Standard forms in shipbuilding contracts
The Baltic Sea is undergoing an economic rebirth. Seaborne trade and offshore wind energy are driving a new wave of activity for the Polish shipyard industry. More and more shipbuilding contracts are being signed with Polish shipyards or governed by Polish law. This makes it increasingly relevant to examine the standard forms on which these contracts are based—and the legal and business consequences flowing from the choice of a particular form.
Standard forms for shipbuilding contracts
In the practice of international maritime law, most ship construction contracts are signed based on standard forms developed by industry organisations. Maritime relations are highly repetitive and international, which encourages standardisation of contractual solutions. The shipyard industry has worked out forms for shipbuilding contracts recognised around the world, regulating in detail the rights and obligations of the parties in the construction process.
Two dominant forms: SAJ and NEWBUILDCON
The most important forms used in shipyard contracts include the SAJ (from the Shipbuilders’ Association of Japan) and the NEWBUILDCON form from BIMCO (Baltic and International Maritime Council).
The SAJ form led the way in international practice for many years, being broadly applied in shipyard contracts particularly on the Asian market. As a form drafted by an organisation representing the interests of shipyards, it is commonly perceived as a form favouring the builder’s contractual position.
In response to criticism of the lack of contractual equilibrium in the SAJ, BIMCO developed its own shipbuilding contract standard, NEWBUILDCON. Its aim was to create an alternative to the forms previously used and to develop a more balanced contractual model, reflecting the buyer’s interest to a greater degree. But NEWBUILDCON has not achieved such broad popularity as the SAJ, mainly because of the disinclination on the part of many shipyards to accept solutions undercutting their privileged contractual position.
Examples of discrepancies
One of the differences between the forms is in the manner of making payments. In the SAJ, payments are due upon achieving certain milestones, and the buyer cannot delay or retain any payment due to any ongoing dispute. In NEWBUILDCON the buyer generally does not have a right to set off or retain payment, but a key exception involves the final instalment, from which the buyer can set off assessed liquidated damages, e.g. for late delivery or failure to achieve the contracted ship speed. Consequently, the SAJ more effectively protects the financial liquidity of the shipyard, while NEWBUILDCON gives the buyer real financial leverage at the stage of finalising the transaction.
There are also key differences involving permissible delays. The SAJ does not condition the permissibility of a delay on whether the shipyard could have foreseen the event at the time of contract signing. The shipyard should notify the buyer of the delay within seven days after a circumstance arises entitling it to extend the delivery deadline. If the buyer does not respond to the notice within seven days from receipt, it is deemed to waive its right to challenge the extension. NEWBUILDCON imposes much higher requirements: not only does the circumstance have to have been unforeseeable for the shipyard at the date of contract signing, but a failure to notify the buyer within 10 days after the circumstance arises completely deprives the builder of its right to extend the delivery deadline. This is a much harsher sanction, generating serious operational risk for the shipyard—if it fails to meet the notification deadline, it loses protection even for objective events of force majeure.
There are also major differences in the mechanism for introducing modifications during the course of construction. In the SAJ the shipyard de facto holds a veto over changes which in its view could negatively impact implementation of the construction plan or other obligations of the shipyard, as adjustments to the price and the deadline must be agreed in advance. By contrast, NEWBUILDCON vests the buyer with the right to demand “reasonable modifications,” and in the event of a dispute over the reasonableness of the adjustment to the price or the delivery deadline proposed by the builder, the buyer may require the shipyard to continue the work, leaving the financial issue to be determined under the dispute resolution procedure. Thus NEWBUILDCON gives the buyer much stronger tools for forcing changes during the course of construction, when the shipyard must work “on credit” pending resolution of the dispute, giving rise to serious financial and scheduling risks on the builder’s part.
There are comparable differences in the case of modifications arising from changes in legal regulations. The SAJ provides that the shipyard must implement the required changes, but only after the parties agree on the relevant changes. NEWBUILDCON takes the opposite approach: the builder must implement the changes regardless of whether the parties agree on the changes, and the financial and scheduling consequences will be determined under the dispute resolution procedure. Moreover, NEWBUILDCON includes the rule that if the change in regulations had not yet entered into force as of the contract date, but was already announced, the builder cannot rely on the change in law as grounds for modifying the terms of the contract—the shipyard is charged with the duty of ensuring compliance with such regulations.
There are different rules between the two forms on changes made by the builder related to availability of materials or introduction of improved production methods. The SAJ provides that in such cases, the parties should agree on relevant amendments to the contract involving the price and other terms. NEWBUILDCON provides that changes of this type cannot result in an increase in the contract price, but any savings should be allocated to the buyer.
There is another crucial difference involving subcontracting. Under the SAJ, the builder may, at its sole discretion and responsibility, subcontract any portion of the construction work. Here, NEWBUILDCON includes a key restriction: apart from minor work, the builder cannot use subcontractors other than those set out in the specification or named in the approved list of suppliers, without the buyer’s prior consent. In this respect as well, the SAJ is clearly more advantageous for the shipyard, ensuring complete discretion in selecting subcontractors and flexibility in managing the supply chain.
Summary
A shipbuilding contract remains an unclassified type of contract under Polish law. But alongside the application of Civil Code rules governing contracts for a specific work, well-established market standards also function, defining in some detail the rights and obligations of the parties to shipbuilding contracts. It should be borne in mind, however, that each shipbuilding contract is unique, particularly in the case of larger or specialised vessels. The market standard should be analysed critically in each case and adjusted to suit the specific contractual relationship, reflecting the specifics of the project, the negotiating position of the parties, and the applicable legal regulations.
Hubert Bińkiewicz, attorney-at-law, M&A and Corporate practice, Zuzanna Poleszak, Maja Kuśnierz, Energy practice, Wardyński & Partners
