Ship Title

Ship title almost always passes from the shipyard to the ship buyer when the ship is physically completed and ship buyer accepts delivery at the shipyard. Transfer of ship title is usually documented with the Builder’s Certificate and Protocol of Delivery and Acceptance that sets out the exact minute when ship title transfers. Usually, prior to the transfer of ship title, shipyard has the risk of loss; that risk of loss passes to ship buyer after ship title is transferred. Ship buyer might obtain security in a partially completed ship. One problem with waiting until delivery of the ship would be that ship buyer to the risk that the shipyard’s creditors may seize materials in the shipyard, including ship buyer’s incomplete new ship, as security for their credit claims against the shipyard. To address that risk, ship buyer may sometimes be able to establish security in a partially completed ship and its parts purchased by the shipyard for installation in the ship, depending on the law of the place where the shipyard is located. In some countries, where such provisions are permitted in ship construction contract, shipbuilding materials and parts will be “identified to the ship” upon payment of specific progress payments, and that materials and parts will be marked accordingly. Shipbuilding Contract for the construction of a ship under United States law is not a Maritime Contract and therefore Shipbuilding Contract is governed by the applicable State Law, which is the state law to which the parties agree in the contract, or as determined in accordance with the conflicts of law provisions of the state where the shipyard is located. Ship buyers usually negotiate for the right to place a supervisory team of technical experts at the shipyard and at key subcontractors in order to inspect and check various aspects of the ship while under construction and to attend equipment tests and ship sea trials. Furthermore, ship buyer’s preferred Classification Society will review plans, drawings, specifications and inspect the construction at various points before, during and after construction. Finally, ship registry where ship buyer (new shipowner) intends to register ship will also inspect the ship, usually at delivery. Risk of loss at the shipyard usually follows ship title. Therefore, if the shipyard retains title to the ship until the final payment is made, then the risk of loss is on the shipyard. If title to materials or equipment to be installed in the ship is passed to ship buyer prior to final delivery, then in the absence of some other agreement, the risk of loss for such materials and equipment will be on the ship buyer. As a practical matter, ships under construction are typically insured against loss or casualty damage by a “Builder’s Risk” insurance policy. When ship buyer has a title interest in materials or equipment identified to or incorporated in the ship, insurance policy may identify ship buyer as an additional insured party “as its interests may appear.” Generally, the remedies available for the breach of the ship construction contract will depend on the specific provisions in the contract. Depending on the type of default, ship buyer may have the right to suspend or cancel the contract, take over a partially completed ship, equipments or parts of that ship on hand at the shipyard, or seek recovery of already paid progress payments from a third party guarantor, among other things. “Refund Guarantee” is payment protection usually provided by a shipyard to ship buyer, commonly in the form of an “irrevocable letter of credit” from a reputable bank, or a bond from a bonding company, payable upon certain conditions related to a default by the shipyard. Refund guarantees are commonly required by prudent ship buyers. Purpose of a refund guarantee is related to the nature of ship construction contracts and payment arrangements. Much of the cost of a new ship goes to purchase by the shipyard of the necessary materials and components such as steel, engines, auxiliary machinery, electronics, shafts and propellers, furniture, paint, and other items. Progress payments made by ship buyer are used to fund those purchases, so as the construction progresses, ship buyer will have invested a substantial amount into the ship. Even with the best of shipyards, that ship investment will be at risk, shipyard could fail to complete the ship due to natural disasters, labor issues, or political strife; ship, materials or equipments could be seized as security for the shipyard’s creditors; or some defect in the ship could cause it to fail to meet the contract requirements. Refund Guarantee protects against those risks by ensuring that ship buyer will get a refund of its investment if the shipyard fails to deliver the ship in accordance with the contract terms. Refund Guarantee may be payable purely on the basis of the presentment of a notice by ship buyer to the guarantor that a default has occurred and a failure of the shipyard to dispute the default. Alternatively, refund guarantee may require a final arbitration award or similar proof. Prudent ship buyers commonly review the terms of refund guarantee closely