Contractual considerations for shipbuilding in China

Key contractual considerations

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

No.

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 to a shipbuilding contract involving a foreign element (such as party, subject matter, etc) may choose the governing law for the shipbuilding contract, whereas a party’s choice of foreign law as governing law for a shipbuilding contract without a foreign element (for example, two Chinese parties concluding a contract to build a vessel in China) will not be upheld by Chinese courts.

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?

Under Chinese law, a shipbuilding contract could either be a contract for the sale of goods or a contract for supply of workmanship and materials, depending on the specific terms of the contract.

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

It is essential to state the hull number in the contract to identify the vessel when it is being built, as the hull number is assigned to the vessel from the date of signing the building contract, whereas the Chinese permanent identification number or International Maritime Organization number can only be applied for at a later stage.

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 vessel should be built pursuant to the agreed specifications, whereas ‘approximate’ dimensions and description of the vessel allow deviation but within the scope of the agreed specifications, relevant class rules and trade standards.

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?

Parties may agree on the standards of performance and the consequences of failing to meet such standards. There are also trade standards for coating, noise and vibration.

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

There are compulsory and recommended trade standards for quality standards. These are normally minimum standards and the parties may agree on higher quality standards.

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?

If the builder contracts with the classification society, depending on the specific terms of the contract, it is generally believed that the society does not owe a duty of care to the buyer.

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

The China Maritime Safety Administration has outsourced part of the compliance with flag-stage legislation to the China Classification Society, mainly in relation to compulsory inspections.

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?

Registration of a vessel under construction is allowed in the name of either the builder or the buyer, or jointly in the name of both the builder and the buyer (if supporting documents can be provided to evidence such joint ownership). Registration can serve as prima facie evidence that the registered owner has ownership of the vessel and the registered owner can create and register a mortgage over 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 can contract from when the title passes to the buyer. The parties can agree that the title is vested with the buyer from the outset.

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

Unless otherwise agreed between the parties, as a general principle, risk will pass upon delivery and title will pass upon delivery (or as per the agreement between the parties).

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?

With consent of the buyer, the shipbuilder can subcontract part or all of the contract, but generally the shipbuilder shall complete the major or principal part of the work, and could subcontract the completion of any auxiliary part of its contracted work to a third party. Depending on the terms of the shipbuilding contract, the builder will remain liable towards the buyers either solely or jointly with the subcontractor. It is customary to include a maker’s list of major suppliers and subcontractors in the contract.

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?

Subject to the terms of the shipbuilding contract, the builder will normally need to obtain the prior consent of the buyer to have main items constructed in another country.