Participation and ownership
Restrictions on foreign participation and investment
Is the shipbuilding industry in your country open to foreign participation and investment? If it is open, please specify any restrictions on foreign participation.
Presidential Regulation No. 36 of 2010 (the Negative Investment List) sets out the lines of business that are open, restricted or limited to foreign direct investment.
The current Negative Investment List does not stipulate any shareholding limitation for the shipbuilding industry. The only related limitation provided in the Negative Investment List is that shipbuilding firms producing wooden vessels intended for marine tourism or fishing shall be established under the partnership requirement. Hence, in practical terms, the shipbuilding industry is open for 100 per cent foreign investment.
Government ownership of shipbuilding facilities
Does government retain ownership or control of any shipbuilding facilities and, if so, why? Are there any plans for the government divesting itself of that participation or control?
The Indonesian government retains ownership of several shipbuilding facilities through share ownership in certain state-owned shipbuilding companies, including PT Dok dan Perkapalan Kodja Bahari (Persero) and PT PAL Indonesia (Persero). As stated in the government regulations providing for the establishment of these companies, the initial reasoning behind the government’s participation in the shipbuilding industry was that the government considered the shipbuilding industry as a strategic industry and at that time there were no private companies that could provide sufficient and compatible shipbuilding services.
We are not aware of any plan for the Indonesian government to divest itself of its participation in the shipbuilding industry.
Key contractual considerations
Are there any statutory formalities in your jurisdiction that must be complied with in entering into a shipbuilding contract?
Under Indonesian law, there is no specific regulation that provides the formalities that must be complied with in entering a shipbuilding contract. As such, the preparation and the execution of a shipbuilding contract must refer to the general provisions of contract law stipulated in the Indonesian Civil Code (ICC).
Under the ICC, the parties to a shipbuilding contract are entitled to set the provisions of the shipbuilding contract as long as such provisions do not conflict with any applicable law in Indonesia. As the provisions of a contract are agreed by the parties, under Indonesian law such provisions must be deemed exhaustive and binding on both parties.
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 to a shipbuilding contract are entitled to select the governing law that shall be applied to the contract. If any dispute or claim arises out of the shipbuilding contract and the parties to the contract decide to bring such dispute to the court, the courts will acknowledge the choice of law. As such, the court shall hear and examine the dispute in accordance with the governing law of the shipbuilding contract.
However, if the parties to a shipbuilding contract agree to settle any dispute arising from the contract in an Indonesian court, but select a foreign law as the governing law of the agreement, it cannot be guaranteed that Indonesian judges will adhere sufficiently to the foreign law, owing to their limited knowledge and awareness of the implementation and interpretation of such foreign 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?
Indonesian law does not stipulate whether a shipbuilding contract shall be regarded as a contract for the sale of goods, as a contract for supply of workmanship and materials or as a sui generis contract. However, as the general practice in Indonesia indicates that during the building process, the buyer and the shipbuilder shall jointly hold the title to the ship, it seems that a shipbuilding contract may not be deemed as a contract for the sale of goods. Similarly, as the shipbuilder and the buyer may contractually agree on whether the ship materials will be provided by the shipbuilder or by the buyer, it seems that a shipbuilding contract may not be deemed a contract for the supply of workmanship and materials.
Therefore, a shipbuilding contract is likely to constitute a sui generis contract, which is in a class of its own.
Is the hull number stated in the contract essential to the vessel’s description or is it a mere label?
There is no implied term under Indonesian law stipulating whether the hull number is an essential part of the shipbuilding contract. As such, it fully depends on the terms and conditions of the shipbuilding contract.
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 shipbuilder shall perform its obligation under the shipbuilding contract to build and deliver the ship in a good condition as specified under the shipbuilding contract. If the shipbuilder fails to do so, the buyer may terminate the shipbuilding contract and claim for any damages incurred as a result of such breach of contract.
