Shipbuilding in Japan

Participation and ownership

Restrictions on foreign participation and investment

Is the shipbuilding industry in your country open to foreign participation and investment? If it is open, please specify any restrictions on foreign participation.

The shipping industry in Japan is open to foreign participation and investment.

As to restrictions, if a company intends to establish, purchase or rent a new facility in Japan with a dock or shipyard for construction or to repair a steel vessel that is more than 500 gross tons or 50 metres long, the company must obtain permission from the Minister of Land, Infrastructure, Transport and Tourism (MLIT) (article 2 of the Shipbuilding Law). There seems to be no precedent of a foreign company applying for such permission on its own, but it would be advisable for a foreign company to first establish a subsidiary in Japan so that it is the subsidiary that applies to the MLIT for permission.

Detailed regulations stipulated in the Foreign Exchange and Foreign Trade Law apply to a foreign investor that intends to acquire shares in a shipbuilding company in Japan. For example, a foreign investor shall report in advance to the Minister of Finance and the MLIT details such as the purpose, amount and time of the acquisition, and whether they intend to acquire shares that will result in having more than 10 per cent of the shares issued by the shipbuilding company or to acquire unlisted shares from investors other than foreign investors. Further, in principle, foreign investors may not acquire the shares until 30 days after the Minister of Finance and MLIT receive the report.

Government ownership of shipbuilding facilities

Does government retain ownership or control of any shipbuilding facilities and, if so, why? Are there any plans for the government divesting itself of that participation or control?

The Japanese government does not retain ownership or control of any shipbuilding facilities.

Key contractual considerations

Statutory formalities

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.

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?

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.

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?

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.

Hull number

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.

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?

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.

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, 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 (SAJ) 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.

Quality 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’.

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?

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.

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?

Yes. Non-passenger vessels classed by classification societies, which are registered with the 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 GL and the American Bureau of Shipping.

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?

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).

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?

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.

Passing of risk

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 SAJ 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.

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?

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

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?

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.

Pricing, payment and financing

Fixed-price and labour-and-cost-plus contracts

Does the law in your country have different provisions for ‘fixed-price’ contracts and ‘labour-and-cost-plus’ contracts?

No, Japanese law does not have different provisions for fixed-price contracts and labour-and-cost-plus contracts.

Price increases

Does the builder have any statutory remedies available to charge the buyer for price increases of labour and materials despite the contract having a fixed price?

No, the builder does not have any statutory remedies to charge the buyer for price increases of labour and materials under a contract that provides for a fixed price. However, there is a possibility, though very remote, that the builder has remedies based on the ‘principle of change of circumstances’, which is recognised in a number of Japanese court precedents. The requirements of this principle are that:

• there has been a change in the circumstances that were the basis of the contract at the time of its conclusion;
• the contractual parties have not foreseen and were not able to foresee the change;
• the change has occurred by a cause that is not attributable to either of the parties; and
• as a result of the change, it is extremely unjust to bind the parties to the existing contract.

For sale contracts, there are court precedents that have applied the principle of change of circumstances and allowed an increase in price. For example, in the case where a land price increased by 620 times more than the agreed sales price, the Sendai Court of Appeal accepted that there had been a substantial change of circumstances and allowed the plaintiff’s request to raise the sales price of the land. For contracts for work and shipbuilding contracts, we have not found any court precedents that applied the principle of change of circumstances.

Retracting consent to a price increase

Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?

It is difficult for a buyer to retract consent to an increase in price included in the agreement. A buyer can rescind its manifestation of intention based on article 96 of the Civil Code if the buyer establishes that the builder tried to have the buyer decide to purchase by threatening or intimidating the buyer and the buyer became frightened and thereby made the decision and manifested its intention. There is, however, no legal concept of ‘economic duress’ under Japanese law and one leading scholar has expressed the view that article 96 does not apply to cases of economic duress.

Exclusions of buyers’ rights

May the builder and the buyer agree to exclude the buyer’s right to set off, suspend payment or deduct certain amounts?

Yes, they may agree to exclude the above-mentioned buyer’s right. Japanese law recognises the principle of freedom of contract and there are no statutory provisions that prohibit the exclusion of those rights in a contract.

Refund guarantees

If the contract price is payable by the buyer in pre-delivery instalments, are there any rules in regard to the form and wording of refund guarantees? Is permission from any authority required for the builder to have the refund guarantees issued?

If the applicable law to a refund guarantee contract is Japanese law, the contract shall be made in writing or shall be concluded by electromagnetic record that records the contents thereof; otherwise, the contract is not effective (article 446, paragraphs 2 and 3 of the Civil Code). There is no particular regulation governing the wording of refund guarantees.

Permission from the authority is not required for the builder to have refund guarantees issued.

Advance payment and parent company guarantees

What formalities govern the issuance of advance payment guarantees and parent company guarantees?

