Key words: standard contract, vessel, shipbuilding contract, shipyard.

Introduction

Currently, there are only a few works in Russian offering legal analysis or an overview of the field of international or domestic shipbuilding.¹ At the same time, foreign researchers considered the theoretical potential in research of shipbuilding approximately in the last quarter of the 20th century. On 23 March 1973, the Assembly of the Comité Maritime International (CMI) established an International Subcommittee chaired by Francesco Berlingieri to study shipbuilding contracts.² Since scientific attention to international shipbuilding contracts has emerged relatively recently, it seems that dogmatic study of the subject is not only relevant but also timely for the Russian legal system.

First of all, it is necessary to outline the legal issues that fall within the scope of this study. Thus, Ph. Delebecque suggests to distinguish between shipbuilding in the economic and legal meaning, on which depends the type of title of a future shipowner.³ Shipbuilding in the economic sense presupposes that the future owner builds a ship for his own use without involving third-party contractors. As Ph. Delebecque explains, such cases currently are either extremely rare or refer to construction of small vessels. In the economic shipbuilding model, the vessel is constructed for and by the original owner, which eliminates the risks of builder’s bankruptcy present in “legal” shipbuilding. On the other hand, the legal shipbuilding model involves the indirect (through-a-builder) acquisition of a vessel built by an independent builder. It should be specified that this essay focuses on the study of shipbuilding involving the indirect acquisition of a vessel by the buyer.

The purpose of this article is to show how different sources of rights and obligations of the parties interact and differ in modern shipbuilding. To achieve this aim, the role of applicable law and standard contracts will be explored in context of determining the rights and duties of the parties to a shipbuilding contract. This approach will allow the study to form a complete picture of legal framework and determine the place of contractual norms, dispositive norms and mandatory legal framework in the field of shipbuilding.

Additionally, this article will showcase that complex issues arising from shipbuilding contracts cannot always be resolved solely on the basis of general contractual norms. Commercial practice has developed solutions that allow for more careful consideration of the specifics of the industry.

The unification of contractual terms in the shipbuilding industry is connected with introduction of the first international shipbuilding standard contracts prepared by the Shipbuilders’ Association of Japan (SAJ) and the Association of West European Shipbuilders (AWES) in the 1970s. Whether to apply a standard contract is within parties’ choice, there exists no mandatory rule or requirement to base the contract on the agreed standard form. The legal technique by means of which the contract acquires the binding force is basically incorporation.

Standardisation of contracts does not impose restrictions on the agreement of individual terms between the parties. The real purpose of unification is to increase the convenience of establishing contractual relationships, legal predictability and certainty in the industry. Unification also makes it possible to maintain a uniform standard of conduct for buyers and builders within the industry, which forms a professional body of actors in the shipbuilding sector.⁴

Despite comprehensiveness of the contractual framework offered by standard contracts, applicable law continues to play a major role at the stage of concluding a contract and in resolving disputes between the parties. As S.A. Sinitsyn correctly notes, the standard contract offers only a general scenario for the development of relations.⁵ A standard contract, like a contract consisting solely of individually agreed terms, may encounter issues on which the parties have not reached a preliminary agreement. Along with the applicable law, business practices accepted in the industry contribute to filling gaps in the contract.⁶

Legal systems take different approaches towards attributing shipbuilding contracts to specific branch of law. This attribution of shipbuilding regulation to general civil law or commercial law may affect not only the applicability of a specific enactment, but also the jurisdiction of the dispute. Thus, in the United States of America, a shipbuilding contract is not considered a contract in the field of private maritime law, which excludes the jurisdiction of federal courts and the application of federal maritime law.⁷ In French law, pursuant to Article 110-2.1 of the Commercial Code a builder under a shipbuilding contract is considered a merchant, which means that the Commercial Code determines his rights and obligations and that the jurisdiction of commercial tribunals extends to such disputes. The Merchant Shipping Code of the Russian Federation does not include any specific rules on shipbuilding contracts, therefore, the general provisions of the Civil Code of the Russian Federation apply to shipbuilding contracts.

