With growing demand for new vessels in the Middle East, how can builders and buyers unite to ensure shipbuilding contracts are covering their interests?
With contracts for new ships ranging from millions to billions of dollars, the shipbuilding trade is a very serious business indeed. This lucrative industry is further capitalising on the demand for ships driven by the growth of the sea freight sector in the Middle East region.
It is not surprising, therefore, that in order to protect such valuable assets, both shipbuilders and buyers rely heavily on having a comprehensive and detailed shipbuilding contract in place.
It has to be kept in mind that the need for a well drafted contract mainly arises when something does not proceed as presumed. - Alessandro Tricoli
Without this, both parties run the risk of jeopardising their investments when the building process does not go according to their best laid plans.
"A shipbuilding contract defines the basic terms and conditions involved in the construction of the vessel - from the contract signing to the delivery of the vessel and any other services thereafter," summarises Sharafuddin Sharaf, president of the UAE Ship Owners Association (UAESOA) and vice chairman of the Sharaf Group.
If a properly drafted contract is not in place, it can lead to confusion or ambiguity." UAESOA itself was established in 2006 to promote the interests of the growing community of ship owners in the region, providing a range of services, such as advice on local and international marine laws.
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As Sharaf advises, for ship owners the contract defines the date, place and time of delivery for the vessel and various other stages of construction, such as keel laying, launching, testing of machinery, sea-trial and so on.
Furthermore, the contract specifies the terms of payments and can also include any additional special requirements as needed.
"The contract is required to define the conditions of acceptance for the vessel at various stages of construction, together with the method of review, approval of drawings and other important factors," he adds.
Sharaf positively believes that there is a very good awareness among the region's shipping fraternity regarding the need for a well-drafted and defined shipbuilding contract, and points to the many law firms in the region that are currently available to help.
One such law firm specialising in marine law in the region, Fichte & Co, has been active in advising on this very subject. The firm has dealt with the market for tankers, bulk carriers and container vessels, having helped many buyers in securing orders for new builds in these sectors.
During the last few years, we have drafted and negotiated different kinds of shipbuilding contracts, from relatively small, but still detailed, offshore vessels to more technical product carriers," expands Alessandro Tricoli, legal consultant at the firm.
Unsurprisingly, Fichte & Co has gained plenty of experience in the intricacies of creating such contracts.
"In a nutshell, the main concerns regard the description and thus the characteristics of the vessel, her price, and its adjustments and payment, default, and hence security, delays and of course warranty," explains Tricoli.
As he points out, the construction of a ship not only involves legal aspects, but also very technical details. In addition, payments are made at a very early stage and well in advance, thus calling for guarantees on both sides to be in place in order to secure the deal.
"Its mainly because of this mix of contents, both from a legal and from a technical point of view, that the shipbuilding contract needs to be carefully drafted using the skills of different parties," Tricoli highlights.
Indeed, as shipbuilding contracts often involve these numerous interests, their execution does not involve the buyer and the builder alone.
To build a ship is a time consuming exercise and it's usual practice to have charterparties signed even before the construction of the ship commences," says Tricoli. "Hence its vital that no delays occur in the long period required to build a ship to avoid dangerous repercussions on other contracts."
The obvious way to avoid such consequences is having a clear contract from the outset, which can foresee and resolve every possible scenario that may arise through its duration.