Based on our observation of the forms of shipbuilding contracts that are normally used in Indonesia, the shipbuilder is allowed a certain latitude to deviate from the figure stated in the shipbuilding contract. The following are common contractual terms in this regard:
- delay of the ship delivery - if the delay in the vessel’s delivery exceeds 50 days, the buyer may accept the ship with a 5 per cent reduction in the contract value;
- insufficient dead weight tonnage - the maximum deviation from the figure stated in the shipbuilding contract is 2 per cent. If the deviation exceeds 4 per cent, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
- insufficient speed - the maximum deviation is 0.2 knots and in this circumstance, the contract value shall be corrected per 0.1 knot of difference. If the deficiency reaches 0.7 per cent of the contracted speed of the vessel, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
- excessive fuel consumption - the maximum deviation is 5 per cent and in this instance, the contract value shall be decreased per 0.1 per cent of difference. If the excess in consumption reaches 8 per cent, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
- insufficient cargo pumping rate - in this instance, the shipbuilder may be asked to remedy the defect or the buyer may accept the ship with a change in the contract value; and
- cargo capacity tank liquidated damages deficiency - in this circumstance, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value.
Nevertheless, Indonesian law recognises the principle of freedom of contract and, therefore, the parties may agree to other terms as long as they do not contravene the mandatory statutory provisions.
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 to a shipbuilding contract may incorporate specific standards of performance for the constructed vessel. In the event that the builder fails to deliver the constructed vessel in a good condition fulfilling the specifications and standards of performance stipulated under the shipbuilding contract, the buyer is entitled to take actions or receive compensation of damages according to the provisions of the shipbuilding contract (eg, to reject the delivery of the constructed ship, to terminate the shipbuilding contract, to receive compensation in certain amount according to the deviation degree, or to file a claim against the builder for any damages incurred). There are no trade standards for coating, noise, vibration or other specific items related to shipbuilding prevailing in Indonesia. Therefore, the standards of performance shall be fully subject to mutual agreement of the parties to the shipbuilding contract.
Do statutory provisions or previous cases in your jurisdiction give greater definition to contractual quality standards?
In common practice, because the ship construction will mostly be supervised by the classification society and the Indonesian authorities (represented by the Directorate General of Sea Communications), the quality standard will most likely be determined based on the rule of the classification society concerned and Indonesian National Standard. The Directorate General of Sea Communications may also refer to the standard set out under international marine regulations such as the 1974 Safety of Life at Sea Convention and the 1973 and 1978 Marine Pollution Conventions.
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 parties to a dispute are bound by an agreement and such dispute arises from or in connection with that agreement, the injured party may file a claim based on breach of contract. Otherwise, the injured party may file a claim based on tort.
In the shipbuilding process, the buyer and the shipbuilder are bound by a shipbuilding contract in which the shipbuilder is obligated to deliver a ship as agreed and specified in the shipbuilding contract. Therefore, if there is any damage incurred from the defects in the vessel, the buyer may submit a claim against the shipbuilder based on breach of contract. The buyer may not directly claim for any compensation of damages against the classification society as there is no direct legal relation between them. The classification society owes a duty of care to the shipbuilder.
Have the flag-state authorities of your jurisdiction outsourced compliance with flag-state legislation to the classification societies? If so, to what extent?
The Indonesian authorities do not currently outsource compliance with the flag-state legislation to any classification society. All survey, certification or assessment can only be carried out by the flag-state authority except for the purpose of issuing classification certificates.
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?
Once a newbuild is 50 per cent completed, it may be temporarily registered with the Indonesian Ship Registry. The temporary registration is effective when a temporary ship registration deed is issued by the Indonesian Ship Registry. The temporary registration, however, shall only be valid until the ship is fully constructed. After the delivery and acceptance of the ship, the owner of the ship must immediately apply for permanent registration with the Indonesian Ship Registry. The ship registration shall be made in the name of the buyer with the approval of the shipbuilder.
No specific and substantial legal consequence will arise from the temporary registration, as the title to the ship shall be held by the buyer when the Permanent Ship Registration Deed is issued by the Indonesian Ship Registry. However, a ship that has been temporarily registered may be subject to collateral or security by way of a mortgage or a hypothec.
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?
Under Indonesian law, the title to a ship is evidenced with a Ship Registration Deed. Article 7 of Ministry of Transportation Regulation No. 13 of 2012 regarding Registration and Nationality of Ships (PM 13/2012) provides that the ship registration deed of a newbuild can only be issued if the buyer is able to present the protocol of delivery of the ship signed by the shipbuilder and the buyer itself. Therefore, by law, the title to a newbuild will be deemed to have passed to the buyer once the said ship has been completely delivered to the buyer.
It is the practice in Indonesia for the buyer and the shipbuilder to jointly own the ship during construction. As such, every action that is intended to be imposed over the ship shall be made with the approval of both parties.
