Contractual considerations for shipbuilding in Russia

Key contractual considerations

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

In accordance with Russian law, transactions between legal entities and between legal entities and individuals must be made in writing, namely by drafting a document that expresses the contents of the transaction and that is signed by the parties entering into the transaction. At present, there is no requirement for the signatures of the authorised signatories of the parties to a shipbuilding contract to be certified by a notary. Theoretically, the legal requirements for a written contract may be considered satisfied if the parties do not sign a single document, but instead exchange a number of documents, as well as signing documents with an electronic signature. However, in most cases, shipbuilding contracts are executed as a single principal document, with addendums and attachments if necessary. Until the recent amendments to the Civil Code of the Russian Federation, a foreign trade contract, meaning a transaction between a Russian and a non-Russian party was considered to be void unless it was made in written form. This restriction has now been abolished, but owing to customs, currency control and other administrative requirements, it is still highly advisable, when entering into contracts with Russian counterparts, to execute them in the form of one single document.

No taxes, duties or other such payments to the state are due when entering a shipbuilding contract (unless the parties choose the contract to be made in notarial form, in which case state duties and notaries’ fees are payable for certification).

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?

Generally, Russian law recognises the right of the parties to a contract to choose the law applicable to the contract. However, ships are considered to be immovable property, and article 1213 of the Civil Code provides that contracts in respect of immovable property that is physically located on the territory of the Russian Federation are subject to Russian law. Therefore, when entering into a contract in respect of a vessel that is intended to be constructed in Russia, the parties will need to choose Russian law to govern it.

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?

There is no uniform practice and no single approach in this respect. Depending on the provisions of a particular contract and on the way in which particular issues are regulated by the contract (such as the moment of passing of title, extent of customers rights to supervise or control works in the construction stage, customer’s role in supplying materials for construction, etc), a shipbuilding contract may be treated as a contract for sale and purchase of immovable property, as a contract to construct a structure or as a contract of mixed nature. Russian law does not provide for specific regulations in respect of shipbuilding contracts, but provisions that regulate construction contracts are, in general, more suitable for reflecting the peculiarities of shipbuilding transactions than the provisions regulating contracts of sale and purchase.

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

The vessel’s construction number is an essential element of description of the vessel under construction. Under the present regulations, registration of the vessel under construction and of the title thereto is not obligatory. However, if the parties so agree or otherwise wish the vessel or title to the vessel to be registered, the construction number becomes the principal number by which the vessel and information in the registry pertaining thereto is identified. Therefore, construction number is an important element of the parties’ agreement in general, whether or not it is intended for the vessel to be registered prior to completion.

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?

Generally, the builder is under a dual responsibility from the point of view of compliance with the description of the vessel. This responsibility is both to the buyer (the vessel must be within the description explicitly provided or implied in the contract) and to the classification society that shall supervise the construction in accordance with its own applicable rules in respect of vessels of a particular type and class. Therefore, the builder will be able to deviate only within the explicit and implied parameters of the contract as well as of the applicable classification rules. In case of dispute (including cases when the contractual description is approximate and implies a certain possibility to deviate), the competent tribunal will be required to determine whether such deviation was acceptable.

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, should the parties wish to include certain standards of performance in the contract, they are free to do so. As a general rule, the customer will be entitled to rescind and claim damages only where the breach or defects are substantial and incurable or where the builder fails to cure the defects within a reasonable time at no extra cost to the buyer. The builder may also be held liable for any delays (failure to meet a building schedule provided in the contract).

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

Russian law in general does not provide for specific rules in respect of shipbuilding contracts. In most cases, a shipbuilding contract will be treated as a sale and purchase contract or a contract to construct a vessel. General rules in respect of quality of goods, works and services shall apply. The law and, in particular, the Civil Code of the Russian Federation provides for such rules, but court practice (judgments of commercial courts and practice guidances issued by the Higher Arbitration Court, the supreme commercial instance) is important for understanding the courts’ policy in construction of provisions of the legislation.

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?

Where it is the builder that contracts with the classification society, the customer will only be able to sue the builder directly and the builder would need to make a claim against the society for recourse. The customer may sue the classification society both for non-fulfilment and for improper fulfilment of the latter’s obligations undertaken only under a direct contract with the customer. Practical implementation of this right will depend on the provisions of the particular contract between the customer and the classification society. For example, the standard contract of the Russian Maritime Register of Ships (the bigger of the two Russian classification societies, and a member of IACS) for supervision of the construction of a vessel substantively limits both the basis of the society’s liability and the extent of such liability.

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

In accordance with both the Merchant Shipping Code (article 22) and the Code of Internal Water Transport (article 35), all ships that are subject to state registration (namely, all vessels with the exception of certain types of small craft) are subject to classification and survey. Responsibility for classification and survey of vessels that are registered (or are intended to be registered) under the Russian flag is delegated to the specialist organisations authorised by the federal government. There are different classification societies for different types of vessel. At present, the classification societies are as follows: the Russian Maritime Register of Ships (for seagoing vessels), the Russian River Register of Ships (for riverine ships) and also, in respect only of those ships that are registered in the Russian International Registry of Ships - a foreign classification society, Bureau Veritas and Registro Italiano Navale.

At the same time, general control over compliance with the requirements of international conventions on merchant shipping to which Russia is a party and of the national legislation regarding merchant shipping is the responsibility of harbour masters.

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 parties are free to define in the contract the moment when the title to a vessel under construction shall pass. Registration of title to a vessel under construction is not obligatory, but is possible at the discretion of the parties concerned. In such cases, title to the ships may be registered with the harbour masters and with river inspectorates. Registration may be made in the name of either the shipbuilder or the buyer. The principal legal consequence is that, in case of registration of title, any transfer of title and other rights must also be registered and shall not be valid without such registration.

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?

Yes. The parties may agree on the moment when the title may pass. Parties are also permitted to each hold a certain proportion of the title and for one party’s title to transfer to the other on an incremental basis. It should, however, be noted that in cases where the title to a vessel under construction is registered, any passing of title and any change in parties’ shares of a title must be registered as well.

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

By default, the risk will pass with delivery of the vessel to the purchaser and, in case of a contract to build a vessel, it may also be possible that certain parts of the vessel may be agreed to be accepted by the customer separately, in which case risk adhering to such parts as are accepted will pass to the customer. The law also allows the parties to agree on a different moment of passing of title, but in such case, this must be clearly stated in the contract.

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?

The builder may, unless expressly restricted from doing so by the contract, subcontract part of the works under the shipbuilding contract. However, the builder shall remain responsible to the customer for proper fulfilment of the terms of the contract and both its own performance and the performance of any subcontractors.

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 are no specific restrictions in this respect.