to ensure that its payment terms are certain, irrevocable, and efficient, and do not require extraordinary processes to obtain a refund. Ship buyer might force shipyard to deliver a ship. Rights of ship buyer will depend on the law chosen in the ship construction contract. Generally, in USA under state law, ship buyer would have to seek an injunction from a court to force a shipyard to deliver a ship. Shipyard will typically have a mechanic’s lien on the ship to the extent of the outstanding payments it is owed. An injunction may be difficult to obtain given the probable need for ship buyer to show that an injunction is necessary based on a showing that it cannot be adequately compensated with monetary damages. Shipyards’ have some rights on default of ship buyers. Ship buyer’s responsibilities under the ship construction contract are usually a few. Notwithstanding, like ship buyer, shipyard may have the right to suspend or cancel the shipbuilding contract. Shipyard often has the right to retain paid progress payments, finish the ship and sell it to a third party, although usually with a requirement to reimburse ship buyer if the resale price otherwise makes shipyard whole. Under current laws in United States, a ship mortgage can only be recorded to secure a lien against the ship once the ship is completed and delivered. Ship buyers in the United States usually protect their interest in partially completed ships, equipments and parts purchased for the ship by shipyard by filing financing statements covering such property under the Uniform Commercial Code. United States Maritime Law Association has in the past proposed that Congress amend the applicable statutes to make it possible for a ship mortgage to be filed on a partially completed ship. In the meantime, cautious ship buyers may insert contractual language requiring that materials, parts, and equipment purchased for use in the ship under construction be “identified to the ship” once the corresponding progress payment has been made. Ship buyer can insure against risks to, or related to, the ship while under construction. Ship owners, as well as lenders and builders, can purchase shipyard’s risks insurance coverage for the risks of physical loss or damage to a ship during construction, testing and trials as well as thirdparty liability risks during that period of time. The extent of losses covered will depend upon the terms of the policy. In general, the broader the insurance coverage, the greater the cost of insurance, so ship buyer will have to evaluate the costs and benefits of the insurance coverage. Ship title almost always passes from the shipyard to the ship buyer when ship is physically completed and ship buyer accepts delivery at the shipyard. This transfer of ship title is usually documented with the Builder’s Certificate and a Protocol of Delivery and Acceptance that sets out the exact minute when title transfers. Usually, prior to the transfer of ship title, shipyard has the risk of loss; that risk of loss passes to the buyer after ship title is transferred. Ship buyer may obtain security in a partially completed ship. One problem with waiting until delivery of the ship for the owner to obtain any rights in the ship is that it subjects the would be owner to the risk that the shipyard’s creditors may seize materials in the yard, including ship buyer’s incomplete new ship, as security for their claims against the shipyard. To address that risk, ship buyer may sometimes be able to establish security in a partially completed ship and in items purchased by the shipyard for installation in the ship, depending on the law of the place where the shipyard is located. Where such provisions are permitted, shipyard and buyer provide in the ship construction contract that materials procured for use in the ship will be “identified to the ship” upon payment of specific progress payments, and that materials will be marked accordingly. Shipbuilding contract for the construction of a ship under United States law is not a maritime contract and therefore is governed by the applicable state law, which is the state law to which the parties agree in the contract, or as determined in accordance with the conflicts of law provisions of the state where the shipyard is located. Ship buyers usually negotiate for the right to place a supervisory team of technical experts at the shipyard and at key subcontractors in order to inspect and check various aspects of the ship while under construction and to attend equipment tests and ship sea trials. Besides, preferred classification society will review plans, drawings and specifications and inspect the construction at various points before, during and after construction. Finally, the registry where ship buyers intend to register the ship will also inspect the ship, usually at delivery. The risk of loss at the shipyard usually follows title. Therefore, if the shipyard retains title to the ship until the final payment is made, then the risk of loss is on the shipyard. If title to materials or equipment to be installed in the ship is passed to ship buyer prior to final delivery, then in the absence of some other agreement, the