Shipbuilding Contract: What can go wrong?

Contractual risks in any shipbuilding projects starts when the parties first make contact. Things that could go wrong at this stage may include disputes on whether a binding contract has been reached between the parties and issues related to the letter of intent. 

 Also, issues regarding option agreements for additional vessels, breach of confidentiality, and intellectual property rights could be a potential source of grief. The contract may include contingent conditions for the effective date of contract which could be contentious. 

Prior to the effective date of contract, the parties may exchange refund and payment guarantees, which could turn out later to be unenforceable. The builder’s risk insurance provided by the shipbuilder may not cover all expected risks. Where insurances are in place, the parties may have to engage in litigation if knock-for-knock indemnity for property damage, personal injury, disease or death are not in place. 

During the production phase, there will be arguments about the buyer’s delays in approval of plans and drawings or its comments thereto, what constitutes a valid variation, and issues arising from inspection, tests and trials. 

After sea trials, the vessel could be found wanting in quality or performance and there may be disagreement on buyer’s right to reject the vessel. 

While the contract may provide relief for extension of time for permissible delay and liquidated damages for non-permissible delay, these are subject to conditions and limitations, which have led to numerous litigations. In the event of excessive delay, buyers may be entitled to terminate the contract after a “drop-dead date”. However, this could be countered by assertions that buyer computed the drop-dead date incorrectly as some delays were due to the buyer’s default, thus buyer wrongfully repudiated the contract. 

When the vessel is finally delivered, it may still be premature to celebrate, as until the expiry of the contractual warranty period, claims and disputes could surface. 

Even though the majority of shipbuilding disputes are resolved through mediation, classification or expert determination, and negotiated settlement, there are still cases that escalate to arbitration or the courts. In such a situation, the ultimate results could be rather unpredictable. This is particularly so in cases (a) of ambiguity, (b) where judicial decisions remain divided on the correct application of the law, and (c) in cases which depend substantially on the judicial interpretation of the text in one or more clauses in the contract. The journey will be tedious, as such proceedings can last many years, and in one particular case involving a pipelay vessel, about ten years. 

Other potential areas of concern could include, consequential loss claim, exposures to unlimited liability, and issues affecting assignment, novation, and suppliers.

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