Q&A: contractual considerations for shipbuilding in Japan

Key contractual considerations

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

No, there are no statutory formalities in Japan that must be complied with in entering into a shipbuilding contract.

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?

Yes, the parties may select the law to apply to the shipbuilding contract (article 7 of the Law of General Rules for Application of Laws). The choice of law will be respected by Japanese courts. However, if the parties select foreign law to apply but the application of the provisions of the foreign law is found to be against Japanese public policy, those provisions will not be applied (article 42 of the Law of General Rules for Application of Laws). However, there are no court precedents holding that the application of the provisions of foreign law that the parties selected in a shipbuilding contract is against Japanese public policy.

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?

According to academics’ views, a shipbuilding contract is regarded as a contract for work if a buyer supplies all or most of the materials, but it is regarded as a mixed contract of sale and contract for work if a builder supplies all or most of the materials. Normally the latter is the case. We have not found any court precedents analysing the legal nature of a shipbuilding contract.

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

There has been no case law or academic discussion of this issue. However, the hull number may be a matter of dispute in a case where the buyer of a vessel charters the vessel out under a charter party with a different hull number from that in the shipbuilding contract, and the charterer refused to accept delivery of the vessel because of the difference in hull numbers. In such a case, before deciding whether the charterer may refuse to take delivery of the vessel, Japanese courts are likely to take into consideration all the facts and circumstances, including the following:

• the hull number in the shipbuilding contract;
• the wording of relevant provisions in the shipbuilding contract and the charter party;
• the circumstances leading to the conclusion of the shipbuilding contract and the charter party; and
• the circumstances relating to the reason why different hull numbers were used.

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?

We have not been able to find any Japanese court precedents or any academic views dealing with this issue. Japanese courts or tribunals will judge whether the difference is allowed on a case-by-case basis, considering all of the facts and circumstances such as the circumstances leading to the conclusion of the shipbuilding contract, facts surrounding the construction in a shipyard and the purpose for which the buyer intends to use the vessel. In our opinion, if the figure given in the contract is ‘approximate’, the builder will be allowed to deviate by 3 to 5 per cent from the figure stated.

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, parties may incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages and even rescission of the contract in certain circumstances. Japanese law recognises the principle of freedom of contract and there are no special provisions that prohibit the above-mentioned incorporation. Article III of the Shipbuilders’ Association of Japan form, which is often used in Japanese practice, incorporates guaranteed standards of performance. We have not found court precedents that specified trade standards for coating, noise and vibration, and accordingly, we do not believe there are such trade standards.

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

No. Japanese statute and case law has not given greater definition to contractual quality standards such as ‘Japanese shipbuilding standards’.

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?

The classification society does not owe a duty of care to the buyer based upon the contract between the classification society and the builder because the buyer is not a party to the contract but is merely a third party.

To successfully sue the classification society in tort if certain defects in the vessel escape the attention of the class surveyors, the buyer has to establish the class surveyor’s negligence, the buyer’s damage and a causal connection between the negligence and the damage (article 709 of the Civil Code). To establish the class surveyor’s negligence, the buyer will have to prove that the class surveyor was able to foresee and could have avoided the damage. The mere fact that the class surveyor overlooked certain defects in the vessel does not always satisfy the requirement of negligence.

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

Yes. Non-passenger vessels classed by classification societies, which are registered with the Minister of Land, Infrastructure, Transport and Tourism (MLIT), are deemed to have passed inspections (except for special inspection) by the Japanese maritime authority with respect to certain items including the hull, machinery, sails, drainage equipment, rudder, mooring equipment, lifesaving and firefighting equipment, accommodation, sanitary equipment, loading equipment for special cargo including dangerous cargo, cargo operation equipment, electrical equipment and the load line (Ship Safety Law, article 2, paragraph 1 and article 8). The classification societies that are currently registered with the MLIT are Nippon Kaiji Kyokai and Lloyd’s Register, DNV and the American Bureau of Shipping.

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?

Under Japanese law, registration of a vessel under construction shall be made for the purpose of describing the details of the vessel under construction; the creation, transfer, alteration, restriction of disposition or extinction of mortgage on the vessel; and the person who will be the owner of the vessel (namely, the buyer). In other words, a builder cannot register a vessel under construction in its own name. Further, ownership or title of a vessel under construction cannot be registered.

The order of priority of mortgages that are created on a vessel under construction follows the chronological order of registration (article 848, paragraph 3 and article 850 of the Commercial Code and article 373 of the Civil Code). A mortgage on a vessel under construction is, even if it is registered, subordinate to a maritime lien over the vessel under construction (articles 848, paragraph 1, and 850 of the Commercial Code).

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 contract that title will pass from a builder to a buyer during construction because Japanese law recognises the principle of freedom of contract.

If there is a provision in a shipbuilding contract regarding when and whether title to a vessel under construction is transferred from a builder to a buyer, title is transferred in accordance with the provision. For example, title will pass gradually upon the progress of the vessel’s construction if there is a provision to that effect.

On the other hand, if there is no provision in a shipbuilding contract regarding when and whether or not title to a vessel under construction is transferred, normally the builder has title to a vessel under construction. The builder obtains title to a vessel upon completion of the work and title to the vessel built is transferred to the buyer upon delivery.

There are no legal provisions or court precedents relating to the earliest stage a buyer can obtain title to a vessel under construction. However, there is a Supreme Court decision dated 6 May 1916 (Kisomatsu v Kondo) to the effect that an agreement to transfer title of a vessel under construction to the buyer to the extent of the progress in the construction is valid despite the fact that the builder provided the materials of the vessel.

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

If there is a provision in a shipbuilding contract regarding when risk is passed from the builder to the buyer, risk is passed in accordance with that provision. For example, risk is passed to the buyer with the title to the vessel upon delivery, if the Shipbuilders’ Association of Japan form is used (article VII.5). If there should be a provision in a shipbuilding contract that title to the vessel is transferred to the buyer upon completion of the construction work while risk is passed to the buyer upon delivery, the title is transferred to the buyer upon completion of the construction but the risk remains with the builder until delivery.

If there is no provision in a shipbuilding contract regarding that point, Japanese courts or tribunals will generally follow the view of leading scholars that the risk and title are transferred to the buyer upon delivery.

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?

If there is a provision in a shipbuilding contract regarding whether or not and to what extent a builder may subcontract, the shipbuilder may or may not subcontract part or all of the contract in accordance with that provision.

If there is no provision in a shipbuilding contract regarding that point, it is difficult to foresee what the position of Japanese courts or tribunals would be. We have found no court precedents regarding this issue and academic views are split. The majority view is that a builder may not subcontract, but some influential opinions suggest that a builder may.

When a builder has subcontracted part or all of the shipbuilding contract, the builder will be fully liable to the buyer for negligent acts by the subcontractor.

We see the gradual increase of contracts that include a maker’s list. However, we do not believe there is a custom.

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?

Whether or not the builder must inform the buyer of the intention to have certain main items constructed in another country depends on the provisions of the shipbuilding contract. A builder’s basic obligation is to build and deliver a vessel pursuant to a shipbuilding contract and it is not material whether or not a builder has certain main items constructed in another country.

Law Stated Date

Give the date on which the information above is accurate.

24 January 2022