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 

Comments

Post a Comment

Popular posts from this blog

Letter of Intent

Updated 12 April 2022 A letter of intent (LOI), also called term sheet, expression or indication of interest in the commercial sectors is an informal offer or recap of the parties’ position on how they would proceed on a business proposal or venture. In the shipbuilding and offshore industry, where discussions on technical, commercial and legal matters leading up to a formal contract are complex and lengthy, letters of intent (LOIs) will often be used as prelude to the formation of a formal contract. Thus, LOIs will be used:   ·        Where the scope of work has been identified, but there are still outstanding items like selection of main engine suppliers, financing, guarantees, and board approvals that need to be finalised.   ·        At other times, LOI may be signed on condition that the parties will enter into a shipbuilding contract after the buyer’s bid for a shipbuilding project is successful, or where...
Read more

Liquidated Damages in Shipbuilding Contract

Penalty or Liquidated Damages? Liquidated damages are the predetermined estimate of loss to one party when the other party has delayed or failed to meet some contractual deadline or achieve certain performance criteria. Its purpose is to provide for adequate compensation to the Buyer while ensuring that the Seller is not unreasonably penalized. In a typical shipbuilding contract, it is common to see liquidated damages clause for delay delivery. This will be computed on a time basis (daily, weekly or monthly) e.g. US$5000 per day of delays or based on a percentage of the contract e.g. 0.2% of the contract price for each day of delay etc. Usually, it will be capped at 10% of the contract price. The parties may agree to a grace period (of between 7 to 21 days) before the liquidated damages become operative. Sample Text: “If the Vessel is not completed and delivered to the Buyer by the Contractual Delivery Date or the Revised Delivery Date then subject to the provisions of su...
Read more

Shipbuilding : The Pre-Contract Phase

The inception of a shipbuilding project is usually preceded by a buyer’s visit to a selected shipyard for discussion and to assess its capability. The itinerary during such a visit will normally include an opening meeting, followed by a yard tour, and commercial and technical discussions. Before the visit, it is common for shipbuilders to prepare a shipyard information memo. The buyer will usually provide the shipbuilder with a meeting agenda and draft a confidentiality agreement, also known as a non-disclosure agreement (NDA ) .     The purpose of the NDA is to ensure that the shipbuilder maintains the secrecy of business and technical information supplied by the buyer for the purpose stated in the NDA. The elements of such NDA should comprise (a) the purpose of the agreement, (b) the definition of confidential information, (c) information excluded from confidential treatment, (d) the recipient’s obligations, (e) retention of title to information supplied, (f) the duration of...
Read more