Key contractual considerations

Statutory formalities

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

As long as the contractual formalities of offer and acceptance, intention to create legal relations and consideration are observed, a contract will be legally enforceable even if concluded orally and not committed to writing, although in light of the complexities and risks inherent in shipbuilding this is extremely unlikely to be the case. It is usual for a shipbuilding contract to provide that any modification or variation to the contract must also be in writing, rather than made orally, and where it does so, the Supreme Court confirmed in Rock Advertising v MWB Business Exchange (2018) that it will give effect to the NOM (no oral modification) clause, although the effectiveness of such clauses may still be prevented if the doctrine of estoppel applies. Where the contract is executed in writing, electronic signatures can be used.

The entry into deeds and other documents under the law of England and Wales by companies incorporated outside the United Kingdom (whether or not they have registered an establishment in the UK) is governed by the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009 (as subsequently amended, but only in relation to the registration of charges). Part 2 of the Regulations, which came into force on 1 October 2009, adapts the formalities set out for doing business under the law of England and Wales in sections 43 (company contracts), 44 (execution of documents) and 46 (execution of deeds) of the Companies Act 2006 for overseas companies.

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?

The parties to a shipbuilding contract are generally free to select the governing law of their contract. For contracts concluded on or after 17 December 2009, the applicable law of a contract is currently determined, for most purposes, in accordance with Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (Rome I). This Regulation applies, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters. The Regulation provides that a contract shall be governed by the law chosen by the parties (whether the law of a member state of the EU or not, such as the UK when it leaves the EU) but that the choice must be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. Where no such choice is made, the Regulation provides that the relevant law is the law of the country with which the contract is most closely connected. Following Brexit, the UK government’s current intention is to incorporate Rome I, as well as Rome II (see question 25), into UK domestic law and if that occurs the UK will continue to apply the same rules when determining the law that governs a contract. Even if the UK were to exit the EU without a deal (which at the time of writing remains a possibility), the UK government has confirmed that it would retain Rome I and, as this regulation does not depend on reciprocity, the rules to determine which law would apply in cross-border contractual disputes would remain the same in the UK.

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?

English law of the sale of goods comprises common law principles as codified, amended and supplemented by a statutory scheme, the current principal legislation being the Sale of Goods Act 1979 and the Sale and Supply of Goods Act 1994. Shipbuilding contracts have historically been regarded as contracts for the sale of goods by the English courts (see McDougall v Aeromarine of Emsworth Ltd (1958)). More recently, principally following two decisions of the House of Lords in Hyundai Heavy Industries Co v Papadopoulos and Others (1980) and Stocznia Gdanska SA v Latvian Shipping Co, Latreefer Inc and Others (1998), the position has been somewhat refined by the recognition that the shipbuilding contract is not just one of sale alone but also resembles a construction contract. Accordingly, the current preferred view is that a shipbuilding contract in English law should be categorised as a contract of sale of goods (more precisely categorised under the Sale of Goods Act 1979 as an agreement to sell future goods by description) containing certain characteristics of a construction contract. While it is the case that general (ie, non-marine) English construction law has had little significant influence on English shipbuilding contract law, the decision of the High Court in Adyard Abu Dhabi v SD Marine Services (2011) did involve consideration of English construction law principles in the context of a shipbuilding contract dispute.

Hull number

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

The hull number has been held not to be an essential part of the description of the vessel but only a means of labelling or identifying her (see Reardon Smith Line Ltd v Hansen-Tangen (The ‘Diana Prosperity’) (1976)). So long as the reference fits the vessel in question and no other vessel could be referred to, the buyer cannot refuse to accept delivery simply because the hull number is different from that stated in the contract.

However, the builder cannot unilaterally switch hull numbers between projects in an attempt to demonstrate performance of its obligations under a different shipbuilding contract as was made clear by the House of Lords in the Stocznia Gdanska case referred to in question 5.

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?

