Thursday, April 12, 2007

Structuring Shipbuilding Contract – Part 1

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Where shipyard has been successful in its marketing activities, it will be invited to express interest in a particular project. The logical progression will be a bid invitation and pre-qualification questionnaire from Owner.

The required information will comprise the following: corporate information, corporate statutory documents, financial information and data, liens, security charges (if any), shipyard facilities and layout, shipyard experience, production facilities, summary of engineering capabilities, summary of planning, capabilities, summary of scheduling capabilities, current workloads , health & safety records, quality assurance policy and procedure , arbitration or legal suits , cost overruns record, schedule delays details, statement of interest, references and other information

Tender Documents:
Upon satisfactory evaluation, shipyard will be invited to bid by submission of tender documents by a particular date, in the price and un-priced packages. This will include a Cover Letter, Form of Tender, Executive Summary, Bid Bond and Form of Performance Bond together with the following, duly completed tender forms.

Tender Forms:
Technical contractual and commercial qualifications, form of agreement, terms and conditions of contract, yard experiences, company profile, cash flow, cash flow schedule, audited financials, ISO certificates, joint venture, consortium, quality management manual, project quality plan, inspection and test plan, planning, resource forecasting, progress and productivity measurement, preliminary project master schedule, method statement, working method, subcontractors, local contents, health and safety record, HSE policy & management manual, project HSE management plan, HSE organization, program and manning, information related to the vessel and equipment, project organization, project organization chart, yard facilities, current workload, general information & facilities, curriculum vitae, QA and QC system, authorized approval and signatory, project reporting and meeting, cost control (change order), communication procedure, document control procedure, purchasing procedure, material Control and handling procedure, design and engineering procedure, preliminary project master schedule, planning and schedule control procedure and interface management plan.

Preliminary Estimate & Price Proposal:
Regardless of whether the price proposal is in response to a formal invitation to bid or a slightly informal request for quotation, the preliminary estimate will essentially be derive from the following: (an example in respect of an offshore supply vessel) - general expenses, hull, superstructure, outfitting, hull preparation, painting, piping system, propulsion and auxiliary systems, electrical and electronic systems, fire fighting and safety equipments, accommodation, carpentry, air-conditioning, navigation and communications systems, launching, certification and documentation fees, insurance (X %), designer’s fees (X %), marketing costs, refund guarantee, bonds, financing costs, commission, overheads and profit (X %)

[Some sore points or overlooked items in the preliminary estimate could be the price to be tagged on indemnity, special terms in insurances, impact of exchange rate on materials and equipments etc (unless adequately hedged), price fluctuation and unfavorable terms in equipment purchase contracts attracting costs impact over and above those originally contemplated] * Note that legal and related costs is omitted.

[Pre-Qualification, Tender Documents, Preliminary Estimates, Price Proposal, Shipbuilding Contract and Ship Financing]

David Seah@All rights reserved 2007

Monday, April 9, 2007

Shipbuilding Contract Amendment – Legalese Versus Commercial Sense

From the diary of the Vice President of Contract, BCC Shipyard (2) – A Winter’s Tale

1st November 2002 – The Brief
Coming in from London after a 10 days contract negotiation trip, I was met at the Singapore Airport by a shipyard’s Director. It was close to midnight, what was the fuzz…what was the honor? I was handed an air-ticket (economy class) and told to get on the first flight out to China (during the graveyard shift) the following day. Also I was given a draft Contract Amendment, re an ongoing USD 100 million shipbuilding project for 5 Platform Supply vessels (“the Project”). My task was to assist in resolving issues relating to a draft Contract Amendment prepared by Owners. Shipyard had delayed in the delivery of the project and the Contract Amendment was to extend the delivery date under certain conditions.

2nd November 2002
2359 hours: Trip to BCC Shipyard, Shandong, China.
Midnight, boarded the plane and was seated conveniently next to the toilet. Sleep was not possible as the traffic to ease the bladder was perennial and returning group tour holiday makers were in extreme chatty mode. Arrived late morning in Shandong and was greeted by an extremely cold winter. Got to work immediately together with the Chairman.

3rd November 2002 - the Draft Contract Amendment
1030 hours: A particular text (“clause 5”) in the draft Contract Amendment proposed that “shipyard must deliver all 5 vessels in sequent, Hull A to E in that order. Owner reserved the right to reject delivery of the vessels if they were not delivered in sequent.” Chairman copied me on emails between himself and 2 lawyers (one a “senior counsel” instructed to advise shipyard on the draft Contract Amendment). Through emails the lawyers had advised twitching clause 5 with various suggested modifications and qualifications.

I perused what had transpired, read clause 5 again and kept thinking …. (1) From the Owners’ perspective: what is the purpose for clause 5? If vessel B was delivered before A, what was the problem? Was this an addition to what will constitute “default” [1]...a convenient avenue for damages (liquidated damages [2]) or rejection? (2) What is shipyard’s lawyers suggesting….to modify and qualify clause 5 with more legalese [3] and semantics?

All this just does not make sense anymore…. In view of the jetlag…my eyes are heavy, I must be very sleepy. Then, wisdom from on high. Delete the whole clause 5….it does not make sense. But what about the lawyers’ advice. Ok, self check...I remembered…what is clause 5 telling you instinctively [4] …it does not make sense commercially…legally? Do they want their boats or not?

1115 hours: I recommended to Chairman: “delete the clause 5 entirely”. He responded. What, you sure or not? I told Chairman: Tell them we want clause 5 deleted as it is onerous and does not make any sense; the vessels are all built to similar specifications. If all else fails, asked them why they needed the clause? Chairman gave a grin, then immediately emailed shipyard’s lawyers: “We have decided to delete clause 5”. The lawyers responded with some snap emails but their work had came to naught…at least they will still get their fees. See you Mr. Chairman…I am taking a nap.

2300 hours: (After dinner and drinks…I meant lots of alcohol). Chairman on the mobile with Owners in the USA….after the pleasantries; we accept the Contract Amendment, but we need to delete clause 5 as it does not make sense to us. Perhaps you could clarify further. Owner…ok let me check with our Counsel. Minutes later, Owner called and said: Ok, leave out clause 5.

4 November 2002
0200hours: I am very high and inebriated***commercial sense had prevailed.

End Notes:
[1] Default: Most shipbuilding agreement will have clause specifying acts or omissions that will constitute an event of “default” which entitles the non-offending party to rescind or cancel the shipbuilding contract.

[2] Liquidated damages – Genuine pre-agreed method of calculating damages in a contract, such that a Court is not required to make a formal assessment of damages or loss. The pre-estimate of damages must be a genuine estimate of the losses that will be sustained by the breach; otherwise the clause will be deemed an unenforceable penalty. In shipbuilding contract such clause are normally agreed to address late delivery and also in instances for deficiencies in the vessel’s performance i.e. speed, fuel consumption, bollard pull and capacity. On the opposite end Shipbuilders can sometime gain bonuses as reward for early completion and delivery.

[3] Legalese: Language used by lawyers that are usually long-winded and alien to the lay person.

[4]This book should have been printed earlier. Blink: The Power of Thinking Without Thinking by Malcolm Gladwell (2005) in which he explores the power of the trained mind to make split second decisions, the ability to think instinctively; without thinking.