Shipbuilding contracts

The book is edited as a commentary, and comments are given to each of the relevant articles and parts of SHIP 2000 in a natural sequence, making it useful as a practical handbook for practitioners. Frequent comparisons with other standard contracts, such as NEWBUILDCOM, SAJ Form and AWES form, are made throughout the book, and hence this is a commentary on standard shipbuilding contracts, not just SHIP 2000. The book is an essential tool for lawyers, shipbuilders, shipowners and shipbrokers, as well as other parties being involved in shipbuilding matters.

Øystein Meland has been a partner in the Norwegian international law firm Wikborg Rein since 1985 and is today working as Of Counsel with the firm’s office in Bergen.

For close to 40 years Meland has worked extensively with maritime law issues and particularly shipbuilding matters for both Norwegian and international clients, and he was head of the firm’s Shipping and Offshore Practice for many years. Meland has argued several large international arbitration matters on shipbuilding, as well as other international disputes, and has extensive experience as arbitrator.

Meland is Manager of Bergen Shipowners Association, member of the Norwegian Shipowners legal committee, drafted and negotiated SHIP 2000 on behalf of the shipbuilders’ association and wrote the first commentary to SHIP 2000 published in Norwegian in 2006.

This book is also available at www.juridika.no

isbn 978-82-15-03447-8

9

788215

034478

Shipbuilding Contracts

Shipbuilding Contracts is the second book by the same author on shipbuilding matters, based on the Norwegian book Skipsbygging from 2006. In its second edition the book has now been expanded to include further comments on provisions and clauses in other shipbuilding contracts and has also had its commentary on law, regulations and practice for the last 15 years updated. The text covers all relevant legal aspects connected with shipbuilding, with Norway as the starting point. The book is structured as a commentary to the Norwegian Standard Shipbuilding Contract, SHIP 2000, which is recommended used, not just in Norway and the Nordic Countries, but also internationally.

Øystein Meland

Shipbuilding Contracts A Commentary Based on SHIP 2000 This book is also available at www.juridika.no

Shipbuilding Contracts

8215034478_Meland_Shipbuilding Contracts.indd 1

14.10.2019 13:12

8215034478_Meland_Shipbuilding Contracts.indd 2

14.10.2019 13:12

Ă˜ystein Meland

Shipbuilding Contracts A Commentary Based on SHIP 2000

Universitetsforlaget

8215034478_Meland_Shipbuilding Contracts.indd 3

14.10.2019 13:12

© Universitetsforlaget 2019 ISBN 978-82-15-03447-8 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or ­otherwise, without the prior permission of Universitetsforlaget. Enquiries should be sent to the Rights Department, Universitetsforlaget, Oslo, at the address below. www.universitetsforlaget.no Universitetsforlaget AS P.O. Box 508 Sentrum NO-0105 Oslo Norway Cover design by ANTI / Erik Johan Worsøe Eriksen Cover by Universitetsforlaget Prepress by ottaBOK Typeset in Times LT Std 10,5/12,5 Printed in Norway by 07 Media – 07.no Binding by Bokbinderiet Johnsen AS

8215034478_Meland_Shipbuilding Contracts.indd 4

14.10.2019 13:12

Preface

Since the publication of my first book, Skipsbygging, in 2006 as a commentary to the Norwegian Standard Shipbuilding Contract (SHIP 2000), SHIP 2000 has now been widely accepted and used internationally, not just in the Nordic countries, but also in Europe and parts of Asia. It has been recognised that although SHIP 2000 is not perfect, it is nevertheless considered the most balanced standard shipbuilding contract internationally.

However, the law and shipbuilding practice are dynamic. The first book, being in Norwegian, is sold out, and many requests have been received for a second edition, now in the English language, recognising that the readership is international and the prevailing language in the business is English. This was my motivation for writing a newly updated and expanded edition, now called Shipbuilding Contracts.

The book is based on my experience for more than 35 years as a maritime lawyer with international shipbuilding matters, acting both for the shipbuilders and the shipowners, as well as for suppliers and subcontractors, banks and underwriters.

A shipbuilding contract contains elements of nearly all parts of law in general, not just law of contract. IPR rights, insolvency, securities, employment law as well as construction law, dispute resolution and arbitration rules are all vital elements to consider when entering into or executing a shipbuilding contract. As in any contract, the core of a shipbuilding contract is a matter of dividing the risks between the parties. The book is intended for practitioners more than pure academics. I have tried to make the book a hybrid between a legal textbook and a handbook for practitioners, giving recommendation and advice as to how the different risks can be identified and the provisions amended to suit the actual need of the parties in different situations. Being a Norwegian lawyer, the book is based on Norwegian law, but the advice given is of general nature based on my own experience and the relevant decisions made in shipbuilding disputes, not just in Norway but also internationally, with use of examples from actual cases to illustrate the issues at hand.

The book is not a second edition of Skipsbygging as such, but based on the same mould, since this format seems to have met the expectations of the readers and users. Apart from now being in English, the book is updated with new relevant laws and regulations as well as court and arbitration practice. In addition, comments and comparisons are also made to NEWBUILDCON, being the latest standard shipbuilding contract internationally.

I am grateful to Wikborg Rein for allowing me to use my time to write this book again, and for the help, assistance and valuable advice given to me over the years by so

8215034478_Meland_Shipbuilding Contracts.indd 5

14.10.2019 13:12

6

Preface

many of my very qualified friends and colleagues in Wikborg Rein, both in Norway and abroad. Although many more of my colleagues could be mentioned, the assistance from Peter Kristian Jebsen, Jonas Nikolaisen and Morten Valen Eide, as well as our super assistant Unni Henriksen in the last period of finalising the book, has been invaluable.

None further mentioned – none forgotten.

Bergen, August 2019 Ă˜ystein Meland

8215034478_Meland_Shipbuilding Contracts.indd 6

14.10.2019 13:12

Contents

Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Chapter 0 Introduction – the formation of shipbuilding contracts. . . . . . . . . . . . . . . . . . 15 0.1 The use of standard-form shipbuilding contracts – historical background for SHIP 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 0.2 The genesis of a shipbuilding project . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 0.3 Negotiations – Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 0.4 When is the contract final and binding?

Precontractual liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 0.5 Conditions precedent or subjects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 0.6 The shipbuilding contract – legal characteristics. . . . . . . . . . . . . . . . . . . 27 0.7 Agreements supplementing the shipbuilding contract. . . . . . . . . . . . . . . 30 0.7.1 Financing agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 0.7.2 Shipbrokers – Commission agreements. . . . . . . . . . . . . . . . . . . 31 0.7.3 Option Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 0.8 The structure of the book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Chapter 1 Preamble and definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 1.1 Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1.2 The definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Chapter 2 The vessel, description and class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.0 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.1 Description and standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.1.1 Hull number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.1.2 The Specification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.1.3 Design of the Vessel – responsibility . . . . . . . . . . . . . . . . . . . . . 51 2.1.4 The Quality of the Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.2 Main dimensions and characteristics. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2.2.1 Dimensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2.2.2 Cargo capacity – deadweight . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 2.2.3 Cubic capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

8215034478_Meland_Shipbuilding Contracts.indd 7

14.10.2019 13:12

8

Contents

2.2.4 Propulsion machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.2.5 Speed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.2.6 Fuel consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.3 Classification, rules and regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.4 Subcontracting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Chapter 3 Price and payment terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.1 Original Contract Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3.1.1 How the price is set – what is included?. . . . . . . . . . . . . . . . . . . 65 3.1.2 Adjustments of the Contract Price . . . . . . . . . . . . . . . . . . . . . . . 66 3.1.3 Use of basis prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 3.2 Currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3.3 Terms and method of payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 3.3.1 Instalments payable during construction. . . . . . . . . . . . . . . . . . . 69 3.3.2 Payment for modification and changes. . . . . . . . . . . . . . . . . . . . 71 3.3.3 Method of payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.3.4 Due date for payment of instalments . . . . . . . . . . . . . . . . . . . . . 72 3.3.5 Documentation for Buyer’s ability to pay. . . . . . . . . . . . . . . . . . 72 3.3.6 Consequences if the Buyer cannot document his ability to pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.3.7 Repayment guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.3.8 The Builder’s right to retention (possessory lien). . . . . . . . . . . . 76 3.3.9 Disputes concerning price, and exchange of guarantees at delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Chapter 4 Adjustment of contract price – cancellation by the buyer. . . . . . . . . . . . . . . . 81 4.0 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.1 Delayed delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.1.1 Anticipatory breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 4.1.2 Bonus for early delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 4.2 Speed deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 4.3 Deficiencies in fuel consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 4.4 Defects in deadweight and/or cubic capacity. . . . . . . . . . . . . . . . . . . . . . 100 4.5 Other important performance criteria and the consequences of not filling in the clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Chapter 5 Approval of plans and drawings and inspection during construction. . . . . . 104 5.0 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.1 Approval of plans and drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 5.1.1 Detailed building schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5.1.2 Approval of Drawings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5.1.3 Comments to drawings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

8215034478_Meland_Shipbuilding Contracts.indd 8

14.10.2019 13:12

Contents

9

5.2 Appointment of Buyer’s Representative . . . . . . . . . . . . . . . . . . . . . . . . . 111 5.3 Inspection by the Representative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 5.3.1 Place of inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 5.3.2 Extent of inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 5.3.3 The Buyer’s own testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 5.3.4 Duty to complain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 5.3.4.1 Consequences of lack of notice. . . . . . . . . . . . . . . . . . 115 5.4 Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 5.5 Representative – Division of liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 5.6 The Buyer’s responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Chapter 6 Modifications and changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 6.1 Modification of the Specification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 6.1.1 The need to be able to make changes. . . . . . . . . . . . . . . . . . . . . 121 6.1.2 Change orders are to be made in writing . . . . . . . . . . . . . . . . . . 124 6.1.3 Unit prices and reasonable price. . . . . . . . . . . . . . . . . . . . . . . . . 125 6.1.4 The condition ‘Adversely affect the Builder’s other commitments’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 6.2 Changes in rules and regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 6.3 Substitution of materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Chapter 7 Tests and Trials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 7.0 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 7.1 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 7.2 Weather conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 7.3 How the sea trial is to be conducted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 7.4 Method of acceptance or rejection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 7.5 Effect of Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 7.6 Surplus consumable stores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Chapter 8 Delivery date and delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 8.1 Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 8.1.1 Notice for delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 8.1.2 Place for delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 8.1.3 The time of delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 8.2 When and how delivery is to be effected. . . . . . . . . . . . . . . . . . . . . . . . . 148 8.3 Documents to be delivered to the Buyer . . . . . . . . . . . . . . . . . . . . . . . . . 152 8.3.1 Protocol of trials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 8.3.2 Protocol of inventory and equipment . . . . . . . . . . . . . . . . . . . . . 152 8.3.3 Protocol of surplus consumable stores. . . . . . . . . . . . . . . . . . . . 153 8.3.4 Drawings and plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 8.3.5 All certificates, including the Builder’s Certificate. . . . . . . . . . . 153

