'Shipbuilding Contracts' - Better terms for Shipowners

Traditionally, most types of cargo ships are built under standardised shipbuilding contracts (including those offered by BIMCO and SAJ) or bespoke shipbuilding contracts that are party standardised, or at least have a common approach to liability. 

The general approach adopted in shipbuilding contracts is that the yard agrees to build the vessel as per a stated specification, by an agreed delivery date, for a fixed lump sum price, which is payable in advance instalments by the buyer.  The yard provides a so called ‘refund guarantee’, usually from a bank, to secure the paid instalments pending delivery of the vessel. 

If the yard is late delivering the vessel, the buyer can elect to cancel the contract and reclaim only the instalment payments it has made to date (relying upon the refund guarantee if the yard has gone bust or will not repay).  Or, if the vessel is delivered and accepted late, usually the buyer will be entitled to some fixed liquidated damages which are capped in amount/duration and deducted from the final instalment due. 

After delivery the yard guarantees to repair any vessel defects for between 12 and 24 months only. 

Other than getting back its instalment payments upon cancellation, or some LDs for late delivery, and a max 24 months defects guarantee, a buyer usually has no other remedies against a yard for breach of contract.  As one of our clients put it ‘the buyer of a new USD 50K Mercedes get more rights than the buyer of a new USD 50M vessel’!

As any experienced shipbuilding lawyer would privately acknowledge, this approach has for years suited yards, whilst not being ideal for shipowners – although owners have in large part put up with this imbalance of rights.  Well, the tide might be starting to turn in favour of shipowners!

IY LEGAL has recently represented shipowners in the purchase of 12 newbuild vessels, and options for further vessels, from two well known Far East yards, where the yards were persuaded to: agree to pay Liquidated Damages if the buyer cancelled for late delivery (as well as returning paid instalments); pay general damages for loss of profits if the vessels were delivered extremely late, in addition to usual accumulated fixed LDs for delays up to a certain point only; guarantee the vessels’ main performance features (speed, bunker consumption etc) from delivery and thereafter, thereby potentially exposing the yard to a damages claim for loss or profit for vessel under-performance whilst in service.   

Whether these improved terms for the shipowners were ‘one offs’ or the start of a trend towards better terms generally for shipowners, remains to be seen, but our shipowner clients and owners generally are likely to welcome the prospect of yards assuming more of the knock-on operating risks which result from late delivery of new vessels and their under-performance when in service.   

If you would like to discuss how IY LEGAL can assist you draft and negotiate shipbuilding contracts, or provide shipping law advice generally, please contact Andrew Iyer on: +44 207 1007714, or by email to: andrew@iylegal.com.

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