Risk Factors in the Shipbuilding and Offshore sector

Questions to ponder:

Q: Do you have a policy designed to safeguard the company against contractual risks which could render a project unprofitable or jeopardize the company?

Q: When the worst happens will your explanation be acceptable to shareholders?

 Companies in the offshore and shipbuilding sector are subjected to perennial contractual risks. Such risks are often identified as Risk Factors inter alia in their Prospectus as follows:

 ·      We may incur additional costs in the event of disputes, claims or defects
·      We may incur liquidated damages in the event of delays
·      We may be affected by delays or premature termination of projects by customers
·      We are exposed to potential liability for pollution or environmental damage
·      Force majeure events and disruptions to facilities may affect our financial position 
·      We face the risk of significant increase in the price or shortage of steel or other materials
·      We are affected by the performance and quality of our vendors and subcontractors
·      We are exposed to potential liability arising from damages, injury or death due to accidents 
·      We are exposed to foreign exchange risks 
·      We are subject to the credit risks of customers

Those with adequate financial resources usually have specialized internal or external lawyers or contract consultants to manage such risks. For Companies with budget constraint or those that leave such risks to chance the end result could be disastrous.

Even with appropriate legal expertise at hand, cases have shown that when the market situation is adverse, profit trimmed to the bone and contract clarity wanting, creative players in the shipbuilding and offshore industry have exploited contract oversight (assumed or otherwise) or apparent counterpart’s contract management weakness as a potential revenue source.

Notable Quotations:

When Rowan Gorilla V contract dispute was finally settled, Bob Palmer, Chairman and CEO of Rowan Companies Inc commented, "It's over! For Rowan, there is a sense of relief -- but little joy -- in this announcement, which represents over three years of wasted time, money and commercial opportunities for everyone involved. Except, of course, for the attorneys and camp followers." 
http://www.rigzone.com/news/article.asp?a_id=2844

“The boom in shipbuilding orders for all classes of ships in the period 2003- 2008 has been followed by an equally dramatic fall  in freight rates in late 2008 and the termination of many shipbuilding contracts. This has inevitably resulted in a large number of references to arbitration of shipbuilding disputes, particularly in 2009.” Per Ian Gaunt, Hon Secretary LMAA at page 4 Common Issues in Shipbuilding Contract Arbitrations 

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