Contractual considerations for shipbuilding in Netherlands

Key contractual considerations

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

The parties are free to negotiate the terms of a shipbuilding contract and design it as they wish. The general rule is that the formation of contracts and other juridical acts is not subject to requirements as to form. They may be concluded orally, or even tacitly by conduct of the parties from which the parties’ intentions can be inferred. For certain specific contracts, statutory requirements of form exist, but shipbuilding contracts do not belong to this category. There are no statutory formalities to be met in entering into a shipbuilding contract.

A shipbuilding contract is formed by an offer and its acceptance. An acceptance at variance with the offer is considered to be a new offer and a rejection of the original offer. Where offer and acceptance refer to different general terms and conditions, the second reference is without effect, unless it expressly rejects the applicability of the general terms and conditions indicated in the first reference. The contract will be legally enforceable even if concluded orally, provided the terms and conditions can be proven.

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 free to make a choice of the law applicable to their contract. The choice of law shall be made expressly or clearly demonstrated by the terms of the contract (preferably) or by the circumstances of the case. By their choice the parties can select the law applicable to the whole or to parts of the contract. The parties may at any time agree to subject the contract to a law other than that which previously governed it as a result of an earlier choice. The Rome I Regulation (EC No. 593/2008 of 17 June 2008) on the law applicable to contractual obligations applies. The choice of law made by the parties will be upheld by the court and the existence and validity of the consent of the parties as to the choice of the law applicable shall be determined in accordance with the provisions of articles 10, 11 and 13 of the Rome I Regulation.

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?

Although the wording of a specific shipbuilding contract will be decisive to conclude whether it should be construed as a contract for the sale of goods or as a contract for the supply of workmanship and materials, generally speaking a shipbuilding contract is qualified as a contract to construct a vessel in accordance with construction law principles. If the vessel does not meet the specifications, which usually include certain performance criteria, there is a breach of contract on the builder’s side. A shipbuilding contract amounts to an obligation for the builder to meet the targets (specifications). From the builder’s perspective, it is not a contract to use its best endeavours to construct a vessel.

According to a decision handed down by the Dutch Supreme Court (Dutch Supreme Court 13 March 1981, NJ 1981, 635), the interpretation of contractual clauses and Dutch law is not merely governed by the grammatical interpretation of the text of a contract, although the textual analysis may be persuasive. Furthermore, it comes down to the intention of parties, given the particular circumstances, and what they could reasonably expect of one another. In this regard, which social or business field of expertise the parties belong to, and what knowledge is involved, is of importance. This criterion is leading in Dutch case law.

The Netherlands Maritime Technology (NMT) trade association is the primary representative of the Dutch maritime technology sector. The 400+ members include shipyards, marine equipment suppliers and service providers. NMT has issued certain standard trade terms (VNSI General Yard Conditions 2018), which are frequently used by its members. By entering into the agreement, the other party or customer shall be deemed to waive other conditions or stipulations, even if the same are expressly referred to or are stated expressly in or on any offer, acceptance or other documents.

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

The hull number stated in the contract is an essential element to identify and apportion title to building materials and equipment. The builder should label any building materials and equipment with the hull number for identification purposes upon their arrival at the builder’s premises. All goods labelled with the hull number are identifiable as belonging to the particular building project unless there is a reservation of title in materials and equipment (see question 33) from a supplier.

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 the word ‘approximate’ in the dimensions and description will allow the builder to deviate slightly from the figure stated. A court will have to decide case by case the exact latitude the builder has. If it is of paramount importance that a certain measurement (eg, the draft of a vessel) is met precisely, the use of ‘approximate’ should be avoided.

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?

