Legal risk prevention in the shipbuilding and repair industry

By Zheng Lei, Co-effort Law Firm
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Since the financial crisis, the shipbuilding industry has remained in the doldrums, prompting numerous shipbuilders to move to the ship repair market, causing the build up of competition and an increase in the number of ship repair contract related disputes. For the shipyard as the repairer, the lack of clarity as to who is the contracting party is a major legal risk in ship repair contracts. In practice, the party entrusting the repairs may be the registered owner of the ship, the ship manager, the bareboat charterer, the actual controller of the ship, or the personal representative of the client company. Different contracting parties may present different legal risks for the shipyard in respect of performance of the contract and recovery of amounts owed.

郑蕾 ZHENG LEI 协力律师事务所高级合伙人 Senior Partner Co-effort Law Firm
郑蕾
ZHENG LEI
协力律师事务所高级合伙人
Senior Partner
Co-effort Law Firm

Registered owner of the ship as contracting party. For the shipyard, execution of a ship repair contract with the registered owner of the ship ensures that the shipyard has the right to apply to the court for arrest of the ship undergoing the repairs. However, in international shipping practices, most registered ship owners are single ship companies and their available assets to discharge debts are very limited, solely being used towards the ship undergoing repairs.

Ship manager as contracting party. It is common for a ship manager to enter into a ship repair contract with the shipyard, and in some cases, the ship manager confirms the settlement statement as the representative of the shipowner. From the perspective of the legal relationship, the ship manager is appointed by the shipowner or the bareboat charterer, and executes and performs the ship repair contract as the agent of the shipowner or bareboat charterer. Should the ship manager breach the contract, this agency relationship may affect the shipyard’s selection of the liable entity, and if the shipyard seeks recourse only against the ship manager after the ship has left the yard, it may forfeit its rightful opportunity to apply to the court for arrest of the repaired vessel.

Bareboat charterer as contracting party. Pursuant to China’s Special Maritime Procedure Law, the maritime court can respond to a party’s application for arrest of the ship only if the bareboat charterer is liable for the maritime claim, and is the bareboat charterer or the shipowner of the ship when the arrest is executed. If the ship has left the yard, the shipyard is required to satisfy two conditions in order to apply for arrest of the ship to recover the ship repair moneys: (1) the bareboat charterer has the obligation to pay the ship repair monies; and (2) at the time the shipyard applies for the arrest, the bareboat charterer is still the involved vessel’s bareboat charterer or its owner, failing which the shipyard will face the risk of wrongful ship arrest.

Actual controller of the ship as contracting party. The risk the shipyard faces is that of being unable to have the involved ship arrested, once the involved ship leaves the yard.

The party executing the contract with the shipyard is a senior officer of the shipowner. In the age of e-commerce, it is common for an employee of the client to determine the ship repair details, the quote and other contract terms with the shipyard directly by e-mail. The shipyard should require the employee to produce the relevant letter of authorization from the company. Otherwise, an apparent agent may not be valid or constituted, exposing the shipyard to the risk that it will be unable to seek recourse against the shipowner at a later date.

RISK PREVENTION MEASURES

Given that different contracting parties may present different legal risks for the shipyard when performing the contract and recovering amounts owed, the author would recommend the shipyard to take the following measures to ensure that it has full capacity at the time of debt clearance:

(1) Increase the entities to the contract to the maximum extent possible and include a provision to the effect that such parties bear joint and several liability;

(2) Increase the percentage of the amount payable before the ship leaves the yard and make full use of liens to protect its rights and interests;

(3) A settlement statement should be signed before the vessel leaves the yard, stating the amount of the ship repair moneys and the deadline for payment, so as to reduce the difficulty of adducing evidence at a later time;

(4) Pay close attention to the actions of the ship and shipowner to seize the appropriate opportunity to take effect on such legal measures as arresting the ship, taking other property preservation measures, instituting arbitration or a legal action, etc.;

(5) If the shipowner is a foreign shipowner, the shipyard should endeavor to insert a provision in the ship repair contract providing for arbitration with the China Maritime Arbitration Commission and have the contract governed by the laws of China; and

(6) Place importance on the retention of evidence and the safekeeping of documents, in particular:

(i) evidence that the ship repair contract was lawfully formed, including the e-mail messages from the shipowner’s representative inquiring about the price, and the quote and terms sent by the shipyard; the power of attorney of the client’s representative and the ship’s certificate; the effective ship repair contract signed and sealed by the parties; the ship repair work order signed and sealed in confirmation by the parties; and documents, telegrams, faxes and figures concerning revision of the contract;

(ii) evidence that the shipyard has performed the ship repair contract, including the pilotage bills for the ship’s entry to and exit from the yard; the work completion acceptance certificate signed and sealed in confirmation by the ship’s representative or technical representative, and when necessary, each of the accepted items should be signed in confirmation to avoid differences of opinion; and a photocopy of the work inspection certificate issued by the ship inspection authority;

(iii) evidence of variations to the repair items effected in the course of performance of the contract, including the work item increase or reduction list, price calculation method and the inspection criteria signed in confirmation by the ship’s representative or technical representative as well as the changes in work period and work item subcontracting agreements between the contractor and other entities; and other documents, telegrams, faxes and figures concerning revision of the contracts, etc.; and

(iv) evidence of the acceptance check and completion of settlement, including proof of payment by the client and settlement by the parties after completion of the work, the settlement statement, payment records and other such written documents (including e-mail messages).

Zheng Lei is a senior partner at Co-effort Law Firm

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