Contractual considerations for shipbuilding in Canada

Key contractual considerations

Are there any statutory formalities in your jurisdiction that must be complied with in entering into a shipbuilding contract?

There are no statutory formalities that must be complied with in entering into a shipbuilding contract. However, it would be highly unusual for a shipbuilding contract in Canada not to be in writing.

May the parties to a shipbuilding contract select the law to apply to the contract, and is this choice of law upheld by the courts?

Parties may, and would be prudent to, select the law applicable to their contract. Commonly, shipbuilding contracts in Canada specify that they will be governed by the laws of the province in which the shipyard is located and the federal laws of Canada applicable therein. The parties are, however, free to specify any law that they wish. Choosing a governing law that is different from that of the jurisdiction applicable to dispute resolution will, however, create an added complication with resulting uncertainties.

Courts will generally adhere to the parties’ selection of governing law provided the selection has been made in a sufficiently clear manner. Where the governing law is not selected or is insufficiently clear, the common law test is that the applicable law will be determined by referring to the system of law with which the contract has its closest and most real connection. In expressing a choice of law, the parties should be careful to avoid the possibility of renvoi, which in Canada is the likely result unless the parties choose a law without regard to governing rules of private international law.

Is a shipbuilding contract regarded as a contract for the sale of goods, as a contract for the supply of workmanship and materials, or as a contract sui generis?

A shipbuilding contract could be construed as either a contract for sale of goods or a contract for the supply of workmanship and materials, depending on the drafting and nature of the contract. In most cases, a contract for the construction and delivery of a vessel will be a contract for sale of goods. Sale of goods legislation codifying the common law principles is present in most Canadian provinces and would be applicable to a shipbuilding contract. In particular, such legislation prescribes implied conditions and warranties with respect to merchantability and fitness for intended purpose. The parties may, and most builders do, expressly exclude the application of the implied conditions and warranties in favour of express warranties in the contract.

Is the hull number stated in the contract essential to the vessel’s description or is it a mere label?

A hull number is unnecessary for contractual purposes. However, Canadian shipyards commonly assign a hull number for their own identification purposes. A vessel under construction may be temporarily recorded in the Canadian Register of Vessels, usually to allow a builder’s mortgage to be registered, at which time it must be assigned a hull number or temporary name.

Do ‘approximate’ dimensions and description of the vessel allow the builder to deviate from the figure stated? If so, what latitude does the builder have?

The use of approximate dimensions would be unusual in a Canadian shipbuilding contract, and if used the parties are likely to specify a range within which the builder can construct. There is no legal test in Canadian law as to how much latitude a builder has if a dimension is specified as approximate. The latitude afforded by the use of an approximate dimension is likely to be a question of fact to be determined in the context of the particular circumstances.

May parties incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages or rescission? Are there any trade standards in your jurisdiction for coating, noise, vibration, etc?

Minimum standards of performance are commonly included in Canadian shipbuilding contracts, with remedies for the buyer where the standards are not met. For critical standards or significant failure, rescission or termination is often provided, and in other cases liquidated damages are common. The enforceability of liquidated damages provisions is subject to the comments under question 26. There are no trade standards for coating, noise or vibration; buyer’s needs on these (and any other) performance issues, if agreed by the builder, will be set out in the contract (or more usually, the specifications). On the subject of coatings, it is noted that the Anti-fouling Systems Convention 2001 is adopted in Canadian law, applying according to its terms to existing ships as well as new buildings.

Do statutory provisions or previous cases in your jurisdiction give greater definition to contractual quality standards?

The parties may incorporate statutory provisions by reference into the contract. For example, the buyer may wish the vessel to be constructed in accordance with certain regulatory requirements under the Canada Shipping Act 2001. These requirements, where necessary, would typically be included in the specifications.

The Marine Safety Directorate of Transport Canada has overall responsibility for establishing and implementing standards and inspection for ships built in Canada. The international conventions with standards applicable to construction of ships are incorporated into the Canada Shipping Act. Some of its regulations, such as the Hull Construction Regulations, CRC, chapter 1431, impose obligations on shipbuilders.

Canadian courts will interpret standards stated in a shipbuilding contract, but no standard of general application has been established by Canadian courts.

Where the builder contracts with the classification society to ensure that construction of the vessel leads to the buyer’s desired class notation, does the society owe a duty of care to the buyer, or can the buyer successfully sue the classification society, if certain defects in the vessel escape the attention of the class surveyors?