8215034478_Meland_Shipbuilding Contracts.indd 9

14.10.2019 13:12

10

Contents

8.3.6 Declaration from the Builder that the Vessel is free of encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 8.3.7 Commercial invoice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 8.3.8 Bill of Sale or similar title document . . . . . . . . . . . . . . . . . . . . . 155 8.4 Title and risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 8.5 Removal of the Vessel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Chapter 9 Delays and extension of time for delivery (Force Majeure). . . . . . . . . . . . . . . 157 9.0 Introduction – the legal concept of ‘Force Majeure’. . . . . . . . . . . . . . . . 159 9.1 Causation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 9.1.1 Extraordinary circumstances or events outside the Builder’s control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 9.1.1.1 Extraordinary circumstances or events . . . . . . . . . . . . 164 9.1.1.2 Outside the Builder’s Control . . . . . . . . . . . . . . . . . . . 166 9.1.1.3 Delay by Subcontractors . . . . . . . . . . . . . . . . . . . . . . . 167 9.1.1.4 Force majeure delaying other projects – or knock-on effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 9.1.1.5 Requirement of due diligence in planning and execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 9.1.1.6 Force Majeure events occurring after the Contract Delivery Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 9.1.1.7 The Builder’s obligation to avoid or minimize delay . 172 9.2 Notice regarding Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 9.3 Permissible Delay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Chapter 10 Warranty of quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 10.1 Extent of Builder’s responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 10.2 The warranty obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 10.2.1 The extent of the warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 10.2.2 Warranty period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 10.2.3 The notification of defects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 10.2.4 The form and content of the notice. . . . . . . . . . . . . . . . . . . . . . . 186 10.2.5 Extended warranty period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 10.3 Rectification of defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 10.3.1 The content of the obligation to rectify. . . . . . . . . . . . . . . . . . . . 187 10.3.2 Insufficient or incomplete repair of a defect. . . . . . . . . . . . . . . . 188 10.3.3 Limited liability for consequential damages – part of same equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 10.3.4 Place of repair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 10.3.5 Supplementary costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 10.4 Subcontractors’ guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 10.5 Sale of the Vessel during warranty period and assignment of warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

8215034478_Meland_Shipbuilding Contracts.indd 10

14.10.2019 13:12

Contents

11

10.6 The guarantee engineer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 10.6.1 The tasks of the guarantee engineer. . . . . . . . . . . . . . . . . . . . . . 195 10.6.2 Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Chapter 11 Ownership, risk and insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 11.1 Ownership and registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 11.2 Risk and insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Chapter 12 Default provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 12.0 Default provisions in general. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 12.1 Builder’s default – Cancellation by Buyer. . . . . . . . . . . . . . . . . . . . . . . . 208 12.2 Buyer’s default – disputes regarding payment. . . . . . . . . . . . . . . . . . . . . 210 12.2.1 The Buyer’s liability in case of breach of payment obligation. . 211 12.2.1.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 12.2.1.2 The starting point – the positive contractual interest. . 212 12.2.1.3 The actual calculation of damages. . . . . . . . . . . . . . . . 212 12.2.2 Default interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 12.2.3 Set-off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 12.3 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 12.3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 12.3.2 Conditions for cancellation caused by insolvency . . . . . . . . . . . 215 12.3.3 Limitations in the right to cancel in case of insolvency. . . . . . . 216 12.3.4 Restitution of contributions at cancellation . . . . . . . . . . . . . . . . 219 12.3.5 Can a mortgagee take over the Contract?. . . . . . . . . . . . . . . . . . 220 Chapter 13 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 13.1 The need for assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 13.2 The 1981 Contract and other shipbuilding contracts – background law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 13.3 Assignment under SHIP 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 13.4 Costs for assignment – valid reasons to withhold consent. . . . . . . . . . . . 225 Chapter 14 Taxes and duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Chapter 15 Patents, trademarks, copyrights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 15.1 Generally about patents, design and other intellectual property rights (IPR). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 15.2 Use of patents and design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 15.3 Disputes regarding IPR infringement . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

8215034478_Meland_Shipbuilding Contracts.indd 11

14.10.2019 13:12

12

Contents

15.4 Limitation of the Buyer’s rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 15.5 Dispute concerning IPR – jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Chapter 16 Buyer’s supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 16.0 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 16.1 Buyer’s responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 16.1.1 Scope and place of delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 16.1.2 Time of delivery and delay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 16.2 The Builder’s responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 Chapter 17 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 17.1 Why have a specific provision concerning notices? . . . . . . . . . . . . . . . . 241 17.2 Solution in other contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 17.3 Requirements for notices to be in writing. . . . . . . . . . . . . . . . . . . . . . . . 243 17.4 Who should send the notice?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 17.5 The effect of sending a notice to a recipient other than specified. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 17.6 Language. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Chapter 18 Entire contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 18.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 18.2 Significance for evidence, parties and choice of law. . . . . . . . . . . . . . . . 248 Chapter 19 Governing law, dispute and arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 19.1 Choice of law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 19.2 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 19.3 Ad hoc versus institutional Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . 254 19.3.1 The traditional Nordic approach. . . . . . . . . . . . . . . . . . . . . . . . . 254 19.3.2 The Nordic Offshore & Maritime Arbitration Association’s rules and guidelines . . . . . . . . . . . . . . . . . . . . . . . 254 19.4 Reasons for choosing arbitration as dispute resolution. . . . . . . . . . . . . . 255 19.4.1 Composition of the tribunal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 19.4.2 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 19.4.3 Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 19.4.4 Neutral ground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 19.5 Arbitration as lis pendens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 19.6 Arbitrators’ required qualifications, experience and expertise . . . . . . . . 260 19.7 Place of arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 19.8 Costs of arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 19.9 Initiating arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

8215034478_Meland_Shipbuilding Contracts.indd 12

14.10.2019 13:12

Contents

13

19.10 Alternative dispute resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 19.11 Remedies against arbitration awards. . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Web pages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Literature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Indexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Appendix 1: Norwegian Standard Shipbuilding Contract – SHIP 2000 . . . . 285 Appendix 2: BIMCO Standard Shipbuilding Contract – NEWBUILDCON. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Subject Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361

8215034478_Meland_Shipbuilding Contracts.indd 13

14.10.2019 13:12

8215034478_Meland_Shipbuilding Contracts.indd 14

14.10.2019 13:12

Chapter 0

Introduction – the formation of shipbuilding contracts

0.1

The use of standard-form shipbuilding contracts – historical background for SHIP 2000

Standard-form shipbuilding contracts have been used for decades. These have often been drafted and developed by the shipbuilding yards. For construction of vessels at Norwegian yards, however, the long-standing tradition has been for Norwegian shipbuilders and shipowners to agree on a standard-form contract. The first such standard-form contract negotiated between the shipbuilders and shipowners in Norway dates back to 1955.1 Later revisions to the 1955 contract resulted in a new, updated, and improved standard-form contract in 1962.

In the 1970s, the Norwegian Shipowners’ Association requested a renegotiation of the 1962 contract, claiming that it was unbalanced in favour of the yards. The Mechanical Yards’ Association did not agree, and continued to recommend their members use the 1962 contract. The result was a lengthy period during which there was no standard-form contract acceptable to and recommended by both parties’ organisations. This was not a desirable situation, and after pressure from members on both sides, the organisations agreed to draft a document which both could recommend to their respective members: a so-called ‘agreed document’.2 Each side appointed its own negotiation committee, and after several years of negotiations, agreement was reached on a new standard-form shipbuilding contract (the ‘1981 Contract’).3 The 1981 Contract is still in limited use today, albeit often in substantially amended form.

In 1991 the Norwegian Supreme Court passed judgment in what is known as the Hardhaus case, the outcome of which was not in line with what the shipbuilding industry expected.4 The case concerned a shipyard’s liability for damages when, immediately after delivery, a defective coupling caused a fire in the vessel’s engine room, resulting in heavy 1 2

3 4

The yards represented by the Mechanical Yards’ Association (then ‘Mekaniske Verksteders Landsforbund’) and the shipowners by Norwegian Shipowners’ Association (then ‘Norges Rederforbund’).

On ‘agreed document(s)’ more generally, and the considerations which must be taken into account when interpreting them, see ‘Tolkning av sjørettslige standardkontrakter – særlig om betydningen av forarbeider’ (‘Interpretation of maritime standard contracts – particularly concerning preparatory works’), Thor Falkanger, Ånd og rett: Festskrift til Birger Stuevold Lassen, page 289.

For an explication of the 1981 Contract, see commentary by Stephen Knudtzon (‘Knudtzon’) in the Nordic Shipowners Defence Clubs Special Member Circular No. A 1984.

Reported in Rt. 1991 page 719.

8215034478_Meland_Shipbuilding Contracts.indd 15

14.10.2019 13:12

16

Chapter 0 Introduction – the formation of shipbuilding contracts

damage to the engine room. The Supreme Court held, in a 3–2 decision, that the yard’s liability for consequential damages was more extensive than had been intended by the parties involved in negotiating the 1981 Contract, and that the relevant limitation-ofliability provision in the 1981 Contract had to be construed more narrowly than the yard had submitted. The yards immediately reacted by amending the limitation-of-liability provision to exclude the effect of the Hardhaus judgment, and their organisation appointed a special committee with the mandate to review the 1981 Contract and suggest necessary amendments.

