Default, liability and remedies in shipbuilding in Netherlands

Default, liability and remedies

Do courts consider defective design to fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract?

After delivery and the commissioning party’s acceptance of a vessel, the builder shall have no liability whatsoever except as set forth in the warranty clause of the building contract. Customarily, the builder warrants that the vessel and all its components and equipment - except for owner’s supplies - upon delivery, shall comply with the requirements of the building contract and specification and shall be new, free from liens and encumbrances, and of the best quality, free from defects in material and workmanship. The question may arise whether defects in design are included within the scope of this warranty. Defective design does not fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of a building contract. Parties should explicitly include the builder’s liability for defective design in the warranty clause if it is their intention that the builder will be liable for that under the warranty clause. It was held in a Transport and Maritime Arbitration Rotterdam-Amsterdam (TAMARA) (since November 2018, TAMARA is named UNUM Transport Arbitration and Mediation) arbitral award of July 2013 that the claim under the warranty provisions of a shipbuilding contract - pursuant to which the yard undertook to remedy by repairing to a new standard or, if necessary, by replacing all defects due to poor design, workmanship or materials - had to be denied, although the contract contained a provision as follows:

The Builder undertakes responsibility with regard to strength, stability, functionality and further shipbuilding aspects, other than sailing performance and aesthetics of the Vessel. He is obliged to review the overall Design, the Plans and the Specifications as generally being suitable for this purpose. It is expressly acknowledged that ‘the builder shall not be responsible for any aesthetic aspects of the Vessel’s design which shall at all times be the responsibility of the Owner and his Naval Architect’.

Within the warranty period the whole of the vessel broke owing to slamming, but the arbitral tribunal held that the provision in the contract quoted imposes a general obligation on the yard, but cannot be understood to shift the responsibility for - and thereby the liability for any faults in - the overall design, the plans and specifications as prepared by the naval architect and the construction engineer, to the shipbuilder. Contrary to the claimant’s assertion, responsibility and liability of the yard for the overall design, plans and specifications does not follow from the wording of the provision quoted. Errors or miscalculations in the overall design, plans and specifications remain for the risk of the commissioning party, who has contracted with a naval architect and the construction engineer. This arbitral award shows that contractual language aimed at making the yard liable for the design cannot be clear enough.

Are there any remedies available to third parties against the shipbuilder for defectiveness?

In the absence of a contractual relationship with the builder, a third party’s ability to enforce the warranty rights under the building contract is in principle not existent under Dutch law.

Third parties suffering loss or damage because of defectiveness of a vessel can try to make a claim against the shipbuilder based on tort. It will be difficult to successfully claim damages from a shipyard, as there is no obligation for the shipyard to repair the damage if the standard breached does not serve to protect against damage such as that suffered by the third party suffering the loss. Except where there are grounds for justification, the following are deemed tortious: the violation of a right and an act or omission breaching a duty imposed by law or a rule of unwritten law pertaining to proper social conduct.

In many cases shipbuilding contracts contain assignment clauses, but if no assignment has taken place prior to delivery such clause will not be of assistance to a third party for defectiveness discovered after delivery.

If the contract contains a liquidated damages clause or a penalty provision for late delivery or not meeting guaranteed performance criteria, must the agreed level of compensation represent a genuine link with the damage suffered? Can courts mitigate liquidated damages or penalties agreed in the contract, and for what reasons?

All clauses that provide that a shipyard (obligor), should it fail in the performance of any of the performance criteria of the shipbuilding contract, must pay a sum of money or perform another obligation, is considered to be a penalty clause, irrespective of whether this is to repair damage or an incentive only to encourage performance (article 6:91 of the Dutch Civil Code). The creditor may not demand performance of the penalty clause where the failure in the performance of the obligation cannot be attributed to the shipyard. A notice will be required in order to demand performance of the penalty clause in the same cases as such is required to claim damages due by law. Under 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 fair to do so. However, the court may not award the obligee less than the damages due by law for failure in the performance. A penalty that was intended as an incentive only may be more susceptible to reduction than a penalty intended to recover (liquidated) damages. This statutory authority of the court cannot be excluded by the parties in their agreement. Though the wording of article 6:94 of the Dutch Civil Code suggests otherwise, this provision does not entitle the court to reduce the amount of penalties simply because it perceives the amount as being unfair. In its decision of 27 April 2007 (ECLI:NL:HR:2007:AZ 6638 Intrahof v Bart Smit), the Dutch Supreme Court ruled that the court should exercise its authority to reduce the penalty amount cautiously. A penalty may be reduced where there is an imbalance between the amount of penalties and the damages incurred by the breach, in the given circumstances, that is excessive and therefore unacceptable. The court should take into account not only the amount of damages but also the nature of the agreement, the content and purpose of the penalty clause and the circumstances under which the penalty clause was invoked. The Dutch Supreme Court has repeated the standard in various other cases over the past few years. Most recently, the standard for reducing penalties has been confirmed by the Dutch Supreme Court in its decision of 16 February 2018 (ECLI:NL:HR:2018:207). The Dutch Supreme Court held in Ampatil v Weggelaar (Dutch Supreme Court 17 December 2004, NJ 2005, 271) that claiming payment of a penalty under certain circumstances can be unacceptable according to standards of reasonableness and fairness. 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.

