About Shipbuilding Contract

Structuring Shipbuilding Contract – Part 1

2007-04-12T01:30:00.005+08:00

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Pre-Qualification:
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.

Questionnaire:
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]

Shipbuilding Contract Amendment – Legalese Versus Commercial Sense

2007-04-09T12:27:00.002+08:00

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

1^st 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.

2^nd 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.

3^rd 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.

4November 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.

Shipbuilding Contract Negotiation – Business Ethics

2007-03-30T15:55:00.001+08:00

David Seah LLB London

A passage from page 156 of the National Best Seller; GETTING TO YES by Harvard Negotiation Project:

QUOTE: Will your conscience ever bother you? Are you likely to regret the agreement, believing that you took unfair advantage of someone? Consider the tourist who bought a beautiful Kashmir rug from the family who had labored for a full year to make it. He cleverly offered to pay in German marks, then offered worthless marks from the inflationary pre- WW II Weimar period. Only when he told the story to shocked friends back home did he began to think about what he had done to this family. In time the very sight of his beautiful rug turned his stomach. Like this tourist many people find that they care more in life than money and “beating” the other side. UNQUOTE

Some thoughts from the field:

Shipyard:
[Wanting in integrity?] Shipyard impressed upon Owner the need to have the first 10% down payment immediately as they need to purchase steel urgently to beat the possible price increase. Owner paid the 10% and found out later that this money was used for some other purposes.

[Sweat Shop] If you want to make your "managers" work 7 days a week (2 days for free), follow the example of this shipyard. Sign an employment contract that says: "5 working days per week". This is to make the Company appear good on record. When your managers claim for compensation for work done or make up leave for working during their off-days (week-ends) or public holidays...honor them and say.....you are "senior management" and expected to make sacrifices, no such thing. (nobody is indispensable).

Owner:
Contract negotiation for a new built vessel. Day 1 of negotiation, Clause 1 to 10 covered and agreed. Next morning….Head (a senior lawyer) of Owners’ negotiation team to shipyard negotiator…even though we gone through items 1 to 10, we would like to go through the contract again starting from page 1. He boldly state that “even though the terms are agreed orally, they are only deemed “agreed” when signed”. Sure enough this went on for days with no result at the end. [This guy is in the wrong profession and should have been a politician].

Ship-Broker’s Commission:
Brokers had facilitated a possible rig construction project for a shipyard and its consortium partners, by bringing Owners into direct contact. It was orally agreed that in event of successful contract signing X% commission will be paid to the Brokers, split equally between yard and its consortium partners. After the oral agreement the consortium partner suggested that the X% be reduced by 1/3. Shipyard’s CEO ( though not a paragon of circumspection), upon advice from close aides told the consortium partner that the X% will remain and shipyard will pay the 1/3 as it desires to honor its words to the Broker.

[Thinking aloud: Despite the huge sums that the Brokers were getting one has to consider that a substantial amount of shipbuilding deals are possible due to participation of brokers. These brokers do not operate from a one-table office but have huge overheads…flying thru and fro in business class with monies from their own pockets…and usually on a “no cure no pay basis”]

Vendors:
A new and inexperience purchasing executive (in a distressed stage) approached the writer and said that certain UK vendors had threatened to claim $X from the yard as she had inadvertently committed to buy certain equipment from them. She had used a standard Letter of Intent template from the Purchasing Department’s folder. Sure enough it was a binding letter that accepted the vendor’s quote. The writer spoke to the vendor and told them about the mistake. The vendors agreed to overlook the whole incident. The poor girl retained her job and the vendor was placed on the yard’s “preferred” vendor’s list. [Contractually, the vendors were in a position of power, but they chose not to exploit it out of good business sense.]

