Debt for ship repair: how to avoid problems?
4 April, 2018
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Almost all the Azov-Black Sea Region coastal states have been developing such maritime industries as shipbuilding and ship repair. But Turkey, Romania and Russia still remain the leaders. Ukraine has also a large base for large-capacity vessel and aircraft-carrier construction, but loading capacity of such enterprises does not exceed 15%.
No doubt, for the last years we see positive trends in such industry. Ship repair yards commence ship repair project performance and conclude contracts with large shipowners, which had not occurred for a long time.
Therefore many commercial disputes, financial and legal problems due to conflicts with contractors (ship repair yards) and customers (shipowners) still arise. Such conflicts often arise from simplified understanding some aspects of ship repair relationship by the parties.
It is obvious, if at the stage of negotiations the parties discuss the whole range of terms for their further relationship and its performance procedure, as well as fixed their arrangements in the contract, many problems will be avoided.
Why the contract is so important?
Baltic and International Maritime Council (BIMCO), the most reputed non-governmental organization of shipowners and maritime brokers, has drafted and recommended two contract proformas for common use: Standard Ship Repair Contract (REPAIRCON) and Standard Minor Repair Work Contract (MINREPCON). Like other contract proformas recommended or drafted by BIMCO, these proformas are non-regulatory and serve as sound grounds for the further contract – only as grounds and nothing else. Individually drafted contract requires for essential additions and modifications for each certain case. In most cases ship repair enterprises draft their own standard forms and propose them to customers-shipowners for signing. But we know certainly that standard contracts do not display the parties’ expectation during the project performance.So, time for ship repair is close. Shipowner or its authorized representative starts looking for ship repair base, jointly with drafting the preliminary repair record and filing request to ship repair enterprises. Having analyzed replies from potential contractors, the Shipowner makes its choice and joins preliminary negotiations.
We recommend to fix the results of such negotiations in the Letter of Understanding. It is not a declarative document with uncertain content, but a protocol of the held negotiations fixing their result. It is reasonable to state in the
Letter of Understanding at least:
• The parties to the further contract and the concerned vessel;
• Supposed date of ship repair commencement, its duration and cost;
• A set of documents to be submitted by the Customer to the Contractor in order to sign the contract.
The latter item is the most essential, since it is very important for the Contractor to check status of the company – a party to the further Contract, to check the vessel status, to find out the vessel main specification, to determine correlation between the contractual party and the shipowner (if they differ) and to determine the payer and the responsible person. Today, when shipowners are mostly offshore companies, the vessel itself may serve as the only guarantee of the Shipowner’s obligation fulfillment. It is quite problematic to force the company with no assets to fulfill a contractual obligation.
Ship Repair Contract: check list
Brief description of the Ship Repair Contract structure, its principal sections and content are set below.
You should not fear to draft a large contract: it is better when the parties’ actions and their effects are more detailed, but without awkward formulations or provisions of ambiguous interpretation.
The contract shall state the achieved arrangements fully and precisely, without anything “interlined” or “presumed” with displaying the opposite.
1. The contract preamble shall state full and precise names of the parties, their jurisdictions and powers of the persons acting on their behalf.
2. In the first section, we recommend to fix interpretation of terms and concepts used in the contract. Accuracy of the contract performance depends mainly on their certain definition and unanimous understanding. There may be discrepancies even upon the simplest provisions (at first sight); even the concept of repair may have different interpretations.
3. In the second section it is reasonable to state procedure of work performance, their duration, regulatory framework and technical regulation of work performance, the issues of supply and use of materials and spare parts, involvement of subcontractors.
4. The possibility or procedure of certain work performance by the Shipowner, jointly with its right to control work performance by the Contractor itself may be set forth either in detached or in the same section.
5. One more essential term concerns engagement of classification society in monitoring repair works and the procedure of testing and submitting the repaired units to classification society.
6. Procedure of vessel acceptance in repair by the Contractor from the Shipowner and vessel return by the Contractor to the Shipowner, jointly with stating the relevant draft documents shall be described in details. It is also reasonable to provide the opportunity to cancel the contract by each party just before vessel acceptance in repair.
7. Procedure of clarifying nature and scope of works and drafting intermediary repair records shall be also set forth in details.
8. The next section concerns financial terms. First, the contract price and aggregate cost should be stated therein, namely: procedure of fixing initial and final repair cost, its arrangement and modification. Payment procedure shall be set forth in details: how much, when and at whose expense. Ship repair contracts usually contain a certain payment schedule, e.g. 60% from the initial repair cost as advance payment and full settlement upon work completion. One of the most frequent disputes concern changes in repair cost (due to changes in scope of required works, material cost etc.). Therefore, procedure of additional work arrangement or grounds for changing prices should be set forth clearly in the contract.
9. The next section shall stipulate mutual responsibility of the parties: for property loss or damage, for death or injuries of crew members, including contractual limitation of liability, reimbursement and possible responsibility against third persons. It is reasonable to include force majeure clause into this section. Responsibility of the parties for fire safety should be set forth in a separate section.
10. Further, the following shall be prescribed by the contract:
• the Contractor’s guarantees on performed works, work quality assessment criteria, procedure of detecting and eliminating defects within the guarantee period;
• possibility, procedure and effects of the contract cancellation (after commencement but before completion of works);
• risk insurance;
• procedure of dispute settlement between the parties, including the applicable law and jurisdiction, venue of dispute consideration and court compound, language and procedure of the court proceedings, procedure of enforcement and appeal against judicial/arbitration awards.
It should be noted that disputed related to non-payment for ship repair shall be treated as maritime claims and in similar cases ship arrest is possible.
Ship arrest: last resort
Today, the Ukrainian current legislation faces quite serious changes in the abovementioned procedure. As for positive aspects, some controversies between the Merchant Shipping Code and procedural codes of Ukraine are eliminated; there is an opportunity to file to state courts applications on ship arrest if the vessel intends to call at the Ukrainian sea port; such concept as adequacy of the claim is eliminated.
This article contains general specifications of the Ship Repair Contract. Underestimation of the legal assistance importance at the stage of contract conclusion may result in unforeseen disputes which might have been avoided in case of the parties’ due diligence in the process of contract conclusion.
11 Key points of the ship repair contract
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