Key contractual considerations

Statutory formalities

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 when entering into a shipbuilding contract. There is, for instance, no requirement that the shipbuilding contract is signed, and an oral agreement would be valid and binding between the parties. Having said that, it is highly recommended that the parties enter into a written shipbuilding contract that is signed by both parties. It is also important to ensure that the persons representing each party are authorised to act on behalf of their employer or principal.

Choice of law

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?

The parties are free to choose the governing law of the contract. This choice will be upheld by the Norwegian courts, provided that the agreement can be demonstrated with reasonable certainty. The Norwegian standard shipbuilding contract Ship 2000 provides for Norwegian law as a default provision, but there is nothing in the contract that prevents the parties from changing the governing law. One should, however, keep in mind that the standard contract is drafted in a Norwegian legal context and that over the years several of the standard provisions have been scrutinised by Norwegian courts and arbitration tribunals, thus developing case law to some extent. Whenever the parties want to change the governing law in the Ship 2000 contract, they are advised to consider the application of the various contractual provisions in the context of the alternative governing law. Ship 2000 is also drafted to be compatible with English law.

Nature of shipbuilding contracts

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?

In principle, a shipbuilding contract is regarded as a contract for the sale of goods. Unless the buyer provides a substantial part of the materials, the Norwegian Sale of Goods Act 1988 will apply. The provisions of the Act are not mandatory and will only apply to the shipbuilding contract to the extent that the particular question at hand is not regulated in the shipbuilding contract. In Ship 2000, certain areas, such as the shipyard’s liability for defects, are fully regulated in the contract, while other areas, such as liability for default (other than delay and defects), are less regulated, and one would have to rely on the rules under Norwegian background law.

Hull number

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

The hull number is essential to the vessel’s description and is not merely a label. The hull number would, for instance, be a key element if the hull is to be registered in the Norwegian Shipbuilding Register. The hull number is supposed to identify the particular hull in question throughout the construction phase, and the buyer can request delivery of that particular hull, with that unique hull number, as identified in the shipbuilding contract. The issue with substitution of hulls or ‘hull swapping’, and whether the builder is entitled to deliver another hull in lieu of the one mentioned in the contract, was raised in the Norwegian arbitration awards of 27 November 2001 (Broström Tankers AB v Factorias Vulcano SA No. II) and 8 January 2008 (Factorias Vulcano SA v Arrow Seismic Invest II Ltd No. II), and in both matters the tribunals held that the substitution of hulls was not permitted unless there were clear reservations in the contract to the contrary.

Deviation from description

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 insertion of ‘about’, ‘ca’, ‘approximate’ or similar will allow the builder some degree of deviation from the figure stated. The actual deviation permitted will depend on an overall assessment of the particular circumstances at hand. To avoid this uncertainty, it is recommended either to apply specific figures or to properly define the ‘about’ margins that are to apply in each particular circumstance. Ship 2000 assumes that specific figures are used to describe the main dimensions and characteristics, and the contract contains a separate provision specifying that any ‘about’ qualifications shall be disregarded for the purposes of calculating liquidated damages and the right of cancellation for deviation from the stipulated figures.

Guaranteed standards of performance

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?

Yes, the parties are free to incorporate such standards of performance. The standard provisions of Ship 2000 include some key standards of performance covering speed, fuel consumption and cargo-carrying capacity (deadweight and cubic capacity). Deviation from these pre-agreed standards would entitle the buyer to liquidated damages or to a right of cancellation if the deviation exceeds the agreed maximum limit. There are trade standards within certain industries, the best example being NORSOK, the standard commonly used for the construction of units and equipment to be used in connection with oil and gas production on the Norwegian continental shelf.

Quality standards

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

There are no statutory provisions, nor any case law, that give greater definition to contractual quality standards in relation to shipbuilding.

Classification society

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?

The normal arrangement in Norway is that the builder contracts with the classification society to ensure that the vessel is built and delivered in accordance with the requirements of the classification society. The classification society is considered as a subcontractor to the builder and, since there is no contractual relationship between the buyer and the classification society, as a starting point the classification society owes no contractual duty or liability to the buyer. This would of course be different if the classification society were engaged directly by the buyer; for instance, as consultants in connection with the supervision of the builder’s construction.

The buyer may, however, in principle hold the classification society liable in tort and as such the classification society owes a duty of care to the buyer. This duty of care may extend to certain other persons, such as a third party that buys the vessel from the buyer after it is delivered from the yard. The starting point for the assessment of such a claim in tort would be whether the classification society has acted negligently based on the particular circumstances of the case and viewed in light of the particular duty of care applicable in similar circumstances. Traditionally, there has been a high threshold for holding the classification society liable in tort, in particular in respect to defects in the vessel. There are indications that this position is shifting and that there is less reason to treat tort claims against classification societies differently - in other words, more strictly - than tort claims against other groups of professional service providers. However, there is very limited case law in Norway on this matter.

