Explanatory notes

• Introduction
• The Mission
• The Main Criteria
• PART I – BOX LAYOUT 
• Part II – Terms and Conditions 
• Section 1 - VESSEL 
• Clause 1 (Builder’s and Buyer’s Obligations) 
• Clause 2 (Description) 
• Clause 3 (Classification, Rules and Regulations) 
• Clause 4 (IMO Hazardous Materials Inventory) 
• Clause 5 (Protective Coatings)
• Section 2 - FINANCIAL
• Clauses 8 – 11 
• Clause 9 (Excessive Fuel Consumption) 
• Clause 12 (Other Deficiencies) (Optional clause) 
• Clause 13 (Late delivery for non-permissible delays) 
• Clause 14 (Guarantees) 
• Clause 15 (Payments) 
• Section 3 - PRODUCTION 
• Clause 19 (Sub-contracting) 
• Clause 20 (Approvals) 
• Clause 21 (Buyer’s Supplies) 
• Clause 22 (Buyer’s Representative) 
• Clause 23 (Inspections, Tests and Trials) 
• Clause 24 (Modifications and Changes) 
• Clause 25 (Builder’s Modifications and Substitution of Materials) 
• Clause 26 (Changes in Rules and Regulations) 
• Clause 27 (Sea Trials) 
• Section 4 - DELIVERY 
• Clause 28 (Delivery) 
• Clause 29 (Documents on Delivery) 
• Clause 30 (Final Installment)
• Section 5 - LEGAL 
• Clause 34 (Permissible Delays) 
• Clause 35 (Builder’s Guarantee) 
• Clause 36 (Guarantee Engineer) 
• Clause 37 (Responsibilities and exclusions from liabilities) 
• Clause 38 (Insurances) 
• Clause 39 (Suspension and Termination) 
• Clause 40 (Copyrights, Trade Marks and Patents) 
• Clause 41 (Governing Law) 
• Clause 42 (Dispute Resolution) 
• Section 6 - SUNDRY 
• Clause 43 (Notices)
• Clause 44 (Effective date of Contract) 
• Clause 45 (Assignment) 
• Clause 46 (Options) 
• Clause 47 (Entire Agreement) 
• Clause 48 (Third Parties) 
• ANNEXES 
• ANNEX “A” – (GUARANTEES) 
• ANNEX “B” (SPECIFICATION) 
• ANNEX “C” (MAKER’S LIST) 

Introduction

For many years BIMCO has thought about whether the shipping industry would benefit from having a standard shipbuilding contract available. BIMCO has had great success in many sectors of the industry in harmonizing contract terms and raising standards. It has always been BIMCO’s ambition to produce a standard document for every sector of the industry representing the entire lifecycle of a ship from construction through trading to demolition. The development of a BIMCO standard shipbuilding contract is the final important part in completing this documentary “wheel of life”.

BIMCO has listened carefully to the requests of its members and the wider industry to gauge the demand for a standard shipbuilding contract. In 2005 it was felt that the time was right to start work on this major project. Previous work on developing a standard ship repair contract (REPAIRCON) provided BIMCO with a good grounding in the relationship between owner/buyer and shipyard.

Work began on developing a standard shipbuilding contract in 2005. The development process has been very thorough involving three separate committees: a committee responsible for drafting; a committee responsible for setting the policy and guidelines for the drafting work; and, finally, the full BIMCO Documentary Committee which acts as an oversight body for all documentary work produced by BIMCO and which is the ultimate authority for giving approval to any standard form of contract issued by the organization.

The actual drafting work was done by a team of lawyers specializing in shipbuilding contracts who have previously worked on behalf of both buyers and builders – this experience has played an important role in ensuring an appropriate contractual balance and that the interests of the builders and the buyers are properly reflected.

The committee responsible for setting policy and guidelines was drawn from many areas of the industry. BIMCO was fortunate to receive valuable input from Asian and European shipbuilding interests as well as guidance from a Japanese shipbuilding observer. The committee also enjoyed constructive input from classification societies through IACS as well as from shipowner and insurance representatives.

The Mission

The objective of developing a Standard Shipbuilding Contract is to provide builders and buyers with a choice of contract to those currently in use. At present most buyers are obliged to rely of the shipbuilding contract produced by the shipyards. The BIMCO Contract offers the parties a modern, clearly worded, balanced and comprehensive shipbuilding contract. The parties can decide which contract will best suit their needs – the yard contract or the BIMCO contract. In its simplest form the BIMCO Contract provides both parties with an ideal checklist to ensure that whatever final agreement is reached with a yard contains the essential key provisions required in any shipbuilding contract.