If the applicable law to the advance payment guarantee contract or parent company guarantee contract is Japanese law, these contracts shall be made in writing or shall be concluded by electromagnetic record that records the contents thereof; otherwise, these contracts are not effective (article 446, paragraphs 2 and 3 of the Civil Code).

Financing of construction with a mortgage

Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?

A buyer can create and register a mortgage over the vessel under construction (see question 12).

Default, liability and remedies

Liability for defective design (after delivery)

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?

We have not found any court precedents or academic views that have dealt with this issue.

If the parties to a shipbuilding contract agree that a builder will design and construct a vessel, a Japanese court will probably consider that the defective design falls within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause. If this issue is disputed, a Japanese court will carefully consider the purpose of relevant clauses in a shipbuilding contract, concrete contents of actual design, cause of defect and so on before deciding on the issue.

If the parties to a shipbuilding contract agree that the buyer will design the vessel and the builder will construct the vessel pursuant to the buyer’s design, a Japanese court would probably not consider that the defective design falls within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract. However, if the shipbuilder, knowing the defectiveness of the design, failed to inform the buyer of such, a Japanese court is likely to hold that the shipbuilder has to rectify the defect in the vessel (articles 635 and 636 of the Civil Code).

Remedies for defectiveness (after delivery)

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

Under Japanese law, a claim for compensation for damage based on article 3 of the Product Liability Law (PLL) or article 709 of the Civil Code is available to third parties against the shipbuilder for defectiveness.

The requirements of article 3 of the PLL are:

• defect in a vessel that the shipbuilder manufactured;
• harm to life, body or property of third party caused by the defect;
• occurrence of damages by the infringement; and
• owing to the defect, damage occurred to something other than the vessel.

‘Defect’ is defined as ‘a lack of safety that the product ordinarily should provide, taking into account the nature of the product, the ordinarily foreseeable manner of use of the product, the time when the manufacturer, etc, delivered the product, and other circumstances concerning the product’ (article 2, paragraph 2 of the PLL). The claim will be time-barred after three years from the time when the third party becomes aware of the damages and the identity of the party liable for the damages (the builder) or after 10 years from the time when the builder delivered the vessel (article 5, paragraph 1 of the PLL).

Pursuant to article 709 of the Civil Code, a claim requires the following elements:

• the builder’s or their employee’s negligence;
• an illegal infringement of the third party’s right;
• the occurrence of damage to the third party; and
• a causal connection between the negligence and the damage.

Where defect exists, the court is likely to assume that the builder’s negligence was involved. The claim will be time-barred after three years from the time when the third party becomes aware of the damages and the identity of the person who caused it (the builder) or after 20 years from the time when the unlawful act was committed (article 724 of the Civil Code).

Liquidated damages clauses

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?

In principle, the agreed level of compensation does not have to represent a genuine link with the damages suffered. Contractual parties may freely determine the amount of liquidated damages. However, there is a possibility that Japanese courts will hold that the liquidated damages clause is against public policy and, accordingly, void it if the agreed amount is excessively high. Under Japanese law, courts cannot increase or reduce the amount of liquidated damages. Penalty is presumed to constitute liquidated damages.

Preclusion from claiming higher actual damages

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 buyer is precluded from claiming proven higher damages. This is the effect of having a liquidated damages provision.

Force majeure

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

Yes, contractual parties are free to design a force majeure clause. Japanese law recognises the principle of freedom of contract, and there are no provisions in Japanese law that prohibit the creation of a force majeure clause in a shipbuilding contract.

Umbrella insurance

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

In principle, it is possible to conclude an insurance contract to cover the builder and all subcontractors for the builder’s risk. However, in general practice, only a builder is insured and subcontractors are not included in shipbuilding insurance. However, Japanese insurance companies usually pay out if the builder’s subcontractors have caused events in the building process that satisfy the requirements for payments of insurance money. It is possible that Japanese insurance companies undertake not one vessel but multiple vessels under a particular project as insured vessels for shipbuilding insurance. Japanese insurance companies are unlikely to undertake shipbuilding insurance where Japanese companies are not involved at any point.

Disagreement on modifications

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?

No, Japanese courts or tribunals will not be prepared to set terms in such a case. There are no provisions in Japanese law or rules for court proceedings or arbitration that empower courts or tribunals to do so. In practice, Japanese courts or tribunals often offer certain terms for the purpose of amicable settlement; however, they do not set terms in line with the offer if either or both of the parties refuse to accept them.

Acceptance of the vessel

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?

Although there is no case law or academic discussion of this matter, we believe that a Japanese court or tribunal is unlikely to find the buyer’s signature as precluding a subsequent claim if it finds that the buyer was unable to find the breach or defects at the time of the delivery. Normally, buyers are not aware of the actual performance or latent defects upon signing a protocol of delivery and acceptance. Signing the protocol of acceptance is not sufficient grounds to preclude subsequent claims, regardless of the terms employed in the protocol.