Flag-state authorities

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

The flag-state authority in Norway, the Norwegian Maritime Authority, has appointed several classification societies as recognised organisations (ROs). These have been delegated certain tasks on behalf of the Norwegian authorities, such as the performance of inspections and surveys of ships to ensure compliance with flag-state requirements.

The societies currently appointed as ROs are:

  • the American Bureau of Shipping;
  • Bureau Veritas;
  • DNV GL;
  • Lloyd’s Register;
  • RINA; and
  • Nippon Kaiji Kyokai (ClassNK).

The authority that has been delegated by the Norwegian Maritime Authority to the ROs is set out in detail in the agreement with each particular RO.

Registration in the name of the builder or the buyer

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?

Vessels under construction in Norway, and contracts for the construction of vessels in Norway, can be registered into a separate chapter of the Norwegian Ship Register called the Shipbuilding Register. This registration also covers hulls, major hull sections or main engines built outside Norway, provided that delivery from the foreign subcontractor has taken place. The vessel or hull under construction can be registered in the name of either the builder or the buyer, depending on which party holds the title to the vessel during the construction period (as agreed in the shipbuilding contract). The party registered as the owner during the construction period can register mortgages over the vessel.

In most shipbuilding contracts, the yard will hold title to the vessel until the vessel is delivered to the buyer. It is common that the yard registers the vessel with the Shipbuilding Register in order to obtain financing for the cost of construction and provision of refund guarantees. Once the vessel under construction is registered in the Shipbuilding Register, the lenders can register a mortgage on the vessel, thus creating security for their loan. Even where the yard holds title to the vessel during the construction period, it is nevertheless possible for the buyer to register the shipbuilding contract with the Register, thereby securing priority for its rights under the shipbuilding contract to, inter alia, take delivery of the vessel upon completion.

Title to the vessel

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?

The parties may agree that the title will pass from the builder to the buyer during construction. It is possible to agree that such transfer of title shall take place progressively during the course of the construction or in stages; for instance, in connection with milestone payments. The buyer can obtain title to the vessel from the earliest commencement of construction. In the Norwegian standard shipbuilding contract Ship 2000, it is agreed that the builder keeps title to the vessel during the entire construction period and that the buyer assumes title upon delivery of the vessel. In offshore construction projects, it is more common that title to the object is passed progressively during the course of construction.

In certain shipbuilding projects where the buyer is supposed to finance the construction period by paying larger instalments to the builder, it is more common to agree that title to the vessel passes to the buyer either gradually or in agreed stages. This will entitle the buyer to have the title to the vessel or hull registered in the Shipbuilding Register, thus allowing lenders to register a mortgage or mortgages on the vessel or hull.

Passing of risk

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

The parties are free to agree when risk will pass to the buyer, and it is possible to agree that the passing of risk and title takes place at different times. However, most commonly it is agreed that risk and title are passed on to the buyer simultaneously. This is also the standard position in Ship 2000, where title and risk are passed on to the buyer upon delivery of the vessel.

Subcontracting

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?

Unless otherwise agreed in the shipbuilding contract, the builder is allowed to subcontract all or part of the contract. This will have no bearing on the builder’s liability, who remains liable to the buyer for the subcontractor’s performance as if such work had been performed by the builder itself. In Ship 2000, the default position is that the builder is free to subcontract all or parts of the work, except for construction of the hull and major sections of the hull. Even if the shipbuilding contract contains no explicit restrictions against subcontracting, there could be pre-contractual correspondence or dealings between the parties from which certain restrictions on subcontracting could be implied.

It is customary to include a ‘maker’s list’ as a schedule to the shipbuilding contract, which specifies the subcontractors and suppliers the builder has to choose between for each particular item or piece of equipment. The builder may freely choose between the named sub­contractors and suppliers.

Extraterritorial construction

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?

Unless otherwise agreed, the builder is free to subcontract all or part of the work to any subcontractor of its choice and irrespective of the country in which this subcontractor is located. But even if the shipbuilding contract contains no explicit restrictions on subcontracting, there may be other provisions in the contract, or pre-contractual correspondence or dealings between the parties, from which it can be implied that that the main items of the vessel shall be built in Norway. It is common for Norwegian shipyards to subcontract the construction of the hull to shipyards in other countries and then arrange for towage to Norway and outfitting and completion at the Norwegian yard.