Allocation of design responsibility (or liability for design) is an important matter in a shipbuilding project as it logically follows that the party responsible for the design is also responsible for defects in or arising from that design.
A common obligation undertaken by a shipbuilder in respect of a newbuild vessel is to “design, construct, outfit, commission and deliver” the ship, all in accordance with the terms of the contract. In such circumstances, if there is a defect in the ship as a result of design work, there is generally little scope for the shipbuilder to argue that liability and responsibility for the defect rests with a third party.
Notwithstanding the importance of the issue, it is not uncommon for liability for design to be unclear from the express wording of the contract (it is, for example, not addressed in the commonly used Shipbuilding Association of Japan Standard form) but, in a standard shipbuilding project, it is usually possible to ascertain which party was intended to have responsibility for the design.
Where the design work is split from the construction and is wholly or partly undertaken by the buyer or a buyer’s contractor, either in addition to or instead of the builder, the situation becomes less clear. Careful drafting of the contract is required to help minimise the risk of later dispute over whether a defect results from the shipbuilder’s scope of work, exclusively from the scope of design provided to the shipbuilder or from a combination of these.
Although giving rise to potential difficulties, there may be commercial pressures requiring a split in design work and therefore responsibility for design. Buyers, for instance, may wish to take on some or all of the responsibility for design of the newbuild as a way of reducing costs or if the contract is for a highly specialist vessel.
Nonetheless, where parties are contemplating splitting the design in whole or in part from the construction workscope, they must be alive to potential problems and the increased chance of a dispute over the cause of any defect: except in the most clear cut cases, there may well be scope for the shipbuilder to argue that the reason for a defect is a design problem for which it is not responsible. The potential for dispute is further increased where a third party designer is involved as the buyer’s contractor, as both the shipbuilder and third party designer may each argue that a defect results from the other’s scope of work.
Clearly, where a dispute arises over whether a defect is the result of poor construction work or poor design (and, if design, whether it is a problem with the shipbuilder’s scope or the buyer’s scope or work carried out by a third party), this can have far reaching consequences for the contract, impacting on matters such as delay, testing, liquidated damages for performance defects, the shipbuilder’s post delivery warranty and even whether the buyer is obliged to take delivery at all. Complex disputes can also arise in relation to the shipbuilder’s obligation to look for errors in design, to remedy defects arising from design problems and the shipbuilder’s right to claim extra payment for work outside the contractual scope.
Avoiding the split
Given the potential difficulties that split design responsibility can cause, the parties should consider carefully whether splitting design responsibility is necessary. For instance, if the buyer wants a third party design house to be involved in the design process, a possible solution might be for the shipbuilder rather than the buyer to sub contract the third party design house so that the shipbuilder still assumes full design responsibility within the contract. Alternatively, the buyer may be able to negotiate that the shipbuilder will verify designs produced by third parties or the buyer, and thereby assume responsibility (and risk) for the design. The latter option will be more time consuming and is likely to result in increased costs, but may avoid or limit the risk of disputes over liability for defects.
If a split in responsibility for design is unavoidable, then there are steps the parties can take when drafting the contract to reduce the likelihood of dispute:
- Step 1 – Ensure that responsibility for the various parts of the design are clearly allocated. If there can be no confusion over which party is responsible for which part of the design, then there is less risk of a dispute arising over who is responsible for defects in the vessel caused by defective design.
- Step 2 – Make sure the shipbuilder’s obligations to review and actively check for errors in design work received by it are clear. For example, will the shipbuilder be responsible for the consequences of later defects where it should have identified problems in the design if it had made a reasonable check, or can the shipbuilder simply rely entirely on the design work provided?
- Step 3 – Consider amendments to the standard modification clause to set out how the builder should be remunerated for remedying defects arising outside its design scope and to deal with any consequential changes to the delivery date or specification of the ship.
- Step 4 – Consider how to deal with matters such as performance related liquidated damages and the post delivery warranty if there is split responsibility for design. Also consider a more difficult issue about what is to happen where the defect has multiple causes cutting across both parties’ design or design and construction.
- Step 5 – Produce a clear means of pro-rating liability in such circumstances to ensure the liquidated damages and warranty clauses are workable.
Embarking on a ship construction project where there is a split in responsibility for design can lead to serious disputes unless the parties have considered the implications for the key terms of the usual standard form contracts. Where such split design responsibility cannot be avoided, careful drafting can reduce the likelihood of dispute.