Passing of risk
Will risk pass to the buyer with title, or will the risk remain with the builder until delivery and acceptance?
As (pursuant to article 7 of PM 13/2012) the title of a ship will legally be passed on to the buyer once the ship has been delivered, which shall be evidenced by protocol of delivery and acceptance, then ordinarily the risk shall also be deemed fully transferred to the buyer on such delivery date. However, based on the principle of freedom of contract, the parties may agree to provisions that customise the timing or conditions that trigger the passing of risk. Under the shipbuilding contract, the parties will normally agree to set out a provision stipulating that the risk during construction shall be borne by the shipbuilder, unless the risk occurred as a result of the buyer or buyer’s contractor.
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?
Subject to the agreement and the approval of the buyer, the builder may subcontract a part of or the whole shipbuilding contract to any third party. However, this subcontracting shall not release the builder from its obligations and liabilities as stipulated under the shipbuilding contract owing to the strict liability provision of article 1367 of the ICC. This provision obliges the builder to take responsibility for any negligence on the part of its subcontractors. As to whether or not the shipbuilding contract should include a maker’s list of major suppliers and subcontractors, it is subject to the mutual agreement of the parties to the shipbuilding contract on a case-by-case basis.
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?
The law is silent on the obligation of the shipbuilder to inform the buyer of any intention to have certain main items constructed in another country. Unless the shipbuilding contract provides otherwise, the shipbuilder may have such items constructed at any place it desires. The only limitation provided by the law is that all materials used for the ship construction must be certified by the classification society and the flag-state authority.
However, during the process of negotiation and execution of the shipbuilding contract, the builder and the buyer will determine the specification of the ship, including but not limited to the specification of the ship materials. If the builder intends to have certain items constructed in another country, the builder should clearly inform the buyer of such intention.
Pricing, payment and financing
Fixed-price and labour-and-cost-plus contracts
Does the law in your country have different provisions for ‘fixed-price’ contracts and ‘labour-and-cost-plus’ contracts?
No. Indonesian law does not have different provisions for fixed-price and labour-and-cost-plus contracts.
Does the builder have any statutory remedies available to charge the buyer for price increases of labour and materials despite the contract having a fixed price?
There is no specific statutory remedy available for the builder to charge the buyer for price increases of labour and materials if the contract has a fixed price.
The ICC provides that parties to a contract are free to set out provisions therein with their mutual consent. The provisions agreed by the parties must be deemed exhaustive and binding on both parties. Therefore, if the shipbuilder and the buyer have previously agreed to a fixed-price shipbuilding contract, the shipbuilder shall have no right to claim for a higher amount, unless the buyer agrees to amend the contract price.
Retracting consent to a price increase
Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?
Article 1323 of the ICC provides that any agreement entered into based on duress shall be deemed voidable. Therefore, there is a possibility for the buyer to retract consent to an increase in price if such consent was incorporated in the shipbuilding contract under economic duress. However, the buyer is required to prove the existence of the duress before the court at the time the buyer entered into the contract.
Exclusions of buyers’ rights
May the builder and the buyer agree to exclude the buyer’s right to set off, suspend payment or deduct certain amounts?
Yes. The parties to a shipbuilding agreement, which are the builder and the buyer, are entitled to exclude the buyer’s rights, provided that such exclusion is not contrary to Indonesian law.
If the contract price is payable by the buyer in pre-delivery instalments, are there any rules in regard to the form and wording of refund guarantees? Is permission from any authority required for the builder to have the refund guarantees issued?
There is no implied term under Indonesian law regarding refund guarantees. Therefore, there is no rule in regard to the form and wording of refund guarantees and the builder does not have to obtain any approval or permission from any authority to have the refund guarantee issued. It fully depends on the arrangement between the builder and its bank.
Advance payment and parent company guarantees
What formalities govern the issuance of advance payment guarantees and parent company guarantees?
Indonesian law provides that a guarantee agreement is classified as an accessory to an agreement and its validity will be dependent on the validity of the main agreement. In a shipbuilding context, the advance payment guarantees and parent company guarantees are normally entered into as an accessory to the shipbuilding contract. No guarantee agreement can be entered into as a stand-alone agreement without the main agreement being executed beforehand.
A guarantee agreement can also be concluded as a privately executed document or in the notarial form, although the current practice indicates that the notarial form is the most preferable, especially for an advance payment guarantee that is granted in the form of bank guarantee.