English law developed the legal notion of “admiralty claims.” Admiralty claims are subject to admiralty jurisdiction within High Court of England. The court has jurisdiction over civil law disputes specified in section 20 of the Senior Courts Act 1981 (Senior Courts Act 1981), Article 61.2 of the Civil Procedure Rules 1998 (The Civil Procedure Rules 1998). It is important to note that contracts for the construction of new ships do not fall within the admiralty jurisdiction, as they do not directly affect maritime trade and the carriage of goods.⁸

It is widely known that most international maritime disputes are resolved in London under English law.⁹ Therefore, global judicial and arbitration practice in the field of shipbuilding has been largely shaped by English law and its legal concepts.

Currently, Asian countries (China, Korea and Japan) are leaders in the shipbuilding industry.¹⁰ However, the dominance of Asian countries in the market has not led to the overthrow of English law’s leadership in the shipbuilding industry. Due to long-established tradition and predictability, the dominance of English law in disputes over shipbuilding contracts continues to this day.

The first part of this article will compare how Russian and English law regulate the conclusion of shipbuilding contracts and modifications in contract prices. It should be noted that English law considers shipbuilding to be a contract of sale,¹¹ while Russian case law classifies shipbuilding contracts as contracts for work.¹²

Next, this article will detect terms of standard contracts that logically flow from contractual standardisation. After disclosing the terms of the leading standard contracts, it will be analysed to which extent the legal framework of standard contract corresponds to the solution proposed by the rules, applicable to contracts for work in Russian law.

1.1. Law applicable to shipbuilding contracts

Following A. Boggiano, it should be noted that the rules of international standard contracts are not a separate legal system.¹³ The scope of application of the dispositive and mandatory rules of applicable law is manifested in cases where contractual framework is incomplete or where the applicable legal order does not allow the parties to agree on a deviating legal rule. The applicable law is linked to general provisions on contracts: the substantive and formal validity of the contract, interpretation, conditions and remedies for breach of contract.

Applicable law determines the type of contractual framework applicable to shipbuilding contract. According to the explicit provision in Article 2(e) of the 1980 Vienna Convention on the International Sale of Goods, this international treaty does not apply to vessels. That fact that a specific object is excluded from the application of the provisions of an international treaty shifts the focus to the study of national approaches. Generally, there are two main approaches to defining a contract type that covers a shipbuilding contract in different legal systems.

According to one of them, a shipbuilding contract is based on the provisions for sale and purchase. This model is supported by Denmark, France, Norway, Sweden, the United Kingdom and the United States of America.¹⁴

However, the strict application of contract type rules may be omitted in order to come to an equitable decision. Thus, in the cases of Hyundai Heavy Industries Co v Papadopoulos¹⁵ and Stocznia Gdanska SA v Latvian Shipping Co,¹⁶ the House of Lords considered it reasonable to apply the rules on contracts for work and services rather than sale and purchase to a shipbuilding contract.

A more detailed examination of the Stocznia Gdanska case will be instructive. According to clause 5.05 of the contract concluded between the companies, in the event of the buyer’s delay in payment for the ship, the seller could withdraw from the contract. This right was exercised by the seller, following that the parties disagreed on the payment for the work performed. The seller insisted that the buyer was obliged to pay for the work performed before the termination of the contract. The buyer objected, arguing that it was not obliged to pay for the work on the construction of a ship with regard to which it will not obtain ownership.

Under a contract of sale, consideration is deemed to be the transfer of ownership of the item, therefore, the rules on sale do not impose an obligation on the buyer to pay for work performed during construction of an item that has not become the property of the buyer.¹⁷ Treating the work performed under the contract as a consideration would justify the buyer’s obligation to pay for it.

The House of Lords found builder’s argument reasonable. Consequently, the precedent cited above justifies that the works for construction of a ship by the seller are included in consideration under a shipbuilding contract.

In addition to a contract of sale and a contract for work, a shipbuilding contract may be classified as a joint venture. If the parties to a shipbuilding contract have an ongoing relationship in which both parties bear significant risks as a result of each other’s actions, such a contract will be considered a joint venture (partnership) contract.¹⁸

Additionally, financial leasing is a widespread method of vessel acquisition, structured as a three-party transaction.¹⁹ At the same time, the basic issue of transferring the ownership is also relevant for this model, since the lessor and a third party agree on construction of ship. Therefore, the discussion on types of contracts is also relevant for leasing relationships.

