Contractual considerations for shipbuilding in Brazil

Key contractual considerations

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

There is no specific statutory formality required for entering into a shipbuilding contract. As a general comment, however, the Brazilian Civil Code establishes that the validity of manifestations of intent does not depend on any special form, except when expressly required by virtue of law (as it would be in the case of mortgages, for instance).

Contracts executed abroad must be signed before a notary public and then sent for legalisation either with the nearest Brazilian consulate or to be apostilled. Such contracts must be translated into Portuguese by a certified translator and be registered with the Registry of Deeds and Documents for admissibility as evidence in Brazil.

The maritime register office shall be competent to draw up contracts by public deed as well as register other maritime contracts in written form generally, whenever required by law or as the parties thereto so decide.

In order to be valid against third parties, the ownership rights and security interests over Brazilian vessels must be registered with the Maritime Court. The Maritime Court is an administrative body under the jurisdiction of the Navy Commander of the Ministry of Defence.

Ownership over a vessel may be acquired through the construction of such vessel or by any other regular mean permitted by law. However, the transfer of a vessel’s ownership shall only be perfected through registration of the vessel with the Maritime Court or, in a few specific cases, through the enrolment of the vessel with the appropriate Port and Coastal Authority.

Registration of ownership (title) of a vessel in Brazil (Registration of Maritime Property - RMP) shall be made when the owner of the vessel is either an individual resident or domiciled in Brazil; or a government or private entity subject to Brazilian law. The exception to this rule is the case of sport or recreational vessels, which may be owned by foreign individuals and registered in Brazil.

The RMP grants the nationality, validity, assurance and publicity of the vessel’s ownership in Brazil. The applicable request shall include the deed of acquisition or, in case of construction, the respective licence and evidence of payment of the price to the shipyard (except regarding any guarantee portion).

Brazilian companies operating a foreign vessel may provisionally register such vessel to fly a Brazilian flag (the Special Brazilian Registration, also known as REB) during the relevant period of utilisation of the vessel, subject to compliance with specific requirements, in order for such Brazilian company to have certain tax and other benefits. Brazilian vessels are also eligible for registration with REB. Registration of shipbuilding contracts with the Maritime Court shall be required for the provisional enrolment with REB of vessels under construction in a Brazilian shipyard, aiming at obtaining said applicable benefits.

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?

According to the rules on conflict of laws in Brazil, obligations arising from acts of the parties are governed by the law of the country in which they are created, although the parties are free to choose another law to govern their relationship. If the parties do not specify the applicable law in the contract, the law to be applied will be that of the place where the contract was made. There are a few cases where Brazilian law must govern a contract, such as those with respect to real property located in Brazil. Brazilian courts would accept the choice of a foreign law to govern a contract, to the extent that such foreign law does not contravene Brazilian national sovereignty, public policy or good morals.

As a general rule, contracts entered into by Brazilian parties shall be governed by Brazilian law, while contracts also involving a foreign party could be governed by a foreign law, with a few exceptions.

Based on our experience, the choice of law will very much depend on the acceptance by the relevant stakeholders of the project, including lenders and, depending on the project structure, government authorities.

In Brazil, ownership rights over vessels must be governed by the laws of the country of the flag that the vessel is flying.

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?

Shipbuilding agreements are not expressly regulated by Brazilian law. Brazilian law generally states that there is freedom to build vessels in the form and conditions that may be suitable; operation thereof, however, shall depend on official inspection and compliance with applicable regulations.

In Brazil, shipbuilding agreements could usually be characterised as a turnkey contract, whereby the shipyard shall be required generally to provide material, equipment and services in connection with the construction or modernisation of a vessel. In such contractual arrangement, one of the parties undertakes to carry on (either by itself or with third-party assistance) a certain job or service, in consideration of a pre-set price. The contractor undertakes to achieve a certain result by employing labour and, sometimes, material. The outcome is instrumental in a turnkey contract and stands as one of the major features that distinguishes it from a service contract.

As to service contracts generally, the Brazilian Civil Code contemplates in turn that the term of duration of service agreements (other than labour contracts and such other services subject to special regimen) shall not exceed four years, including in cases of performance of a specific work, which shall be considered terminated upon the expiry of such period, even if the construction is not completed.

Pursuant to legislation regulating the naval construction industry in Brazil, more specifically, the shipyard shall be responsible for the construction of a ship or vessel in accordance with the terms of the agreement, which shall provide for: the plan and specifications; the construction schedule; and the classification society and conditions of inspection of the works, as well as the preliminary and final tests to which the ship or vessel shall be subject.

The shipyard will also be liable for: the specifications and acquisition of raw material, engines, equipment and spare parts; and the production, assembling and workmanship of the ship or vessel, until the delivery to the ship owner in accordance with the terms and conditions established under the construction agreement.