Most important for the shipbuilding yards is for them to appreciate that the BIMCO Contract is not an attempt to impose a set of rigid terms and conditions as a replacement for existing yard contracts. The BIMCO Contract is designed to form an important part of the negotiation process by providing a solid contractual platform from which the parties can reach agreement. The Contract provides the necessary legal document leaving the technical aspects to the Specification for technicians to formulate. Technical criteria are dealt with in the Contract only to the extent that there are direct legal implications.

The Main Criteria

In developing a Standard Shipbuilding Contract, BIMCO’s objective has been to produce a single, comprehensive document that will be applicable to all ship types and in all jurisdictions. In addition it has been designed to serve as a benchmark for the key provisions that should be contained in any shipbuilding contract and will facilitate negotiation.

The three key documentary elements of NEWBUILDCON are Clarity, Balance and Harmonisation:

Clarity: so that the parties can easily identify their rights and obligations and reduce the risk of disputes on matters of interpretation of contract terms;

Balance: so that the liabilities are equally apportioned between the parties;

Harmonisation: to encourage the use of standard wordings across the industry worldwide, irrespective of jurisdiction, to help facilitate the business process.

The benefit of using NEWBUILDCON is that is an entirely new contract written from scratch. This means that the overall structure of the Contract, which is a real documentary novelty for the industry, clearly guides the reader through the chronological sequence of events involved in a ship building project using language that is simple and easy to understand. The clear structure and the clear language improve the readability of the Contract.

The BIMCO drafters have gone to considerable lengths to provide the Contract with a degree of clarity often missing from existing shipbuilding forms. The rights and obligations of each party are clearly set out in the Contract so that both parties will know where they stand from the outset. This should help to minimize the risk of any disputes arising related to the interpretation of the Contract terms and conditions. The extensive use of references and cross-references greatly assists in this process.

The Contract also introduces a number of novel concepts often absent from existing shipbuilding contracts, such as a clause dealing with the requirements of the IMO Hazardous Materials Inventory and clarifications, such as the Buyer’s relationship to the Classification Society.

The Annexes of the Contract contain proforma letters of guarantee which have been vetted by banking lawyers. The guarantees form an important integral part of any newbuilding contract and users will find these standard versions a useful additional feature in their contractual negotiations.

Users should be aware that if amendments are made to the text of the Contract they must be careful to check that the balance of the provisions has not been undermined. The sectional construction of the Contract should be of assistance in isolating specific aspects of the Contract in this respect.

PART I – BOX LAYOUT

Part I of NEWBUILDCON is set out in the traditional BIMCO box-layout style. The boxes are used to enter details that are intended to cover the main commercial terms that the parties need to agree at the time the Contract is concluded. It should be noted that for convenience the boxes, where appropriate, contain cross-references to the relevant clauses found in Part II.

The boxes are designed to include the key information that underlines the Contract, in part for ease of reference and in part to facilitate completion of the Contract. The technical details in Box 4 are intended to be a summary of the type and main dimensions of the Vessel, together with those which have a consequence on the operation of the Contract (especially the liquidated damages and termination provisions - Clauses 8 to 13 and 39)). The full description of the Vessel will appear in the Specification.

It should be noted that although it is the intention that the parties complete all applicable boxes, the Contract is not invalidated should they leave a box blank.

Of particular note is Box 4E which refers to “Other matters”. The intention of this Box is to allow the parties to add details of specific technical requirements relating to their vessel which may not be covered in the standard form. The importance of this feature is that it will allow the parties through Clause 12 (Other Deficiencies) to apply liquidated damages should the specifically named requirement for their vessel be in some way deficient. This may apply to a special item of equipment placed onboard, such as a heavy lift crane and provides the Contract with a greater degree of flexibility in terms of the vessel types for which it can be used. It should be observed that this is an optional box which the parties need fill in only if required.

The Contract has been designed primarily with the construction of bulk carriers, tankers and container vessels in mind. However, it is important to note that Box 4E in conjunction with Clauses 2 and 12 permits the Contract to be used for other vessel types such as ro-ro vessels or any other special ship type.

Above the signature box on the third page of the box layout is a preamble text which establishes the elements that constitute the Contract and the priority that each part takes over other parts. Should there be a conflict between any information contained in Part I and the terms and conditions of Part II, then Part I overrides Part II.

The second paragraph of the preamble text deals with inconsistencies between the Specification, Maker’s List, Plans and/or Drawings and the provisions of the Contract. Under such circumstances the provisions of the Contract will prevails. The preamble goes on to detail the precedence of the Specification, Maker’s List and Plans and/or Drawings over each other.

Part II – Terms and Conditions

Part II of NEWBUILDCON is divided into six sections each covering a specific aspect of the shipbuilding project. This has been done to make the Contract easier to follow and to cross-reference. The sections also follow the normal chronological order of the building and delivery process.

