Q&A: default, liability and remedies for shipbuilding contracts in Nigeria

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?

Nigerian courts are yet to make any pronouncement on this. However, a Nigerian court will uphold the terms of a contract provided there are no vitiating elements. Therefore, in the absence of any vitiating elements, where parties have by their contract agreed that defective design shall fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract, a Nigerian court will enforce the intention of the parties.

Furthermore, the courts may allow a party to add to or vary the contract by oral evidence upon proof that it is a custom or usage common to agreements of such nature. Therefore, a shipbuilder may be liable under the warranty clause where the buyer is able to establish that defective design falls within the scope of poor workmanship in a shipbuilding contract.

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

Generally, third parties are not entitled to any contractual remedy against a shipbuilder for defectiveness. This is because, as a general rule, a contract cannot confer rights or impose obligations on any person except the parties to that contract. Applying the ‘proximate principle’ established in the locus classicus – Donoghue v Stevenson (1932) AC 562 – the Supreme Court of Nigeria has held that manufacturers and intermediate parties in the chain of distribution are equally liable for injury, death or damage caused to end users by defective products (see Nigerian Bottling Co v Ngonadi [1985] 1 NWLR (Pt 4) 739). Therefore, a third party may recover damages for the tort of negligence, provided that the elements of the tort are proved. Nigerian courts have held that the absence of privity of contract between a plaintiff and defendant does not preclude liability in tort. Thus, manufacturers of products, including shipbuilders, may owe a duty of care to the end consumer or user. In addition to tort law, end users of defective products in Lagos State may have recourse against a manufacturer for damages under section 20 of the Law Reform (Torts) Law of Lagos State, Cap L82, Laws of Lagos State of Nigeria, 2015 (LRTL). The law stipulates that a manufacturer is liable for any damage caused wholly or partly by a defective product. Besides Lagos State, other federating states of Nigeria have promulgated laws similar to the LRTL regulating the manufacture and sale of defective products within their territorial jurisdiction.

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?

Under Nigerian law, parties to a contract are at liberty to fix damages payable in the event of a breach. However, such agreed compensation must represent a genuine link with the damages suffered. Specifically, it has been held that where parties to a contract, as part of the agreement between them, fix the amount payable on the default of one of them or in the event of breach by way of damages, such sum is classified as liquidated damages where it is in the nature of a genuine pre-estimate of the damage that would arise from breach of the contract. Where the fixed amount is unrelated to the actual damage or loss suffered, it is considered a penalty and, therefore, unjustifiable. While penalty provisions are generally unenforceable under Nigerian law, a Nigerian court will not mitigate liquidated damages agreed in a contract.

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

The liquidated damages provision in the contract limits the liability of the party in breach. Therefore, a buyer will be precluded from claiming higher damages where parties have agreed on a certain sum as liquidated damages in relation to a particular breach. However, nothing precludes a party from claiming higher damages where such arise out of a breach separate from that in respect of which there has been an agreed sum. Also, a buyer may claim higher damages if it is expressly stated in the contract that the buyer may do so in circumstances where the actual damages exceed the quantum of liquidated damages agreed by the parties.

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

Under Nigerian law, parties to a contract are at liberty to design the terms of their contract, including terms concerning force majeure. Where a force majeure clause is included in the contract, it is common for the parties to specify the events constituting force majeure and the consequences of the occurrence of such events.

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

In Nigeria, umbrella insurance is available to shipbuilders and their subcontractors. This takes the form of an ‘all-risks’ insurance covering each and every aspect of the project.

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?

Nigerian courts have consistently held that it is not the duty of any court or tribunal to make contracts for the parties. The duty of the court is limited to the construction of contracts for the purposes of enforcement of the rights and obligations of the parties. The same can also be said of arbitration tribunals. The common practice is for parties to agree to refer any ‘disputable’ alteration to a clause in the contract to an agreed independent third party, usually an expert in the subject matter of the dispute. The decision of the expert in such a situation is usually final and binding on the parties.

Therefore, courts in Nigeria and arbitration tribunals are unlikely to set terms of a contract even where the parties are unable to reach an agreement on alteration to key terms or modification to specifications.

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?

Generally, in the absence of fraud or misrepresentation, parties are bound by the terms of their contract. Therefore, a buyer will be bound where he or she contracts that his or her acceptance of the vessel shall be final and binding to the extent that conformity of the vessel to the contract and specifications is concerned. However, because the purpose of the protocol is to confirm the time of the delivery of the vessel by the builder and the terms of acceptance by the buyer, the buyer may have a right of action for damages against the shipbuilder for latent defects. This is the case notwithstanding the fact that the protocol states that the buyer’s acceptance of the vessel shall be final and binding. Essentially, where specific (latent) defects are detected after delivery, the buyer will have a right of action against the builder for breach of any implied term of the contract such as fitness for purpose.

When repairs or replacements covered under the warranty must be carried out, may the buyer insist they be carried out at a shipyard or facility not operated by the builder? Must the buyer bear all costs associated with moving the vessel to the location selected for the repair and replacement work and any sea trials? If the remedial work requires the vessel to be docked, will the costs be covered under the warranty, or will the buyer have to pay?

Nigerian law does not govern any of the foregoing scenarios. In such cases, party autonomy would prevail. As such, parties are at liberty to negotiate and agree suitable contractual terms in their shipbuilding contracts that would apply in such cases.

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?

In view of the fact that the subcontract is between the shipbuilder and third-party suppliers or subcontractors, any right or claim arising from the subcontract will be against the shipbuilder. Consequently, while suppliers or subcontractors may exercise a lien over work or equipment to be incorporated in the vessel pending the settlement of any outstanding invoices, they may not be able to exercise such lien over the vessel.

