Ship Building, Sale and Finance

Baris Soyer, Andrew Tettenborn, Baris Soyer, Andrew Tettenborn

• Publisher: Informa Law from Routledge
• Year: 2016
• ISBN:
  9781317424758
• Edition: 1
• Topic: Law
• Subtopic: Maritime Law
• Index: Law

Written by a team of acclaimed practitioners and leading academics, this book brings together in one single volume an analysis of contemporary legal issues concerning ship building, sale and finance contracts. It offers a comprehensive, expert and thoroughly practical guide on what is a very complex area of law in today's international shipping industry.

The book presents a detailed and critical analysis of standard and non-standard shipbuilding and sale contracts, including vital but often overlooked issues such as payment and refund guarantees, which have been at the forefront of recent litigation and practice. It also critically and thoroughly analyses several types of standard insurance contracts, including shipbuilder's risks and mortgagee's interests, which are not adequately dealt with elsewhere and it provides a critical and contemporary discussion on the legal and practical issues surrounding ship finance, ship mortgages and more esoteric issues such as the use of bareboat charters and financial derivatives.

This book is an indispensable guide for legal practitioners, academics and industry professionals worldwide. The book is divided into 3 parts; Legal Issues relating to Ship Building, Ship Sale Contracts and Practice, and Legal and Practical Issues relating to Ship Finance. Each has been expertly contributed to by the leading practitioners and academics in the field from top firms, chambers and institutions including; Ince & Co, Quadrant Chambers, Haynes and Boone CDG, LLP, Holman Fenwick Willan LLP, Watson Farley & Williams LLP, 7 Kings Bench Walk, and Institute of International Shipping and Trade Law (IISTL) of Swansea University.

PART 1

LEGAL ISSUES RELATING TO SHIP BUILDING

CHAPTER 1

Contracting by numbers: the different characteristics of the main shipbuilding contracts

Professor Andrew Tettenborn^*

Safely corralled behind the heavy electronic glass doors of a large commercial law firm, one of the first things to strike a newbie lawyer is that a good deal of the law of contract that they are called on to practise is nothing like what they were meticulously taught as promising law students a few years earlier. Practical contract law is very often simply about the exegesis of well-tried standard forms: it amounts not so much to an intellectual or academic endeavour as to a prosaic process of keeping checklists of what has and has not been altered from a template kept carefully unchanged on the firm’s mainframe computer. Understandably so. Time is money and shipping clients are increasingly tight-fisted. Given the choice between negotiating from scratch and using a tried-and-tested formula that everyone knows, practitioners understand and one’s predecessors have successfully employed on countless occasions, the answer is a no-brainer. Shipbuilding contracts, the subject of this chapter, are a classic example. Almost all vessels these days are built on the basis of one of five¹ standard forms. On principle, each of these provide a complete workable formula, just leaving such mundane details as the specification, the price, when payable and so on to be filled in. However, as always, there remains the important possibility of more or less extensive mutations to the boilerplate according to the parties’ respective desires, bargaining strengths and legal nous. In order of age, the longest-standing, still used extensively in the Far East, is the SAJ² Standard Shipbuilding Contract³ dating from 1974. This is followed by the AWES⁴ Standard Shipbuilding Contract from 1978, the Standard Form Norwegian Shipbuilding Contract 2009 (NSC),⁵ the BIMCO-sponsored Newbuildcon which appeared in 2007, and the CMAC⁶ Standard Newbuilding Contract⁷ launched in 2012 for the Chinese shipbuilding industry. Of these, the SAJ form is probably the most frequently used, though subject to fairly extensive alterations (as might be expected from a template currently celebrating its fortieth anniversary, quaintly assuming the fastest mode of communication between go-ahead businesses to be by ‘cable’ and referring to such mid-twentieth-century curiosities as the convertible Japanese yen). It is followed by the Norwegian form; the use of the AWES form, while still significant, has declined, partly in line with the reduction in European export buildings. Newbuildcon is fast gaining adherents; as regards the CMAC form, the most recent addition, it is fair to say that this has yet to establish itself. Within these templates, the governing law chosen of course varies, but whatever form is used, a healthy proportion of contracts signed are governed by English law, with provision for LMAA or other London arbitration if anything goes wrong. Hence the relevance of this chapter, which will discuss these forms largely in light of the rules of English law.

The background against which one has to look at shipbuilding contracts is that, for all their advantages, standard forms are not an unmixed blessing. True, using substantial quantities of boilerplate saves vital time and trouble, as mentioned above. But since in shipbuilding there is as regards English law virtually absolute freedom of contract,⁸ representing ‘commerce, red in tooth and claw’,⁹ those using standard forms need to know when a boilerplate is satisfactory for the client and when it needs amending: which bits, in other words, to leave and which to negotiate on a bespoke basis. This is a serious concern with standard shipbuilding contracts. Two points in particular stand out. First, however detailed the forms may look, there are a significant number of matters left unresolved, which as any commercial lawyer will confirm is less than satisfactory for a client engaging on a major project that may well carry a price-tag of comfortably over $100 million. Second, while the essential structure of most shipbuilding contracts is the same (the greatest resemblance being to large-scale construction contracts),¹⁰ there remain a substantial number of variations between these forms which can be of major significance. Those acting for buyers, yards and financiers ignore such matters at their peril.