The use of ‘approximate’ dimensions and descriptions is likely to imply that the builder has a small margin of leeway, but how much will be a question of fact to be decided by the relevant court or tribunal in light of the circumstances in which it is used and appropriate expert evidence. There is no absolute legal test: for example, in the context of a dispute concerning a vessel’s warranted speed under a charter party, the Court of Appeal held that the margin provided by the word ‘about’ cannot be fixed as a matter of law (Arab Maritime Petroleum Transport Co v Luxor Trading Corporation and Geogas Enterprise SA (The ‘Al Bida’) (1986)). This is the kind of question that is often referred to as a mixed question of fact and law, as concluded at first instance in the same case. In the context of a shipbuilding contract, a cautious approach would be to proceed on the basis that the use of such a term simply allows the builder a margin up to the limits of normal construction tolerances for a vessel of the relevant type.

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 in your jurisdiction for coating, noise, vibration, etc?

Yes. Shipbuilding contracts commonly set out performance standards for the speed, fuel consumption and deadweight of the vessel. If any of these agreed performance standards are not met when tested during sea trials, the contract will typically allow a small percentage of agreed deficiency but thereafter the buyer will be entitled to liquidated damages, often tiered depending on the extent of the deficiency. While the builder’s liability for liquidated damages is generally capped, the buyer will have the option of rejecting the vessel and terminating the contract where the discrepancy is greater than an agreed percentage of the guaranteed figure. It would be unusual for any shipbuilder to agree to deviate from this approach. Liquidated damages clauses are considered in question 26.

It is usually the case that vessels that are to be constructed under a shipbuilding contract that is governed by English law will not be built in the jurisdiction. As a result, any trade standards in relation to shipbuilding and marine technology that have been developed by British Standards Institution (BSI) will not apply to a vessel built in another jurisdiction unless they are expressly referred to in the shipbuilding contract. Instead, the local trade standards in the place of construction may apply and, in such circumstances, appropriate legal advice should be sought from local counsel to clarify the position.

Quality standards

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

Unless contractually excluded, three specific conditions relating to quality are implied in any sale contract governed by the Sale of Goods Act 1979 where a seller sells in the course of a business. These are compliance with description (section 13), satisfactory quality (section 14(2)) and reasonable fitness for purpose (section 14(3)). In Neon Shipping Inc v Foreign Economic 7 Technical Corporation Co of China (2016), the High Court considered whether section 14(3) was applicable to a shipbuilding project and on the particular facts found that it was (although for other reasons the claimant was ultimately unsuccessful).

A breach by a seller of any of these implied conditions entitles the buyer to reject the goods, unless the breach is ‘so slight’ that it would be unreasonable for the buyer to do so (and so long as the buyer is not dealing as a consumer) (section 15(A)(1)). Most newbuilding contracts expressly exclude these statutory implied terms. This is in line with usual practice by which the builder agrees to build a vessel in conformity with the requirements of the contract and specifications and provides a limited post-delivery warranty in respect of materials and workmanship, but otherwise makes no general guarantee of quality and almost certainly excludes liability for any losses arising from defects in the vessel.

Where the contract does provide for a quality standard, a phrase such as ‘highest North European shipbuilding standards’ or ‘first-class shipbuilding practice in Western Europe’ is often used. There appear to be no decided cases on the interpretation of such a ‘first-class practice’ provision in shipbuilding cases. However, the phrase ‘of first-class quality’ was considered in Rolls-Royce Power Engineering plc and another v Ricardo Consulting Engineers Ltd (2003). The court held that the words ‘first class’ indicate that a higher standard is required than ordinary reasonable skill and care.