Purchasing Managers
“When one encounters problems during the installation or commissioning or warranty stage, they will understand why treating vendors as essential partner is a prudent exercise”

Ever wonder why some vendors refused to extend quote to RFQs? Getting an unethical purchasing manager is like a curse on shipyards and owners. One particular purchasing manager had the habit of rushing out Purchasing Contracts for the yard. A perusal of past purchasing orders revealed that equipments were procured too early for project, terms in the purchase contract were haphazard and not mutually favorable.…i.e. ex-work shipping terms with huge upfront payment, short installation man-hours. Shipyard ended up paying huge sums for installation supervision commission and extras. Some unhappy vendors (anonymous) subsequently revealed that he had been extracting favors from vendors. In the word of a certain vendor…that fellow is greedy and a “(censured)”. Ever wonder if you have such person(s) in your organization?

Some tell-tale signs that something is not right at your Purchase Department: (a) When you request for vendor’s technical support urgently and the answer is that they do not have available engineers or that they are having a long holiday in their country. (b) An increase in order for missing parts, replacement parts and new parts. (c) Vendors extremely high quotes or refusing to give quote on your RFQ.

[When you have unethical personnel managing the procurement negotiation process and “bullying” the vendors, do not expect too much service or co-operation from vendors…they may have the misconception that it is the Company’s culture or is it?]

Lawyers:
Mr. Bean’s allocating people to hell.."thieves, murderers, rapist,.oh…lawyers".

Seriously they are not all like that - some will go to “heaven”. The writer have negotiated with international lawyers and contract specialists of dignified class - ethical and fair. With these people, the ultimate shipbuilding contract or any contract will usually be mutually favorable.

On the lowly scale – a certain UK solicitor (representing a mega MNC) deliberately left out a critical clause in a one/two page addendum and hope that the writer will only have a cursory scan and give it a miss (due to jetlag or incompetence). When this was flagged up, the excuse was.....oh...its an inadvertent oversight. As they were major customers, and out of commercial considerations, no hoo-ha were raised. [What a shame…....wonder how such scumbag get to sleep at night?...they drug or drink themselves to sleep?].

Then again you have mediocre lawyers who “claim” expertise in drafting shipbuilding contract, ending up with contract containing fundamental and shameful errors. (see earlier article on Shipbuilding Agreement - Some Bad Advice). [What is unethical is the mediocrity bordering “misrepresentation”. When any lawyer collects very huge fees and hold themselves as having legal expertise in a particular transaction, a very high degree of quality is expected of them - there are essentially no margin for errors. They must not only do a good job but a “damn good job!”.]

Shipbuilding Agreement: A level playing field ?

2007-03-28T18:09:00.001+08:00

By: David Seah LLB (London)

During the lull time….. Owner’s representative from A-Oil & Shipping Ltd (major company) calls at shipyard and initiate steps to conclude shipbuilding agreement with shipyard. Representatives then produces business card with Company’s name A-Oil Pte Ltd or A-Oil Offshore Inc. ...all either related companies, subsidiaries or special purpose companies of the major company. (we will call them “SPC”)

A draft contract is given to shipyard (for the construction of one vessel plus option for a few more)….and the contract requires shipyard to furnish irrevocable on-demand refund bond (by a “world class” bank) for every penny that the SPC advances (pay?) to Shipyard.

Shipyard conducts due diligence and found that SPC is a newly formed Company, with no substantial asset and registered in one of the tax haven. It is a “one-ship” company. When Shipyard asked for a payment guarantee from a reputable bank or parent company guarantee…representative becomes agitated and says that “it is not our corporate policy to issue parent company guarantee…tell you what, we will give you a Letter of Comfort".

Shipyard is in a dilemma….business is slow (shareholders are watching)…take the deal, plus the RISK and bring “good news” all around…at least this may see us through….a hard commercial decision. Cast away all talk of Risk Management and Governance…we need the job.

Now what is the RISK? Firstly a letter of comfort in most instances is a non-binding document…with no legal effect. Therefore it is not worth the paper that it is written on. Why then did the SPC offer them in the first place?. Secondly shipyard has to bear the risk and hope that the SPC or its parent have work or charter for its new boat(s) and fulfill its side of the bargain…pay for the vessel and take delivery. But what if?

Is this a fair deal for the shipyard? In a major disputes situation, the equation will be as follows:

SPC - call on the refund bond (win or lose)

SPC wins - besides the cherry (the refund bond), plus maybe a chance to own all or part of the shipyard if the damages were substantial enough.