The committee soon concluded that a total revision of the 1981 Contract was needed, and that a revised standard-form contract should be given a format more suitable for shipbuilding contracts with international Buyers. The desire for a more ‘international’ standard-form contract was based on the Norwegian yards’ experience that large and professional foreign Buyers frequently brought their own ‘standard’ to the negotiating table. The 1981 Contract did not measure up to these ‘international’ standards in terms of detail, and on many questions it provided no clear solution. The 1981 Contract was initially intended to be used solely under Norwegian law and mostly between Norwegian yards and owners, and as such would be supplemented by Norwegian background law.5 International Buyers, however, frequently demanded a foreign governing law of the contract, such as English law with arbitration in London. Due to the short and rather rudimentary form and wording of the 1981 Contract, this led to uncertainty and unpredictability as to the interpretation of the contract and thereby the legal position of the parties.

The goal of the yards’ committee was therefore to draft a new and more detailed standard-form contract, with clear and precise language that would provide improved predictability while remaining balanced. In addition, the yards wanted a contract form they could use as a ‘marketing tool’ in their domestic and international sales work, and as a result it was decided that the contract should be drafted in English. The choice of language, combined with the recognition that the contract might in practice be governed

by English law, made it natural to adopt a more English approach also to the structure of the contract.

Once the committee had finalised their first draft, the Norwegian Shipowners’ Association was approached suggesting that the yards’ draft should form the basis for renegotiating the 1981 Contract. The Norwegian Shipowners’ Association agreed to renegotiate on this basis and engaged the Nordic Shipowners’ Defence Association, represented by Supreme Court Attorney Georg Scheel, to negotiate on behalf of the Norwegian Shipowners’ Association.

In 1997, after a year of negotiations, the first joint draft was approved by both parties. Following further quality control, including by English lawyers, the contract was finally approved and came into use in 2000. Hence this standard-form contract is often referred to as ‘SHIP 2000’, a name also used in this book. There are important differences between SHIP 2000 and the 1981 Contract, and these will be commented on in the discussion of each of the relevant provisions. Comparison will also be made to other standard-form shipbuilding contracts, such as the Shipbuilders’ Association of Japan 5

See Scandinavian Maritime Law, Falkanger/Bull/Brautaset, pages 32–35 and ‘A comparison between English and Norwegian principles for interpretation of contracts’, Thor Falkanger, Arkiv for Sjørett, Issue 9, page 537.

8215034478_Meland_Shipbuilding Contracts.indd 16

14.10.2019 13:12

0.2 The genesis of a shipbuilding project

17

standard-form contract from 1974, known as the ‘SAJ Form’, which again has formed the basis for a number of Korean, Singaporean and Chinese standard-form contracts.

All these forms based on the SAJ Form were, however, unilaterally prepared by the yards: They are balanced more in favour of the Builder and should be considered ‘yard forms’. Such forms nonetheless predominate in international shipbuilding in the Far East, particularly in Japan, Korea and China. In Europe, a yard form was prepared by the Association of Western European Shipbuilders in 1972; the ‘AWES Form’, which was most recently revised in 1995. The AWES Form has, however, never been widely accepted by shipowners, who consider it both less comprehensive and more favourable to the Builder then e.g. SHIP 2000.

The use of SHIP 2000 has steadily increased, and despite originating in Norway, it can no longer be seen as a purely ‘national’ standard-form contract. In Scandinavia, nearly all newbuilding contracts are now based on SHIP 2000, with amendments as required.

Presumably since it is an ‘agreed document’, in contrast to other standard-form contracts, SHIP 2000 has also gained recognition and widespread use outside of Scandinavia, including in Spain, Germany, Poland, Italy, Turkey, India, Russia, and the Baltic States, as well as – to some extent – in India, China, and Singapore.

It was hoped that SHIP 2000 as an agreed document and updated revised shipbuilding contract could gain the approval of BIMCO, implying a recommendation to its members for use. In 2005, however, BIMCO chose instead to prepare its own standard-form shipbuilding contract, which was approved by BIMCO’s Documentary Committee and launched in 2008 under the code name NEWBUILDCON. NEWBUILDCON follows the standard BIMCO format, using the drafting technique of ‘boxes and clauses’. The yards were not invited to participate fully in the discussions or preparation of the new form. Despite in this context mainly representing the Buyers’ interests, BIMCO however strived to prepare a well-balanced document. The yards have nonetheless been wary of using NEWBUILDCON, partly because it was prepared unilaterally by BIMCO without the yards’ participation, and partly since the format with ‘boxes and clauses’ is both different from the format the yards are used to and requires extensive cross references, making the document less readily accessible. Comparisons and references will, where pertinent, be also made to NEWBUILDCON, although the comments and analysis in this book follow the structure of, and mainly concerns, SHIP 2000.

0.2

The genesis of a shipbuilding project

The initiative for a newbuilding project is generally taken by a shipowner. It is unusual for a shipyard to build a ship on its own account, but a yard may – depending on market conditions – find it worthwhile to start building a ship as ‘relief work’ or on the calculation that the vessel, when completed, will attract a Buyer at a price yielding the yard an acceptable profit.6 As their fleets require more or less constant renewal, large shipowning companies 6

An example is the Kværner Group (now Aker), which built several vessels for its own account at its yard in Philadelphia – with great success. Kværner had to maintain the yard’s production and workforce in order to satisfy conditions set by US authorities when they allowed Kværner’s acquisition of the yard.

8215034478_Meland_Shipbuilding Contracts.indd 17

14.10.2019 13:12

18

Chapter 0 Introduction – the formation of shipbuilding contracts

with long-term commitments as operators (engaged in what is referred to as ‘industrial shipping’) often have their own newbuilding and project departments. These departments tend to have considerable experience with and strong views on ships, ship types, and preferred equipment. Through technical management and operation they gain both general and specific competence and experience with respect to the types of vessels the company has under its management, and the vessels needed in order to meet future demand from customers. As a result, such companies often initiate and contribute to the development of new and more advanced or specialised types of ships. Independent ship consulting companies are also a driving force behind ship development; due to their specialised and experienced ship engineers, they possess special competence in vessel design, lines, strength calculations, etc.

Ship consultants also frequently assist shipowners in designing new or improved vessel types specifically in order to meet particular needs in the relevant trade or service.

The interests of shipowners and ship designers may conflict: While shipowners want cost-effective and safe vessels that efficiently satisfy the needs of their customers – cargo owners and charterers – ship designers may strive for the ‘perfect’ vessel from a technical point of view, with the latest, most advanced equipment. Such differences of opinion boil down to a difference between ‘nice to have’ and ‘need to have’.

The development of new, improved and more efficient vessels, vessel types and ship equipment over recent decades has been formidable. New technology; more efficient and active use of consultants and engineers; conscious investment in research and development to create advanced niche products that are competitive in spite of higher initial costs; and new and tougher demands from regulatory authorities and classification societies following media coverage of accidents at sea have all contributed to this development. Double-bottom and double-hull requirements, ballast-water treatment system requirements, limitations on sea and air emissions, emission-controlled areas, a growing recognition of the problems posed by climate change, and skyrocketing bunker prices have all been incentives to improve what is already the most environmentally friendly transportation mode available. As a result, sailing vessels can quickly become ‘old-fashioned’ in comparison to newbuildings. A shipowner must consider all of these factors in light of an investment horizon of 25–30 years.

Hence the process of ship design is important. As will be emphasized later, issues related to design have been the source of many discussions and conflicts. It is therefore important to recall the purpose and basic principles of ship design. The design of a ship can either be a completely new design, being the result of innovative R&D projects undertaken by large ship consultants, or a more developed process often led or initiated by the shipowner as explained above. In any case, the purpose will always be to design a vessel that meets the prospective owner’s requirement; in short the purpose can be said to be to design a vessel that ‘satisfies the owner’s requirements at minimum costs’.7 The vessel must, however, also meet the relevant class and regulatory requirements, and hence be safe and reliable, but at the same time economical to operate within the boundaries set by rules and regulations as well as technology and the potential customer’s budget.

7

Ship Design and Construction 2003, Thomas Lamb, The Society of Naval Architects and Marine Engineers, page 5–1.

8215034478_Meland_Shipbuilding Contracts.indd 18

14.10.2019 13:12

0.2 The genesis of a shipbuilding project

19

Irrespective of whether the design of a vessel is a completely new design or a more developed design, the ship design process is divided into different stages as for industrial design. The first phase is the conceptual design where the customers’ requirements are identified, hereunder evaluating alternative solutions. This includes preliminary power estimations, evaluating the propulsion system, hull shape, general arrangement, preliminary hydrostatic and hydrodynamic calculations, and preliminary cost estimations. These conceptual and initial calculations are further evaluated and are part of the preliminary or basic design phase. The basic design is also described as the phase bridging the gap between the conceptual and detailed design phase.8 The ship design process as such was described and can be illustrated in the so-called ‘design spiral’, which still shows the different stages in use today:9

Shipbrokers also play an important role in the creation or development of specific shipbuilding projects. They know the markets in which vessels trade, and are familiar with the capacity and capabilities of the yards worldwide in relation to each vessel type. Shipbrokers specialise with regard to vessel types, market segments, and geographical areas.

8 9

https://www.caverion.com/service-areas/design-engineering/basic-design.

Ship design spiral (J. Evans 1959). For explication on modern ship design see: https://www.researchgate.net/publication/273026917_Ship_Design_and_System_Integration.

8215034478_Meland_Shipbuilding Contracts.indd 19

14.10.2019 13:12

20

Chapter 0 Introduction – the formation of shipbuilding contracts

Due to comparatively high costs – in particular the high labour costs – Norwegian yards have not been competitive when it comes to building large and relatively simple vessels with large amounts of steel work. As a result, large tankers, bulkers, and container vessels are almost exclusively built at yards in the Far East, particularly in Japan, Korea or China, where a combination of lower labour costs and effective production lines makes it attractive to build large vessels in series. More specialised and complex vessels, such as offshore support and construction vessels requiring installation of very technically complex equipment and systems, and ultra-modern fishing vessels, hydrographic survey vessels, and research vessels, are still built in Scandinavia at competitive quality and price.