Clauses guaranteeing certain standards of performance are frequently included in shipbuilding contracts. If upon delivery the guaranteed performance standards cannot be met by the builder, the building contract may allow for payment of liquidated damages or a penalty to be paid by the builder, and if a certain benchmark cannot be met then rescission of the contract can be applied for. In article 6:91 of the Dutch Civil Code, Dutch civil law defines a penalty clause as any clause that provides that an obligor, should he or she fail in the performance of his or her obligation, must pay a sum of money or perform another obligation, irrespective of whether this is to repair damage or only to encourage performance. Penalty clauses as described above are enforceable, but the constraining function of reasonableness and fairness principles may prohibit the obligee from claiming the benefit of a full penalty when such a claim may be unreasonable in the circumstances (Dutch Supreme Court 17 December 2004, NJ 2005, 271). The correct phrasing of a liquidated damages clause is of great importance. Dutch courts can mitigate contractual penalties upon request of the builder, whereas a liquidated damages clause reflecting a genuine compensation for the loss of the owner cannot easily be set aside in whole or in part.

In the luxury yacht industry, the HISWA COT Standard for Luxury Yachts Coating Work and ICOMIA Technical Guideline are frequently used.

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

The inclusion of a certain contractual benchmark will make the standard of performance of the builder more transparent. Reference to ‘highest North European shipbuilding standards’ will eventually have to be demonstrated by an expert opinion to the court, should there be a dispute between the parties as to what the scope or application of the standard is. In this respect, we should also mention Directive 2013/53EU on recreational craft and personal watercraft. Products covered by this Directive may be placed on the market or put into service only if they meet the general requirement not to endanger the health and safety of persons, property or the environment, and only if they meet the essential requirements set out in the Directive. The CE marking, indicating the conformity of a product, is the visible consequence of a whole process comprising conformity assessment in a broad sense. The general principles governing the CE marking are set out in Regulation (EC) No. 765/2008. Rules governing the affixing of the CE marking to watercraft, components and propulsion engines should be laid down in the Directive. It is appropriate to enlarge the obligation to affix the CE marking also to all inboard engines and stern drive engines without integral exhaust that are regarded as meeting the essential requirements set out in the Directive.

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 party commissioning construction of a newbuilding will decide upon the intended flag of the vessel once delivered and also upon the preferred choice of classification society. The contract with the classification society, however, will be concluded between the builder and the classification society. In this regard the commissioning party is a third party and the classification society does not owe a contractual duty of care to him or her. If any defects in the vessel are attributable to errors or omissions of the classification society, the claim should be directed to the builder based on contract. A claim from the commissioning party directly against the classification society should be based on tort. If a claim is brought in tort by the commissioning party, the classification society may seek to rely on any exonerating clauses contained in the contract concluded with the builder.

The responsibility and liability of statutory certification as a public task was addressed in the Duwbak Linda case (Dutch Supreme Court 7 May 2004, NJ 2006, 281). Although no classification society was involved, the grounds of this judgment are illustrative of the hesitant attitude of the Dutch legislature to make inspection and certification institutes liable. In this case a claim was directed against the Dutch government as well as the surveyor involved, who had assumed the delicate task of certifying a tug-pushed barge. One year after the certificate was extended, the barge Linda capsized, sunk and took with her a dredge-combination that had been lying moored next to her. The owner of the dredge-combination claimed damages on the grounds that a careful inspection would have prevented extension of the certificate for the barge Linda. After the claim had been rejected by the District Court and the Court of Appeal, this case was brought before the Dutch Supreme Court. Here, the owner of the dredge-combination argued that the legal standard that had been infringed by the surveyor, being the requirement of a survey under the Rhine Vessel Inspection Regulations, is intended to offer protection against damages as suffered here by him being the injured party. The Court of Appeal had made a distinction in two standards: a general standard that concerns advancing safety within the territorial waters (in this case, the aforementioned Rhine Rules); and a code of conduct that concerns the standards of due care to be exercised when inspecting and certifying.

This distinction has been confirmed by the Dutch Supreme Court, which also outlined that the standards of due care may envisage contributing to the general standard of safety of shipping within the territorial waters, but are not intended to protect the individual assets and interests of third parties.