Under the English law shipbuilding contracts are governed by the Sale of Goods Act 1979. Explaining the standpoint of English law, S. Curtis acquaints readers with “distinction of not great practical significance “laid down by the law²⁰: he distinguishes between sales contracts, under which ownership is transferred immediately upon conclusion of the contract, and agreements to sell, under which the transfer of ownership is postponed or spread out over time. The sale of a ship that is yet to be built always falls under agreements to sell. The English lawyer concludes that a shipbuilding contract “is an agreement of sale, incorporating certain characteristics of a construction contract, by which one party, typically the builder, agrees to sell to the buyer future goods, i.e., a vessel, by description.”²¹ Accordingly, the English author argues that the distinction he outlines matters little, and that a rigid typology of shipbuilding contracts is likewise insignificant.

Following the second approach, a shipbuilding contract is classified as a contract for work. Germany, Italy, Korea and Japan follow this model.²² As mentioned above, Russia is within this group.

At the same time, various circumstances may influence the applicability of the established approach to a specific case: the existence of the vessel prior to the conclusion of the contract and the degree to which the buyer’s instructions are taken into account. Thus, if the ship had already been built by the time the contract was concluded, the agreement should be considered as a contract of sale. Conversely, if work began only after the agreement was concluded and the buyer is actively involved in the details related to construction of the vessel, the contract will be regarded as a contract for work. The second group of cases is specifically observed by this study.

Russian law has long been searching for a stable criterion for distinguishing between a contract for work and a contract for the sale of an item yet to emerge.²³ Since the mandatory and dispositive norms of contract types provide the parties with different legal opportunities, the theory seeks to make a clear distinction between contractual structures based on their premises. The doctrine discussed the criterion of materials, which is not reflected in Article 704 of the Civil Code of the Russian Federation, the criterion of the buyer’s control over the process of construction, the criterion of individuality and uniqueness of the result, and whether the from the will of the parties follows the importance of construction process, not barely the result. After criticism of each of the approaches, it appears that no consensus on this issue has been reached in Russian doctrine.

In the absence of a common opinion on the issue, it seems reasonable to analyse whether the parties formulate obligations according to the contract model (Article 702 of the Civil Code of the Russian Federation) or according to the sale and purchase model (Article 454 of the Civil Code of the Russian Federation). The freedom of the parties to structure obligations under the contract as they wish does not lead to a breakdown of contractual standardisation, since the court, in order to provide the parties with legal remedies, will interpret the law in accordance with legal tradition and usages. In case of ambiguity, one should also refer to the previous contractual practice of the parties and the usages of the industry. In Russia, it is customary to subject shipbuilding contracts to the rules on contracts for work. As shown above, legal tradition plays an important role in the field of shipbuilding contracts.

After a theoretical introduction to the problem of contract types, the attention can be drawn to the legal problems that arise directly from contract typification. For comparison, issues closely associated with the contract type were selected: essential and other terms of the contract and circumstances affecting the subject matter of the contract. With regards to first matter, it is self-evident that essential terms of contracts are an important issue both under the Russian and English law. The second problem is related to the duration of performance of the shipbuilding contract, and therefore to the expansion of the range of circumstances that may affect the performance of the contract. On average, it takes between two and two and a half years from the signing of the contract to the delivery of the vessel to the buyer’s country,²⁴ which makes it relevant to discuss the possibility of altering the contract price.

1.2. Conclusion of a shipbuilding contract under English and Russian law

Since English law classifies a shipbuilding contract as a sale and purchase agreement, the essential terms of the contract are necessarily the subject matter of the contract and the price.²⁵ The implied terms of the contract will include terms relating to the quality of the goods, the seller’s title to the goods, the time of payment and delivery, and security. However, M. Clark doubts that in a shipbuilding contract, an omission of the contract price can be filled by the market price, since both the subject matter of the contract and the shipbuilding market are specific and individual. Among the implied terms of sale contract Sale of Goods Act 1979 names following: the legal purity of the goods and the seller’s ownership of the goods being sold under the contract (Article 12), conformity of the goods with their description and purpose as communicated by the buyer (sale by description, Article 13).