After a preliminary decision to build a vessel has been made, and the main dimensions and functional requirements have been decided, a shipowner may engage a third party consultant to prepare an initial project plan. This initial project plan forms the basis for an outline specification in which the requirements for speed, consumption and cargo capacity are specified. Depending on the internal resources available to the shipowner and the shipowner’s previous experience, the next step is generally to engage one or more brokers with the necessary knowledge of and experience with the specific vessel type to assist in locating suitable yards.10 The owner may also choose to engage ship consultants to obtain and compare offers from yards, and to evaluate the yards’ quality and experience.

The shipowner or the shipowner’s broker will subsequently submit an invitation to tender based on the outline specification (which may vary in degree of detail) to a number of yards, and request offers for building the vessel as described. The tender invitation can be either public or private. A public procurement/tender invitation process often includes very strict rules – which must be followed to the letter – and is used if the Buyer or end user is a public-sector organisation (the invitation to tender may, for example, concern pilot vessels, or coastguard or naval vessels).11 If the Buyer is a private-sector person or organisation, the broker can typically provide more discretional advice as to which yards have the relevant capabilities, experience and capacity to build the vessel in question, and limit the tender invitation to a smaller number of selected or pre-qualified yards.

Once tenders have been received, the owner will review and consider the offers – from both a technical and a financial point of view – together with his technical consultants and the broker. The yards and their offers will be compared on price, capabilities, experience, proven ability to deliver on time and on budget and overall ‘track record’, both generally and for the specific type of vessel planned. Throughout this evaluation process, the owners may also seek advice from one or more classification societies with experience with the relevant yard(s).

The owner will then generally proceed to a clarification phase with a number of yards, during which one or more initial clarification meetings may be held, concerning both technical and commercial issues. Such a clarification process can be vital to assuring the owner that the yard that is ultimately chosen will be financially and technically able to complete the project and deliver the vessel on time and at the agreed price.

10 11

Many owners keep going back to their ‘favourite’ yard for repeat business, and where such close relations have existed for many years; the brokers are often by-passed or play a less important role.

See the Act on Public Procurement 17 June 2016 with accompanying regulations and relevant EU Directives (binding on Norway through the EEA Agreement). The EEA Agreement relating to public tenders is regulated in the Agreement Article 65 with reference to EEA Agreement Attachment XVI.

8215034478_Meland_Shipbuilding Contracts.indd 20

14.10.2019 13:12

0.3 Negotiations – Letter of Intent

0.3

21

Negotiations – Letter of Intent

Once the technical and financial aspects of the received tenders have been clarified, the next step is to select a yard with which to enter into actual negotiations. At this stage, the parties will often enter into some form of preliminary agreement, setting out matters already agreed and a plan for the further progress towards a final contract. At this point the parties may be in agreement on the main commercial elements of the project, and further negotiations may proceed on an exclusive basis. Essential elements may, however, still be outstanding, such as the financing of the project, the owners’ overall commercial assessment of the project (e.g. securing employment for the vessel), and the details and final wording of the shipbuilding contract. Such preliminary ‘agreements’ are often referred to as Letter(s) of Intent (‘LOI’).12 Though the commercial or moral understanding of an LOI may be clear in the parties’ minds, the strict legal standing and characteristics of such an ‘agreement’ may differ since the wording may vary from merely expressing vague intentions to indicating firmer and more binding obligations.

An LOI can express the parties’ intentions towards one another, their stated goals, or their desire to arrive at a final agreement. It can also be viewed as a preliminary agreement in which certain parts are intended and formulated to be binding, while other parts are clearly non-binding representations. The legal effect of an LOI can only be determined through interpretation of the document as a whole, with the plain meaning of the wording as the natural starting point. The parties should therefore ensure that an LOI is formulated with sufficient precision to cover the parties’ assumptions and intentions (‘You should write what you mean and mean what you write’). In practice, this saying is, unfortunately, not always adhered to.

If the parties have a mutual understanding of the document, this understanding must be applied, even if a third party might have read and understood the document – and the specific words and expressions used – differently. If the parties disagree on how the document is to be understood, the document must be interpreted to establish the meaning and thereby the legal consequence. In Scandinavian law, such an interpretation will (in line with contractual interpretation more generally) be structured around the following questions:13 12

For a discussion of Letters of Intent and Comfort Letters, see Bernhard Gomard, Letters of Intent, NJ/1984 I, page 245 and Erik Røseg, Guarantees or poor man’s comfort?, Oslo 1994, as well as Viggo Hagstrøm, ‘Avtalebundethet ved forhandlinger i kommersielle forhold’ (‘Legal obligations when negotiating in commercial relations,’) Lov og Rett 1995, p. 595 et seq. Hagstrøm (page 599) also refers to a judgment in the Supreme Court of Sweden (reported in NJA 1990 page 745) holding, in general, that, ‘Letters of Intent are used by parties negotiating when they wish to manifest their intention to enter into an agreement. Letters of Intent are not in principle considered binding, but they can contain clauses intended to be binding on the parties. In legal doctrine, Letters of Intent have only recently been granted attention. There is still no broadly shared agreement on their legal implications, and there is considerable uncertainty as to whether – in the absence of binding clauses – they have any legal effect at all.’ (page 758).

A short but illustrative article about the situation under English law is written by Clifford Chance and can be found at http://www.internationallawoffice.com/newsletters/Detail.aspx?r=11715. In addition, see Simon Curtis: The Law of Shipbuilding Contracts, Fourth edition 2012 (‘Curtis’) pages 9–12.

13 For an overview of Norwegian contractual interpretation – including how it compares to English-law contractual interpretation – see Johan Giertsen, Avtaler (‘Contracts’), 3. ed., Oslo 2014.

8215034478_Meland_Shipbuilding Contracts.indd 21

14.10.2019 13:12

22

Chapter 0 Introduction – the formation of shipbuilding contracts

• What is the objectively sensible and reasonable understanding of the wording, based on ‘the plain meaning of the words as they are ordinarily used in the relevant sector, industry or transaction’?14 • How is the document structured, and where in the document are the ambiguous words or expressions used?

• How was the negotiation process leading up to the LOI, and can any acts or statements made in that connection shed light on or clarify the intention and purpose of the parties?

• Have the parties used similar agreements or followed similar practices – either between themselves or with other parties – and if so, how have these been understood?

• What can be established from the parties’ subsequent behaviour? Have they acted in relation to each other and/or to third parties as if the LOI or part of the LOI were legally binding?

• What is the expressed or implied purpose of the LOI? • What policy considerations and degree of reasonableness should be considered?

• Which party drafted the document, and who should bear the risk of ambiguity?

An LOI may have more than one purpose. Firstly, it may express the intent of the parties to negotiate with the goal of reaching a complete and final agreement for the construction of the vessel. As a general rule, this is not binding, since a complete and final agreement presupposes that the parties can reach agreement on a number of crucial elements of the contract at a point in time when these may not even have been discussed. As such, the LOI is nothing but an agreement to agree. Secondly, the intent may be that the parties shall, to a certain extent and for a defined period, be committed and bound by the terms of the LOI. This may entail that one or both of the parties shall refrain from negotiating with others during a defined period of time (in effect granting the other a first right of refusal or option to conclude a contract), or that technical matters shall be checked and clarified, or that various financing options shall be explored or a specific financing possi­ bility pursued. The parties have a duty, based on general principles of loyalty (acting in good faith) during the negotiation process, to try to clear all outstanding or prerequisite matters so that the final negotiations on the contract can commence, e.g. by checking at a relatively early stage which classification society rules and regulatory authority requirements will apply to the vessel in its intended trade.

The obvious starting point is that the parties bear their own pre-contractual expenses and the risk for the same. If a final agreement is reached, such pre-contractual expenses will be included as part of the total project costs. Relatively large expenditures may, however, be expected, as when tests are required prior to entering into the final agreement (e.g. small scale model tests in a test tank laboratory). The yard will often undertake such tests on its own account on condition that the expenses will be reimbursed by the owner if a final agreement is not reached and included in the price of the vessel if a final agreement is reached. Where the owner reimburses the yard for such tests, he should be

14

See Woxholth: ‘Innledning til kontraktsretten’ (‘Introduction to Contract Law‘) in Jussens Venner, 1996 p. 230 et seq. (p. 236).

8215034478_Meland_Shipbuilding Contracts.indd 22

14.10.2019 13:12

0.4 When is the contract final and binding?

23

entitled to use the results regardless of whether a final contract is entered into, provided no design or intellectual property rights hinder such use.

In December 2004 and January 2005 a matter involving a tender issued by Norsk Hydro (‘Hydro’) received extensive media coverage in Norway. Hydro had invited several owners to tender for a long-term charter party for two Anchor Handling Tug Supply (‘AHTS’) vessels in 2004. After negotiations and election – where Hydro was assisted by an offshore broker – a company in western Norway was chosen and an LOI entered into.

Allegations of impropriety were raised in a series of articles by the leading commercial newspaper Dagens Næringsliv, including harsh statements from companies that had tendered but lost. It later emerged that an employee in Hydro’s purchasing department had leaked information to the broker, and that the employee in question had a close relationship with both the broker and the selected owner. This was considered a ‘serious violation of the internal tendering procedures’ in Hydro. After some time – and with public pressure mounting – Hydro chose to cancel the LOI and start a new tender process. The owner – relying on the LOI – had already contracted for two newbuildings, which were specially designed for the contract with Hydro. The owner had, however, secured a right to cancel these contracts within the timeframe specified in the LOI for a final agreement. The owner (being a stock-listed company) had also secured a bond issue as part of the financing of the vessels. When the contracts with Hydro did not materialise, neither the newbuilding contracts nor the bond issue had any commercial basis. The LOI was worded so that Hydro was free not to enter into a final agreement, but Hydro nonetheless undertook to ‘pay compensation to cover the costs incurred after entering into’ the LOI.15

0.4

When is the contract final and binding?

