the two parties pertaining to all foreseeable technical, cost and schedule matters, as well as questions or disputes that may arise between the parties.
  • Builder guarantees specific performance characteristics. Liquidated damages if Builder fails to achieve these • Class / regulations vessel must comply with flag and alterations.
  • Source: Fundamental of Shipbuilding Contracts 2008, Fisher Maritime Consulting Group
  • Depends on the cost of the ship being built and the negotiating strength of the parties Purchaser’s perspective  lump sum payment upon delivery and completion of sea trials Shipbuilder’s perspective  funds paid in advance In practice  milestones or payments based upon the percentage to which the vessel has been completed at the date of the payment These milestones could include: the laying of the keel, completion of the hull, installation of engines, tanks and generators, installation of the superstructure, completion of interior finishing, completion of sea trials, and expiry of a trouble free period since delivery. The refund guarantee allows the buyer and its financiers to hold security from the shipyard which will respond in the event that the ship is not delivered . The exact wording of the refund guarantee is normally a matter of negotiation between the buyer and the shipyard.
  • This is done by leaving title in the name of the shipbuilder and having him record the vessel under construction with the Ship’s Registry.  The builder will then give the purchaser a builder’s mortgage to be registered against the recorded vessel.  In order to register one’s title after the sale has completed, it is necessary for the shipbuilder to provide the purchaser with a builder’s certificate naming the purchaser as the first owner of the ship.
  • Builder’s Warranty • Guarantee of design, workmanship, materials • Duration –12 / 18 / 24 months / first dry-docking? • Further guarantee of repair work • Buyer’s right to have repair work done elsewhere • Limit liability for “knock-on” damage and consequential loss • Guarantee engine manufacturer
  • Most contracts require the ship to be delivered to the shipbuilder’s yard at the purchaser’s cost, although many also contain a provision whereby the builder can, at his option, grant an allowance to the purchaser of funds to complete the repairs elsewhere Shipbuilders often limit their liability is with respect to equipment manufactured by others, unless the failure of that equipment was caused by improper installation by the builder
  • have an agreement to continue with the work and sort out the dispute at a later time by either arbitration or litigation From the perspective of the shipyard, it would be desirable to be able to refuse to make any alterations.  This would give it extra bargaining power when setting a price for the alterations and prevent conflicts with other jobs that may have been taken on by the shipyard.   However, most ship building contracts do allow alterations at the request of the purchaser.  Some building contracts provide that the shipbuilder does not have to perform alterations unless the alterations are reasonable and within the capacity of the ship builder, and an extension of time is given for completion.  The ship builder may also require an alteration of the payment schedule so as to allow for early payment for extras. Some building contracts provide that the shipbuilder does not have to perform alterations unless the alterations are reasonable and within the capacity of the ship builder, and an extension of time is given for completion.  The ship builder may also require an alteration of the payment schedule so as to allow for early payment for extras.
  • Remedy period  time allowed for remedying a default without a penalty
  • Builder's risk insurance is a special type of property insurance which indemnifies against damage to buildings while they are under construction. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause. The ship should be insured for the benefit of both the shipyard and the purchaser Shipyard’s risk policy cover all new buildings and sometimes can cover constructed ships during sea trials Always review insurance coverage before entering into any contract
  • e.g. protocol: Formal Trial results and Buyer’s acceptance
  • A liquidated damage clause, these clauses can sometimes be to their benefit by limiting the damages far below the actual loss suffered by a customer as a result of a late delivery.  Sometimes, shipbuilders are also able to negotiate an overall cap on damages payable pursuant to such a clause. The purchaser can make a claim against the original ship builder for the extra costs associated with having the ship completed by another yard. 
