NEW BUILDING Ship building contracts

For our clients we are able to set up the full scope of newbuild ships. In general w apply BIMCO standard forms.

Shipbuilding Contracts  Construction Arrangements

Shipbuilding contracts set out the relationships between the parties to a newbuild shipping project. These contracts are also relevant to ship conversions and other newbuild contracts for offshore vessels and equipment including drilling rigs, drill ships and FPSOs. Although shipbuilding contracts share many features with other types of construction contract, given the particular characteristics of the offshore industry, these types of contract usually include a number of unique features.

There are a variety of standard form shipbuilding contracts which can be used as the basis for negotiations between the parties. The most common standard forms are The Shipbuilding Association of Japan (SAJ), Association of West European Shipbuilders (AWES) and BIMCO Newbuilcon. Some of the more important terms of shipbuilding contracts are covered as follows.

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Vessel specification: The contract will include the detailed technical specifications of the vessel, such as speed, cargo capacity, fuel consumption, LNG boil-off, loading and unloading rates and so on. Vessel specifications will normally be examined in detail by the lenders’ advisors as many of these parameters impact the overall project economics and interfaces with other commercial contracts.

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Trials and acceptance: The vessel specifications will normally be confirmed through various sea trials that will test the performance of the vessels. Once the trials have been successfully completed the buyer will accept the vessel and disburse the final payment instalments.

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Price and currency risk: Although shipbuilding prices are usually fixed and the shipyard bears the risks of cost overruns, in volatile conditions shipyards may ask for relief in certain circumstances, including, for instance, material price increases (i.e., steel) or exchange rate fluctuations.

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Payment terms: Shipbuilding contracts typically include standardised payment milestones based on particular events during the construction period (such as keel-laying and hull construction).

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Refund guarantees: The shipbuilding contract usually includes terms that allow the owner to claim a refund for payments made to the shipyard in the event the contract is cancelled.

Other terms commonly included in shipbuilding contracts cover: vessel classification, payment security, liquidated damages, delivery, performance guarantees and warranty periods.

Price, currency and payment terms of the contract are obviously critically important. Shipbuilding contracts are usually based on fixed prices which include hull construction, equipment installation, testing and delivery. It is becoming increasingly common, however, for fixed prices to be capable of variation in specific circumstances, including, for instance, increases in steel prices or currency movements. Payment is usually by instalments for specific milestones which typically cover: contract signature, steel-cutting, keel-laying, launching and delivery. Each payment usually represents an equal proportion of the total contract price.

Shipbuilding contracts normally include provisions for refund guarantees. The guarantees are typically given by the shipbuilder to the buyer and guarantee the repayment of payment instalments in case the ship is not delivered. Refund guarantees are often an important element of the lenders’ security package for financing of ships and vessel. It is thus essential that refund guarantees are satisfactory and that the wording of the guarantee allows the guarantee to be called in the necessary circumstances. The calling of refund guarantees can become an area of dispute in the shipbuilding process.

Contracts for other offshore vessels and infrastructure will typically include terms commonly encountered in shipbuilding contracts. The construction of new build FPSOs, conversions, drilling rigs, floating platforms will, however, require significant modification and customisation to handle the required specifications of the project. Shipyards and shipbuilders will normally perform a central role in contracts for offshore vessels and infrastructure. Processing equipment, topsides installation, mooring and control systems and so on will, however, typically be provided by specialist contractors. Shipyard and contractor alliances and joint ventures are common for these non-shipping type of projects and the contract terms will reflect the unique nature of work.