Precontractual liability

There is seldom any doubt as to when a contract is finally agreed and entered into between the parties. The long-standing tradition is that oral agreements are as valid and binding as written agreements, provided there has been an offer and an acceptance covering the terms of the offer.16 The challenge in practice, however, is proving the receipt and content of the offer and acceptance – including that the acceptance fully covers the offer.17 Despite this, many labour under the delusion that no obligation is undertaken and no right gained unless or until a detailed written agreement is signed and any and all conditions precedent are fully complied with. It is nonetheless industry practice – and a valid starting point – that an agreement for the construction and sale of a vessel is not final and binding until it has been signed by duly authorised representatives of the parties.

Each of the parties present in the negotiations should bear in mind that negotiations may fail and no agreement be reached, that work and effort may be in vain, and that expenses – including travelling expenses, the use of consultants, assistance by lawyers to prepare drafts, etc. – may ultimately come to nought.18 The above starting point must, however, be modified by what is often described as precontractual liability (culpa in contrahendo). In reliance on this principle, a party that 15 16 17 18

The case was covered in several articles in Dagens Næringsliv in December 2004 and January 2005.

NL 5-1-1 and 5-1-2, and UNIDROIT Principles 2010 Article 1.2.

Norwegian Contract Act, Chapter 1.

See, as an example, Jo Hov, Avtaleslutning og ugyldighet: Kontraktsrett I (‘Contract formation and invalidity: Law of Contracts I’) (2002) page 130. Recall also the case involving Hydro presented above.

It is not known whether compensation was given because this was considered a legal obligation or purely as a sign of goodwill (as the owner could not be blamed for what happened).

8215034478_Meland_Shipbuilding Contracts.indd 23

14.10.2019 13:12

24

Chapter 0 Introduction – the formation of shipbuilding contracts

on false grounds has been misled into believing that it would be able to enter into a contract may be entitled to claim reimbursement of incurred costs – and to be indemnified for actual losses suffered – as a result.19 The basis for establishing precontractual liability has been summarised as follows: ‘At its core, such a liability is premised on the existence of certain written or (more commonly) unwritten norms, which the parties should follow during negotiations and which set limits for what can be regarded as loyal conduct between the parties, cf. the contractual principle of duty of loyalty. The difficult question is the magnitude of these mutual duties of loyalty in a precontractual phase.’20

There are no clear precedents from the Norwegian Supreme Court concerning precontractual liability. It is interesting to note, however, how the Supreme Court in a 1998 case approached the issue:21 ‘What legal standard this course of events is to be judged against is somewhat uncertain under Norwegian law; there is limited case law and no unequivocal scholarly consensus regarding the conditions for claiming damages for a negative contractual interest. The starting point must, however, be some sort of blameworthy act during the negotiations, such as disloyalty, dishonesty, misrepresentation or similar. In a recent dissertation, breach of negotiations on an unreasonable or non-factual basis is considered a possible ground for compensation, see Lasse Simonsen, Prekontraktuelt ansvar (‘Precontractual Responsibility’), 1997, in particular page 266 et seq.’

It follows from the above that some form of blameworthy behaviour must be established to impose liability. The question of liability must be based on a specific consideration of the level of loyalty required. Important factors are, inter alia, the identity/degree of professionalism of the parties/persons acting in the negotiations, the type of contract, how far in the process the parties have come and the resources used in the attempt to reach a final agreement. The degree of loyalty required increases gradually until the contract is finalised and entered into.22 In a fairly recent decision by the leading Norwegian Court of Appeal (Borgarting Lagmannsrett), the Court of Appeal revisited the issue in some detail, and concluded as follows: ‘The court finds for this reason that for one party to be held liable on a precontractual basis it is a prerequisite that the counterparty after a careful assessment 19

20 21 22

Culpa in contrahendo is an important concept in contract law in Norway, as it is in most civil law countries – recognizing a duty to negotiate with care and in good faith, and not to misrepresent or mislead the other party into acting to his detriment by way of e.g. incurring unnecessary costs or foregoing other business opportunities before a firm contract is concluded. The doctrine originated in Germany in 1861 and has been further modified and expanded from a focus on negligent behaviour to a requirement of good faith. Today it is an internationally accepted doctrine imposing on the parties a duty to negotiate in good faith; see the UNIDROIT Principles 2010 Article 1.7 in general, and in particular Article 2.1.15.

See Geir Woxholth, Law of Contracts (2017) page 172.

Rt. 1998 page 761 (‘Kina-Hansen’).

See Lasse Simonsen: Prekontraktuelt ansvar (‘Precontractual responsibility’) (1997) page 162 et seq.

8215034478_Meland_Shipbuilding Contracts.indd 24

14.10.2019 13:12

0.5 Conditions precedent or subjects

25

of the party’s dealings has justified expectations that the person will sign an agreement with him’.23 There have been no cases (reported or made public) concerning shipbuilding contracts before the Norwegian courts – or in arbitration under Norwegian or English law – where a party has claimed that a shipbuilding contract has been entered into and that the other party should pay damages because the contract was not finalised. There have, however, been several cases in other areas of construction law, some concerning large contracts.24 While these cases do not directly concern damages for a party’s precontractual expenses, they are nevertheless illustrative: The facts in a judgment by the Borgarting Court of Appeal were as follows: The case concerned damages for alleged breach of contract. The parties in the case had initiated negotiations concerning the purchase of five stationary construction cranes, so-called tower cranes, in the spring of 1996. The question was whether a binding contract had been entered into between the Buyer and seller. The Buyer alleged that the seller’s representative had orally accepted the Buyer’s offer. The seller claimed that this was only a part of the ongoing negotiations and not an acceptance. Recalling that a party claiming that a binding agreement has been entered into has the burden of proof, the court found that a binding agreement was not entered into.

The majority of the judges held that the appellant (the Buyer) should have sought clarification by confirming the agreement in writing to the seller after the telephone conversations in which the Buyer alleged that his offer was accepted. The Buyer claimed that the seller had accepted an offer by telephone that the seller had previously rejected. Under these circumstances it was deemed natural to seek confirmation of such a beneficial agreement of huge importance to the company. For this reason, the Buyer was held to bear the risk. The decision was, however, not unanimous.25

The reason why a court may order a party to pay damages to the other party can be summarised as follows: ‘The purpose of liability in the precontractual phase (the negotiation phase) is to protect the parties’ valid or legitimate expectations as to the negotiation process. These expectations should only be protected if they coincide with what naturally or ordinarily would be understood from the precontractual situation at hand.’26

0.5

Conditions precedent or subjects

Even when a final contract has been agreed and signed in all respects, one or both parties may require that certain further conditions be met before the contract shall be regarded as final and binding. Conditions relating to financing or board approval are most common, although other conditions – such as the obtainment of necessary permissions or licences – may also be highly relevant. Furthermore, the contract may be made subject to the securement of a charter party or other kind of employment for the vessel, such as approval as a pool-participating vessel.

It is very important that such conditions precedent or subjects/reservations are drafted 23 24

25 26

LB-2013-14384, quoting extensively from Geir Woxholth: Avtalerett (‘Law of Contracts’), 8th edition (2012), page 150 et seq. and the dissertation by Lasse Simonsen from 1997.

The Norwegian Act on Public Procurement of 17 June 2016 § 10 provides a right to claim damages if a party suffers a loss due to breach of these very detailed rules, and in several cases, a party that was not awarded a public contract has been awarded damages for breach of such rules. Though an analysis of these rules would be illuminating, it is outside the scope of this book.

Borgarting Court of Appeal 1999 (LB-1998-01770).

See Simonsen (l.c.) page 171 et seq.

8215034478_Meland_Shipbuilding Contracts.indd 25

14.10.2019 13:12

26

Chapter 0 Introduction – the formation of shipbuilding contracts

in a precise manner spelling out what the exact conditions are, when and how any subjects shall be lifted, the consequences of non-compliance with the conditions precedent, and any actions the party taking the subjects must perform to have same lifted.

In a case from 1990, an owner claimed that a contract for building a fishing vessel at a Norwegian yard was made subject to financing. This was not accepted by the arbitrators. The arbitrators held (i) that the owner should have been more explicit and clear when requiring such a condition; (ii) that the owner’s subsequent behaviour towards his bank and the yard was so that the yard was entitled to proceed on the basis that the contract was final and binding; and (iii) that in any case the condition or subject only concerned the final acceptance of the payment terms in the contract. The owner was therefore held to compensate the yard for the full loss of bargain.27

The question can be raised as to whether making the contract subject to board approval in reality gives a party the opportunity to ‘change his mind’ after the contract has been negotiated and signed, thereby avoiding a finalised contract becoming binding and effective. The other party should be advised to always consider a reservation regarding board approval substantive, rather than just a matter of formality. Even if the chairman of the board (who may also be the majority owner in the company) has participated in the negotiations and signed the contract, he may still, after discussions in and consultations with the board, vote against approval in a board meeting. If, however, the other party, acting in good faith, has been led firmly to believe that the contract will be approved by the board, he may be entitled to claim his costs covered.28 Whether such a claim will succeed depends on a concrete evaluation of all relevant facts and circumstances in the specific case. Normally damages for costs will only be awarded if the other party has acted in bad faith, and the considerations will be as set out above concerning precontractual liability.

Both parties are expected to act in good faith and take all reasonable steps to comply with the relevant conditions for finalising the contract. If a contract is conditional upon a public permission or licence and this is not granted, a party should be required to appeal such initial refusal unless there is good reason not to.

A reservation may be taken by one of the parties merely to gain time. This in itself may be fully acceptable, unless the purpose is to try to negotiate a better deal with third parties while, at the same time, the other party is bound by the agreement. Such behaviour will readily be characterised as acting in bad faith (in the precontractual process). A party acting in bad faith can be held liable for the loss suffered by the other party as discussed above.29 27 28

29

Reported in ND 1990 page 340 (NV).

See the Swedish ‘Columbia case’ (reported in NJA 1963 page 105), where compensation was awarded.

The case concerned an employee of a Swedish-owned Colombian company. The employee terminated his previous employment and travelled to Colombia to take up his new position. Due to internal disagreements his new employment was not, however, approved internally in the company, and the court found that the employee should have been informed of the possibility that such an approval would not be granted. On this basis the employee was awarded compensation for the costs he had incurred.