Accordingly, a requirement to construct a vessel to such a standard or in accordance with such practice does add something significant to other requirements of the contract. The interaction between express standards of care and other specific contractual requirements has been considered by the highest English court. In MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd (2017), the contractor had built using due care and professional skill, adhering to good industry practice and to the applicable DNV standard for the design of offshore wind turbines and grouted connections; however, the standard contained an error with the result that the foundations would not last for the required design life of 20 years, thereby causing the contractor to breach a fitness for purpose obligation. The Supreme Court overturned the Court of Appeal’s decision but found that it was unnecessary to determine whether there was a warranty that the foundations would have a lifetime of 20 years or a contractual term that the foundations would be designed fit to have such a lifetime as neither had been achieved. Although the international design standard contained an error that meant that it would not be possible to comply with the prescribed criteria, this did not make it mutually inconsistent with the other terms of the contract. Courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer has specified or approved the design, it is the contractor who can be expected to take the risk if it agreed to work to a design that would render the item incapable of meeting the criteria to which it had agreed. As to the complex nature of the contractual arrangements, in this case these were long, diffuse and multi-authored with detailed descriptions and ‘belt and braces’ provisions, but this did not, in the court’s view, alter the fact that the court must do its best to interpret the contractual arrangements by reference to normal principles. The contract imposed a duty on the contractor regarding the life of the foundations and the court did not see this as an improbable or unbusinesslike interpretation, especially as it was the natural meaning of the words used. While this and other recent cases have shown that there can be tension between express standards of care and other specific contractual requirements, such as fitness for purpose obligations, much depends on the specific drafting.

Of the standard forms of shipbuilding contract typically encountered (see question 43), only the Baltic and International Maritime Conference (BIMCO)’s Newbuildcon expressly provides for a quality standard. However, given that shipbuilding conditions and standards vary significantly from country to country and, sometimes, even among shipyards in the same country, the phrase ‘in accordance with good international shipbuilding and marine engineering practice’ set out in its clause 1 can give rise to disputes as to the precise standard imposed.

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 employed solely by the builder, the classification society will not ordinarily be found to owe a contractual duty of care to the buyer to ensure that its surveyors identify defects in the vessel. Whether a classification society can be held liable in tort for negligence is controversial, and although theoretically possible if the claimant can make out the constituent elements of the tort, the English courts have shown a marked reluctance to hold classification societies liable. In the most recent English judgment on the matter, Marc Rich & Co AG and Others v Bishop Rock Marine Co and Others (The ‘Nicholas H’) (1995), the House of Lords again refused to impose tortious liability on a classification society, Lord Steyn stressing that classification societies act for the common good in setting maritime safety standards. Where, however, the vessel is being constructed outside England and Wales, the applicable law and jurisdiction that will apply to a claim against a classification society in tort is unlikely to be determined by the English courts under English law, even though the shipbuilding contract may be governed by English law and subject to the jurisdiction of the English courts or London arbitration. It may be possible to bring a claim where the tort has been committed abroad within the jurisdiction of the English court if the parent company of the classification society is domiciled in England and Wales and is found to have, for example, controlled the operations that gave rise to the claim; however, this has only been considered in respect of health and safety and environmental claims (Lungowe v Vedanta Resources and KCM (2017), Okpadi and others v Royal Dutch Shell plc and another (2018) and AAA v Unilever plc (2018)).