If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?

The innocent party may wish to recover his or her actual losses despite the fact that the contract contains a liquidated damages clause limiting the liability of the party in breach to the agreed amount under the clause. The innocent party may start litigation requesting the court to award supplementary damages, but such a claim would only have a reasonable chance of success if under the circumstances it is evident that principles of reasonableness and fairness so require.

Are the parties free to design the force majeure clause of the contract?

A general definition of force majeure can be found in article 6:75 of the Dutch Civil Code: the failure in performance cannot be attributed to the obligor if it is neither owing to his or her fault nor for his or her account pursuant to the law, a juridical act or generally accepted principles. The parties to a contract are free to include or exclude certain events from the contractual concept of force majeure.

The scope of force majeure will be a matter for negotiation and the parties to the shipbuilding contract must carefully consider the contingencies with regard to the project. The clause providing that the builder must give notice in writing specifying the event that causes force majeure, estimating the time the force majeure situation will probably last, could be of assistance. Under Dutch law, it is beyond doubt that there is also force majeure in cases of ‘relative impossibility’: cases in which performance is possible in theory but, reasonably speaking, cannot be expected of the debtor in question.

Force majeure was discussed in the case ECLI:NL:GHSHE:2013: BZ9854. There was a shipbuilding contract for the construction of the dredger Simson. The completion date was not achieved by the shipbuilder, owing to - according to the shipbuilder - circumstances of force majeure. The parties agreed on a joint expert opinion that stipulated that owing to construction defects in components delivered by a third party, which generally speaking has a good reputation, the shipbuilder faced delays. The court considered that, based on the expert’s opinion, there were circumstances that constituted force majeure. However, the shipbuilder was liable to pay liquidated damages owing to further delays, which could have been reduced by the shipbuilder. In a nutshell, the shipbuilder argued that weather conditions partially caused further delays. The court considered that further delays were caused by the shipbuilder’s own faults, and that the statement that weather conditions have partially caused the further delay were non-substantiated. Therefore, these arguments did not constitute force majeure.

Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?

The Dutch Bourse Policy for Construction Risks 1947 is the prevailing builders’ risk insurance available in the insurance market of the Netherlands. According to this policy a shipyard can take out insurance not only for itself, but also on behalf of all co- and subcontractors and suppliers in connection with the construction, conversion or repair of a certain named vessel. The insurance is to cover all risks, including fire and theft, in buildings, yards and shops of the assured, while under construction, fitting out and during trials, and it includes materials while in transit - except by sea - to and from the works or the vessel wherever it may be laying.

Will courts or arbitration tribunals in your jurisdiction be prepared to set terms if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification?

The parties have contractual freedom, but if there is disagreement on the proper construction of a contractual term, a court or arbitral tribunal will have to establish the presumed intentions of the parties. In Vodafone Libertel NV v European Trading Company CV (Dutch Supreme Court 19 October 2007, JOL 2007, 686), the Dutch Supreme Court held that in finding the proper interpretation of a contractual clause, a mere linguistic approach will not suffice. The test must be to try to establish the meaning parties reasonably have given to the disputed clause, taking into account each other’s position. The rights and obligations of parties in relationship with one another are not only determined by the explicit contractual terms prevailing between them, but also by principles of reasonableness and fairness.

Does the buyer’s signature of a protocol of delivery and acceptance, stating that the buyer’s acceptance of the vessel shall be final and binding so far as conformity of the vessel to the contract and specifications is concerned, preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery?

