Shipbuilding

By Dr. Arun Kasi

Last Updated 4th Sept 2021

Shipbuilding

Shipbuilding agreements involve the construction of the ship and the future sale of the ship upon completion of the construction. Usually, some standard form agreement is made use of to make a shipbuilding agreement. Popular standard forms are the Shipbuilders’ Association of Japan Form (SAJ form), the Association of European Shipbuilders Shiprepairers’ Form (AWES form), the Norwegian Standard Form of Shipbuilding Contract (Norwegian Form) and the Baltic and International Maritime Council Standard Newbuilding Contractor (BIMCO NEWBUILDCON). The forms are usually used as a rough template only and extensively modified. This is quite unlike charterparties where the essential features of the standard forms are maintained despite the addition of numerous riders and modifications to the standard clauses. The danger with extensive modifications is that inconsistencies can easily arise and there may not be precedents how a newly coined clause will be interpreted.

The peculiar nature of the shipbuilding agreements is that it is one both for construction and sale of ‘future goods’. Under the laws of England as well as Malaysia, a ship is a ‘goods’ within the scope of the Sale of Goods Act – the Sale of Goods Act 1979 in England and Wales and the Sale of Goods Act 1957 in Peninsular Malaysia. The sale here involves both workmanship and materials. The property in the goods remains with the shipbuilder until full payment is made, whereupon delivery is given to the buyer.

Compare this with a building construction contract that an employer awards to a contractor. Here, the contract is one for construction only. The final product, the building, is not a ‘goods’. Sale of Goods Act does not apply. The ownership of the building under construction must be with the employer/landowner, as it is built on the land of the landowner.

Again, compare this with a purchaser buying a unit of flat from a developer. Here, the sale is not of a ‘goods’ within the Sale of Goods Act. The ownership of the flat under construction must be with the developer/landowner.

In Hyundai Heavy Industries Co v Papadopoulos (1980) and Stocznia Gdanska SA v Latvian Shipping Co (1998), the House of Lords treated the shipbuilding contract as one for both construction and sale of future goods. The result was that where the shipbuilder rightly terminates the contract, it can claim the unpaid instalments on the ‘construction’ part of the contract although it delivered no consideration on the sale of future goods’ part of the contract and no property in the goods was passed to the buyer. Usually, the standard forms are in line with this concept.

A frequent issue with shipbuilding transactions is that it is usually made ‘subject to details’ while the buyer works on securing terms with the financiers, classification societies, designers, etc. Subsequently, the ‘subject to details’ is lifted. English courts have consistently held that this is the same as ‘subject to contract’ and that no binding contract is concluded until the ‘subject to detail’ is lifted (The Junior K (1988), The Mercedes Envoy (1995), The Epsilon Rosa (No. 2) (2003). The position in the USA is different (The Cluden (1982)). The UK Supreme Court in RTS Flexible System Ltd v Molkerei Alois Muller (2010) seems to have diluted the ‘subject to contract’ immunity where all the relevant terms have been agreed. Although this is not a shipping case, the principle can be applied in the context of shipbuilding transactions.

Parties might wish that while details may be added later, neither party may withdraw from the deal at its will with a view to the parties incurring expenses on the transaction. In such case, it will be possible for them to enter into an indemnity agreement whereby any party who withdraws at its will agrees to compensate the other (see Radian Shipping Co Ltd v Sea Containers Ltd (1995)).

As a shipbuilding agreement is also for the sale of future goods, the Sale of Goods Act will imply certain conditions. It is not uncommon for the standard forms to exhaustively provide for all the applicable conditions and to oust any other condition by legal implication (eg. art IX(4)(c) SAJ Form).

The standard forms usually have a provision for sea trials, where the buyer’s representative can be present, in which if the ship is found not to comply with the agreement the buyer may reject the ship by notice to the shipbuilder specifying the non-compliance.

It is not uncommon for buyers to enter into charterparties for newbuild before delivery of the newbuild. Indeed, having a charterparty in place for the newbuild can be significant in the buyer securing finance for the newbuild. In such cases, the time of delivery will be crucial to the buyer so that the buyer can meet its obligations to the charterer. It will be safer to express that time is of the essence of the contract, if time is crucial to the buyer, in the absence of which a court may not hold the time to be of the essence (see Lindvig v Forth (1921).

Usually, the place of delivery will be specified in the agreement, which will normally be the main yard or the last yard where the ship was fitted.

The standard forms usually have warranties after delivery. SAJ form has a 12-month warranty in respect of any defect due to defective material and/or bad workmanship discovered within 12 months after delivery. The warranty will be excluded in circumstances specified in the agreement. This is something that the buyers must pay special attention to. For instance, art IX(4)(a) SAJ form excludes any warranty where the buyer replaces the relevant part by engaging any other contractor or contributes to the loss. This in effect excludes the liability of the shipbuilder on the warranty where the buyer is in contributory negligence. Of course, parties may modify this clause to limit the warranty exclusions. In Ackerman v Protim (1988) the loss was caused partly by the defective workmanship of the shipbuilder and party by poor maintenance by the buyer. The English Court of Appeal applied the contra proferentem rule, so that the exclusion clause was interpreted strictly against the person (in this case, the shipbuilder) relying on the exclusion, with the result that the shipbuilder will escape liability only if the fault on the part of the buyer was more significant than the fault on the part of the shipbuilder.

Litigations arising from lack of clarity is not unknown in maritime contracts. In Cenargo Ltd v Izar Construcciones Navale SA (2002), the contract was for design, construction and delivery of two Ro-Ro ferries. They were described each to have a capacity at least of 146 13m slots. It was the buyer’s contention that the ’13 m slots’ referred to the length of the trailers and that each ship had a short capacity of 10 slots. It was the shipyard’s contention that it referred to the size of the slots and that ships satisfied this condition. At the English High Court, Andrew Smith J found that the 13 m slots referred to the size of the slot and not the size of the trailers. His lordship found that there was a short capacity by 4 slots in the case of each ship, after allowing some margin for safety concerns. The buyer appealed and the shipyard cross-appealed. The Court of Appeal upheld the finding, in favour of the shipyard, that the 13 m slots referred to the size of the slots. The court reversed the finding of Andrew Smith J that 4 slots were short, as safety concerns were taken into account which cannot be determined until the ships were property operated. Hence, the shipyard was not liable for any short capacity.

In Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Company Limited & Ors (2020), a guarantor gave guarantee for the final instalment payment by the buyer of USD170 million. The guarantee was that, if the buyer defaults in payment, the guarantor would pay on demand. At the same time, it was subject to a provision deferring the obligation of the guarantor to pay in the event of a dispute between the shipyard and the buyer referred to arbitration as to the buyer’s liability to pay. The buyer did not pay and demand under the guarantee was made. Subsequently, the buyer instituted arbitral proceedings challenging the liability to pay. The shipyard took the guarantor to court. It was the shipyard’s contention that it was a demand guarantee and, because there was no arbitration when the demand was made, the payment under the guarantee became due and no deferment was available to the guarantor. Robin Knowles J held that it was a see-to-it guarantee and that the buyer was entitled to rely on the deferment provision irrespective of whether the arbitration was instituted before or after the demand.

 

Dr. Arun Kasi

LLB (Hons), LLM, CLP, Barrister, FCIArb (London), PhD

Nicole Lee Hui Ching

LLB (Hons)

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