Contractual considerations for shipbuilding in Indonesia

Key contractual considerations

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

Under Indonesian law, there is no specific regulation that provides the formalities that must be complied with in entering a shipbuilding contract. As such, the preparation and the execution of a shipbuilding contract must refer to the general provisions of contract law stipulated in the Indonesian Civil Code (ICC).

Under the ICC, the parties to a shipbuilding contract are entitled to set the provisions of the shipbuilding contract as long as such provisions do not conflict with any applicable law in Indonesia. As the provisions of a contract are agreed by the parties, under Indonesian law such provisions must be deemed exhaustive and binding on both parties.

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?

The parties to a shipbuilding contract are entitled to select the governing law that shall be applied to the contract. If any dispute or claim arises out of the shipbuilding contract and the parties to the contract decide to bring such dispute to the court, the courts will acknowledge the choice of law. As such, the court shall hear and examine the dispute in accordance with the governing law of the shipbuilding contract.

However, if the parties to a shipbuilding contract agree to settle any dispute arising from the contract in an Indonesian court, but select a foreign law as the governing law of the agreement, it cannot be guaranteed that Indonesian judges will adhere sufficiently to the foreign law, owing to their limited knowledge and awareness of the implementation and interpretation of such foreign law.

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?

Indonesian law does not stipulate whether a shipbuilding contract shall be regarded as a contract for the sale of goods, as a contract for supply of workmanship and materials or as a sui generis contract. However, as the general practice in Indonesia indicates that during the building process, the buyer and the shipbuilder shall jointly hold the title to the ship, it seems that a shipbuilding contract may not be deemed as a contract for the sale of goods. Similarly, as the shipbuilder and the buyer may contractually agree on whether the ship materials will be provided by the shipbuilder or by the buyer, it seems that a shipbuilding contract may not be deemed a contract for the supply of workmanship and materials.

Therefore, a shipbuilding contract is likely to constitute a sui generis contract, which is in a class of its own.

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

There is no implied term under Indonesian law stipulating whether the hull number is an essential part of the shipbuilding contract. As such, it fully depends on the terms and conditions of the shipbuilding contract.

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 shipbuilder shall perform its obligation under the shipbuilding contract to build and deliver the ship in a good condition as specified under the shipbuilding contract. If the shipbuilder fails to do so, the buyer may terminate the shipbuilding contract and claim for any damages incurred as a result of such breach of contract.

Based on our observation of the forms of shipbuilding contracts that are normally used in Indonesia, the shipbuilder is allowed a certain latitude to deviate from the figure stated in the shipbuilding contract. The following are common contractual terms in this regard:

• delay of the ship delivery - if the delay in the vessel’s delivery exceeds 50 days, the buyer may accept the ship with a 5 per cent reduction in the contract value;
• insufficient dead weight tonnage - the maximum deviation from the figure stated in the shipbuilding contract is 2 per cent. If the deviation exceeds 4 per cent, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
• insufficient speed - the maximum deviation is 0.2 knots and in this circumstance, the contract value shall be corrected per 0.1 knot of difference. If the deficiency reaches 0.7 per cent of the contracted speed of the vessel, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
• excessive fuel consumption - the maximum deviation is 5 per cent and in this instance, the contract value shall be decreased per 0.1 per cent of difference. If the excess in consumption reaches 8 per cent, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value;
• insufficient cargo pumping rate - in this instance, the shipbuilder may be asked to remedy the defect or the buyer may accept the ship with a change in the contract value; and
• cargo capacity tank liquidated damages deficiency - in this circumstance, the buyer may terminate the shipbuilding contract or accept the ship with a change in the contract value.

Nevertheless, Indonesian law recognises the principle of freedom of contract and, therefore, the parties may agree to other terms as long as they do not contravene the mandatory statutory provisions.

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. The parties to a shipbuilding contract may incorporate specific standards of performance for the constructed vessel. In the event that the builder fails to deliver the constructed vessel in a good condition fulfilling the specifications and standards of performance stipulated under the shipbuilding contract, the buyer is entitled to take actions or receive compensation of damages according to the provisions of the shipbuilding contract (eg, to reject the delivery of the constructed ship, to terminate the shipbuilding contract, to receive compensation in certain amount according to the deviation degree, or to file a claim against the builder for any damages incurred). There are no trade standards for coating, noise, vibration or other specific items related to shipbuilding prevailing in Indonesia. Therefore, the standards of performance shall be fully subject to mutual agreement of the parties to the ship­building contract.