An essential element for the conclusion of contracts under common law is consideration. In an enforceable shipbuilding contract, the buyer undertakes to pay the price for the vessel, and the seller undertakes to build it. However, proportionality of performance is not a mandatory condition for reciprocal performance.²⁶ In North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd,²⁷ the High Court recognised the element of reciprocal consideration in an agreement whereby the buyer paid for the stages of vessel construction and the seller provided a guarantee of reimbursement for the stages in the event of circumstances specified in the contract.

In Russian law, in addition to the subject matter of the contract, other essential terms of a construction contract are also recognised. Unlike English law, under Russian law, the price of the work is not an essential condition of a shipbuilding contract. At the same time, according to paragraph 4 of Information Letter No. 51 of the Presidium of the Supreme Commercial Court of the Russian Federation dated 24 January 2000, the absence of an indication of the term of the work leads to the contract not being concluded.

In case No. A06-9340/2024 before the Commercial Court of the Astrakhan District²⁸ and the Twelfth Commercial Court of Appeal,²⁹ the courts of first and appeal instances concluded that the contract, which did not specify the term for beginning and completing the works on the ship, was not concluded under Russian law. The contract between the parties stipulated that the builder must carry out comprehensive refurbishment and finishing works on the passenger cabins, public and service areas of the vessel under construction. The claimant commenced the works in the absence of a signed contract, and the respondent subsequently avoided giving a reply to the claimant’s letters requesting that the contract be signed. The claimant then filed a lawsuit to the court, requesting to recognise a contract as concluded. However, the version of the contract proposed by the claimant did not contain any terms regarding the timing and scope of the work to be performed, nor did it specify the price of the work. The first circumstance served as the basis for refusing to satisfy the claimant’s claim in both instances.

1.3. Change in the contract price for a vessel under English and Russian law

The need to change the contract price arises either due to the influence of external circumstances or at the suggestion of the parties themselves due to a change in the characteristics of the consideration.

When the performance of the contract becomes unfavourable and unprofitable for the parties due to extraordinary circumstances, it becomes necessary to fix the price agreed by the parties or to terminate the contract.

English law follows the approach that the contract price is unlikely to be increased due to an increase in construction costs.³⁰ Consequently, the economic impracticability of performance does not entitle the losing party to terminate the contract (Davis Contractors Ltd v Fareham Urban District Council;³¹ Tsakiroglou & Co Ltd v Noblee Thorl GmbH³²). Often, the circumstances in which the court terminated a shipbuilding contract were related to the imposition of martial law, as a result of which the vessel was subject to requisition, or the continuation of its construction was prohibited.³³ In general, a strict approach to the price of goods follows the logic of sale and purchase contract, in which the work and costs incurred in the production of goods cannot affect the initial agreement. The subject matter of the contract is the result itself, not the processes behind its construction.

Under Russian law, the parties have the right to agree on a fixed price, which cannot be increased subsequently (Article 709,6,2 of the Civil Code of the Russian Federation). If there is an approximate price, the problem posed for the contract for work is to be solved by Article 709,6,2 of the Civil Code of the Russian Federation. Actually, the paragraph offers the parties either to agree on an increased price or to apply the rules on force majeure under Article 451 of the Civil Code of the Russian Federation. However, firstly, this article gives priority to termination rather than modification of the contract (Article 451,4 of the Civil Code of the Russian Federation); secondly, in Russian judicial practice, the frustration of contract is applied extremely rarely.³⁴ The contract for work does not provide a more flexible approach to the contract price. Consequently, the Russian approach to changing the price of a vessel due to an increase in the cost of work or materials is also rigid.

