Default, liability and remedies in shipbuilding in Singapore

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?

It depends on who takes design responsibility under the shipbuilding contract. If responsibility for designing vests with the shipbuilder and a defective design affects the vessel’s performance, then the shipbuilder will be and can be held liable under the warranty clause of the shipbuilding contract.

Are there any remedies available to third parties against the shipbuilder for defectiveness?

Unless its application is expressly excluded by the terms of the shipbuilding contract, the Contracts (Rights of Third Parties) Act provides in essence that a third party may directly enforce a term of a contract where either the contract expressly provides that it may or the contracting parties intend that such third party should be entitled to do so. The third party must ‘be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into’.

Except as stated, there are no remedies available to third parties against the shipbuilder for defects.

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?

The agreed level of compensation must be a genuine pre-estimate of the loss. If not, the courts can strike down such liquidated damages or penalties clause.

If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?

Yes, the buyer is precluded from claiming proven higher damages for that head of claim (ie, for late delivery). The shipbuilder usually will not take responsibility contractually for consequential damages.

Are the parties free to design the force majeure clause of the contract?

Yes, parties are free to design the force majeure clause of the contract. However, being an exemption clause, it will be interpreted strictly.

Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?

Yes, construction all-risks insurance is available in the market covering the builder and all named subcontractors of a particular project for the builder’s risks.

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?

In the event that dispute resolution is taken through the Singaporean courts, this will be left to the builder and the buyer to resolve - the Singaporean courts will not be prepared to set terms. However, if dispute resolution is conducted by arbitration and if the shipbuilding contract gives the arbitrators the power to set terms, then the arbitration tribunal can set the terms if the parties are unable to reach agreement.

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?

It will not preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery. Such claims will be subject to the statutory limitation of claims under Singaporean laws governing limitation.

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?

Suppliers or subcontractors of the shipbuilder may exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices, provided they have possession over the equipment or work. Such claims are possessory in nature. There is an implied term that at the time of delivery, the vessel 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?

A reservation of title by a subcontractor or supplier of materials and equipment will not survive affixing to or incorporation in the vessel under construction, as it will be difficult to identify the work or equipment after it is integrated into the construction.

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?

Third-party creditors of the builder may be able to obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel.

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?

A subcontractor’s or manufacturer’s warranty may be assigned to the buyer if there is no express restriction on such assignment. There is no legislation that entitles the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty. In practice, such warranties are usually for one year and construction of the vessel can take longer than one year after delivery of the equipment to the shipyard. It is more common to rely on the contractual warranties between builder and buyer.

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?

There is no legal requirement under Singaporean law to put the builder in default by sending an official notice if there is no such requirement under the terms of the shipbuilding contract.

The usual remedy will be a claim for damages. Specific performance may be ordered where the buyer can prove that damages will not be an adequate remedy. All this will also depend on the shipbuilding contract. The buyer may also seek to remove the vessel to another yard (if the buyer has title to the vessel under construction), and complete the construction.

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?

A protracted failure to construct or continue construction by the shipbuilder may entitle the buyer to claim that the contract has been frustrated by breach. If successful in such claim, the buyer can recover monies paid to the builder on the basis of a total failure of consideration.

A protracted failure to construct or continue construction can also be a fundamental breach of contract by the builder that will entitle the buyer to terminate the construction and claim damages from the builder for breach of contract.

Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?

Yes, a buyer’s contractual right to terminate the shipbuilding contract for the builder’s insolvency would be enforceable in Singapore.

What institution will most commonly be agreed on by the parties to decide disputes?

The Singapore Chamber of Maritime Arbitration and the Singapore International Arbitration Centre are commonly agreed on. The Singapore High Court also has specialised judges to deal with shipbuilding contract disputes.

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?

This question has not yet been determined by a Singaporean court. Where an insolvency proceeding or a moratorium of proceedings is in place, further proceedings against the Singapore builder may be restrained or stayed by the court, and hence cannot be proceeded with except with the leave of court. The enforceability of the buyer’s contractual right to take possession of the vessel under construction will usually take into account the exact wording of the contractual term. Generally, where the buyer has title to the partly constructed vessel, it is arguable that the buyer’s right to take possession of the uncompleted vessel survives the insolvency or moratorium of creditors of the Singapore builder, and an application can be made to the Singapore court for leave to commence or continue legal proceedings against the Singapore builder to enforce its rights under the shipbuilding contract. However, if the title to the uncompleted vessel vests in the builder, which is commonly the case, it can be expected that it will be more difficult for leave of the Singapore court to be obtained for the buyer to enforce its right to take possession of the uncompleted vessel as the buyer is an unsecured creditor, unless a valid admiralty writ in rem has been issued by the buyer in respect of the uncompleted vessel before the insolvency proceeding or moratorium are in place, such that the buyer thereby qualifies as a secured creditor against the Singapore builder. If the builder is subject to insolvency or restructuring proceedings in other jurisdictions, the Singapore court may restrain or stay Singapore legal proceedings against the builder on application of the builder, pending the outcome of the foreign insolvency or restructuring proceedings, as Singapore has adopted the UNCITRAL Model Law on Cross-Border Insolvency.

In your jurisdiction, do parties tend to incorporate an ADR clause in shipbuilding contracts?

Yes, parties do tend to incorporate an ADR clause in shipbuilding contracts.

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 remedies would usually be specified in the shipbuilding contract. These would include the right of the builder to rescind the shipbuilding contract, to sell the vessel by public auction or by private treaty and, in the event of a shortfall between the sale price recovered by the builder and the construction cost under the shipbuilding contract, to recover such shortfall from the buyer.