Increasing focus on decarbonisation and recent global events have led to more shipbuilding projects involving state of the art technologies, such as:
- duel-fuel LNG and LPG vessels, able to burn both LNG or LPG as well as conventional HFO bunkers;
- exhaust gas cleaning equipment – also known as scrubbers;
- modifications or new-build designs to comply with decarbonisation rules such as EEXI / CII regulations;
- ammonia-ready ships, built with the intention to be ready to switched to ammonia fuel once reliable supply becomes available. (As ammonia contains no carbon its use does not emit any CO2), and
- projects to install and retrofit sails on cargo ships to harness wind power to lessen reliance on mechanical propulsion.
All of these present technical challenges for yards, and raise the spectre of project delays and possibly even missing the delivery date.
Missing the delivery date – the usual contractual setup
As described in our recent article on extreme weather delays, most shipbuilding contracts set an agreed “delivery date”, with liquidated damages payable to the buyer (via reduced purchase price) if the yard misses the delivery date. They tend to contain a system for calculating a long stop date, on which the buyer gets a right to cancel completely if the ship has not been delivered. Most shipbuilding contracts also contain a mechanism by which the yard can push back the contractual delivery date in case of certain types of delay. Typically, there will be “permissible delays”, which tend to include “force-majeure” type delays. Usually, a yard will be given quite a lot of lenience in being able to push back the contractual delivery date due to “permissible delays”, because these are seen as relatively excusable delays, as long as the yard complies with contractual requirements to give notice of delay and to mitigate its effects.
Contracts typically also permit extensions for other delays, sometimes called “non-permissible” delays, but only to a limited extent, and again usually only if notice is given.
Delays due to latent defects in innovative systems or machinery
Shipbuilding contracts typically include delays due to latent defects within their definition of “permissible delays”. E.g. the Shipbuilders Association of Japan or “SAJ” form of shipbuilding contract includes in its definition of permissible delays those due to “defects in materials, machinery or equipment which could not have been detected by the builder using reasonable care”.
Therefore, the yard may be entitled to push back the delivery date for the vessel in cases of delays due to latent defects, as long as there is causative link between the latent defect discovered and the delay. Yards would typically be expected to demonstrate a causative link using critical path analysis to show the difference the latent defect has made to the construction project. This raises the questions: when would it have been reasonable to have tested the relevant part of the system? Would it have been possible or reasonable to have done this prior to installation? Also, the yard will need to make sure it complies with any notice requirements for claiming delays under the shipbuilding contract.
Delays due to shortage of materials
Increased demand for the inclusion of innovative systems in newbuilds may result in shortages of certain materials. For example, where batteries are to be incorporated, global lithium shortages may have a knock-on effect on their availability.
Several standard shipbuilding contracts include shortages of materials or delays in delivery within their definitions of permissible delays. E.g. the SAJ form includes “Shortage of materials, machinery or equipment … delays in delivery etc” in its definition of permissible delays.
Where the shipbuilding contract requires a permissible delay to be “outside the control” of the yard (or similar wording), a buyer might try to argue that shortages or delays were not in fact outside the yard’s control. Such a requirement would involve the yard only being able to claim delays due to unexpected shortages. However, it is not clear in English law how far a yard would have to go, or how much it must be willing to pay, in an effort to source replacements
Hints and Tips
Yards have often come off badly before the courts in the case of delays. They would do well, therefore, to document and claim delays arising from latent defects and shortages, including:
- Claim for permissible delays as they arise, and make sure records of delays supported by critical path analysis are kept.
- Comply with all formal notification provisions under the contract.
- Keep a clear record of what has been done to try to overcome delays, in an effort to demonstrate that the yard has acted reasonably.
This is one of the topics discussed in Thor Maalouf and Sally-Ann-Underhill’s series of podcasts on shipbuilding, the first of which is now ready to stream.