Important Points That Worth In Shipbuilding Contracts For Ships

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  • Points that are worth considering when entering into new building contracts for ships fitted with a wind propulsion device.
  • With a growing number of shipbuilding financiers endorsing the Poseidon Principles there is appetite to look at loan agreements from the perspective of environmental sustainability. 
  • Before a wind propulsion device is procured, it will be necessary to agree which party (shipowner or shipyard) will be responsible for procuring it. 

This article presents an outline of important points that are worth considering when entering into new building contracts for ships fitted with a wind propulsion device to be used to reduce fuel consumption, says an article published on Riviera website. 

Important points that generally applicable to most of the wind propulsion device 

Shipowners: share your sustainability activities with your financier

With a growing number of shipbuilding financiers endorsing the Poseidon Principles there is appetite to look at loan agreements from the perspective of environmental sustainability. 

Participation in joint industry projects concurrent with a new building project is a measurable activity that could be presented to a shipbuilding financier as one worthy of inclusion as a sustainability performance indicator in a loan facility that links sustainability performance to the interest margin. 

Irrespective of whether a condition of the loan agreement or not, where research projects are running concurrent with new building projects, thought should be given to how the outcomes of research can be implementing into the design of subsequent sister vessels if a contract has been placed for more than one vessel. 

If there is likely to be the need to procure different equipment or to undertake design modifications then a contractual mechanism should be incorporated to allow for this, setting out acceptable time and financial limits that each party can accommodate.

Shipyards: read product certificates

It is normal for technology providers to advertise that their products have been certified by one or more classification society. It is important to look in detail at what the certificate actually confirms, for which version of the product, and what the limitations are. 

The potential for project delays in relation to classification when implementing new technology is well known and should not be understated. Certificates of novel technology qualification and certificates granting an approval in principle are often issued with conditions on the back page – this is in effect a to-do list. 

If these matters were easy to resolve, then most would have already been resolved.

Parties should appreciate that having a vessel with a certain wind propulsion device approved at one classification society is no guarantee that the same would be approved by a different classification society without modification or additional analysis and testing. 

At the contract level, the shipyard normally carries the risk of achieving vessel compliance with class. Although delays from the classification society may be treated as permissible delays under the contract, if the yard has misestimated the time needed to achieve compliance, then this would arguably be a self-induced delay and not qualify for an extension of time.

Shipowners: be prepared to procure yourself

Before a wind propulsion device is procured, it will be necessary to agree which party (shipowner or shipyard) will be responsible for procuring it. 

Long term this is likely to be the shipyards, but in the short term it may need to be the shipowner because some shipyards may be reluctant to enter into contracts with wind propulsion device providers on the basis of limited proven manufacturing experience. 

The yards will be concerned that a delay in the supply of the wind propulsion device may impact the critical path for the delivery of the vessel, with unacceptable financial consequences. 

Instead, where the owner procures the wind propulsion device, if it is not delivered on time or to specification then in most contracts the shipyard is permitted to proceed without it.

Shipyards: confirm what the applicable regulatory requirements are

The shipyard normally carries the risk of achieving vessel compliance with the flag state. How this obligation is worded in the contract may give rise to problems on new building projects with certain wind propulsion devices. 

Some contracts use catch-all clauses such as “the vessel is to comply with all applicable regulatory requirements” which is done to catch any regulatory requirements beyond those of the flag state, for example requirements of ports and those in certain territorial waters. 

Unless an exhaustive list of all of the applicable regulatory requirements is agreed upfront and provided in the contract or specification then this could expose the shipyard to local requirements which get missed and which, given the nature of some of the wind propulsion devices in terms of their height and impact on navigation, may be impossible to comply with.

Shipowners: have a yard-friendly design

A project may start with a clear concept of the demarcation between what is the scope of the yard and what is the scope of the wind propulsion device provider, but that demarcation may need to change if what is proposed is later deemed not to be yard-friendly. 

By this stage the buyer and the wind propulsion device provider are likely to have spent considerable time discussing and finalising the demarcation and have expectations on how the yard scope will materialise in terms of layout and selection of equipment. 

Such efforts may be in vain if the builder has been contracted on a design and build basis. Under such circumstances the builder, subject to what is in the specification, has the contractual right to evolve the design as it sees fit. 