Shipyard wins – they will most probably end up with a paper judgment, a partial vessel (with no market or value during the lull season), banks (claiming on the counter guarantee) and vendors breathing down their neck.

End Note: Of course there are many Owners who truly subscribed to the principle of uberrima fides ("utmost good faith"). They recognized that commercial risks should be proportionately distributed and while insisting on appropriate refund guarantee will also reciprocate to specially selected "low risk" shipyard appropriate security (payment bond or LC) and favorable upfront payment terms to say ….we are your partners in this game.

Suggested Reading : http://www.imca-int.com/core/contracts/

SHIPBUILDING CONTRACT DISPUTE

2007-03-26T16:23:00.000+08:00

Certainty and Clarity in Shipbuilding Contract

The English case of Covington Marine Corp v Xiamen Shipbuilding Industry Co. Ltd. [2005] EWHC 2912 Comm] in the London High Court illustrate the significance of certainty and clarity in shipbuilding contract.

Brief Facts: The dispute concern four newbuilding contracts, entered into in the early 2003 between a Chinese shipyard, Xiamen Shipbuilding and Greek Owners for the construction of four 53,800 dwt bulk carriers at a price of US$ 17,970,000 per vessel. The contract was signed on the basis that it shall become effective from the date of its execution by the parties, provided certain conditions were fulfilled. Xiamen repudiated the contracts and signed alternative contracts to build the vessels for another buyer. The Buyers claimed for damages for breach of the contracts. One of the central issues was whether certain exchanges of correspondences after the signing of the Contract amounted to a final agreement. The Arbitration Tribunal held that the “exchanges of 18th and 19th March 2003 did not contain any final agreement but were tentative and provisional. Accordingly we find that by 21st March 2003 there had been no agreement between the parties as to the supplier of the main engine. ” They found in the Builder’s favor. On appeal to the High Court in London, judgment was given in the Buyer’s favor.

Indemnity in Shipbuilding Agreement

2007-03-18T15:10:00.000+08:00

By: David Seah LLB (London)

Purpose: The purpose of this article is to discuss a hypothetical scenario of how ancillary agreement - an indemnity agreement, could present unforeseen exposure and grief for parties concerned.

Parties:
Contractor: US Company
Owner: PRC Company
Subcontractor: SE Asian Company
PRC Shipyard: Subsidiary of Subcontractor
Insurers: US Company

The Main Contract

CONTRACTOR and OWNER entered into a multi-million dollars Shipbuilding Contract (“the Main Contract”) for the construction of a vessel in a shipyard in China (and subsequently amended twice). The governing law was the Law of the People’s Republic of China. Forum for dispute resolution was by Arbitration in China.

The Subcontract

CONTRACTOR subcontracted (“the Subcontract”) the work to SUBCONTRACTOR. The Main Contract and its attachments were incorporated as an integral part of the Subcontract. SUBCONTRACTOR in return subcontracted the work to the Shipyard.

Performance Guarantee

As security for its performance under the Main Contract, CONTRACTOR furnished OWNER with an irrevocable demand guarantee (“the Guarantee”) issued by an international bank (“the Bank”). Upon CONTRACTOR’S request, INSURERS issued a counter guarantee to the Bank.

Indemnity Agreement ancillary to the Subcontract

CONTRACTOR and SUBCONTRACTOR then signed an Indemnity Agreement (Indemnity) with whereby the latter agreed to pay 50% of any obligations, liabilities or indebtedness of CONTRACTOR or its affiliates, for any amount paid or payable by CONTRACTOR or any of its affiliates under the Guarantee. The governing law of the Indemnity was US law.

US Bankruptcy Code Chapter 11

Prior to completion of the vessel, CONTRACTOR filed for Chapter 11 bankruptcy in the USA. Around about this time, CONTRACTOR and OWNER entered into an agreement, where it was agreed that OWNER would pay CONTRACTOR no more money under the Main Contract and instead, OWNER would pay CONTRACTOR'S vendors and subcontractors. OWNER called upon the Guarantee and INSURERS reimbursed the Bank US$X million. During the US Chapter 11 Proceedings, CONTRACTOR (in liquidation) and INSURERS (by itself and/or by its legal representatives) admitted that the amount of US$Y million (principal plus interest) was due and owing to the SUBCONTRACTOR. However, no pay out of such sums was received from the CONTRACTOR (in liquidation) estate.

