Pricing, payment and financing for shipbuilding in Netherlands

Pricing, payment and financing

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

Where, at the time of entering into the building contract, no fixed price has been set or only a target price has been set, the law provides that the commissioning party owes a reasonable price (article 7:752 of the Dutch Civil Code). In setting the price, account shall be taken of the prices usually stipulated by the builder at the time of entry into the contract and the expectations the builder has raised with respect to the presumed price. Where a target price has been set, it may not be exceeded by more than 10 per cent, unless the builder has warned the customer of the possibility of a further cost overrun in reasonable time to afford the customer the opportunity to limit or simplify the works at that stage. Within reasonable limits, the builder must cooperate with such limitation or simplification.

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?

Where, after entry into the building contract, circumstances arise or become apparent that increase costs and that are not attributable to the builder, the court may, upon the demand of the builder, adjust the stipulated price to the cost increase in whole or in part, provided that the builder, in setting the price, was not obliged to take the likelihood of such circumstances happening into account (article 7:753 Dutch Civil Code). This shall apply only if the builder has warned the customer of the necessity of a price increase as soon as possible, so that the latter can exercise in good time the right to which he or she is entitled to make a proposal to limit or simplify the works (article 7:753, section 3 of the Dutch Civil Code).

The duty to warn is considered to be particularly relevant in construction contracts and design contracts. This duty follows from the general duty to carry out the works with reasonable care and skill. If the builder fails to perform his or her duty to warn, he or she will become liable towards the commissioning party for the consequences of that failure. However, the supply of inadequate materials or directions may serve to render the client liable for negligence. The expertise of the commissioning party can be a relevant factor here.

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

In general, a juridical act may be annulled when it has been entered into as a result of economic duress, fraud or undue influence (article 3:44, section 1 of the Dutch Civil Code). Duress occurs where a person induces another person to perform a specific juridical act by unlawfully threatening him, her or a third party with harm to their person or property. The duress must be such that a reasonable person would be influenced by it. Duress in Dutch law comprises not only threats to the person but also to property. A threat of committing an unlawful act against any person may be sufficient, provided that it is such as would influence a reasonable person. This means that the person exercising economic duress will most probably also act in tort towards his or her victim. The economic and financial downturn after the summer of 2008 has led to a number of cases where parties have tried to invoke economic duress (eg, the extreme price increase of steel), but as far as we know these attempts have not been successful.

It should be mentioned that, upon the demand of one of the parties, the court may modify the effects of a contract, or it may set it aside in whole or in part on the basis of unforeseen circumstances that are of such a nature that the other party, according to the criteria of reasonableness and fairness, may not expect that the contract be maintained in an unmodified form (article 6:258 of the Dutch Civil Code). The test to be met for a party invoking this provision is to successfully argue that the contract has no allowance for the occurrence of these circumstances in the first place and this largely is a matter of interpretation of the contract.

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

It is a principle of Dutch contract law that the parties have autonomy to agree upon the contents of the contract, and to submit it to a form and application of a chosen law.

The parties are free to (contractually) exclude the buyer’s right to set off, suspend payment or deduct certain amounts when it is time for the buyer to make a milestone payment.

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?

Until the builder hands over the completed vessel at delivery, the buyer’s deposit and stage payments made during construction are at risk. Under Dutch law this risk may be mitigated to a certain extent by passing title from the builder to the buyer during construction (see question 13), but depending on the stage of construction, the buyer is likely to have an unsecured claim against the shipyard should the shipyard default or become insolvent during construction. A refund guarantee from a creditworthy bank is usually used to cover this risk.

If the contract price is payable by the buyer in pre-delivery instalments according to certain milestones, a refund guarantee from the builder will usually be in the form of an undertaking from his or her bank to refund the relevant instalment upon the buyer’s first written demand.

Article 7:850, section 1 of the Dutch Civil Code defines the contract of suretyship as a contract whereby one party, the surety, obliges himself or herself towards the other party, the creditor, to perform an obligation to which a third person, the principal debtor, is or will be bound towards the creditor. Suretyship is therefore a solidary liability but the surety presents himself or herself towards the creditor as a person only willing to provide security in his or her relationship towards the principal debtor. The debt does not concern himself or herself. The bank guarantee on the basis of which a bank is obliged to pay if the conditions contained in the guarantee are met is different in the sense that the bank guarantee is detached from the underlying juridical relationship, namely, the contract between the creditor and the principal debtor. In the case of suretyship there is always a link between the obligation of the principal debtor and the surety, although suretyship for future obligations can be agreed upon. The contract of suretyship is between creditor and surety and therefore the validity of suretyship does not require that a principal debtor be aware of it. Where the principal obligation is not valid, there is no suretyship and where the principal obligation comes to an end, the suretyship will in general also come to an end.

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

As for advance payment guarantees, there are no formalities to be met prior to issuance of the letter of guarantee. The articles of association of the guarantor should allow the guarantor to issue letters of guarantee and the same applies for parent company guarantees intended to guarantee the performance of a daughter company. Under Dutch law, such a letter of guarantee is usually in the form of a contract of suretyship, whereby one party, the guarantor, obliges himself or herself towards the other party, the obligee, to perform an obligation to which a third person, the principal obligor, is or will be bound towards the obligee. Suretyship is dependent upon the obligation of the principal obligor in respect of which it has been entered into. Because the guarantor may also avail himself or herself of the defences that the principal obligor has against the obligee if they relate to the existence, content or time of performance of the obligation and the guarantor is not obliged to perform until such time as the principal obligor has failed in the performance of his or her obligation, these defences are usually explicitly excluded in the wording of such a letter of guarantee.

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

During construction of the vessel, the builder or the buyer can create and register a mortgage over the vessel under construction if the buyer or the builder owns the vessel.

The owner of the seagoing vessel shall make a request for registration and in doing so, he or she must submit a declaration signed to the effect that, to the best of his or her knowledge, the vessel is suitable to be registered as a seagoing vessel. Where it concerns a request for the registration of a seagoing vessel under construction, this declaration shall be accompanied by proof that the vessel is under construction in the Netherlands. When making a request for registration, the applicant shall elect a domicile within the Netherlands. As long as the registration has not been deleted from the Dutch registers, the registration of a seagoing vessel in a foreign register or the creation abroad of rights (titles or interests) in the vessel, for which creation a registration in the public registers would have been required in the Netherlands, shall have no legal effect. In derogation from this, a registration or creation of rights (titles or interests) shall be recognised when it took place under the condition of deletion of the registration in the Dutch registers after the registration of the vessel in the foreign register.