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Participation and ownership

Restrictions on foreign participation and investment

Is the shipbuilding industry in your country open to foreign participation and investment? If it is open, please specify any restrictions on foreign participation.

There are no restrictions on foreign participation in the capital of shipbuilding companies as such. However, it should be noted that certain shipbuilding companies are involved in building both civilian vessels and naval ships and are, thus, licensed to produce military equipment and armaments. Under the current regulations, transactions aimed at imposing direct or indirect control (through shareholding, obtaining the right to nominate the majority of members of executive and advisory bodies of the company and otherwise) on enterprises of strategic importance, including companies that hold licences for the production of armaments and military equipment, require special permission from the competent federal authorities.

Government ownership of shipbuilding facilities

Does government retain ownership or control of any shipbuilding facilities and if so, why? Are there any plans for the government divesting itself of that participation or control?

In the recent past, the majority of state-owned assets relating to shipbuilding have been consolidated into the United Shipbuilding Corporation (USC). Through a 100 per cent stakeholding in the USC holding company, the Russian Federation controls over 40 shipbuilding and ship-repair facilities.

Key contractual considerations

Statutory formalities

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

In accordance with Russian law, transactions between legal entities and between legal entities and individuals must be made in writing, namely by drafting a document that expresses the contents of the transaction and that is signed by the parties entering into the transaction. At present, there is no requirement for the signatures of the authorised signatories of the parties to a shipbuilding contract to be certified by a notary. Theoretically, the legal requirements for a written contract may be considered satisfied if the parties do not sign a single document, but instead exchange a number of documents, as well as signing documents with an electronic signature. However, in most cases, shipbuilding contracts are executed as a single principal document, with addendums and attachments if necessary. Until the recent amendments to the Civil Code of the Russian Federation, a foreign trade contract, meaning a transaction between a Russian and a non-Russian party was considered to be void unless it was made in written form. This restriction has now been abolished, but owing to customs, currency control and other administrative requirements, it is still highly advisable, when entering into contracts with Russian counterparts, to execute them in the form of one single document.

No taxes, duties or other such payments to the state are due when entering a shipbuilding contract (unless the parties choose the contract to be made in notarial form - in which case state duties and notary’s fees are payable for certification).

Choice of law

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?

Generally, Russian law recognises the right of the parties to a contract to choose the law applicable to the contract. However, ships are considered to be immovable property, and article 1213 of the Civil Code provides that contracts in respect of immovable property that is physically located on the territory of the Russian Federation are subject to Russian law. Therefore, when entering into a contract in respect of a vessel that is intended to be constructed in Russia, the parties will need to choose Russian law to govern it.

Nature of shipbuilding contracts

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?

There is no uniform practice and no single approach in this respect. Depending on the provisions of a particular contract and on the way in which particular issues are regulated by the contract (such as the moment of passing of title, extent of customers rights to supervise or control works in the construction stage, customer’s role in supplying materials for construction, etc), a shipbuilding contract may be treated as a contract for sale and purchase of immovable property, as a contract to construct a structure or as a contract of mixed nature. Russian law does not provide for specific regulations in respect of shipbuilding contracts, but provisions that regulate construction contracts are, in general, more suitable for reflecting the peculiarities of shipbuilding transactions than the provisions regulating contracts of sale and purchase.

Hull number

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

The vessel’s construction number is an essential element of description of the vessel under construction. Under the present regulations, registration of the vessel under construction and of the title thereto is not obligatory. However, if the parties so agree or otherwise wish the vessel or title to the vessel to be registered, the construction number becomes the principal number by which the vessel and information in the registry pertaining thereto is identified. Therefore, construction number is an important element of the parties’ agreement in general, whether or not it is intended for the vessel to be registered prior to completion.

Deviation from description

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?

Generally, the builder is under a dual responsibility from the point of view of compliance with the description of the vessel. This responsibility is both to the buyer (the vessel must be within the description explicitly provided or implied in the contract) and to the classification society that shall supervise the construction in accordance with its own applicable rules in respect of vessels of a particular type and class. Therefore, the builder will be able to deviate only within the explicit and implied parameters of the contract as well as of the applicable classification rules. In case of dispute (including cases when the contractual description is approximate and implies a certain possibility to deviate), the competent tribunal will be required to determine whether such deviation was acceptable.

Guaranteed standards of performance

May parties incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages or rescission? Are there any trade standards for coating, noise and vibration in your jurisdiction, etc?

Yes, should the parties wish to include certain standards of performance in the contract, they are free to do so. As a general rule, the customer will be entitled to rescind and claim damages only where the breach or defects are substantial and incurable or where the builder fails to cure the defects within a reasonable time at no extra cost to the buyer. The builder may also be held liable for any delays (failure to meet a building schedule provided in the contract).

