From Ship Building Agreement to Ship Recycling Agreement – Part I

There are many agreements that are part of the Shipping Trade. When it comes to the life of a vessel, we can say it starts from an agreement of Ship Building and ends in the agreement for ship recycling. This series of posts briefly covers the agreements which are related to a vessel.

Ship Building Agreement

A Ship Building Agreement is nothing but a simple agreement of sale between a ship builder and a purchaser for building of a vessel and sale of the same. For example, the Cochin Shipyard signed an agreement to build two automated electric ferries from the world’s shipping giant, Norway. In India, it is governed by Sale of Goods Act, 1930. Like any other agreement, it must include the details of parties, consideration etc to be valid.

Description of the Vessel : In the description of the vessel to be constructed, it must clearly state the class of vessel to be built, the dimensions required, guaranteed trial speed, guaranteed fuel consumption etc. Approved plans and drawings of the vessel are also enclosed as annexures/schedules to the Agreement.

Contract Price : With regard to the payment of contract price, it is practical to pay in instalments based on the completion of construction. For example, when Stage 1 is completed, 5% of contract price will be released. While drafting the price clause, attention must be paid to banking charges, fluctuation in currency rates, mode of payment, and change in tax rates. It must also mention the consequences of default of payment by the purchaser.

Representative of the Buyer : A representative will be appointed by the purchaser/buyer in order to conduct time to time inspections.

Warranties : The ship builder provides warranty that any manufacturing defects will be taken care of at his expense. The clause must include when the notice of defect is to be issued and must specify if anything is excluded from the warranty. The builder also indemnifies the purchaser from claims of infringement of intellectual property rights belonging to a third party.

Sea Trial : A sea trial is like a test run for the vessel. After the completion of the construction of the Vessel, a sea trial is conducted. A notice must be issued by the builder to the purchaser specifying date and time of the trial so that the purchaser can make necessary arrangements for attendance of trial by the representatives of the purchasers and other observers. The provision providing the same must specify the weather conditions and such other details under which the trial will be conducted. It must also mention the consequences that will follow if the vessel specifications are not as agreed. Provision can be made for deductions, allowing grace period for any changes or an option to the purchaser to reject the vessel. It also must provide clarity regarding the salary of crew during the sea trial.

Delivery : Once the sea trials are completed, the vessel is delivered to the purchaser. It is necessary to include time and place of delivery in the agreement. It must also include a complete list of documents will be handed over along with the vessel. The contract must also include the remedies available to parties if the vessel is not delivered on date or is not taken possession of the mentioned date.

A point to be pondered upon is regarding the title of the vessel. If the title passes upon delivery of the vessel or from the date of first payment is to be paid attention to. Otherwise, it will create hurdles if any of the parties faces insolvency and is declared bankrupt.

Insurance : The ship building contract must assign responsibility of insurance coverage.

Other clauses which are to be included are force majeure, disputes resolution and indemnities. It is important to pay heed to these clauses as the choice of law and seat of arbitration would be an important consideration when there is a dispute, not just from the legal aspect but also, from the cost management aspect.

There are standard forms of contract such as the contracts of of Shipbuilders Association of Japan, AWES etc., which can be used as the basis for negotiating a shipbuilding contract.

The next post will be regarding Seafarer Employment Agreements/Collective Bargaining Agreement.

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