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

Although the hull number would not be expressly required to be reflected in the shipbuilding contract, we understand that, as a general rule, such agreements would refer to such information, more particularly for the purpose of better identification of the asset.

Brazilian law regulating maritime property generally establishes that any interested party may request the registration of security interests and other liens thereon, upon presentation of a contract with the following information: the main characteristics of the vessel, gross tonnage, the deadweight tonnage and other information that may properly identify the vessel; and the statement confirming that the vessel is properly insured. The request for such type of registration shall be submitted to the Maritime Court by the interested party or its legal representative.

From a ship financing security practice standpoint, Brazilian legislation requires that the hull number be expressly reflected in the applicable mortgage or other lien in order to be registered with the Maritime Court for perfection of security interests.

This information, including hull number, is required in standard application forms in various licensing procedures before Brazilian public authorities.

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?

In the particular case of turnkey contracts, Brazilian law establishes that, once the works are concluded as agreed or pursuant to the local practice, the owner shall accept the same, provided that the owner may reject the works if the contractor has not observed the instructions and plans received or the technical requirements applicable to works of such nature. Alternatively, the owner may claim a price reduction instead of rejecting the works.

In any event, any material deviation is likely to give grounds for a party to claim indemnification for any potential losses and damages pursuant to the relevant contract.

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?

The parties would be able to establish specific standards under the relevant shipbuilding agreement and applicable default penalties or termination events, according to maritime industry practice. See question 9.

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

The Brazilian Maritime Rules (NORMAM) No. 1 expressly determines certain construction specifications to safeguard naval construction and maritime operation in Brazil, in accordance with the international codes and conventions to which Brazil is a party, as well as resolutions taken by the International Maritime Organization and adopted by Brazil. For instance: the International Convention for the Safety of Life at Sea (SOLAS) 1974; the International Convention on Load Lines 1966; the International Convention for the Prevention of Pollution from Ships (MARPOL) 73/78; and the Sub-Committee on Standards of Training and Watchkeeping (STW). Brazilian maritime regulations also indicate that the maritime authorities may adopt the criteria established by recognised classification societies, on a case-by-case basis.

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 could generally be held liable by the purchaser of a vessel for any act, omission, negligence, recklessness or malpractice that causes losses to the purchaser, in accordance with the applicable regulations and the relevant contract. The Brazilian Civil Code adopted the principle of strict liability whereby one who develops an activity that, by its nature, may endanger someone shall be liable to repair the injury caused to that person even if it was caused without negligence, recklessness or malpractice.

The burden of proof as a general rule is on the damaged party to show in court the losses and damages suffered and the amount correspondent to the same. Any clause providing for the limitation or exclusion of the obligation to indemnify shall not be binding on third parties that are not signatories to such agreement.

The peculiarities of each transaction shall be considered on a case-by-case basis.

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

NORMAM No. 6 establishes the requirements and procedures for acknowledging the classification societies to act on behalf of the Brazilian Maritime Authorities in the regularisation, control and certification of vessels. The full list of accredited classification societies and certifying entities with the Brazilian Maritime Authorities is available at https://www.dpc.mar.mil.br/pt-br/ssta/sociedade-classificadora:

• American Bureau of Shipping;
• Bureau Veritas Ltda;
• Bureau Colombo Ltda;
• DNV GL;
• Lloyd’s Register do Brasil;
• Nippon Kaiji Kiokai do Brasil;
• Registro Italiano Navale;
• Registro Brasileiro de Navios e Aeronaves;
• Certificadora Brasileira de Embarcações e Sist;
• Autoship;
• ABS Group Services do Brasil;
• Record Certificação Naval Ltda; and
• AWS Eng, Consultoria, Inspeção e Certificação.

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 vessel under construction in the name of the builder or the buyer is an important element to define who owns the vessel under construction, in order to protect from insolvency and bankruptcy risks and for the bankability of a project.

Under Brazilian law, the request for maritime property registration, transfer of title to reflect new ownership or the filing of conditional sale agreements shall be made by the buyer within 15 days of the term of delivery by the shipyard, when the vessel is built in Brazil; the arrival at the port where the vessel shall be registered, when it is acquired or built abroad; or the time of change of ownership or, in case of conditional sale agreements or sale with title retention, when such right is given.

Vessels under construction may be provisionally enrolled with the REB, at the request of the buyer, aiming at obtaining financing at a competitive rate from the Marine Merchant Fund (FMM) and certain tax benefits.

Any interested party may request the registration of security rights and other liens upon presentation to the Maritime Court of an agreement with the following information: the main characteristics of the vessel, gross tonnage, the deadweight tonnage and other information that may properly identify the vessel; and the statement confirming that the vessel is properly insured.

Brazilian law requires that the hull number of a vessel be expressly reflected in the applicable mortgage or other lien, in order to be registered with the Maritime Court for perfection of security interests.

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?