Bill of Sale & Transfer

In the bankruptcy proceedings, INSURERS sought reimbursement of US$X million from CONTRACTOR (in liquidation) in respect of the sum which they had reimbursed the Bank. They subsequently reached a settlement and signed a Bill of Sale and Transfer whereby CONTRACTOR (in liquidation) transferred and assigned of all of its interest in various commercial contracts, including the subcontract with SUBCONTRACTOR and the Indemnity to INSURERS. (A provision in the Indemnity expressly prohibiting any assignment of the same without mutual consent was largely ignored).

Default & Completion

At the point of bankruptcy, CONTRACTOR defaulted under the subcontract and still owed SUBCONTRACTOR US$Y million for work done. The vessel was subsequently completed pursuant to a separate contract between OWNER and the Shipyard.

Claim by INSURERS against SUBCONTRACTOR

INSURERS as holder of the Bill of Sale and Transfer then filed an action in a US Court against SUBCONTRACTOR for 50% contribution and indemnity under the provision of the Indemnity for the US$X million which they had reimbursed to the Bank.

[Disclaimer: This Article is imaginary and no reference to any similar or actual event whatsoever is intended. Its sole purpose is to stimulate discussion.]

To be continued. (Part II – Issues and Defense Strategy)

Shipbuilding Agreement & Specifications

2007-03-14T21:28:00.000+08:00

By: David Seah LLB London

A Shipbuilding Contract will usually include the following documents: the Agreement, the Specifications, Drawings, Plans and other attachments. Frequently, there may be conflict between the respective documents. To address such conflicts or ambiguities, a clause is usually provided to ensure that in the event of a conflict or ambiguities between the documents, the Agreement will prevail over the Specifications and so on in that order.

For example a text from the Association of European Shipbuilders and Shiprepairers standard contract, the AWES Form read as follows: “Article 1 …In the event of any conflict between this CONTRACT and the Specifications the provisions of this CONTRACT shall prevail. In the event of any conflict between the specification(s) and the general plan(s) the provisions of this specification(s) shall prevail”

Parties in shipbuilding contract transaction take comfort in the mistaken notion that this all-encompassing clause will resolve any problem(s) that may arise regarding discrepancies. This is far from reality. One can either choose to work with maximum effort for clarity with a competent front-end team or leave to the litigation lawyers later. Experience has shown that while such a provision may be useful in providing clarity to minor discrepancies, failure to provide clarity in the various contract documents prior to the contract execution can lead to unwelcome disputes, acrimony and loss of goodwill.

An actual case in point: Owners gave notice that they wanted to send a vessel for dry-dock warranty inspection prior to expiry of a 12 months warranty period. They also pointed out that all dry docking expenses (a substantial amount) were for Shipyard's account. Shipyard denied liability and challenged the claim.

The Shipbuilding Agreement - Warranty provision in this Agreement provided inter alia that: (a) the warranty was for a twelve months period from date of delivery of the vessel; (b) that shipyard was obliged to carry out repairs or replacement for justified defects, if these have been duly notified within 14 days of discovery (c) that liability for all other expenses, not expressly set out in the warranty clause, inclusive dry-docking and others were expressly excluded.

The Specifications provided: (a) that an inspection of the vessel shall be carried out at a dry dock before the expiry of the 12 months warranty period (b) that if any shortcomings in workmanship or quality were discovered during such inspection, then shipyard must remedy the same. (c) that all dry-docking expenses for such inspection were for shipyard's account.

The Agreement and the Specifications were in direct conflict on the issue of dry-docking expenses. A flurry of volatile exchanges took place before an unhappy Owner finally abandoned their claim in respect of the dry docking expenses. Shipyard had won the battle but lost heavily on potential repeat orders.

Solution: Read the Shipbuilding Contract as a whole to ensure clarity and uniformity.