Liens and encumbrances

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?

Article 842, item 8 of the Commercial Code of Japan provided that a person that had a claim that had arisen from the manufacture and outfitting of the vessel had a maritime lien over the vessel, her equipment and the unpaid freight. However, article 842, item 8 is deleted in the amended Commercial Code, which became effective on 1 April 2019. One of the reasons for the deletion is said to be that, in present practice, vessels are not delivered to buyers or shipowners before the shipbuilder’s payment to the suppliers. Even after article 842, item 8 of the Commercial Code is deleted, there is a possibility that suppliers may exercise a statutory lien over the vessel or the supplied equipment under article 321 of the Civil Code, while subcontractors may not. There is no implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances.

Reservation of title in materials and equipment

Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?

In principle, the reservation of title does not survive. When a builder incorporates materials or equipment to which a subcontractor or supplier has reserved title, into a vessel under construction, the builder obtains the title to the vessel under construction with incorporated materials or equipment and the subcontractor or supplier who lost the title is only entitled to a claim for compensation (articles 243 and 248 of the Civil Code).

Third-party creditors’ security

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?

In order to obtain security, third-party creditors of the builder can attach the vessel under construction, and the equipment incorporated in the vessel, by obtaining an order for provisional attachment (PAO) of the vessel under construction. In order to obtain a PAO, the creditors have to post counter security.

It is very unlikely that third-party creditors will have a lien on the vessel under construction.

The creditors cannot have possessory lien on the vessel under construction because the vessel under construction is possessed not by the creditors but by the builder.

It is very unlikely, though theoretically not impossible, for third-party creditors to have a maritime lien on the vessel under construction. Article 850 of the Commercial Code of Japan provides that article 842 of the Commercial Code, which provides for maritime lien on the vessel, should apply mutatis mutandis to vessels under construction. An academic suggested that the builder’s employees may have a maritime lien on the vessel under construction for unpaid wages. However, we have not heard of any case in which third-party creditors of the builder attached the vessel under construction to enforce their claim.

Subcontractor’s and manufacturer’s warranties

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?

A subcontractor’s or manufacturer’s warranty can be assigned from a builder to a buyer. However, it cannot be assigned if it is agreed in a contract between subcontractor or manufacturer and the builder that claims for performance of guarantee against the subcontractor or manufacturer shall not be assigned. Under Japanese law, the buyer is not entitled to make a direct claim against the subcontractor or manufacturer under the warranty unless the claim against them has been assigned to the buyer. However, the buyer may be able to raise a claim against the subcontractor or manufacturer in tort.

Default of the builder

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?

General position concerning remedies open to the buyer

If a builder does not deliver to the buyer the agreed vessel on the agreed date in the shipbuilding contract, the buyer may:

• claim for compensation for damages;
• rescind the contract if the builder’s breach or delay is so serious as to make the buyer’s purpose of contract not achievable;
• rescind the contract in case of serious breach or delay and claim for compensation for damages;
• claim for performance of builder’s obligation (ie, obtain a court judgment against the builder for completion of construction and enforce the judgment by way of indirect compulsory execution (ie, force the builder to pay fixed amount of penalty per day during the period of delay)); or
• claim for performance of builder’s obligation and compensation for damages.

If the builder delivered the agreed vessel by the agreed date but defects in the vessel exist, the buyer may:

• claim for compensation for damages;
• rescind the contract if the defects are so serious as to make the buyer’s purpose of contract not achievable;
• rescind the contract in case the defect is serious and claim for compensation for damages;
• claim for rectification of the defect; or
• claim for rectification of the defect and compensation for damages.

Notice

With respect to rescission of contract, the buyer is required to send a notice to the builder whereby the buyer fixes a reasonable period within which the builder should perform the contract. The buyer may rescind the contract if no performance is effected within the period. As to the other remedies, the buyer is not required to send notice before the buyer’s claim for remedy.

When a shipbuilding contract contains provisions about notice, the provisions should be taken into account. For example, under article X.1 of the SAJ form, the buyer has to send notice to the builder fixing reasonable period and demanding performance and send another notice in writing or cable to the builder notifying rescission of the contract.

Remedies for protracted non-performance

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?

See question 36.

Builder’s insolvency

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

A buyer’s contractual right to terminate a shipbuilding contract for the builder’s insolvency is not enforceable under Japanese law.

Judicial proceedings or arbitration

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

Arbitration proceedings will commonly be held in Tokyo, Japan, by the Japan Shipping Exchange, Inc.