Under the Merchant Shipping Act, a shipbuilder may exercise a lien or right of retention to secure claims for building or repairs of the ship. The lien or right of retention is, however, extinguished where the shipbuilder ceases to be in possession of the ship.

It is an implied term of section 12(3) of the Sale of Goods Act 1893 that at the time of delivery, the vessel shall be free from all liens, charges and encumbrances in favour of any third party not declared to or known to the buyer before or at the time when the contract was made.

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 subcontractor or supplier may reserve title in the materials or equipment to be affixed or incorporated in the vessel under construction until payment is made by the shipbuilder for the materials or equipment. However, where the materials or equipment subject to a reservation of title clause are affixed to the vessel and the vessel is delivered to the buyer, the fact that the shipbuilder has not paid for the materials or equipment will not affect the title transferred to the buyer.

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 can obtain a security attachment over the vessel under construction or equipment to be incorporated in the vessel. This will, however, be subject to the builder’s statutory right of retention.

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?

Generally, rights and obligations under a contract can be assigned or novated respectively to a third party except where this is not permitted by the express terms of the contract. The legal effect of such an assignment is that the buyer assumes all the rights relating to the assigned warranty.

There is no legislation that entitles a buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty. Therefore, unless such warranty is assigned to the buyer, the buyer cannot make a direct claim under the subcontractor’s or manufacturer’s warranty.

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?

Generally, under Nigerian law, a party’s default in the performance of its obligations under a valid contract constitutes a breach of contract. Parties, however, usually agree on the events that would constitute a breach of contract. The remedies are usually dependent on the nature and materiality of the breach. For example, where one party has committed a serious breach of contract, the innocent party has a right to rescind the contract. It has been held that the contract is in such circumstances rescinded de futuro. One of the legal effects of rescission is that it discharges the innocent party of further obligations under the contract.

Apart from rescission, an innocent party may also make a claim for damages or specific performance or both. With respect to damages, the damages recoverable are the losses reasonably foreseeable by the parties and foreseen by them at the time of the contract as inevitably arising if one of them broke faith with the other. It has been held that in the contemplation of such a loss, there can be no room for claims that are merely speculative or sentimental unless these are specially provided for by the terms of the contract on the occurrence of an event of default.

Specific performance is an equitable relief usually granted against a defendant or respondent to ensure the performance of its obligations under the contract. It is a discretionary remedy and would not be granted where a claimant would be adequately compensated by damages.

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?

Generally, under Nigerian law, a party’s default in the performance of its obligations under a valid contract constitutes a breach of contract. Parties, however, usually agree on the events that would constitute a breach of contract. The remedies are usually dependent on the nature and materiality of the breach. For example, where one party has committed a serious breach of contract, the innocent party has a right to rescind the contract. It has been held that the contract is in such circumstances rescinded de futuro. One of the legal effects of rescission is that it discharges the innocent party of further obligations under the contract.

Apart from rescission, an innocent party may also make a claim for damages or specific performance or both. With respect to damages, the damages recoverable are the losses reasonably foreseeable by the parties and foreseen by them at the time of the contract as inevitably arising if one of them broke faith with the other. It has been held that in the contemplation of such a loss, there can be no room for claims that are merely speculative or sentimental unless these are specially provided for by the terms of the contract on the occurrence of an event of default.

Specific performance is an equitable relief usually granted against a defendant or respondent to ensure the performance of its obligations under the contract. It is a discretionary remedy and would not be granted where a claimant would be adequately compensated by damages.

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

Nigerian courts will uphold the terms of a contract provided there are no vitiating elements. Consequently, where parties have by their contract agreed to terminate for insolvency, Nigerian courts will uphold such a clause.

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

Arbitration is the commonly agreed mechanism for the resolution of disputes arising from a shipbuilding contract. The London Maritime Arbitrators’ Association appears to be the most frequently selected arbitral institution.

With regard to courts, however, by virtue of section 251(1)(g) of the Nigerian Constitution, matters pertaining to admiralty jurisdiction are within the exclusive jurisdiction of the Federal High Court. The admiralty jurisdiction of the Federal High Court includes maritime claims and section 2(3)(l) of the Admiralty Jurisdiction Act 2004 classifies claims in respect of shipbuilding contracts as a maritime claim. Therefore, disputes arising out of or in relation to a shipbuilding contract can only be entertained by the Federal High Court, except where the parties have agreed to refer the dispute to arbitration.

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?

In the event of insolvency or moratorium of creditors of the shipbuilder, the question of whether the buyer can exercise a contractual right to take possession of the vessel under construction and continue construction will depend on whether title to the vessel under construction has passed to the buyer. Where title to the vessel under construction has passed to the buyer, the buyer will be entitled to exercise proprietary rights of ownership (such as taking possession) to the exclusion of the receiver or liquidator. However, that will not be the case where title to the vessel under construction resides with the shipbuilder. In such circumstances, the right of the receiver or liquidator to possession of the vessel under construction will defeat the interest of the buyer.

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

Parties have the freedom to agree on the mechanism by which disputes are to be resolved. This includes ADR. There is, however, a preference for arbitration over other forms of ADR.

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?

Where a buyer defaults in the performance of the shipbuilding contract, the builder may have recourse to those remedies specified in the contract. However, the ship is the builder’s ultimate security. Therefore, where, for instance, the buyer refuses to pay, the builder can enforce its rights as an unpaid seller as provided in the Sale of Goods Act 1893.

Generally, the consequence of cancellation of a contract is that parties are discharged from performing future obligations under the contract. However, the parties will still be liable for any breach of the contract that occurred prior to cancellation.