Finale: During the process of another contract negotiation, the writer reviewed the Specifications and discovered an open-ended sentence specifying that the supply vessel must be built to withstand all adverse weather conditions with ice class. However this was not priced in the commercials nor mirrored in the Agreement. As the subject matter was not a super high-tech vessel and area of deployment was not the north or south poles, the writer sought clarification with relevant estimators, engineers and designers and the sentence promptly deleted with customers’ blessing.

CAVEAT: This Article is intended to provide useful comment and to stimulate discussion. It is not intended to provide legal advice. Reader should not rely on or act upon information in this Article without seeking specific advice from a competent and qualified professional.

Novation of Shipbuilding Agreement

2007-03-14T18:39:00.000+08:00

Most shipbuilding contracts have provisions allowing the parties to transfer some or all of its rights under the shipbuilding contract to another party (an assignee) by way of an assignment [a] (usually subject to written consent and upon certain conditions) [b].

Under English law, buyer can assign its rights under the contract without the consent of the shipbuilder. Where the shipbuilding contract stipulates that shipbuilder's consent is required, this must be obtained or any purported assignment (subject to certain limitations and exceptions) will be void [c]. To be perfected, notice of any such assignment must be given to the shipbuilder.

However while a party may assign its contractual rights (or benefit), the general rule is that it cannot assign its contractual obligations (burden or liability). Note exceptions under operations of law (bankruptcy or receivership) and contrasting position in the US [d]. Therefore phrases like "assignment of this Contract" or "assign all its right or obligations under this contract" is not strictly correct. In order to transfers its rights and obligation (or part thereof) in the shipbuilding contract, buyer will either have to delegate, subcontract or transfer all or part of its rights and obligations by way of a novation agreement [e].

A novation agreement is essentially a tri-partite agreement between shipbuilder, buyer and new buyer, whereby all rights and obligations of the original buyer are transferred to the new buyer. All parties must agree to this rearrangement, in respect to the termination of the original shipbuilding contract and the formation of the new contract.

Unless the novation agreement is executed by deed, it must be supported by consideration. It seems that the original shipbuilding contract would have to be valid and binding for the novation to be valid, as invalidity of the former would mean that there are no rights or obligations to be transferred.

Pre-existing security in respect of obligations (refund guarantee, payment guarantee, and performance bond) under the original shipbuilding contract will be automatically discharged and relevant Parties should arrange for issuance of replacement security. Where the original shipbuilding contract has been assigned by shipbuilder to its banks, the assignment must be released and the rights reassigned to the shipbuilder. Some novation agreement may even provide for the same to be terminated and the original contract reinstated in the event of stipulated breach by the new buyer. [f]

Where the new buyer (usually a special purpose vehicle of the original buyer) has no asset or substantial financing standing, the shipbuilder should insist on a guarantee or acceptable security from either the new buyer or original buyer. It is usual for shipbuilder's costs to be borne by either of the other party.

FOOTNOTES:

[a] An assignment involves an assignor transferring some or all of its rights under a contract to an assignee, so that the assignee is entitled to the corresponding performance directly from, and can enforce those rights against, the non-assigning party. An assignment in itself does not create a contract between the assignee and the non-assigning party nor does it make the assignee a party to the original contract.

[b] That despite the assignment the assignor (jointly or severally with the assignee) remain liable under the terms of the contract to the extent that it is not fulfilled. See sample clause - “Neither of the parties hereto shall assign this Contract to a third party unless prior consent of the other party is given in writing. In case of assignment by the BUYER, the BUYER shall remain liable under this Contract.”

[c] See the House of Lords' decision in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, where it was held that full effect will be given to contractual provisions prohibiting assignment. Thus any purported assignment will be ineffective[d] This general rule is limited by operation of law. Also in the US, it seems that the term "assignment" can refer to both an assignment and a delegation and assumption of obligation.

[e] Reason for novating a shipbuilding contact may vary from sale, financing or tax purposes to risk transfer purposes. Alternatively, buyer could, subject to any conditions in the shipbuilding contract, transfer all its rights and obligations therein, by selling the whole company to a new buyer. However, this could be a protracted and complex exercise.