In theory, the classification society would owe a duty of care to a buyer. However, to date no Canadian court has found a classification society liable to a buyer for its errors. In matters of maritime law, English jurisprudence is often persuasive and the House of Lords case of Marc Rich & Co AG v Bishop Rock Marine Co, (The Nicholas H), [1995] 2 Lloyd’s LR 299 (HL), where the court expressed a reluctance to impose a duty of care toward third parties because classification societies act for the ‘collective welfare’, would likely influence the position adopted by Canadian courts.

Have the flag-state authorities of your jurisdiction outsourced compliance with flag-state legislation to the classification societies? If so, to what extent?

Through Transport Canada, the government has entered into formal agreements with a number of classification societies delegating statutory inspection, tonnage measurement and certification functions of the flag state. This is referred to as the Delegated Statutory Inspection Program. Transport Canada refers to these delegates as Recognized Organizations, of which there are currently seven: the American Bureau of Shipping, Bureau Veritas, ClassNK, DNV GL, the Korean Register, Lloyd’s Register and RINA Services, SpA. The agreements with Recognized Organizations authorise them to:

• perform inspections and issue approvals or other documents pursuant to domestic regulations or international agreements;
• perform audits and issue certifications, pursuant to the Inter­national Safety Management Code and the Safety Management Regulations and to perform audits and issue certifications pursuant to the revised Safety Management Regulations;
• issue load line certificates, excluding exemption certificates;
• issue documents or statements of compliance;
• approve plans and service suppliers;
• issue type approval certificates; and
• calculate the tonnage of vessels on behalf of the Minister of Transport.

Does your jurisdiction allow for registration of the vessel under construction in the local ships register in the name of the builder or the buyer? If this possibility exists, what are the legal consequences of this registration?

The owner of a vessel under construction, which may be the builder or the buyer, may temporarily record the vessel in the Canadian Register of Vessels by filing a Form 15, description of vessel under construction with the registrar. Recording the vessel is necessary in order to permit a builder’s mortgage to be registered. The registrar will assign a record number to the vessel. The vessel is not considered registered under the Canadian flag at this stage. Within 30 days after completion of the construction of a recorded vessel, the person in whose name the vessel is recorded shall notify the chief registrar of that fact and of the name and address of its owner.

Both recorded and registered vessels are subject to certain incident or accident reporting requirements of the Canada Shipping Act.

May the parties contract that title will pass from the builder to the buyer during construction? Will title pass gradually, upon the progress of the vessel’s construction, or at a certain stage? What is the earliest stage a buyer can obtain title to the vessel?

Canadian shipbuilding contracts may specify when title passes, whether at a point in time or progressively. The usual provision is that title passes upon delivery, commensurate with payment of the contract price. In such a case, the common practice is to specify in a protocol of delivery and acceptance the exact date and time that title passes. Where the buyer is obtaining financing for the construction, it is not unusual for progressive passing of title to the buyer, but the builder will often require security for payment in this situation. The earliest stage at which title can pass is usually when the keel is laid. Prior to that, title would be in the materials and components.

Will risk pass to the buyer with title, or will the risk remain with the builder until delivery and acceptance?

Canadian shipbuilding contracts may specify when risk passes. Where silent on this point, risk would pass with the title. Because of the need for insurance clarity, most Canadian shipbuilding contracts provide for passage of risk on delivery, with the precise date and time specified in a protocol of delivery and acceptance.

May a shipbuilder subcontract part or all of the contract and, if so, will this have a bearing on the builder’s liability towards the buyer? Is there a custom to include a maker’s list of major suppliers and subcontractors in the contract?

Absent any contractual restrictions, a shipbuilder may subcontract part or all of the contract, though it remains liable for its contractual obligations. Canadian shipbuilding contracts typically provide for some restriction on subcontracting, either by pre-approval of certain subcontractor or a requirement to seek approval prior to subcontracting. This requirement is sometimes combined with specified thresholds (by type of work or amount involved) below which consent is not required. In any event, the shipbuilder remains liable to the buyer for subcontracted work. Whether to include reference to major suppliers or subcontractors in the contract is a matter for negotiation between the builder and the buyer, and although entirely permissible, doing so does not amount to ‘custom’ in Canada.

Must the builder inform the buyer of any intention to have certain main items constructed in another country than that where the builder is located, or is it immaterial where and by whom certain performance of the contract is made?

There is no statutory obligation to inform a buyer of the source of vessel components. However, Canadian shipbuilding contracts often specify that the vessel must be built at the builder’s shipyard (in Canada). It is also usual practice for the shipbuilding contract to specify the manufacturer of major components, such as the engines. Underlying these requirements is a need for buyers to know that a vessel was built in Canada for the purposes of registration, and certain restrictions imposed on foreign-built vessels, such as the obligation to pay duty or compliance with domestic coasting trade legislation.