Pricing, payment and financing for shipbuilding in United Kingdom - England & Wales (England & Wales)

Pricing, payment and financing

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

The price can be fixed by the contract either by reference to a specified sum for specific work or, where the work scope is uncertain at the time of contract signing, by measuring the work performed against a given schedule of quantities or rates. In the case of a fixed price, a claim by the builder for the relevant lump sum or an agreed instalment is a liquidated sum in respect of which the builder can apply for summary judgment. In the case of a cost-plus arrangement, the builder can recover the price when the relevant measurement can be ascertained and duly certified.

Shipbuilding contracts are generally fixed-price contracts, whereby the price agreed by the parties incorporates the cost of all materials and labour for the construction of the vessel (with a certain uplift to remunerate the builder), and of all activities and charges ancillary thereto (such as inspections, trials and tests and supervision and certification by the classification society and the regulatory authorities). Where a contract or part of the work scope is placed on a cost-plus basis, the relevant price is often expressed to cover materials and related services at cost (on an open-book basis) with an agreed markup to cover the shipbuilder’s overhead and an agreed profit element.

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, any such increases will be at the builder’s risk. Currently, it is unusual for international shipbuilding contracts to incorporate price escalation provisions, but in times of increased demand, steel price adjustment clauses have been agreed. However, shipbuilding contracts typically provide that the fixed price may be adjusted upward or downward in the event of modifications to the specifications or to reflect any liquidated damages payable by the builder as a result of delays in delivery or technical deficiencies in the vessel.

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

Under English law it is accepted that economic pressure can amount to duress, provided that such economic pressure could be characterised as ‘illegitimate pressure’ and constituted a significant inducement to the claimant to enter into the contract that it is seeking to avoid (see Progress Bulk Carriers Limited v Tube City IMS LLC (The ‘Cenk Kaptanoglu’) (2012) concerning a charter party dispute).

The authorities indicate that each case involving economic duress is heavily dependent on its particular facts, including the conduct of the parties and circumstances of the victim. The remedy for economic duress is generally an action for restitution of money (or property) extracted under such duress rather than an action for damages, together with the avoidance of any contract found to have been induced by it. In some cases, however, the duress may also actually amount to an actionable tort, in which case the restitutionary remedy for money had and received is an alternative (not additional) remedy to an action for damages in tort.

Where conduct is found to amount to economic duress, the agreement (including a contract variation) is voidable (not void) but the right to rescind may be lost if a party is found to have affirmed the contract (or otherwise waived its rights) (see North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The ‘Atlantic Baron’) (1979), a shipbuilding case).

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

Yes, the parties can include provisions in the shipbuilding contract that exclude or limit the buyer’s rights to set off, suspend payment or deduct certain amounts.

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?

Section 4 of the Statute of Frauds 1677 (the Statute) provides that in order to be enforceable in England and Wales, a contract of guarantee must be evidenced by some form of written memorandum or note of the contract signed by the party against whom the claim is to be made. The note or memorandum evidencing the guarantee obligation does not need to be in any special form but must set out all the material terms of the guarantee and, crucially, must be signed by the guarantor or by its agent. ‘Guarantee’ in this context means a ‘true’ guarantee where the guarantor acts as secondary obligor as the primary liability remains with the principal debtor, as opposed to ‘on demand’ guarantees or indemnities (where primary liability is imposed on the party undertaking the obligation).

The above statutory requirements can be fulfilled by guarantees being issued via electronic communication as the courts will uphold accepted contemporary business practice (such as issue of guarantees by SWIFT) and the use of electronic signatures to satisfy the requirements of the Statute for a guarantee to be ‘in writing’ and ‘signed’ (see the series of cases relating to guarantees, including Mehta v J Pereira Fernandes SA (2006), WS Tankship BV v Kwangju Bank (2011) and Golden Ocean Group Limited v Salgaocar Mining Industries Pvt Ltd and another (2012)).

No permission is required from any UK authority for a shipbuilder in England or Wales to have refund guarantees issued.

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

See question 21.

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

English law does not permit the registration of the vessel under construction in the UK Ship Register (see question 12). Accordingly, neither the builder nor the buyer can create and register a mortgage over the vessel under construction to secure construction financing.