Shipbuilding Contract – A Versatile Legal Framework

• Shipbuilding Contract – A Versatile Legal Framework

  Author: Dr. sc. Mišo Mudrić

  Key Words: shipbuilding contract, guarantee period clause, standard terms and conditions, shipbuilder’s responsibility and liability

  The presentation and paper will examine the issue of Guarantee Period regularly present in the standard shipbuilding contract forms, as opposed to the general damage compensation claim available through the Croatian legislation (continental law tradition).

  The shipbuilding process contains a transition from a full to limited, and finally no liability on the side of shipbuilder. In general, during the shipbuilding phase, the shipbuilder retains full responsibility and liability, additionally reinforced by a constant supervision on the side of buyer and classification society. Prior to the vessel delivery, it is necessary to undergo various testing procedures, that are finalized with the final sea trail(s) and class assignment. Successful trails and class assignment usually mark the fulfillment of main shipbuilder’s contractual obligations. In practice, after that moment, a significant portion of responsibility and liability for damage is transferred to the buyer, with the shipbuilder significantly limiting its exposure to liability with the Guarantee Period mechanism. The Guarantee Period clause usually sets a one year time bar, and with the expiration of one year, the question is posed on whether the buyer is capable to claim for additional or other damage compensation.

  The Guarantee Period sets different obligations for all sides to a contract. The buyer, in general, is under an obligation to exercise due care and attention with regard the vessel’s maintenance and expected utilization (as anticipated in the contract). The shipbuilder, in general, during the one year time-frame assumes further responsibility to, if properly notified (up to 30 days from damage) provide replacement for damaged parts of equipment and other parts (allowing for a new Guarantee Period for the replaced parts, up to 18 months from delivery as a time cap), and perform repairs or reimburse the costs of such repairs (in agreement with the buyer). The shipbuilder is not liable for: delay; defects not specified in the Guarantee Period clause; direct or indirect, or consequential damage; and, expenses or loss (including ie: loss of time, loss of profit, loss of earnings, demurrage costs, port costs). With the expiration of one year time bar, it is no longer possible to, in accordance with a contract containing a Guarantee Period clause, enforce further liability compensation. In addition, the Guarantee Period clause usually contains specific wording that places the Guarantee Period mechanism in lieu of any conditions implied by law, statutory obligations or customary obligations. Should the shipbuilder receive any guarantees from various contractors involved in the shipbuilding process, such guarantees are assigned to the buyer after the Guarantee Period has expired.

  To test the possible applicability of general damage compensation with the noted Guarantee Period clause, a hypothetical scenario will be analyzed. The shipbuilding phase has been successfully completed, achieved in auspices of constant supervision by all the involved parties, successful individual testing, successful sea trial and class assignment. The shipbuilder has delivered the vessel, the buyer has made the payment, and the vessel has engaged in the anticipated commercial activity. Following several months of uninterrupted operation, the vessel has experienced serious equipment failure (ie, engine or auxiliary engine failure) due to a faulty component. The engine/auxiliary engine has been provided by a producer nominated by the buyer in the Maker’s List, whereas the faulty component (the part that has caused damage to the engine/auxiliary engine) has been provided by a third-party producer (not nominated by the buyer on the Maker’s List) to the engine/auxiliary engine producer. The Maker’s List is an annex to the shipbuilding contract, and the shipbuilder is under an obligation to procure specified materials and equipment from the nominated producers and providers.

  The master of vessel has directed the vessel to a near-by port for repairs, and the buyer (shipowner) has suffered various costs and damage, including: towage costs, repair costs, loss of time, loss of earning and other associated costs (including the crew costs, fuel costs, supplies costs, etc.). As the incident has occurred during the Guarantee Period, the buyer has immediately notified the shipbuilder, who, in turn, dispatched the replacement parts and agreed to compensate certain costs. As the sum of compensated costs does not cover all costs, the buyer now considers pursing full damage compensation from the shipbuilder.

  The Croatian Maritime Code (MC) contains special provisions on the shipbuilding contract (a rare example of shipbuilding contracts being specifically regulated as a sui generis contract). In accordance with Art. 430 MC, the shipbuilder in under a general obligation to construct the vessel, and the buyer is under a general obligation to make the payment. Art. 433 MC sets the strict liability standard of performance on the side of shipbuilder (strict liability principle), requiring the shipbuilding to be done in accordance with the contract and professional standards. The constructed vessel, therefore, must conform to all requirements necessary for seaworthiness and class assignment. An exception to the strict liability standard (Art. 435 MC) is, however, available if materials and equipment have been ordered from producers or providers nominated by the buyer. In the case of defects on the noted materials or equipment, the shipbuilder’s responsibility is presumed (presumed fault principle), unless the shipbuilder can prove that the defects could not have been avoided by utilizing the due care (professional diligence in accordance with lex generalis, the Obligations Act (OA, Art. 10)). In accordance with Art. 438 MC, all visible (material) defects must be reported prior to vessel delivery, with the shipbuilder retaining liability for such defects. In case of hidden defects (Art. 439 MC), the shipbuilder’s liability is time-barred to one year from the delivery (Art. 411 MC).

  The pending questions, among others, include the following two issues: (a) with regard the materials and equipment (including the vital components) utilized by the producers nominated by the buyer in the Maker’s List, are the third-party producers or such materials and equipment directly responsible to the buyer, producer nominated in the Maker’s List, and/or shipbuilder?; and, (b) is the shipbuilder responsible for the nominated (Maker’s List) producer’s choice of materials and equipment provider (including the vital components) in terms of the quality requirements? To answer these and associated issues, the pending presentation and paper will make a thorough (and, where appropriate, comparative) analysis of the relevant primary (MC) and secondary (OA) legislation and case law, with a particular focus on the general legal framework (as regulated by OA) of sale and purchase contract, contract of work and product liability, and their possible applicability in the default hypothetical scenario. In addition, the pending analysis will assess other possible issues, based on the default hypothetical scenario, that might arise when utilizing standard shipbuilding contract forms based on English and Welsh law and standard English and Welsh case law, in the continental law tradition, such as is the case of Croatian statutory framework and available case law.