Pricing, payment and financing for shipbuilding in Indonesia

Pricing, payment and financing

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.

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.

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.

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.

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.