In a number of the Clauses figures have been added suggesting a reasonable number of days covering time frames for particular events. It is recognised that time frames will vary from project to project due to commercial relationships, market conditions, size of vessel, yards, etc. Therefore the figures supplied are for general guidance only and parties are encouraged to substitute those figures if they feel that they are not appropriate to their individual building project.

Finally, it should be observed that in Clause 2 (Description), Clause 20 (Approvals), Clause 24 (Modifications and Changes) and Clause 27 (Sea Trials) if the parties have agreed in the Specification on criteria or procedures that are contrary to those stated in the Contract then the Specification will take precedence.

Definitions
The Contract contains a number of defined terms which are listed at the beginning of the form to aid ready reference. It should be noted that these definitions are used to define words or phrases in the Contract and are not legal definitions. Some of the key definitions are described below.

“Banking Day” - This is structured to ensure that funds can be remitted without delay, which is particularly important in the context of the final instalment (see Clause 30(a)).

“Builder” - This definition anticipates the position frequently found where the seller under the Contract is not just the shipbuilder but also another group company or trading house. (See Box 2). The Shipyard is separately defined.

“Contract” - The prioritisation of the components of the Contract in case of conflicting provisions is stipulated at the bottom of Part I and (except where expressly provided to the contrary, as in clauses 2(b) and 20) is, in descending order: Part I, Part II, then Specification, Makers List, Plans and Drawings.

“Contractual Date of Delivery” - This is a fixed date. Contrast “Delivery Date”, which can move as a result of Permissible Delays.

“Defects” - This definition forms the basis of the Builder’s guarantee in clause 35(a).

“Delivery Date” - This date may move as the result of Permissible Delays, which are listed in Clause 34.

“Shipyard” - The Contract anticipates that the Vessel may be built at more than one location and Box 5 permits these to be specified.

Section 1 - VESSEL

This Section covers the basic elements of the Contract – the obligations of the parties, the description of the vessel and the rules that will apply to the construction.

Clause 1 (Builder’s and Buyer’s Obligations)

This sets out the primary obligations for paying the entire Contract on behalf of both Parties. The standard chosen for the Builder is “good international shipbuilding and marine engineering practice”. It is, of course, up to the parties to agree upon any other appropriate standard or reference.

In the event that any dispute arose as to the meaning of this phrase, it would be capable of being determined by a Tribunal under the Dispute Resolution Clause, possibly with the assistance of experts.

Clause 2 (Description)

Clause 2(b) - In the context of the dimensions and characteristics of the Vessel, the Specification is dominant. The particulars in Clause 2(b)(i) to (vi) are included as a default mechanism, and also in anticipation of the fact that the box layout will generate a convenient synopsis of the key elements of the Contract.

Buyers’ (and Builders’) technical departments may prefer different methods of measuring speed etc, and if so this should appear in the Specification in which case the provisions of this clause cease to apply.

Clause 3 (Classification, Rules and Regulations)

Clause 3(a) - It should be noted that the relevant applicable laws, rules, regulations and requirements of Class and regulatory authorities are not just those in force at the date of the Contract but also those which are ratified and promulgated on or before the date of the Contract and which will be compulsory for the Vessel on or before the actual date of the delivery.

Clause 4 (IMO Hazardous Materials Inventory)

This clause is novel but reflects modern practice as recommended by the IMO. It is anticipated that this will prove to be an important clause. It is drafted to allow for future amendments.

The BIMCO Hazardous Materials Inventory Clause places a requirement on the shipbuilder in conjunction with equipment manufacturers to provide the buyer with an inventory of all materials used in the construction of the ship and its equipment and known to be potentially hazardous. Many buyers currently in the market for newbuildings would like to be able to include a provision relating to the highly topical “chain of responsibility” in respect of a vessel’s working life and eventual recycling. The Clause taken from the draft BIMCO Standard Shipbuilding Contract provides wording based on IMO Resolution A.962 (23) reflecting the appropriate provisions of the Guidelines.

Clause 5 (Protective Coatings)

The standards applied in this clause are those of the IMO and are drafted to allow for future amendments. It should be noted that the coatings applied to the vessel’s double-side skin spaces and dedicated seawater ballast tanks are to be done in accordance with the Specification and are based on specific vessel types. The reference to the IMO Resolution is to ensure that a minimum standard is applied.

Section 2 - FINANCIAL

The Financial Section deals with payments and guarantees. Liquidated damages are dealt with as a reduction of payments. Financial guarantees of both parties have been made compulsory and the texts included as Annexes are proposed to become standard as far as possible.