In Brazil, ownership over a vessel may be acquired through the construction of such vessel or by any other regular means permitted by law. However, the transfer of a vessel’s ownership shall only be achieved through registration of the vessel with the Maritime Court or, in a few specific cases, through the enrolment of the vessel with the appropriate port and coastal authority.

Transfer of title to movable assets in Brazil shall be achieved (with a few exceptions) upon actual delivery of the asset. Ships, however, are movable assets subject to registration requirements, that is, ownership over a vessel shall be achieved upon registration of the relevant deed of transfer at the Maritime Court.

The parties may agree that title shall pass from the builder to the buyer during construction, as well as gradually, in milestones, upon progress of the vessel’s construction. In order to be able to evidence that transfer of title has occurred, it will be necessary to identify the vessel or its parts (especially upon completion and acceptance of the hull construction), otherwise the equipment and material related to other construction work may be mixed on the shipyard.

The project should be structured in a manner satisfactory to the financiers, including lenders and insurers.

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

As a general rule, transfer of risks shall be made upon delivery and acceptance of the vessel. Such risk allocation (construction, completion, operation, among others), however, may vary depending on the terms and conditions of the applicable project documentation, involving builder, buyer, insurers and financiers and even suppliers.

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?

The shipbuilder may subcontract part of the contract in Brazil or abroad, except if otherwise expressly established under the relevant agreement. As a general rule, the shipbuilder shall remain liable for the relevant part of the work subcontracted.

As we understand it, the terms and conditions of each agreement will very much depend on the negotiation by the parties, provided that main suppliers or subcontractors may be expressly referred to in the shipbuilding agreement.

Outsourcing, which is a controversial matter in Brazilian labour courts, was regulated in Brazil in 2017. Under such new legislation, employers can hire services from independent contractors (even related to the company’s core activity) provided that such services are clear, determined and specific and that subcontractors and their employees do not report to the principal. Brazilian labour courts have traditionally ruled that outsourcing was not permissible when dealing with the principal’s core business. It is still uncertain how courts are going to decide disputes involving outsourcing arrangements. In any event, the principal will be, at all times, subject to secondary liability under labour and social security laws (that is, if the direct employer of such workers fails to pay their salary and benefits, the principal will be required to pay those amounts to them).

The subcontracting of supply of materials or services shall also take into account the different tax implications in Brazil.

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?

As shipbuilding agreements are not expressly regulated by Brazilian law, the parties shall specify the terms and conditions thereof in a mutually satisfactory manner, including with respect to foreign supply and construction partially abroad.

The Brazilian government has adopted a local contents policy applicable to different industries, as a condition to obtain competitive financing from banks controlled by the government or as an element of the essence for a successful outcome in public biddings.

In the oil and natural gas industries, for instance, extraterritorial construction, assembling and usage of foreign parts may be key aspects of a project. In such case, different tax regimens as well as local contents requirements may apply, such as: special customs treatments for the import or export of goods, usually carried out by means of synthetic inflow or outflow of goods, temporary admission or drawback system; and special customs ruling for import and export of goods destined for activities of research and exploitation of oil and natural gas (also known as REPETRO). This allows the import, under temporary admission, of specific equipment to be used directly in activities related to the oil and gas sector, including suspension of federal import taxes, federal value added tax, Contribution for Social Integration Programme, Contribution for Financing Social Security (COFINS-Import), as well as additional fees for renewal of the merchant marine (also known as AFRMM), which would be levied on the temporary import of the equipment.

The following entities would be eligible for REPETRO: the operator of oil exploration, concessionaires, authorised companies or companies contracted under the production-sharing regimen to perform activities of research and drilling of oil and natural gas reservoirs in Brazil; and specific entities headquartered in Brazil described in the applicable regulation, as long as they are indicated by the operator of the oil exploration. REPETRO regulations also list the equipment eligible for such system, including vessels, machines, oil rigs, vehicles, lines, pipelines, among others. Such equipment must be used for exploration and production activities in the oil and gas sector in Brazil.

Vessels provisionally imported into Brazil may enjoy certain tax benefits, whereby the import and federal value added taxes would not be levied on the import, if there is no transfer of ownership, and the applicable Brazilian tax would be paid for each month that the vessel stays in Brazil. To such effect, the Brazilian importer should pay, for each month, an amount equivalent to 1 per cent of the taxes that would be due if the vessel were imported on a definitive basis. If the period of stay of the vessel in Brazil is extended, the Brazilian importer shall pay an additional tax amount corresponding to such extension period, which is not limited to 100 per cent of the taxes due under a definitive import.

Local content requirements may vary depending on the specific bidding round called by the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP), offering oil fields for exploration in both regular areas (through concession) and pre-salt areas (production sharing regimen). The applicable bidding rules and concession agreements shall provide for specific percentages of local content requirements, which may vary depending on the stage of the concession.