On 26 May 2021 the Shanghai Maritime Court published its self-edited Report on Trials Involving the Shipbuilding Industry. The report lists 10 interesting cases and indicates the court's position on various issues regarding:
- ship design;
- financing; and
This article discusses a noteworthy case listed in the report.
On 14 January 2012, during the inspection process of a vessel built by the shipyard for Company A before the trial voyage, workers from the shipyard mistakenly opened the manhole cover connected to the sea, causing the vessel to be flooded and grounded and the equipment inside to be submerged. The accident caused huge economic losses, including salvage expenses, recovery or replacement expenses and labour costs.
According to the design and equipment contract between Company A and the ship design company, as well as the shipbuilding contract between the shipyard and Company A, the ship design company provided only the first-draft design drawings of the vessel and some equipment to Company A. After receiving the first-draft design drawings, the shipyard – as the constructor of the vessel – was then to finalise the detailed drawings and construction drawings and post them to the China Classification Society (CCS) for approval. It was clearly provided in the relevant shipbuilding contract that the shipyard was responsible for all of the problems and the final full liabilities arising from the construction design and the vessel's construction. The shipyard was obliged to verify all of the drawings and documents of the technical design and detailed design provided by the ship design company. If, due to its negligence, the shipyard failed to find defects, negligence or omissions in the drawings and documents of the technical design and detailed design provided by the ship design company, the shipyard would be liable for:
- any increase in costs and expenses;
- the extension of the construction period; and
- any other damages and losses.
The design drawings provided by the ship design company had been approved by both Lloyd's Register of Shipping and the CCS. In addition, during the vessel's construction, the ship design company had many email correspondences with the shipyard and clearly advised the shipyard that the involved manhole cover should be marked as "direct to sea", but the shipyard failed to notice such warnings and did not submit the correct drawings for the approval and manufacture of the relevant manhole cover. The insurers that indemnified the aforementioned losses raised a subrogation claim against the ship design company on tort basis based on that fact that the ship design company had not put a warning sign on the manhole cover and had not arranged for its onsite supervisor to provide guidance, causing the shipyard workers to mistakenly open the manhole and allow the sea water to enter the vessel.
This case was heard at first instance by the Shanghai Maritime Court and the decision was affirmed by the Shanghai Higher People's Court. The courts determined whether the ship design company should be responsible for the design defect alleged by the insurers. The courts held that:
- although the claim held by the insurers was on tort basis and the shipbuilding contract and the ship design contract specified the respective rights and obligations of the shipyard, the ship design company and Company A, the courts would not completely disregard the contractual rights and obligations when determining the liability of the ship design company in this case; and
- the ship design was not a "product" as defined in article 2 of the Product Quality Law, which defines a "product" as something that is processed or manufactured for sale. However, ship design is an intellectual achievement rather than a physical object, which takes drawings as the carrier and the design content presented in drawings as the source of its value.
Relying on the above opinions, the courts further decided that the ship design company would not undertake any liability from the alleged design defect for the following reasons:
- Based on the ship design contract and the shipbuilding contract, it could be concluded that the shipyard was ultimately responsible for any ship design or building problems. Also, based on the ship design contract, the ship design company was liable only for the loss caused by its gross negligence or wilful dereliction of duty before delivery of the drawings, which could not be shown by the evidence submitted.
- With regard to the existence of any design defects, it was to be considered whether the vessel's design measured up to the national or industry standards. If no national or industry standard was available, the court would consider whether the vessel's manufacturer could reasonably have foreseen that the product could have endangered the safety of other people. If so, the court would consider whether the manufacturer could have avoided such danger. In the pending case, the ship design, which should have been examined by the shipyard, had been approved by Lloyd's Register of Shipping and the CCS, meaning that there was no mandatory standard which required the manhole cover to be labelled as "direct to sea" in the design drawings.
- As an experienced and professional vessel manufacturer, it was reasonable to determine that the shipyard should have foreseen and avoided such a danger.
The case at hand provided welcome guidance on the Shanghai courts' attitude to such cases. The courts opined that in a tort claim, even if the contract specifies the detailed rights and obligations of the parties to determine liabilities, the relevant contractual clauses must still be considered to determine whether a contractual party is obliged to take action and whether such a breach of contract has caused the damage in question. Thus, contractual parties cannot avoid the application of the contract's clauses simply by raising a tort claim.
Also, in the discussed case, since the shipyard was co-insured under the policy, the insurer could not recover the relevant losses from the shipyard, which was ultimately responsible for the relevant losses. Therefore, this case is also a reminder to insurers that when designing insurance products and accepting insurance applications, the potential legal risks may be brought by more than one insurant under a policy, especially when they are the counterparties.
For further information on this topic please contact Jin Yu-Lai at KaiRong Law Firm by telephone (+86 21 5396 1065) or email ([email protected]). The KaiRong Law Firm website can be accessed at www.skrlf.com.