Clauses 8 – 11

These Clauses all follow the same pattern and contain the trigger point for reductions in the contract price, and ultimately, termination of the Contract. The standards in each clause are broadly consistent with a range of shipbuilding contracts that the Committee had reviewed, although it would be open to the Parties to vary these, by amendment, if the standards are not applicable to their contract.

Clause 9 (Excessive Fuel Consumption)

If the excess fuel consumption falls outside the permitted level under the Contract, the Buyer has two options, namely either to terminate the Contract (as in Clauses 8, 10 and 11) or require the Builder to rectify the deficiency or replace the main engine. This anticipates the fact that the engine’s fuel consumption deficiency would be identified on a test bed, some time prior to the delivery of the Vessel.

Clause 12 (Other Deficiencies) (Optional clause)

It is anticipated that for some specialist ships, other deficiencies would be required, and this clause provides a logical location for this to be inserted. An insertion of deficiencies in this Clause requires some consequential amendments elsewhere in the Contract, namely:

Box 4 (e) should be completed with the technical description of the item in question.

Box 17 should be completed with the trigger points for cancellation.

Clause 2(b)(vi) should be completed if there are also to be provisions for reduction of the price.

Clause 39(a)(viii) should be checked to ensure that it correctly describes the basis for the Buyer’s right to terminate.

Clause 13 (Late delivery for non-permissible delays)

As with Clauses 8 to 11, this includes a grace period of delay of 30 days after the delivery date. It is important to note two points on this, namely (1) the right to terminate arises if the delay exceeds a total of 180 days after the Delivery Date BUT (2) the Delivery Date is not a fixed date. The Contractual Date of Delivery is a specific date, stated in Box 10, but in common with the usual practice, this date may be adjusted in accordance with the terms of the Contract, and in particular the Permissible Delays provisions in Clause 34. This provision alone, therefore, does not create a back-stop cancelling date for the Buyer since the Delivery Date could continually be postponed by the operation of the Permissible Delays provision. This termination provision is therefore the same as that contained in Clause 39(a)(iii)(2).

Clause 14 (Guarantees)

Sub-clauses (a) and (b) cross refer to the draft guarantees in Annexes (A)(i), (ii) and (iii).

Sub-clause (c) regulates the form of the guarantees but, importantly, with regard to the Builders’ Refund Guarantee, provides that this is to remain in force for a minimum period.

Clause 14(c)(iii)(1) requires this critical guarantee to remain in force for at least 300 days after the Contractual Date of Delivery, (which is the fixed date stated in Box 10), alternatively 30 days after the final resolution of any dispute, whichever is the later. The significance of the 300 days’ period can best be understood by referring to Clause 39(a)(iii)(3) which provides a back-stop cancelling date of 270 days. For the purpose of this calculation, these delays can be the result of any cause (permissible or non-permissible) EXCEPT delays caused by, or the responsibility of, the Buyer (i.e., “Other events” within Clause 34(a)(ii)). 300 days is 30 days after the right to cancel arises. This period is intended to enable the Buyer to discuss solutions with the Builder and, if no solution is found, cancel, and give notice to the guarantor bank prior to the expiry of the Refund Guarantee.

Clause 15 (Payments)

Under Clause 15(a)(i) the first instalment is not due and payable until after the Refund Guarantee has been provided. There is however the opportunity for the Parties to over-ride this by stating to the contrary in Box 11.

The calculation of the instalment payable on delivery is set out in Clause 30 (Final Instalment), but takes account of adjustments based on the factors summarised in Clauses 15(b) and (c).

In Clause 15(d) (Payment Procedures), if the Buyer fails to pay instalments on time, Clause 39(c) allows the Builder to suspend work pending payment. This right does not operate immediately, however, and the procedure the Builder has to follow is set out in Clause 39(c).

Section 3 - PRODUCTION

The Production Section is a practical section which provides the legal framework for the production process, including the Buyer’s restricted right to interfere.

Clause 19 (Sub-contracting)

In modern shipbuilding, Builders can be expected to employ sub-contractors, including, in some cases, personnel in the Shipyard carrying out many of the functions traditionally performed by employees. This could be categorised as routine or minor work. For major work, however, such as the manufacture of engines and machinery, it is expected that the Buyer will specify sub-contractors who would be acceptable in the Specification or Maker’s List.

In any event, the Builder remains fully responsible for their work.

Clause 20 (Approvals)

The timetable for plan approval as set out in this Clause should be considered by the Parties and if thought inappropriate, should be amended in the Specification, which over-rides the clause.

Clauses 20(c) and (d) identify the difference between comments, amendments or reservations on the one hand and modifications and changes on the other. If the Builder considers the amendments amounts to modifications or changes but the Buyer disagrees, the default procedure is set out in Clause 24(e) and ultimately would have to be decided under Clause 42 (Dispute Resolution Clause).

