Contractual considerations for shipbuilding in Nigeria

Key contractual considerations

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

As with any other contract, a shipbuilding contract will be enforceable where the elements necessary for a valid contract can be established, that is: offer and acceptance, intention to create legal relations and consideration. Parties also enjoy the freedom to create obligations by contract and such obligations are enforceable provided the terms are not illegal or contrary to public policy. However, under the Merchant Shipping Act, Chapter M11, Laws of the Federation of Nigeria 2004 (the MSA), the builder of a ship is required to submit the plans and specifications of the ship for approval prior to the commencement of construction. Where a builder commences building or builds a ship without first obtaining the requisite approval as described above, the ship may be detained absolutely or until the builder carries out alterations as directed by the Minister for Transport. Failure to obtain the approval is an offence that is punishable upon conviction with a fine of not less than 100,000 naira.

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?

Under Nigerian law, the parties to a shipbuilding contract are at liberty to select the law of their choice to govern their contract. Generally, Nigerian courts uphold choice of law clauses in contracts on the basis of the common law principle of pacta sunt servanda, ie, parties are bound by their contract. It has, however, been held by the Supreme Court, per Oputa JSC, in Sonnar (Nig) Ltd v Partenreedri MS Nordwind (Owners of the MV Norwind) [1987] 4 NWLR (Part 66) 520, that in order to be effective, the choice of law must be real, genuine, legal, reasonable and made in good faith. It should not be capricious and absurd. Thus, Nigerian courts do not consider choice of law clauses as conclusive in all cases. Where the choice of law is capricious and absurd (or has not been expressly selected by the parties in writing), the law with the closest connection to the transaction will be applied by Nigerian 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?

Shipbuilding contracts are regarded as contracts for the sale of goods, which are subject to the Sale of Goods Act 1893, a statute of general application in Nigeria. A shipbuilding contract will be regarded as a contract for the sale of goods whether the vessel is in existence at the time of the contract or yet to be constructed. (See sections 1(1) and 5(1) of the Sale of Goods Act 1893 to the effect that contracts for sale comprise contracts for existing and future goods.)

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

No Nigerian statute requires a shipbuilder to state a hull number in the description of a vessel in a shipbuilding contract. Therefore, the hull number stated in a shipbuilding contract is not essential to the vessel’s description, particularly where the hull may be identified by other means. The hull number is, however, essential from a contractual perspective, as it assists a buyer to identify with certainty the specific hull being constructed by the shipbuilder in relation to the former’s shipbuilding contract. The hull number is also important for the purpose of allocating materials and equipment in the shipyard or those supplied by the buyer to a specific hull. The hull number stated in the description of the vessel in the shipbuilding contract is placed on materials and equipment purchased or supplied for the hull to ensure traceability to that hull and safeguard against such materials and equipment being applied to a different hull in error.

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 law requires the plans and specification of a newbuild to be submitted for approval prior to construction. Upon such approval, the shipbuilder will be restricted to the approved plans and specifications. Any deviation from the approved dimensions and descriptions contained in the plan and specifications will, therefore, require subsequent approval. Generally, where goods are sold by description and discovered upon delivery to have deviated materially from what was ordered, the buyer is entitled to repudiate the contract. However, where the agreed dimensions and description are ‘approximate’, it presupposes that the shipbuilder is at liberty to modify the specified figures, but such modification shall be within the contemplation of the parties. Essentially, therefore, the extent of any such deviation will be restricted to the reasonably permissible limits of the particular type of ship.

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. Parties are at liberty to incorporate guaranteed standards of performance into their contract. Such agreed standards are enforceable. The remedy available to an innocent party will, however, depend on the nature and extent of the breach. Where there is a breach of a warranty, the innocent party will be entitled to damages, while a breach of a condition will entitle him or her to rescission.

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

Contractual quality standards agreed by parties are generally construed within the limits set by the agreed standard. However, being a contract of sale governed by the Sale of Goods Act 1893, some terms relating to quality are implied in the contract. These terms relate to conformity with description, fitness for purpose and merchantable quality.

