By Fred B. Goldsmith
From MarineNews August 2010
My last column addressed critical clauses in vessel charters. Since this issue of MarineNews is focused on vessel construction and repair, this column will focus on some, but due to space limitations, not all, critical clauses in vessel repair contracts.
Work to be Performed
Vessel repairs are usually an expensive proposition. The vessel must be taken out of service and thus is not generating income while being repaired. Often, the vessel has to be drydocked. Thus, owners usually want to get as much done at once during this disruptive period. Accordingly, there is usually a long list of repairs and improvements which the yard will be performing. Since the specifications require considerable detail, the work to be performed is usually explained in a separate “schedule,” which is attached to, and incorporated by reference into, the repair contract.
How much will it cost? When is payment required? How are payments made? Most repair contracts usually include a detailed schedule of milestones in the work process which must be achieved to the owner’s reasonable satisfaction and, when achieved, how much of a “progress payment” is then owed the shipyard.
Owner’s Supervision of Repairs
The contract should specify who has authority to speak for the vessel owner (approve work that has been completed, authorize change orders, etc.) and attend the vessel at the yard. Since change orders are inevitable, a procedure should be spelled-out in the contract for who can approve change orders. The contract should state that all change orders must be approved in writing by both the owner’s and yard’s authorized representatives. This way, later disagreements about price increases and the scope of the work are hopefully avoided. The owner’s representative should be permitted to inspect the work being performed at all reasonable hours. Some contracts go so far as to spell-out what facilities and quarters will be provided at the yard for the owner’s rep(s).
The contract should detail when the repair work is to start, when it is to be completed, and what happens when there are delays. Which delays are excusable? Which delays are considered the yard’s fault, which are considered the owner’s fault, and thus which party is financially responsible for the delay. If there are yard-caused delays, how much do delays cost the yard? Is there a financial reward to the yard if it finishes ahead of schedule?
The contract should provide for daily or weekly meetings (depending on the nature and extent of the repair work) between the owner and yard representatives and describe what is to be discussed at such meetings.
Subcontractors and Suppliers
In addition to specifying the nature and extent of the work the yard is performing, the contract should describe whether any of the work is being performed by subcontractors, and if so, which ones are authorized and whether the yard will remain ultimately responsible for the quality of the subcontractors’ work. If equipment is being supplied for the repairs or improvements, is such being supplied by the owner or the yard? Who are the suppliers? What are they supplying? At what price? What if they fail to supply the equipment when needed? Who is responsible for delayed equipment and supplies?
Quality of Materials and Supplies
The materials and supplies used by the yard to complete the project should be detailed in a schedule attached to the contract. Somewhere it should be stated what the owner’s expectations are as to the materials and supplies. A particular brand? A certain standard? Never assume anything. Some contracts thus state, “All goods, materials, equipment and machinery to be incorporated in [the repair project] shall, without exception, be new and unused, and be of the precise kinds defined in [the contract or schedule] …. Goods, materials, equipment and machinery of a manufacture or brand other than prescribed in [the contract or the schedule] shall not be incorporated in [the work being performed on the vessel] without the written consent of the owner’s representative.”
Liability and Warranties
This is one of the most critical clauses in a vessel repair contract. It should address contingencies such as who’s responsible if a yard worker or third party employee, such as the crew delivering a new engine, is hurt on the job site. Also, what aspects of the work performed by the yard is the yard standing behind, and for long? And, if warranty repairs are required, where can they be performed and by whom? Does the yard have the option of performing the repairs with its own personnel, even if the vessel is now hundreds of miles from the yard? In this clause, the yard will typically disclaim various warranties which might otherwise be automatically implied by law. Carefully-worded indemnification clauses are standard. But be careful: a missing or insufficiently precise word here or there can render the indemnity provisions unenforceable. Have a qualified lawyer draft or review these clauses, in particular.
This is another very important clause. It should address what types of insurance, with what dollar limits and particular endorsements, each party is required to have in place. Don’t try to handle this yourself. Be sure to involve your admiralty attorney and your marine insurance broker.
The specific events which constitute a default (or breach of the contract), by either the yard or the owner, should be defined. And, when there is a default, the contract should also spell-out what each side’s rights and remedies are.
This type of clause generally states that if, because of certain cataclysmic events such as fuel shortages, embargoes, terrorist actions, etc., or for other causes beyond the reasonable control of either party, the terms of the contract cannot be adhered to, the parties shall attempt to negotiate suitable amendments to the contract so as to continue the work, but if no resolution is agreed upon within a certain amount of time of the force majeure event, either party may terminate the contract without further recourse.
Means of Dispute Resolution
If there is a breach or default, the contract should state how the parties will resolve it. By mediation (and if so, who will be the mediator)? Arbitration (if so, who will serve as arbitrators and under what recognized rules will the arbitration occur)? Litigation? Which state’s laws will apply? Where will the mediation, arbitration, or lawsuit proceed? If one side wins, are they entitled to get their attorney’s fees and costs back from the losing side?
The contract should identify which persons are authorized to give and receive notices for both the yard and the owner. Their contact information, including name, title, address, phone, fax, and e-mail address should be spelled-out. Can important notices be delivered by phone call, e-mail, or fax, or is a certified mail letter required? Answer this question in the contract.
Be careful of forms. Each project is so different, it is rare that a pre-printed form or one someone has on their computer will be appropriate as-is. This is an area of maritime business where paying your lawyer up-front to draft or review the contract can save you tens of thousands of dollars and weeks if not months of time in litigation that can be avoided by a well-drafted, thorough, and complete agreement. Just as good fences make good neighbors, well-drafted contracts help ensure good relations between vessel owners and shipyards.
Fred B. Goldsmith, formerly general counsel of one of the country’s largest tug operators, is licensed in PA, WV, OH, and TX, and practices admiralty & maritime, railroad, personal injury, motorcycle, insurance coverage, and commercial litigation with Pittsburgh-based Goldsmith & Ogrodowski, LLC (www.golawllc.com). Reach him at [email protected] or (877) 404-6529.