Depending on the contract provisions, the buyer usually will have limited opportunity to change the builder’s design. As a reminder to buyers, they should ensure that the concept is yard-friendly by engaging the yard for early studies and that the specification is sufficiently detailed, having converted expectations into obligations.

Shipowners: decide if engine test-bed clauses are still fundamental to the contract

For trading ships, newbuilding contracts contain a clause entitling the buyer to liquidated damages in the event that the prescribed specific fuel consumption of the main engine running at the MCR on the test bed is not achieved within a certain margin. 

Beyond a given percentage deficiency, the buyer has a right to terminate the contract. This demonstrates the criticality of the engine’s performance to the buyer’s commercial purpose of the contract. A ship with wind-assisted propulsion should be spending considerably less sailing time with the main engine ever running at the MCR. 

This will make the engine test bed clause less relevant, but probably not yet redundant given that shipowners will initially still be relying on engine power in various degrees depending on the trading route and sector. 

Shipowners: be realistic about sea trials

Wind propulsion in this commercial application is in addition to, rather than in place of, motor propulsion. Therefore, there will be the need to trial the ship with and without the wind propulsion device operating. 

Acceptance criteria for the wind propulsion device will need to be specified in the contract or specification.

In relation to the contract design speed trial, clarity will need to be added to the contract as to whether any power from the wind propulsion device is to be permitted and if so how. 

If the speed trial is purely on engine power, then depending on the type of wind propulsion device, clarity will be needed as to whether the wind propulsion device will be on board or not, and if on board, whether the device will be stowed away or not.

Sea trials for ships are normally carried out in fair weather and sea conditions, the limits of which are usually prescribed in the contract or specification. The shipyard’s insurance policy will also limit how far the sea trial can take place away from the yard. 

Shipowners: understand the role of the guarantee engineer

Most shipbuilding contracts provide the buyer with the right to have a builder’s guarantee engineer on board for the duration of the warranty period. The guarantee engineer is primarily responsible for managing defect issues. However, the precise duties, experience and competencies of the engineer are often left undefined in the contract. 

The builder may offer someone with general marine engineering experience to act as a point of contact on board, whereas the buyer may be expecting an expert that will assist the crew in training and getting the most out of a piece of equipment. 

Buyers should be careful about relying on any promises that representatives from the wind propulsion device provider will be available to sail with the vessel and provide on board assistance. Unless the contract specifies this, then such statements are unlikely to be binding by virtue of the entire agreement clause which most contracts have. 

Shipyards: disclose the true operating profile to suppliers

A ship’s hull, machinery and equipment are designed to theoretical load profiles that are representative of the actual loading conditions that will be seen during their operational life. 

How significant the change in the load profiles will be and what consequences will result are not fully clear yet for every device and its application. In some cases, there will be no noticeable adverse impact. In other cases, there may be increased degradation amounting to warranty claims. 

There may even be fitness for purpose design claims made beyond the warranty period. For equipment and machinery claims, it is conceivable that an OEM could assert that its equipment or machinery has not been operated within the conditions of the warranty on the basis that the true operating conditions were not disclosed. 

If insurance policies are tested, then similarly, arguments of policies being void could be raised. This will put the shipyard in an exposed position where it may not have back-to-back indemnities for equipment and machinery. 

A builder would therefore be well advised to ensure that the intended purpose (that is “for operation on a wind-assisted propulsion vessel”) of any procured items is adequately disclosed to the suppliers, OEMs and any applicable insurers prior to purchase and is recorded in contracts and insurance policies.

Shipowners: identify possible repair yards in advance

In some shipbuilding contracts, provision is made for allowing the buyer, under certain circumstances, to have warranty defects rectified at shipyards other than the newbuilding yard. 

Before agreeing such a clause, thought should be given as to which repair yards actually have the facilities to accommodate ships with wind propulsion devices, have adequate knowledge of the devices and can properly test them. If the options are limited, then at least both parties know where they stand and can adjust their business plans accordingly and if necessary the contract. 

Due diligence should also be given to how quickly a wind propulsion device provider would be able to respond to a situation where a design change is needed and subsequently new parts need to be manufactured. 

Although two wind propulsion device providers may be comparable in terms of price and performance, the two companies may be completely different in terms of in-service capabilities and support.

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Source: Riviera 

 

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