The buyer’s signature of a protocol of delivery and acceptance will not be final and binding if defects latent at the time of delivery have not been discovered and were not discoverable by a prudent buyer taking reasonable precautions to avoid such defects from escaping his or her attention. The liability of the shipyard for latent defects known to the shipyard and not disclosed cannot be excluded or limited and neither can it be made subject to a shorter prescription period as provided for by law (article 7:761 of the Dutch Civil Code).

Can suppliers or subcontractors of the shipbuilder exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices? Is there an implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances?

A lien is a right to the property of another arising by a specific clause in an agreement or by operation of law.

The exercise of a lien over the vessel or work or equipment ready to be incorporated in the vessel as a security for payment of invoices can only be successfully obtained if the supplier or subcontractor effectively holds possession of the relevant work or equipment, and can prevent the shipbuilder, buyer or third parties from taking possession of this work or equipment without consent. The work or equipment will, therefore, need to be in the custody of the relevant supplier or subcontractor.

In the case ECLI:NL:RBROT:2013:6587 (Aeolus v Van de Grijp), the subcontractor of the defendant claims to have a right of retention towards the defendant. The subcontractor has the factual power over the products and refuses to issue the products to the plaintiff owing to its claimed right of retention. The contract between plaintiff and defendant contains a provision that says that the contractor may not suspend its obligations in the contract when the client does not fulfil its payment obligations. The court considers that this provision holds a prohibition for the (sub)contractor not to exercise a right to suspension. Furthermore, the court considers that, regarding the rights of third parties, a contracting party whose performance has become of such importance to the interests of third parties cannot neglect these interests that are largely dependent on the performance of the contracting party. The standards that are considered acceptable in society according to general principles of civil law may entail that the contracting party needs to respect these interests, when these interests are closely related to a proper performance of the agreement. In its judgment, the court will need to consider the position of the parties involved, the contents and meaning of the contract, and the way the interests of third parties are involved (Dutch Supreme Court 24 September 2004, NJ 2008, 587 (ECLI:NL:HR:2004:AO 9069)).

Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?

Suppliers and subcontractors engaged by the shipbuilder in constructing the vessel will lose any right retaining their title to the goods supplied and the work performed as from the moment the goods supplied or work performed are incorporated in the vessel. There is no implied term or statutory provision that a vessel at the time of delivery shall be free from all liens, charges and encumbrances. This has to be agreed upon in the shipbuilding contract.

Assuming title to the vessel under construction vests with the builder, can third-party creditors of the builder obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel to secure their claim against the builder?

Third-party creditors can obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel, provided that these (the vessel and the equipment) are registered in the public registers.

In this context, however, a distinction must be made between vessel components and vessel accessories. Whereas vessel components will, after being affixed or incorporated, lose their independent nature and follow the ownership of the vessel and, thus, become property of the owner of the vessel, vessel accessories will not. Vessel accessories have a separate legal status in view of a possible reservation of title. (Any such reservations should be registered in the public registers.) In fact, unlike vessel components, vessel accessories may - owing to reservations of title - remain outside the right of recourse of third-party creditors of the owner of the vessel.

Such security attachment or enforcement lien does not affect the builder’s right of retention, inasmuch the holder of a right of retention - the creditor - may invoke its right of retention against third parties that have acquired a right or an interest in the property after its claim arose and property had come into its possession. The creditor will lose its right of retention as from the moment it loses the possession or custody of the relevant property.

Can a subcontractor’s or manufacturer’s warranty be assigned to the buyer? Does legislation entitle the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty?

Unless the contract with the subcontractor or manufacturer contains a provision explicitly denying the shipbuilder’s right to assign the warranty to the buyer, the shipbuilder and the buyer will be at liberty to agree on such assignment of the subcontractor’s or manufacturer’s warranty. There is no specific legislation entitling the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty failing a contractual assignment. Failing a contractual provision to that effect, a claim against a subcontractor or manufacturer will require a written document (deed), signed by both the creditor and the third party, whose purpose is to transfer title of the claim against the debtor by the creditor to that third party. This deed must either be executed before a notary public, or be registered at the Dutch Tax and Customs Administration, or notice of the assignment by deed must be given to the debtor. Once these requirements have been met, the claim is validly transferred (assigned).

Where a builder defaults in the performance of the contract, is there a legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue? What remedies will be open to the buyer?

Where a builder defaults in the performance of the shipbuilding contract, the buyer will have the following remedies to choose from, unless the shipbuilding contract explicitly limits any of such rights:

• specific performance - as in most civil law jurisdictions - is the prevailing remedy. The plaintiff can request the court to impose a monetary penalty on an unwilling defendant and if ordered by the court any penalties forfeited will accrue to the plaintiff;
• as an alternative the plaintiff can request the rescission of the contract. Property should be returned if the damaged party so wants, subject to protection of bona fide purchasers of chattels; or
• in both cases of specific performance and rescission the plaintiff may also recover damages for breach of contract.

