Default, liability and remedies in shipbuilding in Indonesia

Default, liability and remedies

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.

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.

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.

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:

1. beyond the non-performing party’s control; and
2. 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.