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

In common practice, because the ship construction will mostly be supervised by the classification society and the Indonesian authorities (represented by the Directorate General of Sea Communications), the quality standard will most likely be determined based on the rule of the classification society concerned and Indonesian National Standard. The Directorate General of Sea Communications may also refer to the standard set out under international marine regulations such as the 1974 Safety of Life at Sea Convention and the 1973 and 1978 Marine Pollution Conventions.

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?

If the parties to a dispute are bound by an agreement and such dispute arises from or in connection with that agreement, the injured party may file a claim based on breach of contract. Otherwise, the injured party may file a claim based on tort.

In the shipbuilding process, the buyer and the shipbuilder are bound by a shipbuilding contract in which the shipbuilder is obligated to deliver a ship as agreed and specified in the shipbuilding contract. Therefore, if there is any damage incurred from the defects in the vessel, the buyer may submit a claim against the shipbuilder based on breach of contract. The buyer may not directly claim for any compensation of damages against the classification society as there is no direct legal relation between them. The classification society owes a duty of care to the shipbuilder.

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

The Indonesian authorities do not currently outsource compliance with the flag-state legislation to any classification society. All survey, certification or assessment can only be carried out by the flag-state authority except for the purpose of issuing classification certificates.

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?

Once a newbuild is 50 per cent completed, it may be temporarily registered with the Indonesian Ship Registry. The temporary registration is effective when a temporary ship registration deed is issued by the Indonesian Ship Registry. The temporary registration, however, shall only be valid until the ship is fully constructed. After the delivery and acceptance of the ship, the owner of the ship must immediately apply for permanent registration with the Indonesian Ship Registry. The ship registration shall be made in the name of the buyer with the approval of the shipbuilder.

No specific and substantial legal consequence will arise from the temporary registration, as the title to the ship shall be held by the buyer when the Permanent Ship Registration Deed is issued by the Indonesian Ship Registry. However, a ship that has been temporarily registered may be subject to collateral or security by way of a mortgage or a hypothec.

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?

Under Indonesian law, the title to a ship is evidenced with a Ship Registration Deed. Article 7 of Ministry of Transportation Regulation No. 13 of 2012 regarding Registration and Nationality of Ships (PM 13/2012) provides that the ship registration deed of a newbuild can only be issued if the buyer is able to present the protocol of delivery of the ship signed by the shipbuilder and the buyer itself. Therefore, by law, the title to a newbuild will be deemed to have passed to the buyer once the said ship has been completely delivered to the buyer.

It is the practice in Indonesia for the buyer and the shipbuilder to jointly own the ship during construction. As such, every action that is intended to be imposed over the ship shall be made with the approval of both parties.

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

As (pursuant to article 7 of PM 13/2012) the title of a ship will legally be passed on to the buyer once the ship has been delivered, which shall be evidenced by protocol of delivery and acceptance, then ordinarily the risk shall also be deemed fully transferred to the buyer on such delivery date. However, based on the principle of freedom of contract, the parties may agree to provisions that customise the timing or conditions that trigger the passing of risk. Under the shipbuilding contract, the parties will normally agree to set out a provision stipulating that the risk during construction shall be borne by the shipbuilder, unless the risk occurred as a result of the buyer or buyer’s contractor.

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?

Subject to the agreement and the approval of the buyer, the builder may subcontract a part of or the whole shipbuilding contract to any third party. However, this subcontracting shall not release the builder from its obligations and liabilities as stipulated under the shipbuilding contract owing to the strict liability provision of article 1367 of the ICC. This provision obliges the builder to take responsibility for any negligence on the part of its subcontractors. As to whether or not the shipbuilding contract should include a maker’s list of major suppliers and subcontractors, it is subject to the mutual agreement of the parties to the shipbuilding contract on a case-by-case basis.

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 law is silent on the obligation of the shipbuilder to inform the buyer of any intention to have certain main items constructed in another country. Unless the shipbuilding contract provides otherwise, the shipbuilder may have such items constructed at any place it desires. The only limitation provided by the law is that all materials used for the ship construction must be certified by the classification society and the flag-state authority.

However, during the process of negotiation and execution of the shipbuilding contract, the builder and the buyer will determine the specification of the ship, including but not limited to the specification of the ship materials. If the builder intends to have certain items constructed in another country, the builder should clearly inform the buyer of such intention.