This article summarises the legal and other risks associated with shipbuilding projects from its inception until the expiry of the warranty period.

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Shipbuilding Contract: What can go wrong?
By David Seah, LLB London
Contractual risks in shipbuilding projects begin when the parties first
make contact. Things that could go wrong at this stage include a letter of
intent which may eventually be construed as invalid1. Also, issues could
arise involving breach of confidentiality2 and intellectual property rights.3
Upon the effective date of contract, the parties may exchange refund
and payment guarantees which could be unenforceable4, or find issues
with option agreement for additional vessels5.
During the production phase, arguments concerning approval of plans
and drawings could involve the buyer’s delays during the approval process
and its comments to the plans and drawings6. Other disputes could
concern variations,7 delays8, quality of workmanship, late inspection9,
over-inspection and interference.
All this inevitably could lead to delays and this will be compounded
further if, in order to win the project, the shipbuilder had created an
illusion of on-time delivery by developing a schedule with the completion
date as a reference point and working backwards. In such circumstances,
any subsequent rush to accelerate the project may result in construction
shortcomings, thus adding to more delays.
Subcontractors could also join in the fray through disputes concerning
shortcoming in quality, workmanship, late completion or late delivery of
work and equipment respectively, and non-compliance with contract
specification. As subcontractor’s delays (except for those that are related
to buyer supplies) are at shipbuilder’s risk, any delays caused by their
shortcomings above will be at the shipbuilder's expense.
1 RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co. KG [2010] UKSC 14.
2 Seager v. Copydex [1967] 2 All ER 415., Saltman Engineering Co. Ltd v Campbell
Engineering Co. Ltd (1948) 65 RPC 203.
3 Salt Ship Design AS v. Prysmian Powerlink SRL [2021] EWHC 2633 (Comm).
4 See footnote 14, infra.
5 Haugland Tankers v RMK Marine [2005] EWHC 321 (Comm).
6 Cenargo Ltd v Empresa v Nacional Bazan de Construcciones Navales Militares SA
[2001] EWHC 543 (QB), [2002] EXCA Civ 524 QBD (Comm).
7 McAlpine Humberoak Ltd v McDermott International Inc [1992] CILL 747., Blue Circle
Industries Plc v Holland Dredging Co (UK) Limited (1987) 37 BLR 40.
8 Zhoushan Jinhaiwan v Golden Exquisite Inc & 2 others [2014] EWHC 4050 (Comm).
9 Per footnote 7.

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During testing and sea trials, the vessel could be found wanting in
performance criteria relating to speed, fuel consumption, deadweight
deficiency, and cubic capacity, resulting in liquidated damage and possible
termination of contract where performance does not comply with specified
allowable margins.
In the event of delayed delivery10, the buyer will be entitled to
liquidated damages and also to terminate the contract after a “drop-dead
date”11. When this happens, they could encounter allegations that the
buyer got the drop-dead date wrong as some of the delays were due to the
buyer’s default, thus the buyer has wrongfully repudiated the contract12.
Where the vessel does not comply with contract specification, the
buyer could refuse to accept delivery. Conversely, a shipbuilder could
disagree and contend that the buyer's refusal to take delivery of a vessel
was totally unjustified. Even when the vessel is finally delivered, it may
be premature to celebrate as the parties may have to reckon with post-
delivery warranty issues13.
In cases when buyers or shipbuilders call on the refund and payment
guarantee respectively, they may still face serious technical and legal
challenges.14
While the majority of shipbuilding disputes are resolved through
negotiated settlement, mediation, classification society or expert
determination, there are still those that end up in arbitration or the
courts. Even at this juncture, there may be challenges concerning
jurisdiction or the seat of arbitration15and others.
In such a situation, the ultimate results could be rather unpredictable.
This is particularly so in cases (a) of ambiguity, (b) where judicial
10 Taking into account permissible and possibly concurrent delays.
11 Stocznia Gdynia Sa V Gearbulk Holdings Ltd, [2009] EWCA CIV 75.
12 Jiangsu Guoxin Corporation Ltd (Formerly Known as Sainty Marine Corporation Ltd)
v Precious Shipping Public Co. Ltd [2020] EWHC 1030 (Comm). Note also, Adyard Abu
Dhabi v SD Marine Services [2011] EWHC 848 (Comm), where shipbuilder unsuccessfully
invoked the prevention principle.
13 Neon Shipping Inc v Foreign Economic 7 Technical Corporation Co. of China and
others [2016] EWHC 399 (Comm).
14 CIMC Raffles Offshore (Singapore) Limited and Yantai CIMC Raffles Offshore Limited
v Schahin Holding [2013] EWCA Civ 644., Rainy Sky S. A. v Kookmin Bank [2011]
UKSC 50, [2010] EWCA Civ 582., Sea-Cargo Skips As v State Bank of India [2013]
EWHC 177., Wuhan Ocean and Nantong v Schiffahrts-Gesellschaft [2012] EWHC 3104
(Comm)., Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux
SA [2010] EWHC 3362 (Comm), [2011] EWCA Civ 827., WS Tankship II BV v Kwangju
Bank Ltd [2011] EWHC 3103., Carey Value Added SL v Grupo Urvasco SA 2010 EWHC
1905 (Comm)., Sea Emerald SA v Prominvestbank [2008] EWHC 1979 (Comm).,
Stocznia Gdynia SA v Gearbulk Holdings Ltd [2008] EWHC 944 (Comm).
15 Sulamerica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A. and
others [2012] EWCA Civ 638.

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decisions remain divided on the correct application of the law16, and (c) in
cases which depend substantially on the judicial interpretation of the text
in one or more clauses in the contract.
The journey will be tedious as such proceedings can last many years,
and in one particular case involving a pipelay vessel, about ten years.
Ultimately, the effectiveness of enforcing the arbitration award or
judgement against the losing party will depend on whether that party is
still solvent and if otherwise, whether there will be enforcement issues in
its country of residence.
Yet all is not gloomy if steps are taken from the very beginning, to
identify, avoid or minimise not only contractual, but also technical and
other associated risks.
https://www.linkedin.com/in/seahdavid
20 Mar 2022
The writer read law at the university of London and was admitted as a
barrister of Lincoln’s Inn. His transactional expertise in shipbuilding
contracts and related ancillary agreements is derived from prior experience
as in-house shipyard lawyer, involvement with subsea marine construction
contracts and as on-site counsel in an FDPSO conversion project.
DISCLAIMER
THIS ARTICLE IS BASED ON THE RESEARCH AND PRACTICAL
EXPERIENCE OF THE AUTHOR AND IS MEANT FOR GENERAL
READING AND EDUCATIONAL PURPOSE. IT IS NOT INTENDED TO
PROVIDE LEGAL ADVICE AND MUST NOT BE TREATED AS A
SUBSTITUTE FOR SPECIFIC LEGAL ADVICE OR RELIED UPON
UNDER ANY CIRCUMSTANCES. THE WRITER AND PUBLISHER
DOES NOT GUARANTEE THE ACCURACY OF THE INFORMATION
IN THIS ARTICLE AND HEREBY DISCLAIM RESPONSIBILITY FOR
ANY LOSSES OR DAMAGES WHATSOEVER AND HOWSOEVER
INCURRED THROUGH THE USE OF INFORMATION IN THIS
ARTICLE
16 Especially in consequential loss, refund or payment guarantees, and delays claims.