[f] How this will operate in practice remains unclear as it will involve issues on whether the novation agreement was a conditional agreement or revival of an original contract or part thereof that was supposedly extinguished.

David Seah LL.B (London)

SAMPLE TEXT (For illustration only)

THE RECITAL - The Original Buyer has agreed to transfer and the New Buyer has agreed to undertake the rights and obligations under the Shipbuilding Contract dated (insert date of original contract) (the “Contract”).The Original Buyer wishes to be released and discharged from the Contract and the Builder has agreed to release and discharge the Original Buyer from the Contract upon the terms that New Buyer undertakes to perform the Contract and be bound by its terms in place of the Original Buyer and the Original Buyer undertakes to guarantee the performance of the obligations being undertaken by the New Buyer.

TRANSFEREE’S UNDERTAKING - With effect from the date of this Agreement and in consideration of the undertakings given by the Builder herein, the New Buyer undertakes to observe, perform, discharge and be bound by the Contract as if the New Buyer were a party to the Contract in the place of the Original Buyer. The New Buyer shall pay to the Builder following the date hereof the remaining installments of the purchase price for the Vessel falling due after the date hereof on the terms and in the manner set out in the Contract. Furthermore, and in consequence of the novation of the Contract any changes to the contract price agreed between the Builder and the New Buyer shall be paid for by the New Buyer. Notwithstanding this undertaking, nothing in this Agreement shall: (a) require the New Buyer to perform any obligation created by or arising under the Contract falling due for performance, or which should have been performed prior to the date of this Agreement; or (b) make the New Buyer liable for any act, neglect, default or omission in respect of the Contract committed by the Original Buyer or occurring before the date of this Agreement.

BUILDER’S UNDERTAKING AND RELEASE OF ORIGINAL BUYER - With effect from the date of this Agreement and in consideration of the undertakings given by the New Buyer and the Original Buyer herein, the Builder hereby: (a) releases and discharges the Original Buyer from all obligations to observe, perform, discharge and be bound by the Contract; and (b) accepts the New Buyer’s undertaking to observe, perform, discharge and be bound by the Contract; (c) agrees to observe, perform and discharge all of the covenants, undertakings, duties, obligations and liabilities (including, without limitation, the obligation to deliver and transfer title to the Vessel) issued, given or assumed by the Builder (whether arising before or after the date of this Agreement) and be bound by the Contract as if the New Buyer were a party to the Contract in the place of the Original Buyer. Notwithstanding anything to the contrary, nothing in this Agreement shall affect or prejudice any claim or demand which the Builder may have against the Original Buyer (a) in relation to the Contract and arising out of matters prior to the date of this agreement (regardless of whether it is notified prior to or after the date of this Agreement) or (b) under any Guarantee given by the Original Buyer to the Builder under this Agreement or ancillary to it.

TRANSFEROR’S UNDERTAKING AND RELEASE OF BUILDER - With effect from the date of this agreement and in consideration of the undertakings given by the Builder, the Original Buyer hereby releases and discharges the Builder from all obligations to observe, perform, discharge and be bound by the Contract as towards the Original Buyer. Notwithstanding this undertaking and release, nothing in this agreement shall affect or prejudice any claim or demand which the Original Buyer may have against the Builder in relation to the Contract and arising out of matters prior to the date of this Agreement, nor shall it affect the Builder’s obligations under the Contract as towards the New Buyer.

TRANSFEROR’S GUARANTEE OF OBLIGATIONS OF TRANSFEREE- The Original Buyer unconditionally and irrevocably guarantees to the Builder the due and punctual discharge and performance by the New Buyer of its obligations under the Contract as more particularly set out in the guarantee in the form attached as Schedule 1 hereto.

COSTS AND EXPENSES- The New Buyer shall be solely responsible for the costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this Agreement and will promptly on demand pay to Builder the amount of all costs and expenses (including legal fees) reasonably incurred by Builder in connection with this Agreement.