Buyer’s right to complete construction

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 a Japanese court decides to start bankruptcy proceedings for a builder, the court-appointed administrator may rescind a shipbuilding contract. If the administrator rescinds, the buyer’s contractual right to take delivery of the vessel pursuant to the contractual terms would not survive. If the administrator does not rescind, the buyer’s right would survive. As to the vessel under construction, in general, the buyer does not have contractual right to take possession of it.

The position is similar when a Japanese court decides to start civil rehabilitation proceedings or corporate rehabilitation proceedings for a builder.

Moratorium may be admitted when a debtor asks major claimants (normally financial institutions) for workout by the Guidelines for Workout and the major claimants agree to issue moratorium notice. During the moratorium period, the buyer’s contractual right to take delivery of the vessel survives. In the workout process, a rehabilitation plan is prepared. If all of the claimants agree to the plan, the claimants’ rights and obligations may be changed in accordance with the plan. Therefore, the buyer’s contractual right would survive as long as the buyer does not consent to the plan.

ADR/mediation

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

No, parties do not tend to incorporate an ADR clause in shipbuilding contracts in Japan.

Default of the buyer

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?

Remedies available to the builder depend upon relevant provisions in a shipbuilding contract.

For example, if an SAJ form is used, the builder is entitled to claim an agreed rate of interest on unpaid instalments and all charges and expenses incurred in consequence of the buyer’s default (article XI 2). When the buyer’s default continues for 15 days, the builder may rescind the shipbuilding contract by giving notice to the buyer (article XI 3). The consequences of the builder’s cancellation of the contract are that items furnished by the buyer become the builder’s property (article XI 3); the builder may have the right to complete or not to complete the vessel, sell it and obtain proceeds (article XI 4); and, for example, if the builder completed the vessel and sold it, the builder may claim against the buyer the difference between the amount of the proceeds and the total amount of expense of the sale, unpaid instalments and interests thereon (article XI 4 (b)(e)).

If there is no provision in the shipbuilding contract in relation to remedies available to the builder:

• the builder is entitled to claim for unpaid instalments and compensation for damage based upon the contract, when the builder completes a vessel, makes preparation to deliver it and sends notice thereof to the buyer. The amount of claimable damage is, in principle, 6 per cent per annum of unpaid instalments for unpaid period; or
• the builder is entitled to send notice to the buyer notifying that the builder will cancel the shipbuilding contract if the buyer does not pay unpaid instalments within a reasonable period, and cancel the shipbuilding contract after lapse of the period without the buyer’s payment. The consequences of the builder’s cancellation of the contract are that items furnished by the buyer are the builder’s property; the builder may have the right to complete or not to complete the vessel, sell it and obtain proceeds; and the builder may claim against the buyer for compensation for damage. However, the amount of claimable damage is unclear.

Contract forms and assignment

Standard contract forms

Are any standard forms predominantly used in your jurisdiction as a starting point for drafting a shipbuilding contract?

The SAJ form is predominantly used in Japan.

Assignment of the contract

What are the statutory requirements for assigning the contract to a third party?

The traditional academic views about the requirements for assigning a contract to a third party have been that one party of the contract agrees with a third party to assign its position under the contract to the third party, and the other party gives consent thereto. One Supreme Court judgment dated 29 September 1955 (Haruo Watanabe v Gisaburo Ozaki) adopted this view in obiter dicta. However, more recently, one influential scholar’s view is that the requirement is a tripartite agreement. In Japan, the Supreme Court’s holdings in its obiter dicta do not always have decisive authority, and an influential scholar’s view sometimes has persuasive power. In light of this, it is safer to conclude a tripartite agreement to assign a contract to a third party.

If one party to a contract concluded an assignment agreement with a third party, notwithstanding a contractual provision in the contract that prohibits the assignment, the assignment becomes valid and effective only if the other party to the contract gives consent to the assignment.

By assignment of the original contract from one party to a third party, the rights and obligations of the one party are transferred to the third party and, accordingly, parties to the original contract become the other party and the third party. If a buyer performed its obligation to pay the first, second and third instalments out of four (the fourth instalment is not due) and then assigned the shipbuilding contract to a new buyer, the new buyer has an obligation to pay the fourth instalment when it becomes due but does not have an obligation to pay the first, second and third instalments, which have already been paid by the assignor.

Updates and trends

The Commercial Code of Japan was amended in 2018 and the amendments became effective on 1 April 2019. The Civil Code of Japan (claims and obligations) was amended in 2017 and the amended Civil Code will be effective from 1 April 2020. Generally, most of the provisions of the Commercial Code and the Civil Code are not mandatory provisions, and shipbuilding contracts usually contain detailed provisions for the parties’ claims and obligations. Therefore, both the shipyard’s and the shipowners’ claims and obligations should not be affected very much by the amendments of the codes. The answers in this chapter are based upon the Commercial Code after the amendment and the Civil Code before the amendment.