Clause 20(e) permits the Builder to proceed with construction in the event that the Buyer fails to return any plans or drawings in the time permitted, although the Buyer has a remedy in that under Clause 20(b) he can request more time to consider them.

Clause 21 (Buyer’s Supplies)

Buyers have to supply Buyers’ Supplies in accordance with the building and testing schedules. If they do not, this will give rise to a Permissible Delay under Clause 34. The same applies if the Buyers’ Supplies are defective.

The Builder is responsible for the safe storage and handling of the Buyer’s Supplies from the time they are delivered to the shipyard, and they are to be covered by the Builder’s Risk Insurance that the Builder is obliged to take out under Clause 38(a).

Clause 22 (Buyer’s Representative)

This is a practical clause which underpins the smooth operation of a construction process. Without being too prescriptive, the clause contains several references to what is “reasonable”. This is not capable of definition although in the event of disagreements it is something that could be resolved through the Dispute Resolution Clause.

A very important aspect of the role of the Buyer’s Representative is to be found in Sub-clause (d) which permits the Representative to communicate directly with the Classification Society. Whilst this must not interfere with communications between the Builder and Class it is felt that this provision will encourage a constructive dialogue that will assist the buyer during the building.

Clause 23 (Inspections, Tests and Trials)

Clause 23(c) extends the Buyers’ representative’s right to attend inspections, tests and trials beyond the shipyard to anywhere else where work on or storage of items connected to the construction is being performed.

Clause 24 (Modifications and Changes)

This Clause interlinks with Clause 20(c) (Approvals). It anticipates the possibility of a disagreement between the Buyer and the Builder as to the Builder’s assessment of the consequences of implementing them, in which case the matter will have to be determined in accordance with the Dispute Resolution Clause.

Clause 25 (Builder’s Modifications and Substitution of Materials)

Whilst this is permitted, the circumstances are restricted and it is subject to the Buyer’s written approval (not to be unreasonably withheld or delayed).

Clause 26 (Changes in Rules and Regulations)

This clause applies if there are changes after the date of the Contract (in other words outside the scope of Clause 3).

Clause 27 (Sea Trials)

This Clause seeks to anticipate the common situation whereby a difference of opinion arises at delivery between the Builder and the Buyer as to whether the Vessel conforms with the Contract. If the Buyer considers that it does not, he has to give details of the “Delivery Defects”.

If the Builder agrees the Delivery Defects, he has to rectify them and give notice of a revised date for delivery. Although Clause 27(d)(i) requires 15 running days’ notice to be given, it is possible for the Parties to agree a shorter period, and this might be particularly appropriate when Delivery Defects have been rectified.

If these are of minor importance and do not affect Class or the operation of the Vessel in its intended trade, the Builder can require the Buyer to take delivery of the Vessel on the terms set out in Clause 27(d)(iv), which include the provision of a guarantee in the form set out in Annex A(iv).

Section 4 - DELIVERY

The delivery of the Vessel has been singled out and placed in its own Section covering the respective obligations of the parties in relation to the delivery of the Vessel and the procedures, such as the Final Instalment, connected therewith.

Clause 28 (Delivery)

The Vessel should be delivered on or after the Delivery Date, which, it should be remembered is moveable, in the sense that the Contractual Date of Delivery may be extended by Permissible Delays.

Clause 29 (Documents on Delivery)

Buyers should ensure that the list of documents and their description complies with their requirements and those of their Regulatory Authorities. In the event that required Certificates are not available at the time of delivery Clause 29(e) sets out the procedure that is to apply.

The Clause also provides for documents to be notarised and legalised, where required.

Clause 30 (Final Installment)

The Final Installment is the amount specified in Box 11. The amount to be paid at the time of delivery of the Vessel, however, will be the Final Instalment adjusted to take account of the various factors in the Contract such as adjustments under Clauses 8 to 13 and Clause 24 (Modifications and Changes).

This Clause sets out the procedure for agreeing the amount payable on delivery and provides for the situation where the Buyer does not agree the Builder’s calculations but wants to take delivery of the Vessel. He can do so by paying the amount required by the Builder, whilst reserving his right to dispute this amount at a future date.

Section 5 - LEGAL

This Section covers the legal consequences of situations/circumstances where there have been deviations or disturbances in the agreed or planned performance of the contract on behalf of either party as well as insurances.

Clause 34 (Permissible Delays)

This important Clause is key to the calculation of the Delivery Date and also to the Buyer’s right to terminate the Contract for delay (see Clause 39 (Suspension and Termination). It should be remembered that the structure of the Contract incorporates a fixed date (the Contractual Date of Delivery, specified in Box 10) which may, but in most cases will not, be the actual date on which the Vessel is delivered, and the Delivery Date, which may move as the result of the operation of this Clause. The liquidated damages payable for delay under Clause 13 apply with reference to the Delivery Date, as does the Buyer’s right to terminate the Contract under Clause 39(a)(iii).

