Shipbuilding Contracts
The shipbuilding market, which was traditionally concentrated in Northern Europe, has shifted eastward in recent decades. In particular, Japan, South Korea, and China have developed substantial shipbuilding capacities since the late 1990s. As a result of this market shift, the European Commission proposed to the Council that the Council sign and conclude an international agreement between the European Union and the Republic of Korea, aimed at cooperation and support in the maritime shipping sector.
Shipbuilding contracts are generally drafted in English, with English law governing the contract and dispute resolution within the jurisdiction of the English courts. Accordingly, a comprehensive understanding of the fundamental principles of English law governing the nature of shipbuilding contracts is essential for international maritime legal practitioners.
Technical Conditions and Quality Guarantees in Shipbuilding Contracts
The Legal Nature of Shipbuilding Contracts
Shipbuilding contracts encompass both the construction and the sale of a vessel. A frequently raised question is whether such contracts should be classified as construction contracts in the strict sense or as contracts for the sale of goods.
The answer to this question is critical, as contracts classified as sales are subject only to the general rules governing the sale of goods. In contrast, if a contract is treated as a construction contract, the legal rules governing the manufacture and supply of goods and materials will apply.
In many instances, shipbuilding contracts resemble contracts for the sale of goods, with the distinction that they include detailed provisions and specific emphasis on the means of production. Historically, in earlier case law, English law classified shipbuilding contracts as contracts for the sale of goods.
Formalities of Ship Purchase and Sale Contracts under Common Law
Under common law, the formation of a ship purchase and sale contract, commonly referred to as a first-hand shipbuilding contract, follows a two-stage process. This process comprises the pre-contract stage and the final stage, culminating in the contract’s conclusion.
The pre-contract stage involves extensive negotiations between the parties regarding the contractual details. Due to the complex nature of shipbuilding contracts, both the builder and the buyer must engage in detailed discussions prior to reaching an agreement. Matters relating to both form and substance, as well as the technical features and specifications of the vessel to be constructed, must be clearly and comprehensively set out in the contract.
One of the primary factors considered by ship buyers when selecting a shipyard is the shipyard’s past performance and operational track record. The successful conclusion of a shipbuilding contract requires expertise in commercial, technical, and legal terminology. The role of shipbuilding brokers and marine architects is also of considerable importance at the pre-contract stage. Prior to contract execution, it is necessary to collect information from various shipyards on pricing, construction timelines, delivery schedules, and specialized design options.
A shipyard may be able to provide ready-made specifications, commonly referred to as principal particulars. In other cases, the buyer may prepare the desired vessel specifications in advance and submit them to multiple shipbuilders in order to obtain competitive construction offers. Such offers are commonly referred to as invitations to tender.
If the first approach, namely acceptance of the shipyard’s proposed specifications, is adopted, subsequent negotiations tend to be less time-consuming. However, if the second approach is chosen, the builder will require additional time to prepare the construction technical requirements. It should be noted that a memorandum of understanding recording the agreed specifications and intentions is binding only in a moral sense and does not create legal obligations. Such a memorandum merely reflects an agreement to negotiate in good faith the terms of the shipbuilding contract that will ultimately be signed at the final stage.
Standard Form of Shipbuilding Contracts
The essential terms of a shipbuilding contract, without which the contract would be considered incomplete, may be summarized as follows:
- Description of the vessel and its dimensions, including deadweight capacity, with allocation of a hull number during construction. The vessel’s class must also be specified, although class details may be finalized at a later stage.
- Speed and type of fuel.
- Contract price and payment terms.
- Inspection of construction progress.
- Modification of agreed specifications.
- Nature and conditions of tests and trials.
- Time and place of delivery.
- Transfer of ownership and allocation of risks, together with insurance arrangements.
- Rectification of defects.
Frequently Asked Questions Regarding Shipbuilding Contracts
Shipbuilding contracts involve both the construction and sale of a vessel. If classified as a sale contract, general rules on the sale of goods apply. If classified as a construction contract, rules governing the manufacture and supply of goods and materials will apply.
Such contracts are typically drafted in English, governed by English law, and disputes are resolved in the English courts.
During the pre-contract stage, the parties engage in extensive negotiations over contractual terms, technical specifications, pricing, construction timelines, delivery schedules, and specialized design features, which form the basis of the final agreement.
A shipyard’s prior performance and operational history are key factors in a buyer’s selection of a builder. Issues such as pricing, construction time, and technical capability are carefully evaluated before contract execution.
A memorandum of understanding prior to the final contract is not legally binding and merely reflects an intention to negotiate in good faith. Its purpose is limited to facilitating negotiations and information gathering for the final contract.
Essential terms include vessel specifications and deadweight capacity; speed and fuel type; price and payment terms; inspection procedures; modification of specifications; testing conditions; delivery arrangements; transfer of ownership and insurance; and defect rectification.
Inspections and trials ensure that the vessel is constructed in accordance with contractual specifications and that any defects are identified and remedied prior to delivery.
The contract must clearly define the arrangements for transfer of ownership, allocation of risk, and insurance coverage to ensure clarity regarding rights and liabilities following delivery. What are shipbuilding contracts, and how do they differ from contracts for the sale of goods?
Which laws govern shipbuilding contracts?
What does the pre-contract stage of a shipbuilding contract involve?
Why is the shipyard’s track record important in concluding a shipbuilding contract?
What is the legal nature of a memorandum of understanding prior to the final contract?
What are the essential terms of a standard shipbuilding contract?
What is the role of inspections and trials in shipbuilding contracts?
How are ownership transfer and insurance addressed in shipbuilding contracts?