Article 1831 of the ICC provides that a guarantor shall be entitled to require the creditor to firstly seize the assets of the debtor and seek compensation therefrom. The creditor can only ask the guarantor to settle outstanding payment of the debtor if the assets of the debtor are not sufficient to fully settle the debtor’s obligation. This right, however, can be waived under the guarantee agreement and, therefore, will enable the guarantor to immediately settle the obligation of the debtor once the default occurs.
Financing of construction with a mortgage
Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?
Ships that are registered in the Indonesian Ship Registry can be subject to collateral or security by way of mortgage or hypothec. Once a ship under construction is 50 per cent completed, it may be temporarily registered. As such, the temporarily registered ship may also be mortgaged to secure the construction financing (see question 12). The mortgage is effective when the mortgage deed is issued by the Officer of the Indonesian Ship Registry and such mortgage is recorded in the Ships Register.
Default, liability and remedies
Liability for defective design (after delivery)
Do courts consider defective design to fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract?
In practice, the shipbuilder may be liable for defective design under the warranty clause of the shipbuilding contract. However, as regards the courts’ likely opinion, it will depend entirely on the consideration of the judges of Indonesian courts, as there is no strict regulation on this matter.
Remedies for defectiveness (after delivery)
Are there any remedies available to third parties against the shipbuilder for defectiveness?
A civil claim may only be submitted if there is a legal relationship between the plaintiff and the defendant; be it the legal relationship arising from an agreement or from a tort.
In the event that the third party only has a legal relationship with the buyer, either because of an agreement with the buyer or because of a tort committed by the buyer, such third party may only submit a claim against the buyer. The third party may not directly claim against the shipbuilder for defectiveness as there is no direct legal relationship between the third party and the shipbuilder.
If the buyer can prove that the damages suffered by the third party were caused by the failure of the shipbuilder (ie, for defectiveness), the buyer may involve the shipbuilder as a party to the civil case between the third party and the buyer, or the buyer may file a claim against the shipbuilder separately.
Liquidated damages clauses
If the contract contains a liquidated damages clause or a penalty provision for late delivery or not meeting guaranteed performance criteria, must the agreed level of compensation represent a genuine link with the damage suffered? Can courts mitigate liquidated damages or penalties agreed in the contract, and for what reasons?
As stipulated under article 1249 of the ICC, if the parties to an agreement have agreed and determined a certain amount of compensation that should be paid by the defaulting party to the injured party on the occurrence of a certain default, the defaulting party shall not pay and the suffering party shall not receive more or less than the determined amount of compensation.
The parties to a contract are entitled to determine and agree the amount of the compensation without having to ensure that such figure will represent a genuine link with the actual damages. If such amount of compensation has been agreed, the court will acknowledge its validity and therefore the court may not mitigate the liquidated damages agreed.
Preclusion from claiming higher actual damages
If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?
In line with the provision of article 1249 of the ICC (see question 26), the buyer may not claim a higher amount of compensation than that agreed in the shipbuilding contract.
Are the parties free to design the force majeure clause of the contract?
Based on the principle of freedom of contract, the parties to a contract are entitled to design the force majeure clause by setting out certain circumstances that can be deemed as the force majeure. In case there is no provision under the contract that prescribes any events to be considered as force majeure, the implied terms under Indonesian law shall apply.
The provisions in Indonesian law regarding force majeure are set out in articles 1244 and 1245 of the ICC. In brief, force majeure requires that the non-performance of a contract or agreement is caused by facts or circumstances that are:
- beyond the non-performing party’s control; and
- for which the non-performing party is not responsible.
As regards (ii), the facts or circumstances must not arise from the fault of or as a result of negligence on the part of the non-performing party, or risks that the non-performing party should reasonably bear.
Any party that is affected by force majeure is entitled to use this as a defence even though there is no force majeure provision stipulated in the contract. The non-performing party will bear the burden of proof to evidence the occurrence of the force majeure as an excuse for the non-performance.
Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?
We are not aware of any such umbrella insurance in Indonesia.
Disagreement on modifications
Will courts or arbitration tribunals in your jurisdiction be prepared to set terms if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification?
Indonesian courts and arbitrational tribunals are not authorised or obliged to help the parties to a contract in reaching an agreement regarding the provisions of the contract or the modification thereof.
Acceptance of the vessel
Does the buyer’s signature of a protocol of delivery and acceptance, stating that the buyer’s acceptance of the vessel shall be final and binding so far as conformity of the vessel to the contract and specifications is concerned, preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery?