Quality standards

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

Russian law in general does not provide for specific rules in respect of shipbuilding contracts. In most cases, a shipbuilding contract will be treated as a sale and purchase contract or a contract to construct a vessel. General rules in respect of quality of goods, works and services shall apply. The law and, in particular, the Civil Code of the Russian Federation provides for such rules, but court practice (judgments of commercial courts and practice guidances issued by the Higher Arbitration Court, the supreme commercial instance) is important for understanding the courts’ policy in construction of provisions of the legislation.

Classification society

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?

Where it is the builder that contracts with the classification society, the customer will only be able to sue the builder directly and the builder would need to make a claim against the society for recourse. The customer may sue the classification society both for non-fulfilment and for improper fulfilment of the latter’s obligations undertaken only under a direct contract with the customer. Practical implementation of this right will depend on the provisions of the particular contract between the customer and the classification society. For example, the standard contract of the Russian Maritime Register of Ships (the bigger of the two Russian classification societies, and a member of IACS) for supervision of the construction of a vessel substantively limits both the basis of the society’s liability and the extent of such liability.

Flag-state authorities

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

In accordance with both the Merchant Shipping Code (article 22) and the Code of Internal Water Transport (article 35), all ships that are subject to state registration (namely, all vessels with the exception of certain types of small craft) are subject to classification and survey. Responsibility for classification and survey of vessels that are registered (or are intended to be registered) under the Russian flag is delegated to the specialist organisations authorised by the federal government. There are different classification societies for different types of vessel. At present, the classification societies are as follows: the Russian Maritime Register of Ships (for seagoing vessels), the Russian River Register of Ships (for riverine ships) and also, in respect only of those ships that are registered in the Russian International Registry of Ships - a foreign classification society, Bureau Veritas and Registro Italiano Navale.

At the same time, general control over compliance with the requirements of international conventions on merchant shipping to which Russia is a party and of the national legislation regarding merchant shipping is the responsibility of harbour masters.

Registration in the name of the builder or the buyer

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?

The parties are free to define in the contract the moment when the title to a vessel under construction shall pass. Registration of title to a vessel under construction is not obligatory, but is possible at the discretion of the parties concerned. In such cases, title to the ships may be registered with the harbour masters and with river inspectorates. Registration may be made in the name of either the shipbuilder or the buyer. The principal legal consequence is that, in case of registration of title, any transfer of title and other rights must also be registered and shall not be valid without such registration.

Title to the vessel

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?

Yes. The parties may agree on the moment when the title may pass. Parties are also permitted to each hold a certain proportion of the title and for one party’s title to transfer to the other on an incremental basis. It should, however, be noted that in cases where the title to a vessel under construction is registered, any passing of title and any change in parties’ shares of a title must be registered as well.

Passing of risk

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

By default, the risk will pass with delivery of the vessel to the purchaser and, in case of a contract to build a vessel, it may also be possible that certain parts of the vessel may be agreed to be accepted by the customer separately, in which case risk adhering to such parts as are accepted will pass to the customer. The law also allows the parties to agree on a different moment of passing of title, but in such case, this must be clearly stated in the contract.

Subcontracting

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 builder may, unless expressly restricted from doing so by the contract, subcontract part of the works under the shipbuilding contract. However, the builder shall remain responsible to the customer for proper fulfilment of the terms of the contract and both its own performance and the performance of any subcontractors.

Extraterritorial construction

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?

There are no specific restrictions in this respect.

Pricing, payment and financing

Fixed-price and labour-and-cost-plus contracts

Does the law in your country have different provisions for ‘fixed price’ contracts and ‘labour and cost plus’ contracts?

No.

Price increases

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?

In accordance with the provisions of the Civil Code, the builder is generally entitled to demand an increase of the contract price if, owing to circumstances beyond its control, the total increase of cost of the building works exceeds the original estimate by more than 10 per cent.

Retracting consent to a price increase

Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?

Theoretically, Russian law allows the invalidation of a transaction that has been entered into under the influence of deceit, error, violence, threats, conspiracy between the representative of one party and another party to the contract, or if it has been entered into by one of the parties in difficult circumstances and on extremely unfavourable terms. In practice, however, it is highly unlikely that the court will be willing to satisfy such a claim in case of a transaction between two businesses, other than in truly exceptional circumstances.

Exclusions of buyers’ rights

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 are entitled to restrict the right to set-off, suspend payments and deduct payments in the contract.

Refund guarantees

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 are no special requirements for refund guarantees other than those that exist in respect of guarantees or suretyships of any kind, and no official permissions are required.

Advance payment and parent company guarantees

What formalities govern issuance of advance payment guarantees and parent company guarantees?