Are there any remedies available to the shipowner in the event of protracted failure to construct or continue construction by the shipbuilder apart from the contractual provisions?

In the event of protracted failure to construct or continue construction by the shipbuilder, the buyer may seek a court order by way of an interim measure to force the shipbuilder to continue construction in accordance with the building schedule agreed upon. Such court order can be enforced by a penalty, which will accrue to the plaintiff should the shipbuilder default (again). As an alternative, the buyer may at all times cancel the shipbuilding contract in whole or in part. In the event of such cancellation, the buyer must pay the price applicable to the entire works, after deduction of the savings resulting for the shipbuilder from the cancellation, against delivery by the shipbuilder of the works already completed. If the contract price was made dependent upon the costs actually to be incurred by the shipbuilder, the price owed by the buyer shall be calculated on the basis of costs incurred, the labour performed and the profit that the contractor would have made for the entire works (article 7:764 of the Dutch Civil Code).

Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?

The parties have contractual freedom; therefore, it is possible to include an insolvency clause in the shipbuilding contract, which provides that in case of the builder’s suspension of payments or bankruptcy the buyer may terminate the shipbuilding contract in whole or in part. Such clause may even provide that the shipbuilding contract will terminate automatically in case of the builder’s insolvency. This clause provides clarity to the contracting parties; however, the downside of such a clause is that the other creditors in the bankruptcy may be disadvantaged.

An insolvency clause was discussed by the Dutch Supreme Court in the case ECLI:NL:HR:2013:BY9087. The Dutch Supreme Court considered that an insolvency clause on the basis of which a party may terminate an agreement and no longer has to perform, while the same party already received compensation from the bankrupt party, may in some cases constitute an unacceptable violation of article 20 of the Dutch Bankruptcy Act.

What institution will most commonly be agreed on by the parties to decide disputes?

The parties to a shipbuilding contract are free to make a choice in favour of one of the institutional arbitration institutes or ad hoc arbitrators. The institutions most commonly agreed on by the parties are UNUM Transport Arbitration and Mediation and the Netherlands Arbitration Institute.

Failing a choice in favour of arbitration, the state courts of the Netherlands are competent to hear the case.

Would a buyer’s contractual right to take possession of the vessel under construction and continue construction survive the bankruptcy or moratorium of creditors of the builder?

If the building contract provides for the buyer having title to the vessel under construction, this provision will survive the bankruptcy or moratorium of the builder. The administrator (moratorium of creditors) and trustee (bankruptcy) may call for a cooling off period of two months, which means that the buyer is prevented from having the vessel under construction removed from the builder’s yard. This will have to wait until the end of the cooling off period. A contractual right to take possession of the vessel and continue construction at the builder’s site will in most cases not survive the bankruptcy or moratorium of creditors of the builder for a number of reasons. First of all, a trustee has the statutory right to terminate agreements that are not beneficial for the estate. Secondly, in this jurisdiction the land and buildings of the shipyard are in most cases leased. This can be an intercompany transaction with an associated company or it may be at arm’s length. In both cases the lease agreements can be terminated on account of the moratorium or bankruptcy, which would leave the buyer empty-handed.

In your jurisdiction, do parties tend to incorporate an ADR clause in shipbuilding contracts?

There is no tendency to incorporate an ADR clause in shipbuilding contracts.

Where the buyer defaults in the performance of the contract, what remedies will be available to the builder? What are the consequences of the builder’s cancellation of the contract?

Where a buyer defaults in the performance of the shipbuilding contract, the builder will have the following remedies to choose from, unless the shipbuilding contract explicitly limits or excludes any of such rights:

• the prevailing remedy is to seek a court order to force the unwilling defendant to continue the performance in accordance with the contract agreed upon (specific performance). Such court order can be enforced by a penalty, which will accrue to the plaintiff should the buyer default (again);
• as an alternative, the plaintiff can request the rescission of the contract. As a consequence of the rescission the performances completed and the payments made must be undone or reversed - in this context a distinction must be made between the rescission of a contract and the cancellation of the same. The latter, in fact, does not result in the performances and payments to be undone; and
• in both cases of specific performance and rescission of the contract the plaintiff may also recover damages for breach of contract.