See Viggo Hagstrøm in Obligasjonsrett (‘Law on Contracts and Torts’) 2nd edition, 2017 page 792 with further reference to (his own) unpublished arbitration award, and with references to international cases on pages 543–545. He is of the opinion that such behaviour may form the basis not just for claiming the negative contractual interest, but also for claiming the positive contractual interest. See also RG 2001 page 1566 (although not with the same comprehensive legal analysis as in Hagstrøm).

8215034478_Meland_Shipbuilding Contracts.indd 26

14.10.2019 13:12

0.6 The shipbuilding contract – legal characteristics

27

If the effect, duration or implication of a specific condition or reservation is disputed between the parties – how the condition will affect the parties’ obligations under the contract – the provision in question will be subject to the normal rules for interpretation of contracts.30 A Norwegian arbitration award from 1980 is illustrative: the case concerned a contract for the construction of a car ferry. The contract was made conditional upon the Builder being granted a building loan. As the Builder did not get the building loan in time and on satisfactory conditions, the Buyer considered the contract ineffective and not binding on the Buyer. The Builder claimed damages for the loss of bargain (positive contractual interest), alternatively for his actual costs (the negative contractual interest), but the claims failed.

The single arbitrator held that both the risk and responsibility for securing the building loan rested on the Builder, as the main payment from the Buyer was only due on delivery of the ferry. The reservation relieved the Builder of the responsibility to obtain a building loan, but not for the risk. When the reservation was taken by the Builder, the Buyer had a right to seek clarification and be informed of the status of the building loan soon after the contract was entered into. Furthermore, when the building loan was offered only on terms requiring guarantees from the Buyer and repayment of the loan prior to delivery of the ferry, the Buyer was held to be entitled to terminate the contract or consider the same not binding on the Buyer since the terms were substantially adverse compared to that which the Buyer had reason to expect.31

This issue of conditions is further illustrated by an English arbitration award, Covington Marine Corp and others v Xiamen Shipbuilding Industry Co.32 This case concerned building contracts for four sister vessels which were entered into by the Xiamen yard, with four different companies as Buyers. The contracts contained terms that were in reality reservations (conditions subsequent), but worded in such a manner that the contracts were already binding and effective upon signing. According to these terms, if the parties did not within set time limits agree on the price of the main engine and on whether this should be produced locally or imported, the contract would be automatically rescinded.

The contract would also be rescinded if mutual guarantees were not provided. The market at the time was good and rising. The day before expiry of the time limit, the Buyer’s broker confirmed that the Buyer agreed to pay all extra costs for the main engine as requested by the yard. The Buyer also agreed to extend the time limit for the yard to obtain required guarantees. That same day, the yard entered into a contract with another Buyer, and claimed that the contracts with the first Buyer(s) were no longer valid since the parties had not mutually fulfilled the conditions, as the yard had not been able to provide the Buyer with the agreed guarantee. The yard also submitted that the Buyer could not unilaterally extend a time limit. The tribunal held in favour of the yard, but the Buyer appealed to the Commercial Court, which allowed the appeal. The Commercial Court reversed the arbitrators’ award, and ruled that the contract was effective and that the yard had no right to regard it as rescinded. The yard was held liable for payment of damages to the Buyer, and the case was referred back to the tribunal for a decision on quantum.

0.6

The shipbuilding contract – legal characteristics

A contract for the construction and delivery of a ship has traditionally been viewed as a ‘sale of goods’ under Norwegian law, and the Norwegian Sale of Goods Act will in 30 31 32

See Chapter 0.3 above on contract interpretation principles in general.

ND 1980 page 211.

Lloyd’s Law Reports 2006 Vol. 1, page 759.

8215034478_Meland_Shipbuilding Contracts.indd 27

14.10.2019 13:12

28

Chapter 0 Introduction – the formation of shipbuilding contracts

principle apply.33 A construction contract is, on the other hand, viewed differently, as the Buyer in a construction contract generally has other distinct obligations in addition to paying the purchase price and accepting the goods, such as providing drawings and materials to the Builder/contractor. Hence, the actual work performed has the dominant characteristic of the construction contract (although the definition of ‘work’ may well include procurement and supply of required materials).34 This understanding is also vested in the UN Convention on the International Sale of Goods Article 3, which states: ‘Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.’

Presumably in an effort to save costs, we have seen projects where shipowners engage consultants to prepare complete sets of drawings (including work drawings) – often based on designs used in previous ships – consisting of a complete package which has already been approved by a classification society and by relevant regulatory authorities. The shipowner has further procured all major equipment directly from the suppliers, and even contracted the hull from a separate yard, leaving only the installation of equipment, finalisation and commissioning of the vessel to a yard in Norway. The yards obviously disliked this practice as the shipowners required the yards to be liable for the finished vessel in the same manner as if the yard had performed all the design work, had all contact with the classification society and regulatory authorities, and negotiated for and purchased the equipment. Such projects are in reality closer to a construction contract than a contract for the sale of goods. The contractual relationship between the parties will be more complicated, and the shipbuilding contract must be carefully drafted to take this into account. None of the prevailing standard-form shipbuilding contracts will be suitable unless considerable amendments are made to rebalance the risk between the parties. The number of such projects has recently decreased as yards have become more conscious of the inherent risk and now rarely accept such terms. We have also experienced contracts where the design responsibility has been divided; the Buyer delivering and being responsible for the basic design, while the Builder is responsible for the detailed design. It will be difficult to draw the exact line of responsibility during such a project, which will subsequently often lead to conflicts, and this should be avoided. Alternatively the shipbuilding contract must be very precisely drafted to take this into account, but even so the project execution will be very demanding.

Although shipbuilding contracts are viewed as ‘sale of goods’, it is generally accepted that the provisions of the Sale of Goods Act should not apply in full. Shipbuilding contracts are between professionals, the projects are large and the process is complex, involving many players. Professional parties are free to regulate their contract, and many of the provisions in the Sale of Goods Act are in practice therefore varied, deviated from or excluded.35 When the parties use a standard-form shipbuilding contract, they consciously set aside the provisions of the Sale of Goods Act to better suit their needs. This is one of the reasons why SHIP 2000 is more detailed than the Sale of Goods Act, and at times provides different solutions. It should, however, be noted that the Act will provide rele­ vant principles and background law if the contract should be silent on a particular issue.

33 34

35

Norwegian Sale of Goods Act 13 May 1988 no. 27 in force from 1 January 1989. See also Falkanger/ Bull: Sjørett (‘Maritime Law’) 8th edition, Oslo 2016, page 66, and in their latest work in company with Brautaset, Scandinavian Maritime Law Oslo 2017 pages 98–99.

The Norwegian Sale of Goods Act distinguishes between goods specifically manufactured for the Buyer and other goods using the term ‘made-to-order sale’ (in Norwegian: ‘tilvirkningskjøp’), see the preparatory works (Ot.prp. no. 80 (1986–87)) page 48 et seq. This distinction can also be seen in the UN Convention on International Sale of Goods (CISG).

See the Norwegian Sale of Goods Act § 3.

8215034478_Meland_Shipbuilding Contracts.indd 28

14.10.2019 13:12

0.6 The shipbuilding contract – legal characteristics

29

There are many elements of construction law in shipbuilding, and a number of the solutions chosen in the standard forms bear similarities to those in ‘pure’ construction contracts. As a result, the principles in the Sale of Goods Act will not always be appropriate as background law.36 Though interesting, it is fair to say that the discussion regarding construction elements in shipbuilding contracts seems of little relevance other than to legal scholarship as the provisions of today’s shipbuilding contracts regulate the parties’ rights and obligations in such detail that little or nothing is left out. This means that the Sale of Goods Act will generally be of little or no relevance, and that solving disputes boils down to interpretation of the contract. The importance of classifying a contract as a ‘construction’ or ‘sales’ contract lies in the amount of available preparatory work, precedent and legal scholarship; there is little or no preparatory work covering shipbuilding contracts, and the major legal sources are therefore case law, arbitration awards and the limited available legal scholarship. Nevertheless, analogies from other areas of law may be relevant in deciding what should be the correct result in a shipbuilding dispute.

Although many of the provisions in the Sale of Goods Act do not apply to shipbuilding contracts, a number of precedents explaining legal principles concerning the sale of goods are still relevant to shipbuilding disputes. The Sale of Goods Act as such is therefore still relevant as background law, and it should be recalled that a shipbuilding contract by its nature is a sale of goods contract,37 corresponding roughly to what § 2 of the Sale of Goods Act describes as a ‘made-to-order sale’ (in Norwegian: ‘tilvirkningskjøp’).38 Hence, it is common practice to use the Sale of Goods Act and the principles on which the provisions are based as a supplement to the provisions of the shipbuilding contract, particularly on issues on which the contract is silent.39 Even though there is no legal requirement that a contract should be in writing, a party claiming that a binding contract has been entered into orally will have a heavy burden of proof, particularly if the alleged contract is for the construction of a vessel. There have, historically, been stories of gentlemen’s agreements for building ships drawn up on napkins, but these – along with oral agreements – are fortunately a thing of the past, as all contracts for the construction and sale of ships are now in written form, and predominantly based on one of the internationally recognised standard forms. SHIP 2000, 36

37 38 39

In the commentary to NS 8405 (Marthinussen et al.), pages 45–46, the core of construction law is characterised as follows: ‘A construction contract is an agreement which presupposes an obligation to deliver a specific result. It implies that the contractor bears the risk that the result will be as described based on the presumptions given by the owner. Normally, this implies that the contractor shall deliver the works, and he shall deliver the materials necessary to achieve the result, but it is the actual work which is the core, not as such, but as a necessity to achieve the agreed result. This is phrased as the contractor having a result obligation. We often see that the owner undertakes to deliver materials to the contractor, or in construction contracts that the contractor works on the owner’s property, but this does not change the fact that it is a construction contract. The distinction towards pure employment contracts and pure supply contracts is where there is no duty to achieve a specific result.’

For a detailed analysis, see Lasse Simonsen, ‘Kreditors mangelsbeføyelser – særlig for tilvirkningskontraktene (‘The Creditor’s Remedies in Made-to-Order Sales Contracts’) Jussens Venner, 1999 page 305, et seq., where he includes shipbuilding contracts as a central part of sale contracts.

