Embracing the future in tugboat newbuild contracts

As a rising tide floats all boats, a steadily strengthening array of forces are pushing tugboat and other workboat owners and operators to consider newbuilds that utilize alternative power sources. Those forces include new and more stringent environmental regulations for greenhouse gas emissions, rapidly maturing alternative power technologies, significant federal and provincial government incentives, changing commercial and public expectations, and an aging coastal workboat fleet.

When the time finally comes to commission a new build utilizing battery-electric, LNG, methanol, hydrogen, biodiesel, or another alternative power source, we are seeing that many traditional shipbuilding contract terms require revision or reconsideration.

It is a standard shipbuilding contract term that the new build comply with applicable flag state (Transport Canada) regulations, and with Class requirements if the vessel is to be classed. But with the novel technologies required for an alternative power source, the applicable Transport Canada regulations and Class rules may not yet exist. Moreover, specific components, such as battery types, fuel storage tanks, or engine models, may not yet have passed required testing and received required approvals such as type approval. In fact, your newbuild might be the test case by which testing and type approvals are achieved and new regulations and rules are developed!

Future new builds will benefit from your pioneering work. But for your new build contract, it will be important to consider how to address and allocate risks for technologies not yet approved and regulations and rules not yet developed, procedures for navigating the path to final approval, and contingencies in the event such final approval is not achieved.

The provisions governing maker’s list, vendor’s list, allowable substitutions, and allowable subcontracting may also require greater consideration than usual, especially for an international build. Novel power technologies are likely to require the fabrication or procurement of specialized and novel components and equipment, such as electrical boards for battery-electric and specialized fuel management and monitoring systems for LNG, hydrogen or methanol. It may be essential to have key novel components fabricated by or procured from

By Jason Hicks, Partner, Bernard LLP

specified suppliers with the requisite knowledge and expertise, and substitutions or subcontracting on such components may present problematic risks for the buyer.

The targets and tolerances for some key performance metrics will likely require reconsideration. Clearly, the fuel consumption target must be restated in the units of the alternative power source. But, given the novelty of the alternative power technology, it is highly likely that neither builder nor buyer will have a good baseline of experience from which such targets and tolerances can be set with any confidence. Accordingly, it may be difficult to obtain or give guaranteed targets at all, or tolerances might have to be set at much wider ranges than is typical for traditional fossil fuel power sources.

On the other hand, the novel technologies may warrant new or different targets and tolerances. Consider, for instance, the merits of setting targets and tolerances for battery-electric charging rates, LNG boil-off gas rates, or gaseous fuel evaporation rates.

Warranties may also require review and revision, including shipyard construction warranties, naval architect and marine engineering design warranties, and third- party supplier and manufacturing warranties. The risk of warranty claims is potentially higher with novel technology, as there is less history available to guide expectations. The warranty provisions will need to be balanced carefully to ensure sufficient coverage for the buyer, on the one hand, without being unrealistically onerous on the designer, builder, or third-party suppliers, on the other hand.

Another area likely to require greater care and attention than usual is the allocation of intellectual property. In a new build involving novel technologies, the buyer must take care to ensure that it obtains the intellectual property rights essential to operate and maintain the new build throughout its entire life cycle, inclusive of refits, rebuilds, and decommissioning, as well as any subsequent sales to future purchasers. Shipyards and designers, for their part, must take care not to give away IP that may be essential to their future work with the novel technology.

Federal and provincial government incentive programs may offer significant financial incentives to make alternative-power new builds commercially attractive. But both buyers and builders should be mindful that these incentives may come with strings attached that potentially impact the shipbuilding contract terms. Programs may be targeted to vessels of specific attributes, such as of a particular category of gross tonnage, a particular fuel as power source, or a particular category of intended work. Programs may require use of Canadian shipyards or provide additional incentives for Canadian content. The timing and availability of payments may be impacted by the beginning and ending of government fiscal years. The precise requirements will vary by program.

The arrival of alternative power source technologies in the tugboat and workboat sector promises to have significant and long-term implications. It is important for builders and buyers alike to carefully review and adapt their shipbuilding contract terms and conditions to properly embrace this development and to minimize the risk of unintended contractual consequences.

Jason Hicks is a solicitor and partner at Bernard LLP in Vancouver, a leading Canadian maritime law firm. He can be reached at 604.661.0600 or hicks@bernardllp.ca. Ü