Shipbuilding Contract

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Shipbuilding Contract

A Brief Introduction About the Shipbuilding Contract

The shipbuilding contract –also referred to as the shipbuilding agreement, is the official contract that is concerned with the complete construction of the ship. The contract is used to specify the shipbuilding definition for stating the ship constructions between two or more parties. T

he contract is typically known to concern the construction and sale of ships. The main aim of the shipbuilding contract is to regulate the complex project in case the builders and borrowers believe long-term obligations to each other while bearing substantial commercial risks.

A shipbuilding contract or agreement is a type of non-maritime agreement. Moreover, it does not fall under the jurisdiction of Admiralty. This is because it is inappropriately related to the respective rights as well as duties that pertain to sea commerce or navigation. The property is then passed to the buyer or the borrower as the ship is completed.

For avoiding difficulties, provisions can be implemented for the property to allow it to pass through the subsequent stages of construction and development. Shipbuilding contracts tend to differ from the typical hire-purchase contracts in which the seller practices the ownership of the property or goods until the payment of the last installment of the good has been made.

Who Takes the Shipbuilding Contract?

In a typical shipbuilding agreement, the major participants are the shipping building companies or ship manufacturing units and the borrower or the buyer of the ship.

Shipbuilding agreements are prepared within the specific framework of standard agreement forms, as amended by the contractual parties for meeting the specific requirements.

The choice of contractual forms will depend on the influence of the respective trade association to which the builders belong.

Purpose of the Shipbuilding Contract

A ship manufacturing unit or a potential buyer is known to enter into a shipbuilding contract for beneficial reasons that are mutual.

The shipbuilding agreement is the manifestation of the respective mutual intentions between the involved parties. The main purpose of such a contract is achieving the construction as well as delivery of the completed ship from the manufacturing shipyard to the respective buyer or shipowner. 

From the moment the parties agree to achieve the technical objective until it gets achieved, the parties are known to establish a temporary form of the business relationship. This relationship gets shaped by legal constraints as well as obligations that are aimed at satisfying a specific technical outcome.

In formal terms, the primary purpose of drafting a ship manufacturing contract is to define the overall entirety of the existing temporary relationship between the manufacturing party and the buyer or the owner of the ship.

Essentially, the agreement in itself helps in establishing the respective rights, rules of conduct, responsibilities, and assignment of the associated risks between the involved parties.

The contract is also concerned with the assignment of risks depending on the schedule and cost matters, along with resolving questions or disputes that tend to arise between the parties.

The form of the shipbuilding agreement is known to determine the accepting party along with the risks of the overall cost overruns. In a fixed price contract form, the contractor of the agreement is obliged to complete the construction of the ship along with other deliverables in the given price that has been defined in the contract.

Content of the Shipbuilding Contract

There are several important aspects of the shipbuilding contract. The ship industries are known to specify certain conditions of the shipbuilding agreement while building ships for the buyer or the borrowers. Some of the important parts of the shipbuilding agreement are:

  • Mode of Payment: Contractual terms for the mode of payment would vary significantly based on the overall cost of the ship being constructed while negotiating the overall strengths of the respective parties.
  • Title & Security: Contractual terms & conditions concerning the title & security would depend on whether the ship is being constructed for export or not.
  • Plans & Specifications: Most of the shipbuilding agreements are known to highlight drawings and specifications that are attached as schedules.
  •  Warranties & Liabilities: Negotiations that are made over warranties can be a challenging task. Most of the ship manufacturing companies are known to provide warranties against full labor delivery along with the materials for a specific period.
  • Extra & Changed Orders: One of the most common grounds of disputes between borrowers and shipbuilders is determining whether or not a material is extra or component of the fixed price contract.

Some of the additional elements of the content of the agreement are name & contact details of the parties involved, specifications for changes & modifications, tests & trials, and so more.

How to Draft the Shipbuilding Contract?

A typical ship construction project is known to comprise a series of activities that are concerned with the designing as well as fabrication of the high-end marine vehicles. For achieving the successful construction of the ship, a ship manufacturing contract is signed between the manufacturing party and the shipowner or buyer. There are several aspects to consider while drafting the shipbuilding agreement. 

Some of the essential pointers to consider while preparing a ship manufacturing contract are:

  • Description & class of construction –including regulations, registration, subcontracting, guaranteed trial speed, guaranteed deadweight, and specifications of the vessel
  • Contract Price along with the terms of payment –including provisions for the contract price, terms of payment, mode of payment, currency, prepayment, and others
  • Provision for the adjustment of price –including the delivery of the vessel, fuel consumption, speed, deadweight, and effects of the recession
  • Approval of plans & inspection during construction of the vessel –including details like approval of the drawing & plan, the appointment of the representative of the buyer, representative inspection, facilities, liabilities & responsibilities of the buyer, expense & salaries, and others

As soon as the contract has been drafted, the parties can negotiate with the subcontractors for supplying the necessary items like furnishing, propulsion machinery, electric power plant, propellers, shafting, and others.

Negotiation Strategy

Most of the ship manufacturing companies have standard agreement forms that they might refer to as contracts. Negotiations in a typical shipbuilding agreement can be made on the grounds of costs involved or materials of the ship construction. Some of the important negotiation grounds that can be utilized in a typical ship construction agreement are:

  • Material costs
  • Production labor hours
  • Subcontractor costs
  • Additional hours of engineering
  • Markup of the material costs
  • Markup of the costs associated with subcontractors

Benefits & Drawbacks of the Shipbuilding Contract

Typically, ship manufacturing contracts are drafted with the intent of addressing all the major components of the given contractual relationship. Some of the top benefits of the construction of a ship with the help of the valid contract are

  • Outsourcing Production Activity: When the parties are involved in a typical ship manufacturing company, it helps in outsourcing the entire activities of the manufacturing process. The entire production of the vessel can be entrusted to the given ship manufacturing company.
  • Cost-saving Benefits: The process of ship manufacturing with the help of a proper valid contract is known to provide excellent manufacturing results. The parties can expect cost-effective results with the applications of the activities like aluminum die casting, CNC machining, forging, grinding, and others.
  • Effective Quality Control: When the parties are known to be involved in a specific shipbuilding agreement, there is the assurance of top-class quality assurance from both the ends. The provision of value-added services includes testing the products towards conforming strict quality control specifications.

Some of the common drawbacks are:

  • The pressure to complete a large-scale project like shipbuilding within a specific period
  • Greater grounds of violation for the breaching of materials, raw materials, and others
  • Provision for increased changes or modifications

What Happens in Case of Violation?

There are specific grounds for the violation of the ship’s manufacturing contract. Some are:

  • Not fulfilling the payment terms
  • Breaching on the grounds of procurement of the materials
  • Not completing the project on time

In case the buyer is not able to fulfill the payment terms, the manufacturer might:

  • Resell as the result
  • Exercise the processor lien
  • Sue for the price
  • Exercise some common law
  • Exit from the contract

In case the manufacturer fails to deliver the completed ship, the borrower or buyer might:

  • Sue for the non-delivery
  • Seek particular performance
  • Terminate the contract(1)

Shipbuilding contracts tend to differ from the general sales agreement for the overall nature of the agreement, passage of risks, and time frame. Each ship’s manufacturing contract is tailor-made for the varying requirements of the borrower or the buyer. The drafting process of the shipbuilding agreement is required to be drafted carefully while defining the specific provisions of the contract. It is recommended to go through the given terms & conditions of the agreement carefully.