In other words, although in the Netherlands the state has a duty to take care of safety within its territorial waters and has to that purpose introduced a certification system, neither an intention for introducing a liability for damages towards third parties can be derived nor has such a liability been caused by operation of law. In theory, this decision will probably also be relevant for all other situations of testing, survey and inspection.

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

The flag-state authorities of the Netherlands have outsourced compliance with flag-state legislation to the classification societies. In the Netherlands, the government agency responsible is the Human Environment and Transport Inspectorate of the Ministry of Infrastructure and Water Management. The Dutch Shipping Act applies to all seagoing vessels flying the Dutch flag, and the Human Environment and Transport Inspectorate monitors vessels flying the Dutch flag, but also foreign vessels, crews, shipping companies and classification societies. The Inspectorate has authorised a number of organisations, including classification societies, to perform certain inspections. These are the ‘Recognised Organisations’. These organisations conduct inspections and certification on, for example, seagoing vessels, marine equipment, recreational crafts and rescue boats. Supervision of these organisations is the responsibility of the Inspectorate. Thirteen classification societies are recognised by the European Commission. The Netherlands has appointed seven recognised organisations to act on its behalf. The working method and procedures are laid down in an agreement combined with a mandate. It concerns inspections and certification required by international conventions such as SOLAS, MARPOL, Tonnage Measurements, Load Lines and ILO 152 on Dutch seagoing vessels. The Inspectorate continues to perform inspections on vessels that are not or partly within the scope of the international conventions. The Inspectorate also conducts inspections based on national legislation, the STCW, inspections not mentioned in the agreement and as part of the Flag State Control requirements.

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?

Registration of a seagoing vessel under construction is only possible if it is under construction in the Netherlands (article 8:194, section 1 of the Dutch Civil Code). Registration must be requested by the shipowner and he or she must submit a declaration signed to the effect that, to the best of his or her knowledge, the vessel is registrable as a seagoing vessel. If it concerns a request for registration as a seagoing vessel under construction, this declaration must be accompanied by proof that it is a vessel under construction in the Netherlands. Shipbuilding contracts in this jurisdiction usually contain a provision allowing the commissioning party to register the vessel in its name as a seagoing vessel under construction upon payment of a certain milestone instalment. The earliest possible moment, therefore, is the laying of the keel of the vessel. The legal consequences of registration of the vessel are mainly in respect of the possibility to register a mortgage over the vessel under construction. If the vessel under construction has not been registered yet, a right of pledge could be created as a security for a financial institution.

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?

The parties are free to contract that title will pass from the builder to the buyer during construction. The earliest moment during construction that this passing of title can be recorded in the ships register is the laying of the keel of the vessel or reaching a similar milestone in construction. Title will pass immediately to the buyer. Title will not pass gradually.

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

After delivery, the vessel constructed shall be at the risk of the buyer. The risk of loss and damage will remain with the builder until delivery and acceptance of the vessel.

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?

Unless otherwise agreed upon in the shipbuilding contract, the builder will be entitled to have the works performed by one or more subcontractors under his or her supervision and, with respect to parts of the works, the builder will also be entitled to delegate the supervision to others, without prejudice, to his or her responsibility for the proper performance of the contract (article 7:751 of the Dutch Civil Code). If an owner wants a certain subcontractor to be involved in the project, this will usually be agreed upon with the builder. The same agreement is required with the exclusion of a certain subcontractor or supplier. It is common practice to negotiate a maker’s list of suppliers and subcontractors and to include this list in the contract as an annex.

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 building contract to the contractee, and also provided that the contract does not otherwise restrict the ability of the builder as main contractor to subcontract the construction of certain items without the commissioning party’s prior approval, the builder is under no obligation to inform the buyer of an intention to have certain main items constructed in another country, but to avoid claims for misrepresentation (‘highest Dutch build quality’) it is advisable that the builder discloses this fact, should he or she have the intention to construct main sections outside the country where the builder is located.