Whether the buyer’s signature of a protocol of delivery and acceptance precludes subsequent claims depends on the terms and conditions of the shipbuilding contract.
Liens and encumbrances
Can suppliers or subcontractors of the shipbuilder exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices? Is there an implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances?
It is the general practice in Indonesia for the buyer and the shipbuilder to own a vessel jointly while it is under construction. Every action taken that affects the ship shall therefore be taken with the approval of both parties.
Therefore, the suppliers or subcontractors of the shipbuilder can exercise a lien over the ship or work or equipment ready to be incorporated in the ship for any unpaid invoices in the event that such lien is approved by both the buyer and the shipbuilder.
There is no statutory provision stipulating that, at the time of delivery, the ship shall be free from all liens, charges and encumbrances.
Reservation of title in materials and equipment
Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?
No, any outstanding payment to the subcontractor or supplier will be deemed as general business debt without preferential rights that might allow the subcontractor or supplier to seek settlement from the ship, unless the parties have agreed to place a mortgage on the vessel to guarantee any outstanding obligation to a subcontractor or supplier.
Third-party creditors’ security
Assuming title to the vessel under construction vests with the builder, can third-party creditors of the builder obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel to secure their claim against the builder?
Assuming title to the vessel under construction vests with the builder, it is possible for a third-party creditor of the builder to obtain security over the equipment to be incorporated in the vessel through a security right known as fiducia. Although the shipbuilding contract incorporates a clause stating that the vessel remains in the possession of the builder until delivery takes place, it is still necessary for the builder to seek permission from the buyer before encumbering fiducia over such equipment. The builder would also be responsible to cancel the fiducia once the purchase price of the vessel has been paid in full by the buyer.
If the construction process of the vessel has reached 50 per cent of the contract value, it can be temporarily registered with the Directorate General of Sea Transportation in cases where the vessel is constructed outside Indonesia. If the vessel is constructed within Indonesia, the vessel can be registered with the closest vessel registration office. Upon the completion of registration, the vessel can then be encumbered with a temporary mortgage.
Subcontractor’s and manufacturer’s warranties
Can a subcontractor’s or manufacturer’s warranty be assigned to the buyer? Does legislation entitle the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty?
In the shipbuilding process, the rights and the obligations of the builder and the buyer are stipulated in the shipbuilding contract. Therefore, if any dispute arises from or in connection with that shipbuilding process, the buyer suffering damages may file a lawsuit calling for breach of contract against the builder and vice versa.
In consequence, Indonesian law does not entitle the buyer to directly claim against a subcontractor or manufacturer appointed by the builder as there is no legal relationship that can be established between those parties. If the shipbuilder fails to perform its obligation under the shipbuilding contract owing to the fault of the subcontractor or the manufacturer and such failure causes damages for the buyer, the buyer may file a claim against the shipbuilder but not against the subcontractor unless the agreement provides otherwise. On the other hand, the shipbuilder is entitled to file a claim against the negligent subcontractor or manufacturer if it has incurred any damages as a result of the buyer’s claim against it.
Default of the builder
Where a builder defaults in the performance of the contract, is there a legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue? What remedies will be open to the buyer?
The buyer suffering damages as a result of the shipbuilder’s default may file a claim against the shipbuilder through civil proceedings. Indonesian law does not recognise any specific performance that can be imposed on the defaulting party in a civil case, including official note. However, in order to ensure that the shipbuilder, as the defaulting party, will perform its obligation, the buyer may file a request for an attachment order over the shipbuilder’s assets.
Remedies for protracted non-performance
Are there any remedies available to the shipowner in the event of protracted failure to construct or continue construction by the shipbuilder apart from the contractual provisions?
Indonesian law does not recognise any special remedies available to the shipowner in the event of protracted failure. Generally, if the shipbuilder fails to perform its obligation under the shipbuilding contract, be it a single failure or a protracted failure, the shipowner (buyer) may submit a claim for compensation for damages against the shipbuilder.
Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?
Yes, such right is enforceable under Indonesian law.
Judicial proceedings or arbitration
What institution will most commonly be agreed on by the parties to decide disputes?
Basically, the parties to the contract are free to choose any judicial institution, either court or arbitration, that they deem consistent with the nature of the contract and able to fairly settle any dispute arising from the contract.