1.1 Uncertainties

1.1.1 The problem of design quality

Given the amount that may well be at stake in a newbuild project, one omission from many of the standard forms is surprising. While they all stipulate, with impressive precision, the dimensions, weight, speed, fuel consumption and other readily calculable details of the vessel to be built (or at least provide boxes where that information can be filled in), they are curiously vague and variable on the actual quality of design and construction that the customer is entitled to expect. Thus the buyer under the AWES form gets a reassuring but somewhat fuzzy promise that his ship will be built ‘in accordance with normal shipbuilding practices [in the place of building] for new vessels of the type and general characteristics of the vessel’.¹¹ Under the Norwegian form, by contrast, the vessel must be constructed ‘in accordance with first class shipbuilding practice in Western Europe’.¹² Newbuildcon similarly uninformatively mandates work ‘in accordance with good international shipbuilding and marine engineering practice’. As for the SAJ and CMAC forms, these coyly (and rather curiously) say nothing whatsoever about quality. This creates, to say the least, potential for uncertainty and disagreement: even if there is such a thing as ‘normal shipbuilding practice’, it may well take two or more experts hired at huge expense to decide what it is. The matter may be especially relevant in the relatively short time after sea-trials and before the contractual delivery date, where there is most scope for argument (and consequent arbitral expense and delay) over what amounts to a shortcoming which the yard is legally bound to put right before handing over the vessel.¹³ Is there, for example, room for a contention that there is a difference in standard between first class (Norwegian form) and normal (AWES) shipbuilding practice (with the intriguing implication that all ordinary shipbuilding is by definition somehow second-rate)? More to the point, diffuse provisions of this type, and a fortiori the complete non-existence of any standard laid down in some contracts, may leave the argument open that the default standards of s 14 of the Sale of Goods Act 1979¹⁴ have a part to play, especially in the light of Flaux J’s recent decision in the related context of ship sale in Dalmare SpA v Union Maritime Ltd ¹⁵ that only pretty clear words can oust them.¹⁶ It is true that the problem can be, and often is, overcome by the use of more certain and arbitrable standards such as those promoted by the International Standards Organisation;¹⁷ but the point remains that the forms as given are inadequate and can amount to a trap for unwary practitioners.

1.1.2 The issue of insurance

In any shipbuilding contract there is invariably a provision for property and risk to remain in the yard until delivery at which point they are transferred to the buyer.¹⁸ Back-to-back with this is a duty in the yard pending delivery to insure at its own charge the vessel and any buyer’s supplies, a provision aimed partly at protecting the buyer’s right to get his money back in the event of total destruction,¹⁹ and (no doubt) partly at making sure that the yard is in a position to continue with the work in the event of lesser damage.²⁰ Nevertheless, there are nagging uncertainties here as to two matters: first, precisely what has to be insured against, and second, what happens if the term is broken? As regards the former, the forms vary from the specific (Newbuildcon, as might be expected, cuts straight to the chase and mandates the 1988 Institute Clauses for Builder’s Risk terms including war and strikes),²¹ through to the not-entirely-precise, which clearly leaves worrying scope for argument (‘customary “all-risk” terms’ in the Norwegian form)²² to the maddeningly vague (the CMAC requirement that any policy ‘shall cover the damages or losses of the vessel’s materials, hull and equipments which incurred [sic] by various marine perils, inland perils or the builder’s errors and omissions’).²³ The difficulty here is simply that, except for the Newbuildcon form, it is often going to be difficult or impossible to say whether or not the yard is in breach of its obligation. Such indeterminacy ought to worry negotiators: might the yard be able to satisfy its obligation to the letter and yet leave the buyer unprotected against some significant risk? But that leads on to another point: assuming we can get over any uncertainty as to the content of the obligation to insure, what happens where the yard is in breach of it? Any immediate harm to the buyer from non-insurance is likely to be nil as long as the risk has not eventuated; if so, any damages from such failure are apt to be nominal. Hence the only live issue is whether failure by the yard might give rise to some other remedy. Specific performance is one possibility, though perhaps not a very practical one.²⁴ More importantly, does failure to insure allow suspension or cancellation by the buyer? Even here, the prospects for those seeking certainty do not look good. None of the forms gives any such right expressly and the prospects of demonstrating that a failure to insure, especially against the background of the requirement of a refund guarantee to protect many of the buyer’s interests, do not seem good. Indeed, in Wuhan Ocean Economic Cooperation Co Ltd v Schiffahrts-Gesellschaft Hansa Murcia mbH,²⁵ Cooke J held that where there was no immediate threat to the buyer’s security even failure to maintain a refund guarantee, a rather more important obligation, was not repudiatory. In the light of this decision anyone arguing that a different rule should apply to failure to insure faces a somewhat uphill task. This is a matter that must be addressed in any properly drafted contract.

1.1.3 Payment and refund guarantees

Payment and refund guarantees issued by a bank or financier are a universal feature of shipbuilding contracts.²⁶ Payment guarantees cover the buyer’s obligation to pay instalments as and when due at various stages of construction; refund guarantees cover the converse case of the yard’s obligation in the event of rightful cancellation to reimburse sums paid by the buyer. Both effectively provide the parties with a vital element of credit insurance. However, with the possible exception of the Newbuildcon form, none of the standard forms deals clearly or satisfactorily with the vital point of precisely what must be done in this respect.²⁷

To begin with, what happens if a required guarantee is not forthcoming, or ceases to be effective (for example, because of governmental action, the insolvency of the...