Default, liability and remedies in shipbuilding in China

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?

Courts will determine liability for defective design (after delivery) based on the terms of the shipbuilding contract, warranty clauses and the actual circumstances, such as who contracted the design company, etc.

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

Third parties could claim against the builder for compensation of actual losses suffered as a result of defectiveness on the basis of tort.

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?

If the parties agree on a liquidated damages clause or a penalty provision for late delivery or not meeting the guaranteed performance criteria, the agreed level of compensation does not have to absolutely represent a genuine link with the damage suffered. However, either party could request the court to increase the liquidated damages if the agreed liquidated damages are not sufficient to cover the damage suffered by that party. Or they could request the court to mitigate the liquidated damages or penalties if the amount is significantly higher than the actual damage suffered by the other party.

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

If the agreed liquidated damages are not sufficient to cover the damage suffered, the buyer can request the court to award proven higher damages.

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

The parties are free to design the force majeure clause.

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

‘Umbrella’ insurance (construction all risks) 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?

Courts or arbitration tribunals are normally reluctant to set terms for the parties, even if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification.

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?

A buyer’s signature of a protocol of delivery and acceptance does not preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery.

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 can exercise a possessory lien over the vessel or work or equipment in their possession. There is statutory provision that the builder (as seller) shall hold the buyer (as buyer) harmless from any encumbrances from third parties.

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 does not survive affixing to or incorporation in the vessel after the vessel has been delivered to the buyer. Before delivery of the vessel to the buyer, the situation will be more complicated, and the answers will depend on a number of factors, but it is generally believed that if the materials and equipment are separable from the vessel, the reservation of title will still be effective between the subcontractor or supplier and the builder.

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?

Assuming that the title to the vessel under construction vests with the builder, the builder’s third-party creditors can apply to the court to attach such vessel to secure their claim against the builder.

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?

Subject to the specific terms of the warranty, it can normally be assigned to the buyer. After the warranty has been assigned to the buyer, the buyer can make a direct claim under the warranty against the subcontractor or the supplier. If the warranty has not been assigned to the buyer, the buyer could instead make a claim against the subcontractor or supplier for compensation of actual losses suffered as a result of defectiveness of the materials or equipment supplied on basis of tort.

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?

Subject to the mechanism agreed under the shipbuilding contract, there is no requirement to put the builder in default by sending notice before the buyer’s remedies begin to accrue. Depending on the actual circumstances, the usual remedies include specific performance (if feasible) or claim for damages or both.

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?

In the event of protracted failure to construct or continue construction by the shipbuilder, apart from and subject to the contractual provisions, the buyer can ask for specific performance (if feasible) or claim damages or both.

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

If it is expressly agreed under the shipbuilding contract that the buyer has the right to terminate the contract for the builder’s insolvency, it is generally believed that such right should be enforceable. However, if this is not expressly contained in the contract, the administrator of the builder (if bankruptcy administrator has been appointed) will decide whether or not to terminate the contract.

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

For shipbuilding disputes, the China Maritime Arbitration Commission or the China International Economic and Trade Commission are most commonly agreed on by the parties to decide disputes. In any case, if arbitration agreement could not be reached by parties, disputes can be brought to the relevant Chinese Maritime Courts for resolution.

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?

If the builder has entered into bankruptcy proceedings (either for liquidation or for restructuring), after a bankruptcy administrator has been appointed, the administrator has the right to decide whether to continue or terminate the contract. If the administrator decides to continue to perform the contract, the buyer is not allowed to terminate the contract but can ask the administrator to provide additional security. So basically the buyer’s contractual right to take possession of the vessel and continue construction may be affected subject to review by the administrator.

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

It is not common to incorporate an ADR clause in shipbuilding contracts in China.

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?

Subject to the specific terms of the contract, the builder can cancel the contract, keep the advance payment, sell the vessel to a third party and claim for proven damages.