See Ot.prp. no. 80 (1986–87) regarding Sale of Goods Act page 39 stating that ‘the act applies in principles to the construction of all sorts of chattels, hereunder also contracts for shipbuilding or building of movable drilling rigs.’

It should be noted that the UN Convention on International Sale of Goods (CISG) explicitly excludes the sale of ships from its application, see Article 2 (e).

8215034478_Meland_Shipbuilding Contracts.indd 29

14.10.2019 13:12

30

Chapter 0 Introduction – the formation of shipbuilding contracts

the SAJ and AWES Forms, and NEWBUILDCON are the most commonly used standard contracts, although a number of yards have developed their own ‘standards’ – usually by way of copying different solutions from commonly used existing standards and adding ‘local’ provisions to suit the needs of the particular yard.

As further explained in Chapters 18 and 19 below, SHIP 2000 may be construed differently if governed by English rather than Norwegian law, even though it was drafted in English and seems closer to the English than to the Norwegian contract-drafting tradition.

Since one of the explicit goals in drafting SHIP 2000 was to create a marketing tool for Norwegian yards in their export sales, the contract will often be used to regulate transnational sales in which foreign laws may be more relevant than in domestic Norwegian contracts. Lastly, it should be recalled that both the UNIDROIT principles and PECL may be of relevance when interpreting international contracts,40 particularly when fair and balanced outcomes are sought in cross-border arbitrations.41 English law judgments and arbitrations are also of considerable interest as English law has traditionally been selected as the governing law in many shipbuilding projects (as in other areas of maritime law).42

0.7

Agreements supplementing the shipbuilding contract

0.7.1

Financing agreements

As the financial burden is extensive, owners and yards can rarely finance the full construction of a vessel without loans or guarantees from financing institutions.

Since government subsidies have been gradually reduced and the OECD (or equivalent) financing schemes are of lesser importance, it is no longer common practice for yards to provide the financing for shipbuilding projects. Issues related to yard financing may, therefore, not be as directly relevant as they were when extensive government subsidies were in place to support national shipbuilding industries by way of direct subsidies to the shipbuilding projects. State aid is still available in different countries, albeit within the limits of international agreements between the states, such as the EU state-aid guidelines.43 Shipbuilding contracts and financing agreements are usually negotiated and entered into as two entirely separate agreements, even though they are related and a bank will, as a matter of standard procedure, request a copy of the complete shipbuilding contract for review before deciding to offer a loan – whether to the Buyer or to the Builder.

40

41 42

43

UNIDROIT (the International Institute for the Unification of Private Law) is an international organisation incorporated in 1926 as an entity under the League of Nations and re-established in 1949. Norway is a member. UNIDROIT established certain principles in 1994 covering International Commercial Contracts. These were most recently revised and extended in 2010.

PECL stands for ‘Principles of European Contract Law’, drafted by the Commission on European Contract Law, where Norway is an observer (not a member). On PECL principles in general, see Viggo Hagstrøm: Obligasjonsrett (‘Law on Contracts and Torts’) 2nd edition, 2017, pages 61–70.

The SAJ Form Article XX (1) as default solution refers to the ‘country where the VESSEL is built’ as the governing law, while AWES Form Article 15 (a) leaves the issue open to be filled in by the parties.

NEWBUILDCON, not surprisingly, has English law as default – see Clause 41 – but an alternative choice may be inserted in Box 23 (a).

EU rules on state regulate the granting of aid to the shipbuilding industry in the member states; see Guidelines on Regional State Aid for 2014–2020, 2013/C 209/01, footnote 9.

8215034478_Meland_Shipbuilding Contracts.indd 30

14.10.2019 13:12

0.7 Agreements supplementing the shipbuilding contract

31

In the past, the connection between shipbuilding contracts and financing agreements was closer. A Norwegian arbitration award from 1978 illustrates the problems that can arise in such situations. The case concerned a shipbuilding contract for MS Leila and three other vessels, under which 20 % of the contract price was to be paid in cash by the Buyer and 80 % to be arranged as credit. The yard arranged the financing through secured loans (by mortgaging the vessels), but as further security the lender required guarantees from the Norwegian Guarantee Institute as well as other banks. The tribunal held that the Buyer had to pay the guarantee commission since the yard had not undertaken as a separate obligation to provide the financing. The guarantee commission was held to be similar to interest on a loan, i.e. a cost of providing and maintaining a long-term credit facility. It was also held that the fees for registration of mortgages should be borne by the Buyer. The yard was, on the other hand, held to cover the loss due to converting and repaying the building loan in foreign currency, since the parties had agreed that the currency risk should be borne by the yard.44

A common – albeit advanced – financing scheme in shipbuilding is the so-called ‘tax lease’. This system involves actively leveraging the generous depreciation rates for vessels available in certain tax jurisdictions, for which purpose a highly advanced and complicated contractual structure has been developed. A tax lease is, in principle, a form of long-term financing for the owner after he has taken delivery of a newbuild vessel.

The system is mostly used where long-term employment to solid charterers has been secured for the vessel. Such agreements often presuppose that a leasing company (or a special purpose company owned by a bank or financial institution) will be the owner of the vessel upon delivery from the yard, and amendments to the shipbuilding contract are needed to take this into account. As many of the tax leases are governed by English law (irrespective of the relevant flag and tax jurisdiction), the contract must be ‘novated’ to the company that is to serve as registered owner upon delivery.45 The original Buyer, who is the intended owner of the vessel, instead becomes the lessee. When changes of this nature are requested by the Buyer, the Builder should ensure that his contractual position is not adversely affected, e.g. by the agreed governing law and arbitration being changed to English governing law with arbitration in London.

0.7.2 Shipbrokers – Commission agreements As explained above, shipbrokers are often involved in bringing the parties together and completing the negotiation process. The broker may contact or be contacted by a potential Buyer, or he may be engaged by a yard to assist in the sale of new buildings. As a matter of industry practice, the broker is paid by way of a commission based on a percentage of the contract price. To earn commission, the broker must have been given an assignment by a principal for whom he will be acting.46 The agreement between the principal and the broker is separate from the shipbuilding contract. Clauses in the shipbuilding contract, 44 45

46

Reported in ND 1978 page 392.

The term ‘novation’ implies that the whole contract is entered into again as a new contract (is novated) instead of the existing contract or the rights thereunder (assignment) being transferred to a new Buyer.

It is a formal legal construction often needed to ensure that all conditions required in the relevant tax laws are fulfilled. On the term ‘novation’ and other issues in relation to assignment, see Chapter 13 below.

On brokers and their right to commission, see Brækhus, Mæglerens rettslige stilling (‘The broker’s legal position’), Oslo 1946, pages 326–466, and his article regarding ‘The broker’s right to commission’ in the Publication series from Gothenburg Business School (Skriftserie fra Handelshøyskolen i Gøteborg), 1991, pages 167–204.

8215034478_Meland_Shipbuilding Contracts.indd 31

14.10.2019 13:12

32

Chapter 0 Introduction – the formation of shipbuilding contracts

such as governing law, jurisdiction and ‘entire agreement’ clauses will therefore not be binding on the broker.47, 48 The broker bears no risk for the successful completion of a shipbuilding contract, i.e. delivery and acceptance of the vessel. A Norwegian arbitration award from 1986 concerning brokers’ right to commission for four shipbuilding contracts is illustrative:49 The shipbuilding contracts entered into were subsequently cancelled by the Buyer as a consequence of the yard’s bankruptcy, and the Buyer entered into similar shipbuilding contracts with another yard. The brokers claimed to be entitled to a dividend from the bankruptcy estate based on the full commission for the cancelled contracts. The estate was only willing to pay a dividend based on the net amount left after deduction of the commission the brokers had received from the new yard. The tribunal held in favour of the estate. It was held that the right to commission was earned when the contracts were entered into, and the main rule that the broker had no risk for the completion of the agreement applied. The insolvency therefore did not imply that the claim for commission was lost. However, during negotiations after the insolvency, the brokers, in an effort to reach a settlement, had agreed to reduce their claim for commission by deducting the amount that the new yard agreed to pay.

Whether a broker can still claim commission if the vessel in question is built by a different yard and at a later time than originally intended will depend on the scope of the assignment and the commission agreement.

In a Norwegian case a shipbroker negotiated a contract between a Russian Buyer and a Norwegian yard for three supply vessels to be delivered in 1977. In the autumn of 1976 the parties negotiated for two further vessels, but a final contract was never concluded. In 1980, through new and direct negotiations between the 47

48

49

In a case reported in ND 1993 page 328, Kværner Shipping AS entered into several shipbuilding contracts with a Scottish yard, Kværner Govan Ltd. The contracts were governed by English law with arbitration in London, and were later assigned to an English company. A Norwegian broker sued the yard in Norway for commission. The yard, which had assets in Norway and could thus be sued there, argued that the Norwegian courts did not have jurisdiction and that the claim should be heard in England or Scotland (based on forum non convenience). Reference was also made to the Lugano Convention, Article 3 – which would hinder a suit in Norway – and it was argued that this provision was applicable even though the claim was issued before Norway signed the convention. The Court of Appeal held that the case had sufficient connection to Norway. The shipbuilding contract was a Norwegian-Scottish matter, the place of payment was Norway, and the claimant and one of the defendants were Norwegian entities. The case was therefore allowed as the asset requirement under the (then prevailing) Norwegian Procedural Act § 32 was fulfilled.

On entire agreement clauses in general, see Chapter 18 below. In relation to shipbrokers’ claims for commission in particular, this issue was touched upon in a judgment by the Oslo City Court reported in ND 1994 page 181. The case concerned a Norwegian company that bought a yard in the United Kingdom where two newbuilding contracts entered into with a company controlled by the Norwegian company were a vital part of the transaction. Later, these contracts were to be transferred to a new company where a shipbroker was one of the owners. The shipbroker had a longstanding relationship with the Buyer of the yard, as well as the company named as Buyer of the vessels and the participants in the shipowning company. There was no written agreement for any broker assignment or commission, only a draft confirmation letter from the yard. When the broker’s claim for commission was refused by the yard, he sued both the yard and the Buyer of the yard. The defendants argued that the broker had not received assignments from either of them and that his participation was very limited and unnecessary for the contracts to be entered into. The court held in favour of the broker. It found that commission was presupposed by a number of parties to the transaction, as well as by representatives of the Buyer of the yard. Commission was also included in price calculations. The lack of a written agreement did not change the position. An entire-agreement clause in the shipbuilding contract was not deemed relevant in relation to the broker, who was not a party to the shipbuilding contract.