Clause 34(a) identifies two categories of events, either of which would amount to a Permissible Delay extending the Delivery Date:

(i) force majeure events (in other words events which are outside the control of the Builder) and
(ii) other events which can be categorised as events which are either caused by the Buyer, or are the Buyer’s responsibility.

It is important to note that with both categories, the over-riding requirements in Clause 34(b) apply, namely that the event should not have been caused or foreseen by the Builder, who must also do what he reasonably can to avoid or minimise the effect of such events.

The Builder has to give notice of the beginning and ending of any event which he intends to claim is a Permissible Delay, the purpose of which is to enable the Buyer to check the circumstances contemporaneously.

The force majeure provisions are based on the standard clause recommended by the ICC, adapted for use in this Contract.

Clause 35 (Builder’s Guarantee)

Clause 35(a) sets out the scope of the guarantee by defining “Guarantee Defects”. The period of the guarantee (although frequently 12 months) has been left for the Parties to agree and complete in Box 20.

“Defect” is a defined term and therefore if the Parties decide to extend or reduce the areas of work covered by the Guarantee they should do so by amending the definition of “Defect” in the definition section.

Clause 35(a) makes it clear that the Guarantee only extends to Defects discovered after the delivery of the Vessel. Defects discovered before or at the time of delivery are covered by Clause 27(d).

Clause 35(b) makes it clear that the Guarantee extends not only to the defective item but also to damage caused as a direct and immediate consequence.

Clause 35(d) provides for an additional guarantee period to apply to repair or replace parts. It is for the Parties to decide how long this should be by completing Box 20 (although the additional period cannot end before the end of the original guarantee period).

Clause 35(e) provides for an extension of the Guarantee Period but only where the Vessel has been lying idle continuously for a period in excess of 30 days as a result of guarantee works.

Clause 35(f) gives the Buyer the right to require the Builder, in certain circumstances, to assign to the Buyer rights against sub-contractors or suppliers. This might apply in the event that the sub-contractor or supplier’s guarantee (to the Builder) is for a period in excess of the Guarantee Period or the Builder had failed to rectify Guarantee Defects, for instance in the event of financial difficulties.

Clause 36 (Guarantee Engineer)

Either Party may request the provision of a Guarantee Engineer.

Clause 37 (Responsibilities and exclusions from liabilities)

The exclusion clauses in the Contract have been drawn together in one clause. These have been categorised as the Builder’s exclusion clauses, mutual exclusion clauses and responsibility clauses.

Builder’s Exclusion Clauses - These have been sub-divided into 4 categories, (a) to (d), which are self explanatory and in the case of sub-clauses (b) to (d) may have been found in the Guarantee Clause in other shipbuilding contracts.

Clause 37(e) contains a mutual exclusion clause in respect of the liability that follows termination. However the second paragraph contains an important mutual reservation of rights. This operates if the conduct of the other Party is such as to amount to what under English law is known as a repudiatory breach. Similar concepts are to be found in other legal systems. This covers particularly serious or intentional breaches of the Contract such as a total failure to construct the Vessel, or a refusal to pay instalments. The clause emphasises that the restrictions on a Party’s right to recover damages (as set out elsewhere in Clause 37 and the Contract) do not apply in such circumstances.

Clauses 37(f) and (g) are “knock for knock” provisions. This means that each party takes responsibility for loss of or damage to their own property or injury or death of their personnel, regardless of fault. Knock for knock provisions in contracts limit the risk and minimise insurance costs by avoiding duplication in the cover required, as each parties insurance should only be called upon to respond to losses in respect of their own property and personnel.

Clause 37(g) (responsibility for damage to or loss of property), is subject to provisions to the contrary in the Contract (so that it would not over-ride, for instance, the guarantee provisions in Clause 35).

The wording follows the Limitation Convention 1976 and therefore will be easily interpreted by the Courts.

Clause 38 (Insurances)

The standard set for the level of insurance to be taken out by the Builder is the Institute Clauses for Builders’ Risks (1/6/88) including the Institute War & Institute Strike Clauses. These clauses are currently under review, but the new clauses are not yet in operation.

The policy has to extend to cover the Buyer’s Supplies, and therefore the commencement date could be earlier than first steel cutting or equivalent if Buyer’s Supplies are delivered to the Builder before then.

Clause 38(b)(ii) - In the event of a total loss, either the Parties can reach agreement as to the building or reconstruction of the Vessel or, failing agreement, the Contract is terminated.

