Ask the expert: Alessandro Tricoli
What guarantees and warranties should companies look for when considering a contract between a buyer and a shipbuilder?
Focussing on the details
It has to be kept in mind that, apart from warding off countless sleepless nights, the requirement for a well-drafted contract mainly rises to the fore when matters related to the planning and construction of a vessel do not proceed exactly as presumed.
Because of the often exceptionally high cost of repairs, warranty problems can easily lead to even more expensive litigation, and it is thus important to double-check that the period of time during which the warranty of quality is in place is well covered in the contract between the buyer and the builder.
When talking about guarantees and warranties, there is also a genuine need to distinguish clearly between the buyer and the builder and, in the case of the buyer, between short- and long-term investment decisions.
Types of guarantee
The buyer will be looking for two crucial types of guarantee: a refund guarantee for the pre-delivery installments and a warranty of quality for the vessel itself.
The former guarantee is aimed at the protection of the financial investment made by the buyer, who has given a significant sum of money to the shipyard without receiving anything in return other than a promise that a vessel will be delivered at a certain stage in the future, while the latter guarantee is a protection against defects and other in the construction of said vessel.
Protecting your investment
The refund guarantee will be issued by a bank or other institution satisfactory to the buyer in a form and substance that is largely set out in an appendix to the shipbuilding contract.
It is naturally of vital importance for the buyer as it secures the repayment obligation of the builder should the contract be lawfully cancelled and it is even more crucial when a bank takes on the financing of the newbuild project.
Obligations as a buyer
As a result of its importance, such a guarantee will often be regarded as a condition that is precedent to the payment of the first installment and thus, if the builder fails to provide such a guarantee, the buyer will not be under any obligation to pay the first installment, thus leading inevitably to the collapse of the contract itself.
The warranty of quality has, instead, a different meaning as it aims to protect the long-term investment made by the buyer towards the purchase of the vessel.
It is thus a 'normal' guarantee against, to use the standard wording of a contract, "any defects in the vessel which are due to defective material and/or bad workmanship on the part of the builder and/or its subcontractors".
Guarantees for the shipbuilder
The builder, on the other hand, will be looking for a guarantee that the pre-delivery installments will be paid in a timely fashion.
The amount and timing of such payments will vary according to the contract price, the bargaining position of the parties, the buyer's financial strength and the entity to which the title to the vessel is vested before its delivery.
Such a contract also relies on the provision of a satisfactory and adequate refund guarantee, but shipyards will, of course, always insist on a separate guarantee for each and every payment.
Who provides the guarantee?
As the buyer, more often than not, is a special-purpose company subsidiary of the buyer that has been set up with the sole purpose of owning the vessel - and thus a company that has no assets other than the vessel - guarantees will usually be provided either by the parent company or by a third party; in most cases this will be a bank.
Concluding a successful contract
The form of such guarantees is then usually agreed upon during negotiations and appended in draft to the shipbuilding contract along with the forms of each and every guarantee to be used.
Lastly, and in a certain sense a guarantee for the financing of the project itself, the builder will understandably be reluctant to give the buyer any right of set-off so that pre-delivery instalments will be paid in full and on time, and construction of the vessel can proceed without any undue and unexpected delays.
Alessandro Tricoli, legal consultant, Fichte & Co.