As with refund guarantees, there are no specific requirements for payment and parent company guarantees other than the general legal requirements concerning such types of obligation. Regarding practical formalities, it must be noted that many Russian companies restrict the authority of their executive bodies to issue and undertake financial obligations, especially guarantees and suretyships. In many cases, the issue of such undertakings requires explicit approval from particular managing bodies of the company such as the board of directors or the general meeting and may be invalidated in case of failure to obtain such approval.

Financing of construction with a mortgage

Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?

Yes. It is possible to mortgage a vessel under construction, provided that it has been, prior to the registration of a mortgage, registered as a vessel under construction (see question 12). However, it should be noted that in accordance with the current regulations, if the vessel is being built for a foreign customer or buyer, its mortgage may not be registered in Russia.

Default, liability and remedies

Liability for defective design (after delivery)

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?

The builder may only be held liable for defective design where he or she undertook to provide such design to the customer and not in cases where the customer itself provided design documents and other technical elements to the builder.

Remedies for defectiveness (after delivery)

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

As a general rule, remedies for defectiveness will be available to the customer only. Third parties who may have sustained losses when the ultimate cause of such losses is a confirmed misperformance on the part of the shipbuilder will need to claim, depending on the circumstances, against the owner or the operator of the vessel in question, and the latter may be entitled to a recourse against the builder.

Liquidated damages clauses

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?

Russian law recognises the right of the parties to include in the contract a provision on penalties (as sanctions) for non-performance or improper performance of obligations. To a certain extent the obligation to pay a penalty is independent of the obligation to compensate losses: the injured party is neither obliged to prove that it sustained losses owing to improper performance nor the extent of such losses. However, if the injured party demands compensation of losses in addition to the payment of a penalty, losses shall be compensated to the extent in which they are not covered by the penalty, unless the contract explicitly provides otherwise. The courts are entitled to reduce the amount of a penalty due if that penalty is manifestly disproportionate to the consequences of the violation of an obligation.

Preclusion from claiming higher actual damages

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 accordance with the general rule, an injured party may claim for losses that exceed the amount of the penalty (see question 26). However, the parties may also contractually agree to a different regime under which, for example, losses may not be claimed in excess of the contractual penalty, or when losses can be claimed in full in addition to the penalty.

Force majeure

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

Yes, the parties are relatively free to design the force majeure clause, provided that they do not clearly depart from the general definition of force majeure as provided in the law (ie, ‘extraordinary and unavoidable circumstances’).

Umbrella insurance

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

Such insurance is technically possible. Note that in accordance with Russian law, insurance of the risk of non-performance of the party’s own contractual obligations is not possible, unless it is explicitly provided for by the law and currently the law does not provide such a possibility for construction contracts. Therefore, risks related to performance of the contract may be insured to the extent of risks relating to the safety of the object under construction and damage to third parties.

Disagreement on modifications

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 cases of an adverse change of circumstances, the parties may, inter alia, demand to have the contract amended or terminated by the court. One of the instances where such right is explicitly provided for in law is when the initially intended cost of construction works is exceeded by not less than 10 per cent of the amount agreed to in the contract. A change of circumstances will be considered adverse if the court agrees that, should the parties have been able to reasonably foresee such change, they would not have entered into the contract in question, or would have negotiated substantially different terms. However, amendment of contractual terms by the court is an exception from the general rule that a contract may be terminated in case of an adverse change of circumstances - the court shall amend the terms only where the termination of the contract will be contrary to the public interest or would cause the parties more substantial damages than would performance of the contract on terms amended by the court.

Acceptance of the vessel

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?

No. Even if a buyer has signed such a protocol, he or she is entitled to claim against the builder for defects that are owing to the underperformance of the builder within a term of five years of the date of delivery. However, it would be up to the buyer to prove that such defects exist and that the builder is responsible for them.

Liens and encumbrances

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 unlikely that suppliers or subcontractors of the builder would be able to exercise a lien over the vessel, because in accordance with Russian law (both in general and in respect of ships under construction or repair), a necessary precondition for the exercise of a lien is physical possession by the creditor of the particular item of the debtor’s property. Therefore, it is most likely that only the builder will be able to exercise such right. Also, the general rule of Russian civil law provides that goods sold on condition of payment due after delivery of the goods remain pledged in favour of the seller until they are paid for. Therefore, there is also a slight possibility that the equipment in question may be under the original supplier’s pledge. However, another general rule provides that the pledge is terminated by acquisition against consideration by a third party that was not aware, and should not have been aware, that the item in questions was pledged.

Reservation of title in materials and equipment

Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?