With the development of international rules (both by the International Maritime Organization (IMO) and by the European Union authorities) to improve maritime safety and environmental protection, flag states’ powers have been delegated to some selected classification societies, each of which has acquired the status of ‘recognised organisation’ (RO). The degree to which a flag state may choose to delegate authority to an RO is for each flag state to decide, and the corresponding authority of the RO is generally set out in the relevant agreement individually negotiated between the RO and the relevant administration. These agreements are based on the Model Agreement for the Authorization of Recognized Organizations Acting on behalf of the Administration, issued by the IMO’s Maritime Safety Committee (MSC) and its Marine Environment Protection Committee (MEPC) (MSC/Circ.710-MEPC/Circ.307), which imposes a duty of care on the ROs and a liability for breach of such duty to the appointing authority. On 1 January 2015, a Code for Recognized Organisations (RO Code), a consolidated international instrument that sets out the minimum criteria against which organisations must be assessed towards recognition as an RO, became mandatory under SOLAS (the International Convention for the Safety of Life at Sea), MARPOL (the International Convention for the Prevention of Pollution from Ships) and the Protocol of 1988 relating to the International Convention on Load Lines 1966. In particular, the RO Code sets out general requirements for ROs, including the capacity to deliver high standards of service and the need to act independently, impartially and transparently, as well as with integrity, competence and responsibility. Various other IMO resolutions lay down mandatory minimum requirements for ROs with respect to, inter alia, their technical competence, governance and certification. However, following the Erika and the Prestige disasters, additional legislation has also been implemented in the European Union to tighten the regulatory regime applicable to classification societies when performing their duties as ROs and to harmonise their liabilities throughout the European Union (the most recent being set out in Directive 2009/15/EC, as amended by Directive 2014/111/EU, and in Regulation (EC) No. 391/2009 included in the Third Maritime Safety (Erika III) Package). Under these rules, an RO may face unlimited liability for damages caused by gross negligence or intentional acts. However, such liability relates only to the indemnity obligations undertaken by the RO in favour of the authorising administration under the relevant agreement granting it RO status. A buyer seeking to sue an RO for damages in respect of loss arising from such RO’s negligent acts or omissions could not, therefore, rely on the above rules alone to establish the RO’s liability. However, given that the Nicholas H pre-dates the RO regime described above, it is unclear whether it would now be followed in any future case where negligence of a classification society acting as RO was alleged. Following Brexit, it is likely that existing authorisation agreements between the UK and ROs will need to be renegotiated and re-established (although at the time of writing, the position remains unclear), while any UK company that wishes to operate in the EU will still need to comply with the EU regime, even if it is repealed in the UK.

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?

Compliance with flag-state legislation has been outsourced, but only to a limited extent to certain approved classification societies.

The bulk of the survey and certification work required for statutory purposes is delegated to non-governmental organisations that act as certifying authorities on behalf of the UK Maritime and Coastguard Agency (MCA). For surveys required by international conventions, those certifying authorities must be classification societies authorised as ROs in accordance with the EU regime resulting from the Third Maritime Safety (Erika III) Package as described in question 10 and the relevant UK implementing legislation (see the MCA Merchant Shipping Notice MSN 1672 (M+F) Amendment 3 issued in September 2011).

Following the implementation in the UK of EU Directive 2009/15/EC, all agreements previously concluded between the MCA and the relevant classification societies have been terminated by mutual consent and replaced by new agreements complying with the revised European rules and their implementing domestic provisions. The six classification societies that are ROs authorised by the UK are: Lloyd’s Register Marine, ABS Europe Limited, Bureau Veritas, DNV GL AS, RINA UK Limited and ClassNK.

In order to avoid unnecessary duplication of survey items between the relevant classification society and the MCA, classification society surveyors are authorised to conduct hull and machinery, electrical and control installation surveys on UK ships on the MCA’s behalf, but the scope of such delegation is narrower with respect to ro-ro passenger ships. Furthermore, ROs’ survey and certification powers may also be less comprehensive with respect to passenger ships as opposed to cargo ships, as the MCA’s focus remains on the more critical aspects of passenger ship safety, such as fire protection and stability.

Since April 2003, the MCA has been operating the Alternative Compliance Scheme, which, in relation to newbuildings (other than passenger ships) to be registered in the UK, also allows the relevant classification society to perform most statutory surveys and associated plan approvals without the involvement of the MCA, save for the initial inspection of the vessel on delivery and the audits or inspections for International Safety Management Code, International Ship and Port Facility Security Code and Maritime Labour Convention 2006 requirements.

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?

Vessels under construction may not be registered on the UK Ship Register.

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?