In international commercial practice, an attempt has been made to design a contractual shield against price fluctuations – an escalation clause. The clause consists of several components: firstly, it includes a stable price limit within which the builder assumes all market and inflation risks; secondly, the clause includes a variable clause covering the indexation of works, wages, etc.; thirdly, changes may also be made to material price indices.³⁵

2. Standard Contracts for Shipbuilding

The parties to a shipbuilding contract often make use of a legal template provided by standard contracts approved by professional organisations in the field of international maritime trade. The Shipbuilders’ Association of Japan (SAJ), the Baltic International Maritime Council (BIMCO), China Maritime Arbitration Commission (CMAC), US Maritime Administration (MARAD), Norwegian Shipowners’ Association (NSA) and Community of European Shipbuilders’ Associations (CESA). Subsequently, most standard contracts will be designated by the name of the organisation, with the exception of BIMCO, which developed the NEWBUILDCON.

It can be argued that, to date, there is a set of terms which is stipulated by every shipbuilding standard contract. The subcommittee on shipbuilding contracts of the CMI has included the following provisions in the (a) key features of the vessel (deadweight, speed, fuel consumption), (b) cost of the vessel, (c) control over the performance of work, (d) the procedure for making changes to the characteristics of the vessel under construction, (e) the procedure and conditions for sea trials of the vessel, (f) the time and place of delivery, (g) insurance, and (h) rectification of defects.³⁶ Russian lawyers should note that the above list does not include the term for performance of obligations under the contract, which is an essential condition of a shipbuilding contract under Russian law.

Shipyards tend to apply standard contracts adopted by national trade associations and institutions. CMAC and MARAD standard contracts are mainly used by national shipyards in China and the United States and are not widely used in the international market. The CMAC standard form contains many features of Chinese law that are alien to foreign buyers. For example, if the builder performs the task better than specified in the contract, the builder is entitled to a bonus to the price within the limits set by the parties (clauses 6.1.5; 6.2.4; 6.3.4 CMAC). The contract also distinguishes between the basic price of the vessel under the shipbuilding contract and the contract price for the purpose of dividing between the parties the amount by which the contract price exceeds the base price (clause 6.6 CMAC). The model contract proposes applying People’s Republic of China law and referring disputes to the China Maritime Arbitration Commission.

It should be noted that standard forms do not always follow the framework of the contract type when formulating terms and conditions. Due to the dominance of English law, the contractual model for shipbuilding contracts is sale and purchase (e.g., clause 41 NEWBUILDCON). In order to highlight the aspects in which the rules of the contractual type are consistent with or yield to the logic of the standard contract, the terms and conditions for the provision of materials and the consequences of termination of the contract have been selected.

2.1. The party providing the materials

According to one of the theoretical approaches to distinguishing between a contract for work and a sale and purchase agreement, in case of uncertainty as to whether a contract should be classified as a sale and purchase agreement or a contract for work, one should focus on which party provides the materials (Article 3.1 of the Vienna Convention; Gai., 3,147). In Russian law, the classic solution was abandoned by Article 704 of the Civil Code of the Russian Federation, which established that the work is performed at the expense of the builder. Consequently, the classic criterion has no normative value in Russian law.

The following condition can be found in standard contracts:

The Buyer shall, at its own risk, cost and expense, supply and deliver to the Builder all of the Buyer’s Supplies (NEWBUILDCON, s. 21.a.i).

The wording is confusing and deceits that the contract is subject to the applicable law on contracts for work. However, regardless of the provision of materials by the buyer, the NEWBUILDCON standard contract, referring directly to English law, identifies the contract as a sale and purchase agreement. Consequently, standard contracts, like Russian law, have devalued the criterion of materials as a qualification of the contract type.

The limits of buyer’s ownership over materials that were included into the vessel seems to be a more complicated issue. The Civil Code does not provide an explicit answer to this concern. The application of Article 220 of the Civil Code of the Russian Federation does not bring any clarity as, firstly, the builder manufactures the item for the buyer’s needs and not for itself, and secondly, the scope of the provision does not cover immovable property such as sea vessels (Article 130 of the Civil Code of the Russian Federation). It should be taken into account that the builder is recognised as the owner of the vessel (Article 703, 2 of the Civil Code of the Russian Federation; clause 7.5 SAJ; also standard contracts: clause 31 NEWBUILDCON; clause 8.b AWES). The purpose of assigning ownership rights to the builder is to enable it register the ship and act on behalf of the ship before classification society.