In practice, however, in consideration of the credibility and the confidentiality of the arbitration process, the parties to a shipbuilding contract commonly choose arbitration rather than court.
As stipulated under article 11 of Law No. 30 of 1999 concerning Arbitration and Alternative Dispute Resolution, in the event that a contract stipulates that any dispute arising from or relating to that contract should be resolved by arbitration, the courts should reject or refuse to hear and examine the dispute.
Consequently, if the parties to a shipbuilding contract agree to bring any dispute arising from the contract to arbitration, they should comply with such provision. If the shipbuilding contract does not contain any arbitration clause or if the parties to a shipbuilding contract agree to bring any dispute arising from the contract to the court, they may submit their claim to the court.
Buyer’s right to complete construction
Would a buyer’s contractual right to take possession of the vessel under construction and continue construction survive the bankruptcy or moratorium of creditors of the builder?
In principle, bankruptcy of a company does not affect the validity of the terms of contract a company has entered into. The rights and obligations of the parties to such contracts remain valid and unchanged. Whether or not the buyer is entitled to take possession of the vessel under construction and to continue construction in the event of the builder’s bankruptcy depends on whether or not the buyer holds the ownership over the vessel under construction.
In Indonesian common practice, shipbuilding contracts may take the form of either a contract of workmanship or a contract of provision of goods. Generally, under contract of workmanship, the ownership over the vessel under construction is held by the buyer. As a consequence, even though the vessel is under the control and supervision of the builder when the bankruptcy event occurs, the vessel should not be included in the bundle of bankruptcy. Therefore, theoretically the buyer shall be entitled to take possession of the vessel under construction and continue construction according to the provisions of the shipbuilding contract. However, in practice the buyer shall still be required to deal with the appointed receiver and submit evidences concerning the buyer’s ownership over the vessel.
As under contract of provision of goods, the ownership over the vessel under construction is held by the builder. As a result, the vessel under construction might be included in the bundle of bankruptcy. In accordance with the provision of article 36, paragraph (1) of Indonesian bankruptcy law, in the event of bankruptcy of the builder, the buyer can ask the receiver to provide confirmation on the status and continuity of the performance of the ongoing shipbuilding contract. If the receiver confirms performance, they must guarantee performance; if they confirm cancellation, the buyer will have to submit a damages claim as an unsecured creditor in the bankruptcy process.
In your jurisdiction, do parties tend to incorporate an ADR clause in shipbuilding contracts?
In practice, the parties to a shipbuilding contract tend to incorporate an ADR clause to ensure that they will be able to fairly settle any dispute arising out of or relating to the shipbuilding contract.
Default of the buyer
Where the buyer defaults in the performance of the contract, what remedies will be available to the builder? What are the consequences of the builder’s cancellation of the contract?
The builder has the right to retain the vessel under construction in case of buyer’s default in the performance of the contract. Indonesian law does not provide any consequences of the builder’s cancellation of the contract in case of buyer’s default. Therefore, in common practice, it is recommended that the builder incorporates a clause in the shipbuilding contract stipulating that the title of the constructed vessel will remain under the builder’s possession until the buyer fully pays the purchase price and vessel delivery takes place.
Contract forms and assignment
Standard contract forms
Are any standard forms predominantly used in your jurisdiction as a starting point for drafting a shipbuilding contract?
Because Indonesia is not a leading player in the international shipbuilding market, Indonesian shipbuilders rarely deal with foreign buyers. Therefore, the standard forms such as those of the Shipbuilders’ Association of Japan, the Association of European Shipbuilders and Shiprepairers and Newbuildcon are not commonly used in Indonesia.
Assignment of the contract
What are the statutory requirements for assigning the contract to a third party?
Under Indonesian law, assignment of contract (changing the parties to the contract) is performed by way of novation. This concept is provided in articles 1413 to 1424 of the ICC. Assignment of contract requires the original parties and the assignee to execute an assignment or novation agreement. The novation agreement is a tripartite agreement pursuant to which the original parties to the contract agree that, upon execution of the novation agreement, all rights and obligations of one party (assignor) are assigned to the new party (assignee). The original contract will then be deemed terminated and, therefore, the assignor will be discharged from all rights and obligations. Consequently, the date of the novation agreement will be regarded as the starting date for the new contract between the assignee and the existing contract party. Except as specifically novated or amended by the novation agreement, the original contract terms shall bind the assignee.