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LAW IN-DEPTH

Builder's Remedies under Ship Building Contracts

S.M. Mohiuddin Hasan
Usually, a ship building contract typically provides for arbitration instead of litigation as its dispute resolution mechanism. Further, in the event the buyer cancels or terminates the ship building contract, there is usually a contractual timeframe within which the builder is required to institute arbitration proceeding in order to dispute the buyer's cancellation and/or termination of the said contract.***
SHIPBUILDING contract is a contract for the complete construction of a ship. In law, a shipbuilding contract is in essence, an agreement for sale by description of future goods between the yard (builder) as seller and the prospective owner as buyer. Amongst many features of the contract, the investment of money and time in such contracts by both buyers and builders are immense and the parties assume long-term obligations to other. The commercial risk under the contract is also significant as both buyer and builder are dependent on many factors beyond their control such as the availability of credit, the supply and cost of steel and other materials and equipment. Whilst the contract provides the framework for allocating responsibilities and risks, inability of one party to discharge its obligations under the contract tend to affect both parties.
The ship building industry of Bangladesh is at an infancy stage. The ship builders should take note of the new legal development staking place in the law of ship building contracts and also the consequences following therefrom. Therefore, it is vital for shipbuilders of our country to seek expert opinion in the negotiation and drafting of the ship building contract and scrutinize the terms of the contract in such a manner so that their
rights and interests are protected. This write up focuses on some of the remedies that may be availed by builders under the shipbuilding contract in case of breach of contract by the buyer.
The main duty of a buyer under a ship building contract is to pay the agreed purchase price of the ship and to accept delivery if the vessel is built to specification and delivered on the agreed time. The common form of breach on the part of the buyer usually takes place when it cancels or terminates the ship building contract. Generally, on many occasions the buyer may want to exit from the contract due to change in market situation or financial situation. This may happen either during the process of building or upon completion of the construction of the ship.
Regarding the mode of payment, in practice, the parties to a shipbuilding contract usually agrees that the contract price is to be paid in instalments when certain milestones are achieved during the ship build-
ing process. These milestones include: the laying of the keel, completion of the hull, installation of engines, tanks and generators, installation of the superstructure, completion of interior finishing, completion of sea trials, and expiry of a trouble free period since delivery. Another approach sometimes used as an alternative to defined milestones, is for regular payments to be made based upon the percentage to which the vessel has been completed at the date of the payment. Normally, the time of payment is not the essential factor unless there is a related term in the contract. In case of buyer's default to pay instalments, the buyer is entitled to the instalments that are due together with interests. The right is not affected even when the contract is cancelled by the builder. (Scotzina vs. Latvian Shipping [1995] 2 LR 592). In other cases where the contract is not terminated but instalment remains due, the builder may postpone the delivery date. If the buyer fails to take delivery, the builder may sue him for failure to accept.
If the buyer ultimately cannot fulfil the payment, and the builder is in possession of the vessel, the builder may exercise his possessory lien for the vessel until payment by the buyer and also resell the vessel to the other buyer if the buyer fails to settle the payment in the time. But if the builder has parted with possession and the buyer becomes insolvent, the builder may exercise a common law right of stoppage in transit and also sue for the price.
Disputes under the shipbuilding contract are resolved either by litigation or arbitration. Usually, a ship building contract typically provides for arbitration instead of litigation as its dispute resolution mechanism. Further, in the event the buyer cancels or terminates the ship building contract, there is usually a contractual time frame within which the builder is required to institute arbitration proceeding in order to dispute the buyer's cancellation and/or termination of the said contract. Therefore, the builder should carefully consider dispute resolution clauses in shipbuilding contracts, in particular any applicable time limits and the procedure to be followed for the valid commencement of arbitration.
Whatever option the builder wishes to avail, proper action should be taken without any delay to mitigate any loss following from the breach by the buyer.
The writer is an Advocate, Supreme Court, Bangladesh.