Key contractual considerations

Statutory formalities

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

Parties are free to negotiate the terms and conditions of a shipbuilding contract and to design the contract as they wish. The general rule is that the formation of contracts and other juridical acts is not subject to requirements as to form. Contracts may also be concluded orally, or even tacitly by conduct of the parties from which the parties’ intentions can be inferred. The contract will be legally enforceable even if concluded orally, provided the terms and conditions of the oral contract can be proven.

For certain specific contracts, statutory requirements of form exist, but this does not apply to shipbuilding contracts. For example, certain terms in contracts of employment must be in writing. Furthermore, there are instances where Dutch law prescribes the use of a notarial instrument, such as for the formation of companies or the sale of real estate. There are no statutory formalities to be met when entering into a shipbuilding contract.

A shipbuilding contract is formed by an offer of one party and the acceptance thereof by the other party. Acceptance is a declaration of will on the part of the offeree addressed to the offeror, which establishes the consent of the offeree to the terms of offer. Acceptance can be expressed by means of a statement, express or implied, or by conduct. An act of performance of the proposed contract may also result in acceptance. An acceptance at variance with the offer is considered to be a new offer and a rejection of the original offer. In principle, offers are revocable by the offeree up until accepted. Where an offer indicates that it is made without obligation, it may even be possible to revoke the offer after acceptance, provided that the revocation occurs without delay. In some cases, an offer will be irrevocable. For example, where a time limit for acceptance is specified in the offer, the offer will be irrevocable during this period. 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.

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 free to select the law applicable to their contract. The choice of law shall be made expressly (preferably), or at least must be clearly demonstrated by the terms of the contract or by the circumstances of the case. The parties have the option of selecting the law applicable to the whole contract, or to parts thereof.

The parties are at liberty to agree to subject the contract to a law other than the law that previously governed the contract as a result of an earlier choice of law clause. 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 Dutch courts and the existence and validity of the consent of the parties as to the choice of law applicable shall be determined in accordance with the provisions of articles 10, 11 and 13 of the Rome I Regulation.

In the majority of cases, though, Dutch law is chosen as the governing law for projects being realised at shipyards in the Netherlands. It is a fact that without a choice of forum the contract will be governed by the laws of the country in which the builder is domiciled. This means that without another choice of law, Dutch substantive law will apply to construction projects realised in the Netherlands.

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?

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, a shipbuilding contract is qualified as a contract to construct a vessel in accordance with Dutch 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 agreed targets (specifications). From the builder’s perspective, it is not a contract to use its best endeavours to construct a vessel.

Briefly put, interpretation of a contract is generally conducted on the basis of the ‘Haviltex’ criterion, named after the 1981 Supreme Court judgment in the case Ermes/Haviltex. Upon application of the (subjective-objective) Haviltex criterion, the question at issue is what the parties thought and could think they agreed to; in that context all circumstances of the case are relevant. However, in some cases, notably when interpreting collective bargaining agreements, a merely objective criterion is applied. According to this CAO criterion (these three letters refer to the Dutch abbreviation for collective bargaining agreement), the question is what third parties think the disputed text means; in that context not only textual arguments are relevant, but other arguments also, provided they are objectively apparent.

It comes down to the intention of the parties, given the particular circumstances, and what they could reasonably expect of one another. In this regard, the social or business field of expertise to which the parties belong (and what knowledge is involved) is of importance. This criterion is leading in Dutch case law.

The Dutch trade association Netherlands Maritime Technology Association 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 document (such as an invoice).

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 stated in the shipbuilding contract is an essential element to identify and apportion title to the building materials and equipment. The builder should label any building materials and equipment with the hull number for identification purposes upon arrival of same at the builder’s premises. All goods labelled with the hull number are identifiable as belonging to the particular shipbuilding project unless a supplier has made a reservation of title in respect of materials and equipment.

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 the word ‘approximate’ in the dimensions and description of the vessel will allow the builder to deviate slightly from the figure stated. A court will have to decide case by case the exact latitude that 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.

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?

Clauses guaranteeing certain standards of performance are frequently included in shipbuilding contracts. If upon delivery of the vessel the guaranteed performance standards are not met by the builder, the shipbuilding contract may allow for payment of liquidated damages or a penalty by the builder. If a certain benchmark cannot be met, rescission of the shipbuilding 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 stipulates 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 the reasonableness and fairness principle 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, 7 December 2004, NJ 2005, 271). Penalty clauses can have two different functions: to act as an incentive to ensure compliance by the obligee; or to function as a liquidated damages clause (eg, in a situation where it may be difficult to substantiate the amount of damages incurred as a consequence of a breach of contract). A combination of these two functions is possible, depending on the way in which the penalty clause was drafted.