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?

Generally, a classification society does not owe a buyer a contractual duty of care as the buyer is not privy to the contract between the builder and the classification society to ensure that construction of the vessel is in accordance with the buyer’s desired class notation. As a general rule, a contract cannot confer rights or impose obligations on any person except the parties to it. This is based on the English common law principle of privity of contract. Therefore, the buyer’s recourse for any defect in the vessel will lie against the builder of the vessel for breach of contract.

However, notwithstanding the absence of a contractual duty of care, the buyer may be able to sue the classification society in tort to recover damages for negligence. This is subject to the buyer successfully establishing the elements of negligence. The builder will have direct recourse against the classification society for breach of contract.

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

The flag-state authority has not outsourced compliance with flag-state legislation to any classification society. Flag-state duties are performed by the Nigeria Maritime Administration and Safety Agency (NIMASA). NIMASA was established by the NIMASA Act 2007. It has responsibility for performing all of the customary duties of a flag state.

Under the MSA, the approving authority may by means of regulations nominate any person within or outside Nigeria to be a classification society for the purpose of surveying and measuring ships and for other purposes subject to such conditions as the Minister of Transport may impose. This statutory provision has, however, not been implemented.

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?

Ships in Nigeria are registered at the Nigerian Ship Registration Office. The Register of Ships is maintained by the Registrar of Ships. Under the MSA, the Registrar of Ships is required to maintain such register or books as may be necessary, including a register for ships under construction. Ships under construction are registered in the name of the owner. An individual may be registered as sole owner of the ship in his or her own name, while a corporation may be registered as owner by its corporate name. On completion of the registration of the ship, the Registrar issues a certificate of registration.

However, notwithstanding the registration of a ship, any vessel intending to operate within the coastal and inland waters of Nigeria is required to obtain operational permits from the relevant government agencies.

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?

Pursuant to section 17(1) of the Sale of Goods Act 1893, title in specific and ascertained goods is transferred at such time as the parties to the contract intend it to be transferred. Therefore, the parties may contract that title will pass from the builder to the buyer during construction.

Depending on the agreement of parties as to when title should pass, title may pass gradually upon the progress of the vessel’s construction or at any other stage.

In addition to the foregoing, the parties may state in the shipbuilding contract that the title in the ship passes to the buyer on a block-by-block basis, that is, that title passes as construction progresses rather than on completion or delivery. An agreement that title passes to the buyer on a block-by-block basis allows the financier, where necessary, to take possession of an incomplete structure that can be sold to mitigate loss if the need arises.

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

Under section 20 of the Sale of Goods Act 1893, risk passes with title unless otherwise agreed by the parties. Therefore, parties are at liberty to state when risk will pass. Where title passes on a block-on-block basis, the risk passes as well and the buyer takes on all risks that may occur during construction.

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 ability of the shipbuilder to subcontract part or all of its obligations to a third party will depend on the terms of the shipbuilding contract, which may require the buyer’s prior consent in writing, which consent shall not be unreasonably withheld.

Notwithstanding the builder’s ability to subcontract to a third party, it does not discharge the liability of the builder towards the buyer. In some instances, the agreement may expressly contain provision to the effect that subcontracting is not a waiver of the rights of the buyer towards the builder with respect to the obligations of the builder under the shipbuilding contract. This liability may arise where a subcontracted portion of the construction does not meet the specification agreed under the shipbuilding 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?

The parties may agree that the builder informs the buyer of any intention to have any portion of the ship constructed in a country other than that where the builder is located. Otherwise, where the builder is permitted to subcontract part or all of the construction to a third party, the builder will not be under any obligation to inform the buyer of the location of any such subcontractor.

It is, however, important to mention that subject to any double taxation treaty between Nigeria and the other country, the profit on the subcontracted portion of the shipbuilding contract will be liable to tax in Nigeria.