According to section 17(1) of the Sale of Goods Act 1979, title to the vessel will pass when it is intended by the parties to do so; therefore the parties may agree that the vesting of title to the buyer is continuous as the construction progresses, or that it occurs upon the builder’s achievement of specified and ascertainable milestones.

The ‘continuous transfer of title’ structure tended to be the approach used in shipbuilding contracts with British yards, and it is still commonly encountered in contracts for the construction of superyachts and in ship conversion contracts.

While English law will uphold the parties’ agreement as to the timing of the vesting of title to the partly built vessel, nonetheless the effectiveness of those agreements will ultimately depend upon the lex situs, that is, the law of the place of construction. For instance, the insolvency rules of the lex situs may render any transfer of title ineffective against a liquidator of the yard. These considerations obviously do not apply where the vessel is under construction in England and Wales, but where the contract is governed by English law with a place of construction abroad (as very frequently occurs). In such circumstances, appropriate legal advice should be sought from local counsel to clarify the position.

There is no legal restriction with respect to the moment when the vesting of title can start, but the parties usually choose the vessel’s keel laying as the relevant trigger. In any event, the parties should bear in mind that the English courts have tended, in the absence of clear drafting, to be slow to uphold contractual provisions providing for the transfer of title in the material and equipment intended for the vessel where these have not actually been physically incorporated into the vessel.

Passing of risk

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

The general rule, which is enshrined in section 20(1) of the Sale of Goods Act 1979, is that goods remain at the seller’s risk until property in them is transferred to the buyer, unless the parties provide otherwise.

For the vast majority of shipbuilding contracts, the parties agree that, regardless of the time of transfer of title, the risk of damage to or loss of the vessel remains with the builder until the delivery and acceptance of the vessel.

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?

Subject to the terms of the shipbuilding contract, the builder may subcontract part or all of the contract works (design, construction of the hull or the superstructure, assembly, outfitting, etc) to third parties.

However, depending on the parties’ respective bargaining positions, the extent of the builder’s rights to subcontract will be more or less extensively defined and limited in the contract. For instance, it may be agreed that certain key steps of the construction process (such as the assembly of the hull and other items of works directly affecting the agreed quality standards of the vessel) cannot be delegated without the prior approval of the buyer, or are not delegable at all.

No matter how wide the builder’s liberty to subcontract, and subject to the parties’ contrary provision, the builder will remain fully liable towards the buyer for any subcontracted work, and it is usual to find express language to that effect in the contract.

There is no custom in England and Wales to include a maker’s list of major suppliers and subcontractors in a shipbuilding contact and the SAJ form, upon which most international shipbuilding contracts governed by English law tend to be based, does not include such a list. It instead grants the builder sole discretion and responsibility to subcontract any portion of the construction, although this is commonly amended to allow the buyer the right to approve major suppliers and subcontractors and such amendments can, usually depending on where the vessel is being built, include a maker’s list. The CMAC Standard Ship Building Contract form and BIMCO’s Newbuildcon form both make provision for a maker’s list of potential major suppliers and subcontractors, thereby allowing the builder to proceed to making the final selection of major suppliers and subcontractors without further approval from the buyer. Further details of these standard forms are set out in question 43.

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?

Subject to any express term of the contract to the contrary, and provided that the contract does not otherwise restrict the ability of the builder to subcontract the construction of the relevant items without the buyer’s prior approval, an English or Welsh shipbuilder has no obligation to inform the buyer of its intention to use subcontractors located in countries other than England and Wales. However, it is usually the case that vessels that are to be constructed under a shipbuilding contract that is governed by English law will not be built in the jurisdiction. In such circumstances, appropriate legal advice should be sought from local counsel to clarify if there are any local content rules in that jurisdiction.

In addition to a provision detailing the builder’s rights and obligations in respect of subcontracting, the builder’s right to perform the contract works (or to have them performed) in a place other than the builder’s shipyard may also be curtailed by a term expressly providing that the vessel shall be constructed at that shipyard, as is provided for in the CMAC form.