Clause 39 (Suspension and Termination)

So far as possible, this clause is expressed mutually, although because of the Parties’ different positions, the provisions are not identical.

Clauses 39(a)(i) and 39(b)(i) are designed to ensure that the important Builder’s Refund Guarantee and the Buyer’s Instalment/Performance Guarantee are replaced in the event of the insolvency of the guarantor. These provisions also link with the rights of both Buyer and Builder to terminate under Clauses 39(a)(ix) and 39(b)(iv).

Clause 39(a)(ii) protects the Buyer in the event of protracted failure to construct by the Builder, and the Parties should agree the period of non construction that would trigger this power (Box 22).

Clause 39(a)(iii) is an important provision which sets out the Buyer’s right to terminate for delay in delivery. There are three sets of events which have to be read together, and it is important to remember the definitions of the terms used. The first event is where the Delivery Date is extended by more than 180 days by force majeure events. Force majeure events are only one of the two categories of Permissible Delays under Clause 34. These are events which are outside the influence of the Buyer, and/or are not his responsibility (as distinct from “other events” under Clause 34(a)(ii)). The purpose behind the restriction of this cancelling provision is to ensure that the Buyer cannot manipulate delays such as to permit it to trigger its right of termination.

The second termination event is where there are more than 180 days of non-permissible delay to the delivery of the Vessel, meaning delays in addition to either category of Permissible Delay (force majeure and “other events”). These are therefore events for which the Builder is responsible.

The third event is where an aggregate of delays that would fall within first and second events total more than 270 days. This means that the Buyer can calculate with certainty a “long stop” date following which he would be able to cancel (excluding any delays for which he is responsible), being 270 days after the Contractual Date of Delivery. This is important when considering the expiry date of the Refund Guarantee (see Annex A(i)).

The clause also permits the Builder, after the right to terminate has occurred, to request the Buyer to agree a new Delivery Date, and sets out the procedure that follows after this.

Clause 39(b)(ii) permits the Builder to terminate if the Buyer fails to pay any sums due under the Contract for a period of 21 Banking Days, although the Builder has to give five Banking Days notice of his intention to terminate, meaning that the Buyer will have a minimum of 26 Banking Days in total within which to pay any instalment.

In Clause 39(c) (Suspension of Work), the Builder has the right, (but not the obligation) to suspend work if the Buyer fails to pay any instalment for fifteen Banking Days. Although suspension of work for this reason also gives rise to a Permissible Delay (see Clause 34(a)(ii)(5)) it is an “other event” and therefore does not contribute to the delay that gives rise to the Buyer’s right to terminate for delayed delivery under Clause 39(a)(iii).

Clause 39(d) Deemed insolvency. What is meant by “insolvency” is defined, and either Party can terminate the Contract if the other is deemed to be insolvent.

Clause 39(f) Although the position if the Buyer terminates is straight forward (see Clause 39(e)) the same is not the case with regard to the Builder’s termination. This clause gives the Builder two options, namely to complete the construction of the Vessel and then sell it, or to sell it without completing it. The purpose is to put the Builder in the same position as he would have been if the Contract had been performed, so far as possible, but if there is a profit, after deduction of the various costs and expenses detailed in the clause, the excess is to be paid to the Buyer. This would be without interest because the termination would have arisen as a result of the Buyer’s default.

If the proceeds of sale are insufficient, however, the Builder can recover the shortfall, first by selling the Buyer’s Supplies and secondly by requiring the residual shortfall to be paid by the Buyer.

Clause 40 (Copyrights, Trade Marks and Patents)

This clause applies mutually to both Parties.

Clause 41 (Governing Law)

This clause leaves the Parties free to select the law to apply to the Contract by completing Box 23(a), and care should be taken to state the correct legal system (for instance “the law of New York” rather than “United States law”). If Box 23(a) is not filled in, the law of the Contract is English.

Clause 42 (Dispute Resolution)

This is an amended and extended version of the BIMCO Standard Dispute Resolution Clause. It has been adapted for specific use in shipbuilding contracts and there are four different methods of resolving disputes:

In Clause 42(a) disputes relating to Rules, Regulations and requirements of the Classification Society or other regulatory authorities are referred to the relevant body. It should be noted that the reference to the decision of Class or Regulatory Authorities being final and binding means the decision of the head office of the relevant body and not the local representatives.

Clause 42(b) (Expert Determination) is a fairly new concept for a shipbuilding contract. It works well in other areas of construction but is dependent upon the Parties nominating an appropriate expert in order to achieve a prompt and effective resolution to practical issues where there is a difference of opinion.

