Shipbuilding Contracts

Shipbuilding industry is one of the biggest heavy industries in the world. Shipyards come in all different sizes and specialties. Some shipyards build a particular type of ship like OSV (Offshore Support Ship) or large cruise ships, and other shipyards build wide array of large commercial ships from container ships and bulk carriers to LNG (Liquefied Natural Gas) carriers to FPSOs (Floating Production Storage and Offloading Ships). Ship designs are produced both by shipyards and by independent marine architectural firms. Biggest and busiest shipyards, like Chinese, Korean and Japanese shipyards, usually have a backlog of newbuilding orders. The leading shipbuilding nations of the world in terms of overall tonnage have been China, Korea and Japan for the last decades. In shipping business, it is a common practice for a ship owner to have to order a ship for delivery more than a year in advance. When ship demand outpaces existing shipyard capacity, ship owners may compete for shipyard slots in a queue and negotiate for transferable slot. Usually, shipyards are the largest employers of that city and shipyards might receive state subsidies. It is common for shipyards to price the construction of ships on factors other than purely commercial ones. USA has a robust shipyard industry but United States shipyards tend to fall into one of two types. The first type shipyards that primarily focus on the construction of ships for the U.S. Navy, such as Newport News Shipbuilding in Virginia. The second type shipyards that primarily focus on commercial ships, such as Aker Shipbuilding in Pennsylvania. One major shipyard in San Diego, California is NASSCO (National Steel and Shipbuilding Company or NASSCO, located in San Diego) constructs both U.S. Navy and commercial ships. In United States, there are over 20 active large shipyards and almost 90 small shipyards at the end of 2014. Ship construction contracts are not considered “maritime contracts” for purposes of federal court admiralty jurisdiction. Ship construction contracts do not directly relate to commerce by sea or ships in navigation. There are a number of standard ship construction forms, mostly used one is BIMCO’s (Baltic and International Maritime Council) “Newbuildcon”. Furthermore, there is substantial similarity in ship construction dispute decisions, because most ship construction contracts outside the United States include choice of law and forum clauses generally calling for the application of English law and dispute resolution through English arbitrations. Shipbuilding contracts are typically comprised of two parts. The first part, which sets out the primary ship building contract, usually includes the following terms:
• ship description/characteristics/general specifications
• contract price and whether it is to be paid in specified progress payments
• liquidated damages payable by the builder to the buyer for deviations from significant ship characteristics such as speed, cargo capacity and fuel consumption and for late delivery
• guarantees of the buyer’s progress payment obligations and the builder’s refund obligations
• processes for buyer’s approval of the plans, drawings and detailed specifications, inspection of the ship while under construction, and ship testing and trials
• procedures for making changes to the terms and specifications (“change -orders”); rights of the parties to make ship modifications and allocation of responsibility if regulatory changes mandate such modifications; intellectual property rights and licenses; warranties and remedies; physical and document delivery and closing requirements; builder’s warranty against defects;
• suspension, termination and default rights and procedures.

The second part of shipbuilding contract usually by far the larger document, will be the detailed ship specifications that describe the construction of the ship, system by system, the standards to which the ship will be built, the certificates for the ship that the shipyard will be required to deliver, and other technical details. Buyers and their attorneys may be tempted to concentrate on the “legal” and “commercial” terms, and leave the specifications to the engineers, but that is a risky practice. Any conflict between the terms of the main contract and the specifications could make enforcement of contract terms more difficult, and any omissions, ambiguity or lack of standards in the specifications will limit the buyer’s ability to bring a claim under the contract.
Vast majority of ship building contracts provide for the buyer to pay the shipyard through progress payments made over time with the last payment usually due at delivery. There is considerable variation in the timing of progress payments although it is typical for significant payments to be clue based upon construction milestones, such as first steel cutting and keel laying.