risk of loss for such materials and equipment will be on ship buyer. As a practical matter, ships under construction are typically insured against loss or casualty damage by a “Builder’s Risk” insurance policy. When the buyer has a title interest in materials or equipment identified to or incorporated in the ship, the policy may identify the buyer as an additional insured party “as its interests may appear.” To a large extent, the remedies available for the breach of the ship construction contract will depend on the specific provisions in the contract. Depending on the type of default, the buyer may have the right to suspend or cancel the contract, take over a partially completed ship or the components of that ship on hand at the shipyard, or seek recovery of already paid progress payments from a third party guarantor, among other things. “Refund Guarantee” is payment protection usually provided by a shipyard to ship buyer, commonly in the form of an “irrevocable letter of credit” from a reputable bank, or a bond from a bonding company, payable upon certain conditions related to a default by the shipyard. Refund guarantees are commonly required by prudent buyers. The purpose of a refund guarantee is related to the nature of ship construction contracts and their payment arrangements. Much of the cost of a new ship goes to the purchase by the shipyard of the necessary materials and components such as steel, engines, auxiliary machinery, electronics, shafts and propellers, furniture, paint, and other items. Progress payments made by ship buyer are used to fund those purchases, so as the construction progresses, ship buyer will have invested a substantial amount into the ship. Even with the best of shipyards, that investment will be at risk, shipyard could fail to complete the ship due to natural disasters, labor issues, or political strife; the ship or materials could be seized as security for the shipyard’s creditors; or some defect in the ship could cause it to fail to meet the contract requirements. Refund Guarantee protects against those risks by ensuring that the ship buyer will get a refund of its investment if the shipyard fails to deliver the ship in accordance with the contract terms. Refund Guarantee may be payable purely on the basis of the presentment of a notice by ship buyer to the guarantor that a default has occurred and a failure of the shipyard to dispute the default. Alternatively, Refund Guarantee may require a final arbitration award or similar proof. Prudent buyers commonly review the terms of a refund guarantee closely to ensure that its payment terms are certain, irrevocable, and efficient, and do not require extraordinary processes to obtain a refund. Ship buyer might force a shipyard to deliver a ship. The rights of ship buyer will depend on the law chosen in the ship construction contract. Generally, in the United States under state law, ship buyer would have to seek an injunction from a court to force a shipyard to deliver a ship. Shipyard will typically have a mechanic’s lien on the ship to the extent of the outstanding payments it is owed. An injunction may be difficult to obtain given the probable need for the buyer to show that an injunction is necessary based on a showing that it cannot be adequately compensated with monetary damages. Shipyards’ rights on default buyers. Ship buyer’s responsibilities under the ship construction contract are usually few. Nevertheless, like the buyer, ship builder may have the right to suspend or cancel the contract. In so doing, ship builder often has the right to retain paid progress payments, finish the ship and sell it to a third party, although usually with a requirement to reimburse the buyer if the resale price otherwise makes the builder whole. Under current laws in United States, a ship mortgage can only be recorded to secure a lien against the ship once the ship is complete and delivered. Buyers of ships in the United States usually protect their interest in partially completed ships and components and parts purchased for the ship by the builder by filing financing statements covering such property under the Uniform Commercial Code. The U.S. Maritime Law Association has in the past proposed that Congress amend the applicable statutes to make it possible for a ship mortgage to be filed on a partially completed ship. In the meantime, cautious buyers may insert contractual language requiring that materials, parts, and equipment purchased for use in the ship under construction be “identified to the ship” once the corresponding progress payment has been made. Ship buyer can insure against risks to, or related to, the ship while under construction. Ship owners, as well as lenders and shipyards, can purchase shipyard’s risks insurance coverage for the risks of physical loss or damage to a ship during construction, testing and trials as well as third party liability risks during that period of time. The extent of losses covered will depend upon the terms of the policy. In general, the broader the insurance coverage, the greater the cost of insurance, so ship buyer will have to evaluate the costs and benefits of the insurance coverage.