  • Ship Building Contracts: Theory and Practice

    1. 1. SHIP BUILDING CONTRACTS: Theory and Practice EGEST BARBULLUSHI ANTWERPEN, 3 MAY. 2010 Maritime and Seaports Law
    2. 2. What are shipbuilding contracts? <ul><li>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”. </li></ul><ul><li>Most common standard shipbuilding contracts: </li></ul><ul><ul><ul><ul><ul><li>SAJ form </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>BIMCO Newbuildcon </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>AWES Form </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>NSA form </li></ul></ul></ul></ul></ul>
    3. 3. Main obligation of the two parties <ul><li>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” </li></ul><ul><li>The Buyer  to purchase the “Vessel”, take delivery, all in accordance with the terms. </li></ul>
    4. 4. Major Components of Commercial Shipbuilding Contracts
    5. 5. Terms and Conditions
    6. 6. PAYMENT <ul><li>Payment by installments: </li></ul><ul><li>Completion of milestones </li></ul><ul><li>Security for payments  refund guarantee </li></ul><ul><li>Guarantee from Buyer’s parent / third party </li></ul><ul><li>Final installment on delivery </li></ul>
    7. 7. TITLE <ul><li>The title passes to the purchaser as construction proceeds and the ship is paid for </li></ul><ul><li>Also clauses to pass title of ship equipment purchased before it has even been incorporated into the ship </li></ul><ul><li>Practice  title transferred before delivery( builder’s mortgage) </li></ul>
    8. 8. PLANS AND SPECIFICATIONS <ul><li>Shipbuilding contracts  specifications and drawings attached </li></ul><ul><li>A naval architect or marine surveyor should review the specifications and drawings </li></ul><ul><li>Provision requiring the builder to build the ship “in accordance with good ship building practise” </li></ul>
    9. 9. WARRANTIES AND LIMITATION OF LIABILITY <ul><li>Ship builders  reluctant to unlimited liability </li></ul><ul><li>Will the builder warrant his design on matters such as speed, fuel consumption, length, hold capacity, or tonnage? </li></ul><ul><li>Breach of a warranty  entitles the injured party to damages </li></ul><ul><li>Warranty against faulty workmanship and material for a specified period of time </li></ul>
    10. 10. WARRANTIES AND LIMITATION OF LIABILITY <ul><li>Clause excluding liability for any consequential damage suffered by the purchase such as damages for loss of use of the vessel. </li></ul><ul><li>Shipbuilders often limit their liability for equipment manufactured by others. </li></ul><ul><li>Transferability of warranties  negotiable </li></ul>
    11. 11. EXTRAS AND CHANGE ORDERS <ul><li>Alterations at the request of the purchaser(delivery and payment date) </li></ul><ul><li>Term which specifies who is authorized to order and approve extras </li></ul><ul><li>Practice  price of extras and changes to be determined by arbitration if the parties fail to reach an agreement </li></ul>
    12. 12. Termination Buyer’s Default <ul><li>• Buyer’s default –failure to pay installments </li></ul><ul><li>• Builder’s remedy –interest and postponement of </li></ul><ul><li>delivery date </li></ul><ul><li>• Builder’s right to terminate </li></ul><ul><li>• Remedy Period </li></ul><ul><li>• Default Notice </li></ul><ul><li>• Builder’s right to sell incomplete / completed vessel </li></ul><ul><li>• Application of sale proceeds </li></ul>
    13. 13. Termination Builder’s Default <ul><li>Identifies Buyer’s rights of termination in case of </li></ul><ul><li>Builder default </li></ul><ul><li>Failure to deliver vessel by drop-dead date, failure to provide refund guarantees, etc. </li></ul><ul><li>Termination –refund of installments and interest </li></ul><ul><li>Recovery of costs thrown away and losses? </li></ul><ul><li>Completion of vessel elsewhere? </li></ul>
    14. 14. Insurance and Indemnity Provisions <ul><li>• Insurance during construction  Institute Builders’ Risk insurance </li></ul><ul><li>• Buyer named as co-assured  security for Buyer </li></ul><ul><li>• Rights of parties  damage and total loss </li></ul><ul><li>• Mutual indemnity  damage to property, personal injury or loss of life </li></ul>
    15. 15. DELIVERY <ul><li>Contractual delivery date and permissible delays </li></ul><ul><li>Delivery documents </li></ul><ul><li>Class certificates </li></ul><ul><li>Protocol of delivery and acceptance </li></ul><ul><li>Passage of title </li></ul>
    16. 16. COMPLETION DATES <ul><li>Liquidated damages clause  per diem penalty for late delivery </li></ul><ul><li>Bonus for early delivery </li></ul><ul><li>“ F orce majeure” clause  the circumstances outside shipyard’s control that will excuse it for failing to meet the completion date </li></ul><ul><li>Provision allowing for the purchaser to complete the vessel on another shipyard </li></ul>
    17. 17. Miscellaneous <ul><li>Buyer’s Supplies  extent of Builder’s liability </li></ul><ul><li>Copyright / Patent  Buyer’s right to use design in operation of vessel </li></ul><ul><li>Law and jurisdiction </li></ul><ul><li>Assignment of contract </li></ul><ul><li>Confidentiality </li></ul><ul><li>Non-Waiver / Saving Provisions / Amendments </li></ul><ul><li>Exclusion of rights of third parties </li></ul><ul><li>Annexes -Guarantees </li></ul>
    18. 18. <ul><li>THANK YOU </li></ul>

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