CONDITION PRECEDENT- On or prior to the signing of this Agreement the Original Buyer and the New Buyer shall furnish to the Builder a copy, certified to be a true copy and as being in full force and effect by a duly authorized officer of the relevant party, of a board resolution of each of the Original Buyer and the New Buyer: (a) approving this Agreement and the transactions hereunder; and (b) authorizing named persons (or persons identified by their office) to sign this Agreement; and (c) a copy of the Statutory Documents of the Original Buyer and the New Buyer, each as in force on the date of this Agreement, certified by a duly authorized officer of the relevant party as being a true, complete and up-to-date copy as at such date and (d) a letter of guarantee issued by the Original Buyer in favor of the Builder in the form annexed hereto together with a certified true copy of the Board Resolution of the Original Buyer authorizing the issue of such letter of guarantee.

Disclaimer: This article is for general reading and discussion purposes only. It is not meant to provide legal or professional advice. Reader must not rely on or act upon it without consulting a qualified professional.

What does it take to negotiate a Shipbuilding Contract?

2007-03-14T10:43:00.005+08:00

"Partnering with business function to facilitate the attainment of business objectives within acceptable legal boundaries"

Given the complexity of Shipbuilding Contracts [a], meticulous planning will be required if a predictable and mutually favorable contract is to be achieved. Negotiation of such contracts involve a wide range of expertise encompassing legal, technical and financial and well as practical drafting or reviewing skill. Management and commercial skill are also essential to achieve the require balance. This is usually carried out by one or two individuals supported by inputs from the various teams.

Where English law are applicable, personnel managing contract negotiations should be familiar with:

The application of contract law and the Sale of Goods Act 1979 (footnote [b])

Risks, issues, obligations and liabilities in shipbuilding, pre-contract and ancillary agreements

Issues relating to equipment supply contract (footnote [c]), international trade, customs requirements, maritime law, builder's risk insurance, marine insurance, shipping terms (Incoterms)

Uniform Customs and Practice for Documentary Credit and the workings of export insurance,

Ship financing, mortgage, project financing, refund guarantee and performance bond

Legal issues and process relating to engineering and construction contract, including without limitation variations and delay claims

Passing knowledge of relevant Classification and Authorities rules and regulations

Some understanding of shipbuilding business and process

Recognition of issues relating to tax liabilities and duties

Apart from the above, a well structured negotiation plan will entail coordination of the following activities.

• Assessment of the project technical feasibility and commercial viability
• Engagement of external professionals to conduct due diligence on prospective Owner
• Liaising with Finance Department on finance capability, budget and cash flow projection
• Liaising with Bankers or Financiers and on financing or bonds requirements
• Preparation of Executive Summary to support financing or credit application
• Liaising with Insurers for relevant insurance requirement
• Organization of the Project Team
• Structuring procurement and construction plan
• Strategizing a contract negotiation plan

Footnotes:

a) Broadly this refers as a whole to the Shipbuilding Agreement, Contract Specifications, Plans and other attachments. See examples of some shipbuilding agreement - Crine Model Contract Forms, SAJ Form, AWES Form, Norwegian Standard Form and others

(b) Previously, the English Courts have treated Shipbuilding Contract as one for the sale of goods. Two decisions in the House of Lords in UK have now provided clarity that a Shipbuilding Contract is a hybrid contract for the construction and sale of ship. Hyundai Shipbuilding v Pournaras (1980) 2 Lloyd's Rep (HL), Stocznia Gdanska SA v Latvian Shipping Co (1998) 1 Lloyd's Rep 609(HL) (It should also be noted that the international Convention for Sale of Goods does not apply to shipbuilding).

(c) Examples: Orgalime General Conditions, World Bank Supply and Installation Contract sample etc. Good reading materials include: Schmitthoff's - The Law and Practice of International Trade, UN Convention for International Sale of Goods (CISG), A short course in international contracts: drafting the international sales contract for attorneys and non-attorneys, by Karla C Shippey etc

Caveat: This Article is intended to provide useful comment and to kindle discussion. It is not intended to provide legal advice whatsoever. Reader should not rely on or act upon information in this Article without seeking specific advice from qualified professional.

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