In international shipbuilding there are many different contract forms available to the parties that vary in shape and content. Does it really matter which form the parties choose to contract on?
The parties to a shipbuilding contract, the builder and the buyer, typically come from different countries. There is often a
difference in the bargaining power and experience between them. The builder may be part of a large shipbuilding group or trading house, which negotiates contracts on a daily basis. The buyer on the other hand, may be a small shipowning company, who only enters into shipbuilding contracts as part of their fleet renewal programme.
The cyclical nature of the shipping market makes timing very important as to how one should approach negotiations to achieve a good outcome. Thus the task of creating a well-balanced standard form of shipbuilding contract for all market conditions may be a challenging task.
This article identifies some of the most common forms in use in international shipbuilding and considers some of the important differences between them.
COMMON FORMS
Shipbuilders’ forms
Traditionally, shipbuilders around the world present potential buyers with their own standard contracts. In the 1960’s, the most often used standard con-tract was prepared by the Shipbuilders’ Association of Japan (the “SAJ Form”).
The SAJ Form in turn inspired the Korean Shipbuilders to create their own standard contract, with certain variations, but mostly favouring the builders. More recently Chinese shipbuilders have introduced their own standard forms, largely based on the SAJ Form with adjustments to meet local needs. In Europe the Association of Western European Shipbuilders introduced their standard form (the “AWES Form”) in 1972 and this was revised in 1995. The AWES Form did not however receive widespread recognition, particularly with the Asian yards.
SHIP 2000 – an “agreed document”
In Norway, there is a long tradition of using “agreed documents”. These are standard forms where both parties’ organisations contribute to create a balanced contract, often supported by independent representatives such as lawyers or legal scholars. The Norwegian ship-builders and shipowners joined forces and agreed on a standard form, the latest edition
being the 2000 Norwegian Standard Shipbuilding Contract (“SHIP 2000”).
BIMCO’s Newbuildcon
BIMCO launched its standard shipbuilding contract (the “NEWBUILDCON”) in 2007. This makes it the most recent and detailed standard form. NEWBUILDCON contains several new and detailed provisions not found in other forms.
NEWBUILDCON has the typical BIMCO format, using a mix of boxes and clauses. Although BIMCO members are used to this format, which is useful when executing repetitive and similar transactions, such as charterparties, it may not be to everyone’s liking. Despite the fact that NEWBUILDCON is a well drafted contract with many carefully thought through
solutions, the format and the numerous cross-references can make it seem more difficult to follow. It was also perhaps unfortunate that shipbuilders did not actively participate in the preparation of NEWBUILDCON, and partially
for this reason it is considered a more “buyer friendly” document than the other standard forms in the market. This circumstance, combined with the boxes and clauses format, makes it challenging for buyers to introduce NEWBUILDCON to shipbuilders.
CRUCIAL DIFFERENCES
Defects, warranties and consequential damages
A twelve month warranty period for defects is common in shipbuilding con-tracts. The SAJ Form and most Korean and Chinese forms exclude all liability for consequential damage to the vessel caused by the defect. Further, ship-builders are cautious that their warranty liability is limited to repair of the defect itself. This may not provide a satisfactory solution for buyers, and buyers must therefore seek to ensure that further damage is covered by the vessel’s hull and machinery insurance, if this is available.
The cyclical nature of the shipping market makes timing very important
SHIP 2000 seeks to address the buyers’ needs to a certain extent, and imposes liability for consequential damage to other parts of the vessel, provided that: (i) such other part is a part of the same system or equipment, and (ii) the damage is caused directly by the defect without an intermediary cause. This solution is also adopted in NEWBUILDCON, where the builder is obliged to repair defects and damage to the vessel caused “as a direct and immediate consequence” of a defect.
Disputes regarding payment on delivery – “anti blackmail clause”
Fixing the amount of the delivery instalment under a shipbuilding contract can often be a difficult exercise, as inevitably
disagreements on change orders and liquidated damages are postponed until the last minute prior to delivery.
Contrary to SHIP 2000 and many offshore contracts, neither the SAJ Form, NEWBUILDCON or any of the other standard forms contain any specific “payment dispute” provision. This means that when a payment dispute arises in respect of the final instalment, the buyer may have to pay whatever the builder demands in order to secure delivery of the vessel. The
builder will normally have ownership and title to the vessel during construction, and can in any event rely on a lien based on his possession of the vessel. Builders may be tempted to abuse this position and buyers, eager to commence a favourable charterparty, may be tempted to give in to such pressure.
To avoid these “blackmail” situations, SHIP 2000 provides that in case of a payment dispute on delivery, the buyer is only obliged to pay what the builder demands if the builder provides a bank guarantee (or other security) for the disputed amount. If the builder is not willing or able to provide such guarantee, the buyer may instead provide a guarantee to the builder, in which case the builder cannot refuse to deliver the vessel.
Dispute resolution
In NEWBUILDCON a new dispute resolution clause has been introduced. It distinguishes between: (i) disputes concerning compliance or non-compliance with rules and regulations of class and regulatory authorities, in which case the relevant class of regulatory authority’s decision shall be final and binding; (ii) reference to an expert; and (iii)
mediation or arbitration.
Similar provisions have often been added when using other standard forms without such advanced dispute resolution clauses (the SAJ Form or SHIP 2000). Parties should however be cautious before electing to use an expert to resolve disputes. Disputes that are not of a predominantly technical nature are better dealt with in arbitration before commercial
arbitrators.
English law is still the predominant law for shipbuilding contracts, and for many good reasons. The SAJ Form and NEWBUILDCON provide for English law, whilst SHIP 2000 provides for Norwegian law and arbitration in Norway, with English law as an alternative option.