What Are the Legal Rules for Shipbuilding Contracts?

Shipbuilding contracts are specialized legal agreements made between a shipbuilder (yard) and a buyer (shipowner) for the design, construction, and delivery of a vessel. These contracts involve high financial stakes, complex engineering requirements, and long timelines, making strong legal frameworks essential. The rules governing such contracts derive from a mix of maritime law, contract law, and international conventions, ensuring fairness, performance, and recourse in case of disputes.

Key Legal Rules and Contractual Elements in Shipbuilding

Contract Formation and Customization

Shipbuilding contracts are bespoke contracts, usually negotiated in detail between the parties. They outline specifications, timelines, costs, and legal obligations.

Commonly used models include the SAJ (Shipbuilders’ Association of Japan) form or BIMCO’s Newbuildcon standard form.

Specifications and Technical Drawings

The contract must include precise design specifications, standards, and technical plans. These define what the buyer expects and ensure legal enforceability.

Construction Timeline and Milestones

Key milestones such as keel laying, launching, and sea trials are specified.

Delays beyond agreed timelines may lead to liquidated damages or termination.

Performance and Quality Guarantees

Contracts often include performance benchmarks (e.g., speed, fuel efficiency).

If the ship fails tests like sea trials, the builder may be required to rectify defects or pay compensation.

Payment Terms

Payments are usually made in installments linked to construction milestones.

A refund guarantee is typically provided by a bank to protect the buyer if the builder defaults.

Risk and Title Transfer

Ownership and risk generally pass to the buyer on delivery, unless otherwise agreed.

Insurance during construction is often the responsibility of the builder.

Warranties and Liability

Builders provide warranties for a specific period post-delivery to address structural defects or performance failures.

Force Majeure

Provisions for natural disasters, wars, pandemics, or labor strikes are included to excuse delay or non-performance under defined circumstances.

Dispute Resolution

Disputes are typically settled through arbitration in a neutral jurisdiction (e.g., London Maritime Arbitrators Association - LMAA).

The contract will specify governing law—commonly English law or Singapore law.

Example

Suppose a European shipping company enters into a shipbuilding contract with an Indian shipyard for constructing a cargo vessel. Here's how the legal rules apply:

• Both parties sign a customized contract based on the BIMCO Newbuildcon format.
• The contract specifies milestones like steel cutting, launching, and final delivery in 24 months.
• Payments are made in five installments, with a bank guarantee protecting the buyer.
• During sea trials, the vessel underperforms on fuel efficiency. The shipyard must rectify the issue or offer compensation as per the warranty clause.
• A dispute arises over delay due to a workers’ strike. The matter is taken to arbitration in London, as agreed in the contract’s dispute resolution clause.
• The vessel is eventually delivered, and ownership transfers to the buyer along with all relevant technical documentation and certificates.