In accordance with article 6:94 of the Dutch Civil Code, the court may reduce the contractually agreed penalty at the request of the obligor if it is considered fair and reasonable to do so. However, the court may not award the obligee less than the damages due by law for failure in the performance. This underlines the importance of being clear about the function of a penalty clause when drafting. 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. A penalty that was intended as an incentive only may be more susceptible to reduction than a penalty intended to recover (liquidated) damages.

In the luxury yacht industry, the HISWA/COT standard for the aesthetics of the paint of luxury yachts and the ICOMIA Technical Guideline are frequently used as guaranteed standards of performance in respect of coatings.

Quality standards

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’ or 'highest Dutch shipbuilding standards' will eventually have to be demonstrated to the court or the arbitral tribunal by an expert opinion should there be a dispute between the parties as to what the scope or application of the standard is.

In this respect, Directive 2013/53/EU on recreational craft and personal watercraft should also be mentioned. 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 are 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.

The Regulation Safety Seagoing Vessels is applicable to seagoing vessels as from the day on which the keel of the ship is laid, or the day on which a stage of construction similar to the laying of the keel has been reached in compliance with the relevant provisions of the Codes, resolutions or guidelines that are applicable under this Regulation. Unless explicitly stated otherwise, the Regulation is applicable to ships that are entitled to fly the flag of the Kingdom. This Regulation, containing further rules with respect to the safety and certification of seagoing vessels registered in the Netherlands, as well as rules with respect to the safety of foreign ships in Dutch estuaries, also contains quality standards applicable to seagoing vessels.

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 party commissioning the construction of a newbuilding will decide which flag the vessel will fly and will also nominate the classification society to be used. 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 the commissioning party. If any defects in the vessel are attributable to errors or omissions of the classification society, the claim of the commissioning party 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 between the classification society and the builder.

The responsibility and liability of statutory certification as a public task was addressed in the barge 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 tug-pushed barge Linda. One year after the certificate was extended, the barge Linda capsized, sank 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, the 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.

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?

The Dutch flag-state authorities 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 (Inspectorate) of the Ministry of Infrastructure and Water Management. The Dutch Shipping Act applies to all seagoing vessels flying the Dutch flag, and the Inspectorate monitors vessels flying the Dutch flag, but also foreign vessels, crews, shipping companies and classification societies operating in the Dutch jurisdiction. 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 craft and rescue boats. Supervision of these Recognised Organisations is the responsibility of the Inspectorate. The European Commission recognised the relevant classification societies and also reviews their abilities and performance records on an annual basis.

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 certifications 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 are only partly within the scope of the international conventions. The Inspectorate also conducts inspections based on national legislation and as part of the Flag State Control 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?

Registration in the Dutch Ships Register of a seagoing vessel under construction is only possible if the vessel is under construction in the Netherlands (article 8:194, section 1 of the Dutch Civil Code). Registration must be requested by the shipowner or commissioning party. A declaration must be submitted signed to the effect that, to the best of the shipowner’s or commissioning party’s 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 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.

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?

The parties are free to contract that title to the vessel 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 Dutch Ships Register is the laying of the keel of the vessel or reaching a similar milestone in construction (provided that the vessel is under construction in the Netherlands). Title will pass immediately to the buyer. Title will not pass gradually.

Passing of risk

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, unless of course other contractual arrangements have been made.

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?

Shipbuilding contracts often stipulate conditions in favour of shipyards for the engagement of subcontractors. Standard general terms and conditions often attach conditions to subcontracting. The principal can stipulate the obligation that contractors impose back-to-back conditions of the main contract on their subcontractors.

Unless otherwise agreed upon in the shipbuilding contract, the builder will be entitled to have the works performed by one or more subcontractors under its supervision and, with respect to parts of the works, the builder will also be entitled to delegate the supervision to others, without prejudice, to its 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 and included in the shipbuilding contract. 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 shipbuilding contract as an annex.

Naval architects, engineers and other consultants are generally on board early in shipbuilding projects. Information modelling (a digital working method used in this phase to share information) is of vital importance in the project. Employers are recommended to check the quality of shipyards in this respect.

Foreign professionals from outside the European Union who work on a ship construction project in the Netherlands must have a work permit requested by the employer, which is the builder or contractor employing said foreign professionals on a project.

In the absence of a valid work permit, the Social Affairs and Employment Inspectorate may impose fines on contractors, but also on the principal. Further, contractors and their principal will be registered in a register open to the public for inspection.

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 shipbuilding contract, 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. However, to avoid claims for misrepresentation (‘highest Dutch build quality’) it is advisable that the builder discloses this fact, should it have the intention to construct main sections of the vessel outside the country where the builder is located.

Law Stated Date

Correct On

Give the date on which the information above is accurate.

7 January 2022