ND 1986 page 193.

8215034478_Meland_Shipbuilding Contracts.indd 32

14.10.2019 13:12

0.7 Agreements supplementing the shipbuilding contract

33

Buyer and the yard, a contract was signed for delivery of two vessels similar to those on which the broker, albeit unsuccessfully, had assisted in negotiations in 1976. Although the broker under his previous agreement with the yard was entitled to commission if new orders from the Russian Buyer were concluded, this right could not, presumptively, extend indefinitely. Nor was there a close enough connection between the 1976 contracts and the 1980 contracts to give rise to a claim for commission.50

The broker need not participate in all stages of the negotiations to be entitled to commission, and there is no requirement that he attend the final negotiations where the contract is agreed.51 On the other hand, if the broker’s contribution and participation is very limited and of an ancillary character, the commission may be reduced by a discretionary amount even if considered earned.

In a case from 1991 a Norwegian partnership (in Norwegian: ‘partrederi’) sought to contract for a shrimp trawler in Denmark, inter alia to achieve favourable financing.52 The managing owner gave a written brokerage assignment, including a right to commission, to the broker. The shipbroker’s contribution to the formation of the contract was at best unclear, among other reasons because financing had to be arranged from other sources than originally planned. The partnership argued – on several grounds – that the broker was not entitled to commission. First, it was argued that the assignment given by the managing owner lay outside his authority and was not binding on the partnership. Second, it was argued that the assignment had been terminated.

Third, it was argued that the broker had not made a substantial contribution. Lastly, it was argued that the agreement (if binding) was unreasonable and contrary to proper business practice, and should be set aside by the court with reference to the Norwegian Contract Act § 36.53 The court found partly in favour of the shipbroker. His assignment was held to be binding on the partnership. However, it was not an exclusive assignment. The assignment was further deemed terminated at a relatively early stage. Prior to the agreement being terminated, however, the broker had performed the minimum amount of work needed to earn a right to commission, though a lower amount than set out in the agreement. It was held by the Court of Appeal that ‘since the major part of the broker’s work, such as negotiating the shipbuilding contract, the financing agreements, and follow-up work during the construction process has not been done by [the broker], it is not reasonable that [the broker] should retain a claim for full commission. The Court of Appeal has, considering all the circumstances, concluded that [the broker] should only be entitled to a proportional commission of NOK 200,000’.

0.7.3

Option Agreements

When a contract for one vessel is successfully signed, the Buyer may want an option to build further vessels with the same Builder in the future. Such options will generally be for sister vessels, which are to be built on the same terms as negotiated for vessel no. 1, including the right to have improvements made on vessel no. 1 included in the subsequent optional vessels; the optional vessels will be built on the same terms, but following the specification of vessel no. 1 ‘as built’. The price is typically the same as for vessel no. 1, 50 51

52 53

Reported in ND 1983 page 273.

See judgment by Frostating lagmannsrett reported in LF-1995-00127, where very limited participation nevertheless gave the broker the right to full commission. Two further interesting cases as to the required level of participation, and how to decide whether an assignment has been given, are reported in Rt. 1964, page 1037, and RG 1984 page 458.

Reported in ND 1991 page 253.

The official title of the act is ‘Act relating to conclusions of agreements, the right to deposit an item of debt, limitation of claims’ https://www.nb.no/items/URN:NBN:no-nb_digibok_2014060308062?page=57, and dated 31 May 1918, but in this book it will be referred to as the Contract Act.

8215034478_Meland_Shipbuilding Contracts.indd 33

14.10.2019 13:12

34

Chapter 0 Introduction – the formation of shipbuilding contracts

albeit adjusted for changes made to the specification and/or subject to an agreed inflation index. Option agreements are an unmitigated benefit to the Buyer since they provide a right, but not an obligation, to contract for subsequent vessels. The Buyer will normally request that the time limit for declaring the option be valid for a considerable period.

For the yard it may seem tempting to grant the Buyer one or more options in order to commercially accommodate and please the Buyer, particularly if the yard believes the market will soften. However, the value of an option agreement is marginal for the yard as the Buyer can freely choose never to use the option. The yard, however, must take such options into account as possible future obligations when considering and planning its capacity utilisation. The yard may, therefore, have to forego other – potentially more valuable – opportunities because capacity must be reserved for the Buyer’s options. The yard is generally better served by burnishing its reputation with the Buyer by delivering the initially contracted vessel on time, with the expected quality, in accordance with the specification, and without surprising price increases. This will show the Buyer that the yard is reliable and possesses the necessary capabilities, and a satisfied customer is likely to return with repeat business even without an option agreement.

To have an option really means that if the market for the particular type of vessels rises, the owner will have secured a right to contract a new vessel at a lower price than the market, while the yard, on the other hand, must turn away better-priced projects. If the market falls, the owner can instead choose another yard that is willing to deliver the optional vessel at a lower price than the option price (provided that the new yard has the satisfactory competence) or simply use the lower market as leverage to renegotiate the option price.

Option agreements are therefore, as a general rule, solely to the Buyers’ benefit, and yards are usually reluctant – as they should be – to grant them unless paid a significant premium. Owners are, however, reluctant to pay option premiums. If an option is granted, the yard should at least seek to minimize the option period.

The following summary of a judgment by Sø- og Handelsretten in Copenhagen is illustrative: ‘A yard entered into a contract for the building of two freezer ships with an option for three additional sister vessels. A final agreement was entered into regarding the first and subsequently the second of the three sister vessels. After the first of these was finished in the dock, the yard started building a new sister vessel, which the yard had contracted with a different owner. This was deemed a default under the option agreement as the yard thereafter would not be able to fulfil its obligations under the option agreement. The provision in the shipbuilding contract concerning liquidated damages was not deemed exhaustive for compensation of losses in a case where the delay was due to a direct cause of action by the yard, which not only delayed the construction considerably, but was to the advantage of a possible competitor.’54 A Swedish arbitration award regarding another type of option concerned a unilateral right to change the vessel to another type than originally specified: Under a contract signed by the parties in March 1957 – and in accordance with mutual correspondence between the parties – the owner, Eriksberg, committed itself to build a motor tanker of about 36.100 dwt for delivery in the second quarter of 1961. The contract included an option for the owner to convert the vessel to another type of ship. When the yard thereafter – in connection with a planned expansion of its yard facilities – entered into agreements with other owners to build considerably larger vessels – while at the same time refusing to build a larger vessel for Eriksberg – the owner claimed that the yard had breached the option agreement and terminated the contract. After considerable deliberation, the tribunal held (non-unanimously) that the owner did not have a right to terminate the agreement and was therefore liable to the yard for damages for breach of contract.55 54 55

Reported in ND 1979 page 284.

Reported in ND 1960 page 420.

8215034478_Meland_Shipbuilding Contracts.indd 34

14.10.2019 13:12

0.8 The structure of the book

35

In an English judgment from 2017, the Commercial Court found that an option agreement was not valid since the Option Agreement included wording to the effect that the delivery dates for each of the optional vessels should be mutually agreed upon at the time of the Buyer’s declaration of the relevant option.56

0.8

The structure of the book

The book will follow the sequence of the articles of SHIP 2000. This produces an outline that follows the natural progress of a construction project, starting with the parties and the description of the vessel, followed by price and delivery terms, before considering the provisions covering approvals and changes during construction, inspection and delivery – including default and guarantee provisions – then concluding with dispute resolution and governing law. Comparisons to the other standard shipbuilding contracts mentioned above are included in the comments where deemed relevant.

56

Teekay Tankers Ltd v. STX Offshore & Shipbuilding Co. Ltd [2017] EWHC 253 (Comm).

8215034478_Meland_Shipbuilding Contracts.indd 35

14.10.2019 13:12

The book is edited as a commentary, and comments are given to each of the relevant articles and parts of SHIP 2000 in a natural sequence, making it useful as a practical handbook for practitioners. Frequent comparisons with other standard contracts, such as NEWBUILDCOM, SAJ Form and AWES form, are made throughout the book, and hence this is a commentary on standard shipbuilding contracts, not just SHIP 2000. The book is an essential tool for lawyers, shipbuilders, shipowners and shipbrokers, as well as other parties being involved in shipbuilding matters.

Øystein Meland has been a partner in the Norwegian international law firm Wikborg Rein since 1985 and is today working as Of Counsel with the firm’s office in Bergen.

For close to 40 years Meland has worked extensively with maritime law issues and particularly shipbuilding matters for both Norwegian and international clients, and he was head of the firm’s Shipping and Offshore Practice for many years. Meland has argued several large international arbitration matters on shipbuilding, as well as other international disputes, and has extensive experience as arbitrator.

Meland is Manager of Bergen Shipowners Association, member of the Norwegian Shipowners legal committee, drafted and negotiated SHIP 2000 on behalf of the shipbuilders’ association and wrote the first commentary to SHIP 2000 published in Norwegian in 2006.

This book is also available at www.juridika.no

isbn 978-82-15-03447-8

9

788215

034478

Shipbuilding Contracts

Shipbuilding Contracts is the second book by the same author on shipbuilding matters, based on the Norwegian book Skipsbygging from 2006. In its second edition the book has now been expanded to include further comments on provisions and clauses in other shipbuilding contracts and has also had its commentary on law, regulations and practice for the last 15 years updated. The text covers all relevant legal aspects connected with shipbuilding, with Norway as the starting point. The book is structured as a commentary to the Norwegian Standard Shipbuilding Contract, SHIP 2000, which is recommended used, not just in Norway and the Nordic Countries, but also internationally.

Øystein Meland

Shipbuilding Contracts A Commentary Based on SHIP 2000 This book is also available at www.juridika.no