In this light, it is fair to assume that the buyer retains ownership of the materials provided by it until the ship appears as an object, i.e. until the keel of the ship is laid. The buyer’s ownership rights should also be retained in relation to materials that were not used in construction. In legal systems where the buyer supplies the materials, the risk of accidental loss of materials lies with the buyer.³⁷ At the same time, it should be noted that the builder acts as professional custodian which makes it liable for wide range of circumstances that may occur.

2.2. Consequences of contract termination

The SAJ model contract subdivides the consequences of contract termination depending on which party is at fault for the circumstance that entitled the other party to terminate the contract.

If the buyer terminates the contract due to the builder’s delay or the vessel’s failure to comply with specified characteristics, then “Builder shall promptly refund to the Buyer the full amount of all sums paid by the Buyer to the Builder on account of the Vessel,” (clause 10.2 SAJ). Interest rate for the use of funds shall also be added to the payments. According to clause 3.5 SAJ, the buyer is not entitled to claim any liquidated damages as a result of exercising the right to withdraw from the contract after establishing that the vessel does not comply with its key characteristics.

If the circumstance leading to the termination occurred on the part of the buyer, then after the buyer receives notification of the termination, “Contract shall forthwith become null and void and any of the Buyer’s Supplies shall become the sole property of the Builder,” “the Builder shall be entitled to retain any Installment or Installments theretofore paid by the Buyer to the Builder on account of this Contract” (clause 11.3 SAJ). Furthermore, the form protects the interests of the builder in the sale of the vessel, so payments are withheld until the purchase price is received and the sale is settled. Any surplus which remains after excluding the costs of the sale, the uncovered cost of construction, interest, penalties and the builder’s lost profits shall be returned to the Buyer.

This rule is an example of a standard contract regulation favouring the builder. Termination due to the builder’s fault entitles the buyer only to receive the debt under the obligation, while termination due to circumstances dependent on the buyer allows the builder not only to receive what is due under the obligation, but also to hold the buyer liable.

At the same time, payment for the builder’s work upon termination of the contract depends on whether the builder provoked the circumstances that led to the termination of the contract. That is, the work is subject to payment if the builder has not violated its obligations. Termination in the case of the builder’s fault is based on the logic of provisions for sale and purchase: if the buyer did not receive ownership of the vessel due to the builder’s fault, then the builder should not receive payment for the work either. If the circumstance that led to the termination was caused by the buyer, the builder’s work is considered as a consideration requiring payment, even if the buyer does not receive ownership of the vessel.

In Russian law, under the Article 717 of the Civil Code of the Russian Federation the buyer has the right to withdraw from the contract at any time without explaining reasonable grounds for such withdrawal. In this case, the buyer pays the builder for the work performed and compensates for the losses caused by the withdrawal. The possibility of restricting the right to withdraw is debatable.³⁸

The SAJ solution does not adequately take into account the interests of the buyer in the event of termination of the contract and therefore needs to be adapted and supplemented with general rules on liability for breach of contract. It is necessary that the builder also be liable for termination caused by its actions.

Conclusion

The analysis shows that the legal regime for international shipbuilding contracts is formed at the intersection of applicable law and contractual unification. A comparison of the English and Russian approaches revealed a discrepancy in typification: English law consistently treats shipbuilding as a sale and purchase, while Russian practice treats it as a contract. However, both legal systems are strict on the issue of price changes due to cost increases, which encourages the search for contractual mechanisms for risk redistribution.

Standard forms increase predictability and support high qualification in the industry, but do not functionally replace applicable law. Some of standard solutions demonstrate imbalances in favour of one party and require adaptation to national requirements and the balance of interests of the parties. It is important for Russian lawyers to remember that a number of standard contracts do not require the date of beginning and completion of the work to be specified, whereas under domestic law, a construction contract without a time limit will not be considered concluded. This example highlights the importance of correctly incorporating and adapting the contract to the applicable law.

A stable balance of rights between the parties to a shipbuilding contract is ensured not only by the applicable law, but also by the careful allocation of risks in the contract. In the future, this study may also be supplemented by the role of conflict of laws in the field of international shipbuilding. ■

Notes