It is optional, in the sense that if the Parties do not agree to nominate an expert within 14 days of a notice from one Party to invoke this procedure, the dispute goes to arbitration or mediation.

If appointed, the expert acts as an expert and not as an arbitrator. The purpose behind this provision is to protect the expert from criticism or sanction in the event that he does not act as judicially as would be expected of an arbitrator. For instance, whereas arbitrators are constrained from using their own expertise without allowing the Parties to comment on it, an expert should not be so restricted.

The intention behind this procedure is that it should be brisk, and therefore it should not be a mechanism for delay. The suggested timescale is that the expert should publish his decision within 28 days of his appointment.

Clause 42(c) sets out the procedure where London arbitration applies but the Parties have the option to choose a different jurisdiction under Clause 42(d) by completing Box 23(b). Note that Clauses 42(c) and 42(d) are alternatives. If Box 23(b) is not filled in, London Arbitration applies.

In line with the standard BIMCO Dispute Resolution Clause, Clause 42(e) contains a provision for mediation, which is becoming increasingly popular.

The mediation provision is designed to function in conjunction with the chosen arbitration option. In order to encourage the Parties to mediate, the Arbitration Tribunal are empowered to take into account the failure of a Party to participate when allocating the costs of the arbitration.

Mediation is a technique that is recognised as offering savings in costs and time over traditional methods of dispute resolution and is a method that is gaining use in the shipping industry. BIMCO’s mediation provision is only triggered once arbitration proceedings have commenced and then runs in parallel with those proceedings, if the parties so choose. This has been done to ensure that one party cannot invoke mediation as a delaying tactic. It also provides for the parties to mediate on all or just some of the issues being arbitrated.

Section 6 - SUNDRY

The final Section encompasses additional provisions that have broad application to the Contract itself such as notices, assignment and optional vessels.

Clause 43 (Notices)

This clause anticipates that the Parties will wish to send notices and documents between them by electronic means, although from the point of view of evidence it would still be necessary to prove that the message had been transmitted.

Clause 44 (Effective date of Contract)

The Contract anticipates that the Parties will wish to impose conditions on it becoming effective, and these should be inserted in Box 25. The conditions have to be fulfilled within the number of days stated in Box 26 after the date of the Contract in Box 1.

Clause 45 (Assignment)

Both Parties have limited rights of assignment, and this is subject to the other Party’s consent unless required for financing purposes.

In the event of an assignment by the Buyer, the Builder is to arrange for the refund guarantee to be assigned to the new Buyer.

Clause 46 (Options)

The Contract has the facility to be adapted for the use where options are to be granted to the Buyer by the completion of Boxes 27, 28 and 29.

Clause 47 (Entire Agreement)

This is a normal provision in English Law contracts to avoid disputes arising as to whether any other terms (for instance in accompanying correspondence, or verbal discussions) form part of the Contract.

Clause 48 (Third Parties)

This clause clarifies that only third parties who are expressly identified in the Contract can benefit from it.

ANNEXES

NEWBUILDCON contains three Annexes covering Guarantees, Specification and Maker’s List:

ANNEX “A” – (GUARANTEES)

Guarantees in an appropriate form are considered to be an integral part of the Contract. Each of the four standard guarantees contained in NEWBUILDCON has been vetted by banking lawyers.

Annex A(i) (Payment Guarantee)
This covers the Buyer’s obligations to pay the pre-delivery instalments other than the first instalment (which is normally paid at the time of contract effectiveness). If more than two instalments are to be covered by such a guarantee, it could be easily amended.

Annex A (ii) (Buyers’ Performance Guarantee)
This is typically given by a parent company.

Annex A(iii) (Refund Guarantee)
This is a critical document to most Buyers and it has been drafted so that its validity dovetails with the cancellation provisions in the Contract. In particular, therefore, the expiry provisions in paragraphs 4 and 5 should be considered very carefully, and the date to be inserted at paragraph (c) should be calculated in accordance with Clause 14(c)(iii)(1) of the Contract. It should therefore be at least 300 days after the Contractual Date of Delivery stated in Box 10, being 30 days after the long stop cancellation date in Clause 39(a)(iii)(3). In some cases, it is not necessary to have such a date because the Builder’s financing does not impose the need for it.

Annex A(iv) (Irrevocable Letter of Guarantee for Builder’s Obligations)
This is a guarantee for use where required to cover the Builder’s obligations under Clause 27(d)(iv)(3), in respect of Delivery Defects identified prior to delivery but which are not corrected before delivery.

ANNEX “B” (SPECIFICATION)

This Annex has been left blank for the parties to add a Specification to suit the needs of individual construction projects.

ANNEX “C” (MAKER’S LIST)

Similar to the Specification, the Annex for the Maker’s List is blank to allow the parties to add a List as required.