The Law of Shipbuilding Contracts

Simon Curtis, Ian Gaunt, William Cecil

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9780429766169
• Edition: 5
• Topic: Derecho
• Subtopic: Derecho marítimo

The Law of Shipbuilding Contracts examines the principles of English contract law as these apply to shipbuilding. The leading text on shipbuilding and marine construction, widely used by the global maritime community, this new edition is updated to account for the "long tail" effects of the global economic crisis on the sector.

The authors provide expert analysis on the key shipbuilding contract forms, including sections dealing with agreements ancillary to the shipbuilding contract and ship conversion contracts, together with — for the first time — contracts for the construction of offshore oil and gas vessels and units. The new edition has been comprehensively updated, including commentary on recent High Court decisions on shipbuilding contracts and, in particular, associated refund guarantees. The contractual and legal consequences of global economic turbulence and the resultant increase in the number and size of disputes in the shipbuilding sector are discussed, alongside coverage of other contemporary regulatory and legal issues resulting from environmental pressures and the trend for "cleaner", more efficient tonnage.

A comprehensive and authoritative resource, this book is essential reading for buyers and charterers of newbuilding tonnage, shipbuilders and offshore construction yards, shipbrokers, banks and other finance providers, lawyers and insurers working in the maritime and offshore oil and gas sectors, as well as students of maritime law.

PART 1

The nature of the shipbuilding contract

In English law certain distinctions exist between contracts which are categorised as relating to the sale and purchase of goods and those relating to the supply of workmanship and materials. In particular, contracts for the sale of goods may, depending in part upon their terms, fall within a detailed statutory regime for such contracts,¹ which may alter or supplement the agreement that the parties have themselves reached.

It may, however, be difficult in practice to determine into which of these two categories a particular contract should fall. This is especially so where, as in the case of a shipbuilding contract, the agreement provides that one party, A, will not only undertake a complex manufacturing process under the supervision of the other party, B, but will also sell and deliver the manufactured item to B once the process has been completed. In such a case, it is plain that neither of the categories in question exclusively defines the nature and scope of the transaction.

It is nevertheless clear that, as a matter of English law (and subject to the qualification discussed below), shipbuilding contracts are agreements for the sale of goods. Thus, according to Diplock J. in McDougall v. Aeromarine of Emsworth Ltd (1958)² “… it seems well settled by authority that, although a shipbuilding contract is, in form, a contract for the construction of the vessel, it is in law a contract for the sale of goods …”.³ In the recent cases of Neon Shipping Inc v. Foreign Economic & Technical Corporation Co of China and Another (2016)⁴ and Teekay Tankers Ltd v. STX Offshore and Shipbuilding Co Ltd (No 2)(2017)⁵ it was either agreed by the parties or determined by the High Court that this categorisation was correct and that accordingly the Sale of Goods Act 1979 (the “1979 Act”) applied to the contracts in dispute. Shipbuilding contracts are as such similar to agreements for the sale of existing or second-hand ships, which are always regarded as “goods” in English contract law.⁶

1 Principally contained within the Sale of Goods Act 1979; see below.

2 [1958] 2 Lloyd’s Rep. 345.

3 Ibid, at pages 355–356; see also Reid v. Macbeth and Gray [1904] A.C. 223, Sir James Laing & Sons Ltd v. Barclay, Curle & Co. Ltd [1908] A.C. 35 and Re Blyth Shipbuilding and Dry Docks Co. [1926] 1 Ch. 494 (where the shipbuilding agreement was said to be “unquestionably a contract for the sale of future goods”, per Romer J. at page 499). The proposition applies equally to contracts for the construction and sale of machinery and equipment for a newbuilding (e.g., a propeller), Cammell Laird & Co. Ltd v. Manganese Bronze & Brass Co. Ltd [1934] A.C. 402.

4 [2016] EWHC 399 (Comm).

5 [2017] EWHC 253 (Comm).

