Some 11 billion tons of goods are estimated to be transported by ship each year around the world. Trinidad and Tobago, located at the southern base of the Caribbean, is well positioned in relation to shipping lanes in the Eastern Caribbean and North, Central and South America. The country currently acts as a trans-shipment hub, engaging in land-based and offshore, bulk and containerised trans-shipment activities, and servicing smaller ports in the Caribbean. To bolster our maritime economy, shipbuilding and ship repair industries have been identified as key areas of expansion.
The parties to such a contract, the builder of the ship and the buyer of the ship may come from different countries and may have varied backgrounds, experiences and bargaining power. It is therefore important to ensure that both parties’ rights and obligations are adequately covered and protected in a contract for shipbuilding. Traditionally, shipbuilders around the world present potential buyers with their own standard contracts which can be subject to negotiation and amendment. It should be noted that shipbuilding contracts are different from other types of contract in terms of the provisions required and how they might be interpreted by a court or arbitration tribunal when there is a dispute.
What goes into a shipbuilding contract?
A shipbuilding contract will expressly and essentially provide detailed specifications that the vessel should conform to. These might include a number of ‘guaranteed’ standards of performance, such as speed, deadweight, container capacity and fuel consumption. Parties might agree that breach of the guaranteed standards by the shipbuilder entitles the buyer to damages and, in some cases, a right to reject the vessel and treat the contract as having been repudiated. Ensuring that all the essential specifications of the vessel are listed as a contract term is key to ensuring the buyer receives what he desires and there is no ambivalence.
Delays and Extensions of Time
Many commercial contracts for delivery of an item may contain an express provision setting out the contractual delivery date. A shipbuilding contract is no different. It is not difficult to imagine that in many instances, the shipbuilder will encounter an issue which would make delivery on the agreed date impossible. A shipbuilding contract therefore should also contain provisions that address delays due to the buyer’s conduct or circumstances beyond either parties’ control by allowing, for example, extensions of time to the date of delivery in certain circumstances. In some contracts, what is a permissible delay is specifically defined.
Performance and Refund Guarantees
Another important element of a shipbuilding contract is that of performance and refund guarantees. Essentially if a shipbuilder fails to perform the contract as it has been agreed, a clause to that effect can be incorporated into the agreement where, in the event of a ship builder’s default, a third-party guarantee can be called upon. In this regard, at the outset of the contract, a shipbuilder may be asked to provide a refund guarantee. A refund guarantee is an undertaking by a bank, or other surety that if the shipbuilder fails to refund the pre- delivery instalments of the contract price in circumstances where the buyer has lawfully cancelled the contract, it will repay those instalments to the buyer in full.
Shipbuilding contracts usually contain a guarantee or warranty provision, warranting the condition of the ship on delivery. The builder, usually for a period of twelve months would guarantee the vessel in her entirety including parts and equipment installed, furnished or incorporated by the builder against all defects due to omissions, non-conformities, defective materials or equipment, faulty design and/or performance, construction miscalculations, and/or poor workmanship by the builder. It is interesting to note that the English courts generally construe warranty provisions in shipbuilding contracts very narrowly and the buyer in particular, should ensure the wording of the warranty is expansive enough to cover the type of losses that may occur as a result of defects in the vessel.
If there is a fixed agreed price for the vessel, what happens if there are unexpected price increases of labour and materials? If the contract does not have price escalation provisions, which address these items, such increases will be for the builder’s account. Shipbuilding contracts typically provide that the fixed price may be increased or decreased in the event of any modifications to the specifications or the vessel. However, the shipbuilder should ensure it does not perform additional work unless the parties have agreed and recorded any modification to the price of the vessel or its delivery date. If this is not so specifically agreed, the builder may not be able to claim these costs subsequently.
The above represents some of the basic contractual terms that are relevant in a shipbuilding contract. The terms of such a contract are nuanced and should be drafted carefully to ensure smooth sailing, in particular that both the buyer and seller are clear on the expectations of either party and the remedies which are available to both in the event legal issues arise.