Law Firm Warns on Shipbuilding Contracts

Wednesday, July 05, 2006
London law firm Lawrence Graham LLP says owners contracting for new ships should be extra careful about communication with the yard to ensure that they do actually get the ship they want, when they want it. Writing in the March issue of Lawrence Graham’s newsletter, Shipping Lawgram, Mike Lax, partner in the shipping law team, says, “In a hot market shipowners want ships quickly. Some shipyards take advantage of that by wriggling out of contracts and reselling early building slots at higher prices to new buyers. If the shipbuilding contract has been correctly drawn up, the law is generally on the side of the owner – but it is an unwise owner who relies too much on the law. Getting damages after the event and after a lengthy and costly dispute is no substitute for getting the right ship at the right time. There is a lot of wriggle room in standard shipbuilding contracts, as typically, signed contracts do not become effective until a number of conditions have been met.” Lax goes on to advise, “Before signing contracts, try to ensure that there is a minimum of wriggle room. Leave as few items as possible open which can affect the effectiveness of the contract and be very clear about the exact timings by which certain items must be completed. The key then is to deal in writing in a very clear, timely, well documented and open fashion, both through the brokers and direct. Be positive, clear and say exactly what you mean, and always work on paper on the assumption that the contract is going ahead. In a recent judgment in London (Covington Marine Corp v Xiamen Shipbuilding) varying an arbitration award in a shipbuilding dispute between a Greek owner and a Chinese yard, the judge made clear that the issues involved were a mixture of fact and law and had to be viewed commercially. His review of the exchanges between the yard and the owner illuminate how the attitude of the owner, and the clarity of its communications with the yard, can ultimately affect the interpretation of the law covering the contract – in the owner’s interest. “Choose a good yard, cut down wriggle room, watch the clock, communicate clearly. Simple, and much cheaper than reaching for your lawyer,” says Lax.

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