6 Behnke v. Bede Shipping Ltd [1927] 1 K.B. 649; see also Dalmare SpA v. Union Maritime Ltd and another; The “Union Power” [2012] EWHC 3537 (Comm). Shipbuilding contracts relate, however, to the sale of “future” rather than “existing” goods (see Moore-Bick L.J. in Stocznia Gdynia S.A. v. Gearbulk Holdings Ltd [2009] EWCA Civ 75, at paragraph 12 of his judgment); there are obviously other differences (e.g., the builder provides a post-delivery warranty and normally retains the copyright in the vessel’s plans and drawings), although these are of limited importance in terms of legal classification.

However, a significant proportion of the content of most shipbuilding contracts is directed towards the regulation of a substantial and complex construction project, in which each party assumes long-term obligations to the other and bears significant commercial risks. Although the ultimate purpose of such a contract is to transfer legal title to a good (i.e. a ship) in return for payment of an agreed price, the nature and extent of the commitments assumed by both parties in order to achieve this objective are more akin to those of a non-marine construction project than to a mere agreement of sale and purchase.

Since McDougall these features have been recognised in two House of Lords decisions, Hyundai Heavy Industries Co. v. Papadopoulos and Others (1980)⁷ and Stocznia Gdanska S.A. v. Latvian Shipping Co., Latreefer Inc. and Others (1998),⁸ which cast doubt on the traditional categorisation of shipbuilding contracts as “pure” sale contracts.

The issue to be decided in Hyundai and Stocznia Gdanska was whether unpaid instalments of the contract price which had accrued due to the builder prior to its termination of the contract remained payable by the buyer after such termination had taken effect. In both cases, the House of Lords held that the instalments did indeed remain payable because consideration (i.e., value) had been given by the builder to the buyer in the form of the work it had undertaken in partially constructing the vessel.

In Hyundai the House of Lords declined to follow a long-standing authority⁹ dealing with exactly the same issue in the context of contracts of sale and distinguished it on the ground that the contract considered in the earlier decision was a contract for the sale of goods, which, unlike a shipbuilding contract, “did not require the vendor to perform any work or incur any expense on the subjects of sale”.¹⁰ Further, Viscount Dilhorne stated that the shipbuilding contract under consideration “was not just for the sale of a ship … [i]t was a contract to ‘build, launch, equip and complete’ a vessel and ‘to deliver and sell her’ …”.

The conclusions reached in Hyundai were affirmed and applied in Stocznia Gdanska, where it was held that the shipbuilding contract under consideration was not simply a contract for the sale of a ship but “… rather a contract under which the design and construction of the vessel formed part of the yard’s contractual duties, as well as the duty to transfer the finished object to the buyers”.¹¹

Both Hyundai and Stocznia Gdanska dealt with a very specific issue, namely, the parties’ rights and obligations upon termination of the shipbuilding contract, and (it is submitted) neither decision has changed the categorisation of such a contract in English law. Thus, in Hyundai Lord Fraser simply spoke of the similarity of the contracts there in question with contracts for work and materials “so far as the present issues [were] concerned”. Similarly, Viscount Dilhorne stated that the shipbuilding contract in question “… was a contract which was not simply one of sale but which so far as the construction of the vessel was concerned, resembled a building contract”.

According to the leading English law textbook on the sale of goods, the Hyundai and Stocznia Gdanska decisions establish that “…a contract to build a ship, though a contract of sale of goods, [has] also some of the characteristics of a building contract”,¹² which (it is respectfully submitted) represents the correct legal analysis. These characteristics mitigate the impact upon the builder of certain principles of English law relating to the sale of goods, but do not alter the fundamental nature of the contract itself.

7 [1980] 2 Lloyd’s Rep. 1.

8 [1998] 1 Lloyd’s Rep. 609.

9 Dies v. British and International Mining and Finance Corporation Ltd [1939] 1 K.B. 724, which established that a purchaser’s repudiatory breach of a contract for the sale of goods does not prevent him from recovering his pre-paid instalments of the price to the extent that these exceed the vendor’s recoverable damages.

10 10 Per Lord Fraser at page 13.

11 11 Per Lord Goff at pages 619–620.

12 Benjamin’s Sal...