Shipbuilding Contracts

Shipbuilding contracts

1. The contract

The negotiations leading up to the contract formation are significant in ensuring what the parties want. The parties must not misrepresent their position in order to induce the contract. There are statutory remedies for misrepresentation (s.2 of the Misrepresentation Act 1967). 

To have a binding contract there must be an offer and unconditional acceptance, intention to create a legal relationship and a promise given by each party to do something in return for the promise of the other (this is known in English law as the ‘consideration’ of the contract). For example, the builder promises to carry out the building of the ship to specification and deliver it complete, and the buyer promises to pay the price in stages of the building.

For a contract to be binding there must be no inconsistent or uncertain terms, and matters of substance must not be left to be agreed at a later stage (by contrast see Fast Ferries v Ferries Australia).

Like all types of English law contracts, a shipbuilding contract will contain three types of express contractual terms:

a) Some terms are classified as conditions; these are very important terms, breach of which goes to the root of the contract and will entitle the other party (if they choose) to accept the breach as terminating the contract. The breach is known as ‘repudiation’ of the contract by the guilty party.

b) There are other less significant terms, known as warranties, which (except in insurance contracts in which a warranty is equivalent to a condition) will entitle the innocent party to claim damages for breach and not to treat the breach as terminating the contract.

c) The third type of terms is called ‘intermediate’ or ‘innominate’; this means that the remedy for breach will depend on the nature and consequences of the breach.

Whether a term is a condition or warranty or an intermediate term will depend on the construction (interpretation) of the contract as a whole (Hong Kong Fir Shipping v Kawasaki Kisen Kaisa).

There are also implied terms derived either from statute (the Sale of Goods Act 1979 (SOGA), as amended by the SOGA 1995) or relating to compliance with the description of the goods (Ashington Piggeries v Christopher Hill). As a test, the shortcoming of goods must be of a substantial ingredient of the description so that a reasonable person would regard the goods as distinct from what they contracted for (Diana Prosperity), and must be of satisfactory quality and fitness for purpose, which are essential in this type of contract (Slater v Finning).

See Neon Shipping Inc v Foreign Economic & Technical Cooperation of China where the implied requirement that the ship’s equipment was ‘reasonably fit for that purpose’ is discussed. 

Then there is the specification for the building and other specialized terms particular to the obligations

2. Basic rights and obligations of the parties and remedies for breach

The basic obligations of the builder are to build as per specification for a fixed price, to perform trials and deliver on time. The basic obligation of the buyer is to pay the price in stages of the building and the balance upon satisfactory delivery, which they are obliged to accept, after trials and possible modifications.

The property and risk pass to the buyer upon delivery and payment, or when the parties intended them to pass. The contract contains standard terms from the builder. There are certain statutory and contractual protective terms in favour of the builder in the event of default by the buyer:

a) for repudiatory breach see Spettable Consorzion v Northumberland Shipbuilding; Stocznia Gdanska v Latvian Shipping 

b) on the right of instalments see Hyundai Heavy Industries v

In addition, there is a guarantee provided to the builder by a guarantor in case of a financial default by the buyer (on construction of guarantee see Gold Coast Ltd v Caja. The ship is the ultimate security for the builder in case of non-payment.

The buyer also has rights and remedies under contract, statute and common law for breach by the builder (default depends on the magnitude of the breach and the possibility of correction: McDougall v Aeromarine). On delay in delivery see Matsoukis v Priestman and Cape v Hatteress.

Pay attention to the interpretation of contractual terms by the court. For instance, the following decision of the Court of Appeal may seem strange to a non-lawyer, but it is based on pure construction of the contract as agreed.

In BMBF (No.12) v Harland & Wolff Shipbuilding the arbitrators’ award was restored and the first instance decision overruled. Basically, on the wording of clause 15(2) of the contract, when the ship is offered by the builder for delivery and the buyer claims defaults, the buyer has a choice either to cancel the contract or to take possession of it in an unfinished state and complete the building, although they will still be obliged to pay the due instalments. 

The buyer will have a right to deduct from the remaining instalments their costs incurred to complete the ship.

For a further decision by the CA on construction of the contract see Stoczia Gdanska v Latvian Shipping Co.

In this case, non-payment of the keel instalment leading to a notice of rescission under the contract was a breach of a condition of the contract, thus amounting to an actual repudiatory breach (at p.450).

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