As a general rule, items incorporated into a vessel under construction will cease to be treated as separate items and, depending on the value of works relative to the value of materials and equipment, it will be either the owner of the incorporated equipment and materials or the builder that will obtain the title to a newly constructed vessel. However, considering the realities of an average shipbuilding project, this may be treated as a purely hypothetical situation and the title will most likely (depending on the provisions of the shipbuilding contract in question and in particular on how the parties have agreed to regulate the issue of passing of title in the contract) be acquired either by the builder or the buyer. If there are any unpaid debts to suppliers of equipment and materials, the party obtaining title to the vessel will assume the obligation to discharge those debts.

Third-party creditors’ security

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?

Depending on whose property such items shall be at the respective time (customer’s or builder’s), third-party creditors may seek enforcement or security of claims against the respective parties, including application of the appropriate security measures such as arrest.

Subcontractor’s and manufacturer’s warranties

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?

Yes. The law allows the parties (provided that they directly agreed so in the contract) to entitle the buyer and subcontractors to be able to claim against each other directly. By default, each of them will only be able to direct their claims to the contractor that has direct legal relations with both sides.

Default of the builder

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?

Where the builder has permitted violations of the terms of the contract that resulted in a loss of quality or in other defects in the vessel, including violations of the design and other technical specifications in accordance with which the vessel was being built, the customer is normally entitled:

  • to demand that the builder remedy the defects at no extra cost to the customer and within a reasonable time;
  • to demand a proportionate decrease in price of the vessel; or
  • where the contract entitles the customer to remedy the defects by itself or by hiring third-party contractors, compensation of the ensuing expenses.

If the defects have not been remedied as demanded by the customer or if they are substantial and incurable, the customer is entitled to treat the contract as repudiated and claim against the builder for the compensation of losses.

Remedies for protracted non-performance

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?

As a general rule that also applies to shipbuilding contracts, in case of delay, the debtor that delays performance may be held liable for any losses of the creditor incurred owing to the delay. If a delay has been so substantial that the creditor has lost interest in the performance, the creditor is entitled to refuse to accept the object of the performance (in this instance the vessel itself), thereby terminating the contract and to claim losses from the shipbuilder.

Builder’s insolvency

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

Yes, the parties may agree to terminate the contract in case of either party’s insolvency. However, this would not affect the order of mutual settlements, which would still need to be performed in accordance with the requirements set by the legislation on bankruptcy. Thus, the customer’s claims against the builder (if any) would need to be brought and will be satisfied in the same order as claims of any other creditors of similar ranking; any customer’s debts to the builder’s estate will also be recovered in general order.

Judicial proceedings or arbitration

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

More often than not, the parties choose arbitration to deal with disputes arising from shipbuilding contracts. Particularly when the vessel is being built for a foreign customer, the parties will choose an arbitration institution outside Russia, and the most popular place of arbitration is London. However, in contracts without a foreign element, disputes may be left to be decided by the competent Russian courts (there are no specialised courts dealing with shipbuilding disputes) or specialised arbitrations, of which the most widely known is the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation, which has its seat in Moscow.

Buyer’s right to complete construction

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?

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ADR/mediation

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

ADR and mediation have not yet gained popularity in Russia as methods of resolving commercial disputes, but in 2010, a special federal law was adopted, the main aim of which was to provide a basic framework for the development of alternative dispute resolution.

Default of the buyer

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?

Depending on the particulars of the breach, either party may demand compensation of losses incurred (including, where appropriate, interest, lost profits, costs of works and services rendered by third-party contractors hired in place of the defaulting builder, etc), payment of penalties (if agreed on), termination of the contract, return of amounts paid and enforcement of security measures agreed on (guarantees, suretyships, pledges).

Contract forms and assignment

Standard contract forms

Are any standard forms predominantly used in your jurisdiction as a starting point for drafting a shipbuilding contract?

It is not unusual for standard forms of shipbuilding contracts, such as the Baltic and International Maritime Conference (BIMCO)’s Newbuildcon, to be used as a basis for drafting particular contracts, but normally they are substantially amended to reflect the requirements of Russian law and the realities of Russian commercial practice.

Assignment of the contract

What are the statutory requirements for assigning the contract to a third party?

The contract may be assigned to the third party with the exception of certain rights that are closely connected with the identity of the creditor (which is normally not the case for commercial contracts). The right to assign a contract may be limited by the contract itself, but in accordance with the current rules, such limitation may not always be enforceable. Assignment must be effected in the same way as for the principal contract, and in cases where the contract or its object are subject to state registration (for example, as vessels under construction that have been registered), assignment must also be registered in order for the corresponding rights of the customer to be valid. Notification of the debtor is not, strictly speaking, obligatory, but unless such notification is effected in writing, the creditors bear the burden of negative consequences. Notification may be effected by either a new or old creditor, but notification by a new creditor may be disregarded by the debtor unless accompanied by proof of assignment (for example, a copy of the assignment agreement). The contract and respective rights and obligations are assigned in the full extent in which they exist as on the date of the assignment.