January 10 2007
The Standard Form Norwegian Shipbuilding Contract 2000 is now widely used inside and outside Norway. This update explains the reasons for its success and comments on the benefits of using Norwegian shipbuilding contracts.
The Norwegian shipbuilding contract is an 'agreed document', as it has been negotiated and agreed between the Norwegian Shipowners' Association on the one hand and the Norwegian Shipbuilders' Sales and Marketing Organization and the Norwegian Shipbuilders' Association on the other hand. This follows a tradition which dates back decades; however, the latest form of the contract is the first that was negotiated and drafted in English and was intended for use in international shipping from the outset. Outside Norway it has been more common to use a 'yard standard' or an 'owner standard' as the basis for bidding and negotiations. The most common basis has been the Shipbuilders' Association of Japan Form (SAJ form); the European yard standard (AWES form) is not as widely accepted as it is often considered to be too 'yard friendly'. The use of agreed documents as standards is widely accepted in shipping (eg, by charterparties) and in the offshore industry. The Norwegian shipbuilding contract follows the same path; it is the only shipbuilding contract which is pre-agreed by the relevant associations and is thus the most balanced standard shipbuilding contract available.
The layout of the Norwegian shipbuilding contract is similar to other known shipbuilding contracts, which makes it easier for the parties to read the document. The form sets out the basic commercial and legal terms agreed between the builder and the buyer. It is assumed that a full technical specification shall be attached and form part of the contract as such. The specification must be negotiated and agreed on a case-by-case basis.
Under the Norwegian shipbuilding contract, the builder has full responsibility for the design of the vessel and for all sub-suppliers, with defined buyers' supplies as the only exception. Refund guarantees must be provided by the builder as a pre-condition for the payment of instalments. The builder is the title holder during construction and may use the vessel as security for its financing, but the buyer must consent thereto. The contract includes detailed provisions on the approval of plans and drawings before the start of the actual construction, as well as provisions on tests and supervision. The provisions serve to ensure a flexible but formalized cooperation between the builder and the buyer during the construction. The aim is that the construction shall not be interrupted by differences between the parties. Should this happen, the main rule is that the work shall continue and the dispute be resolved later (ultimately by arbitration if necessary).
The delivery procedure is outlined in detail to ensure both a smooth delivery and that either party cannot misuse a position or a dispute for its benefit. The documents to be provided are specified; these also serve as a check-list when negotiating the contract.
The Norwegian shipbuilding contract contains standard 12-month warranty provisions; the main obligation of the builder is to rectify defects. Such rectifications or repairs may be done elsewhere than at the builder's site, provided that the builder is duly notified.
The obligation to rectify defects under the Norwegian shipbuilding contract is strict compared with other shipbuilding contracts (eg, the SAJ and AWES forms); the builder must repair any damage to other parts of the vessel caused by any defect which the builder has warranted, provided that:
"such part or parts have been damaged as a direct and immediate consequence of the defect without any intermediate cause, and that such part or parts can be considered to form part of the same equipment or system."
However, the builder's obligation in this respect may be limited to a maximum agreed amount, which should (i) represent an amount for which the builder may reasonably obtain insurance cover, or (ii) be equal to the buyer's deductible under its hull and machinery insurance.
By using the Norwegian shipbuilding contract, the contractual relationship of the parties is governed by a pre-approved, well-balanced and widely accepted document; precedents from both UK and Scandinavian law will ensure a reasonable decision in any dispute. Internationally accepted principles of contract law will serve as the basis for the decision, while the actual wording of the contract will usually be the decisive factor. To minimize the risk of dispute, thorough negotiations and drafting are highly recommended. Resources spent at this stage usually save significant amounts of time and money if things go sour.
The standard governing law is Norwegian law (with arbitration in Norway) as the Norwegian shipbuilding contract is a Norwegian document per se. When drafting and negotiating a Norwegian shipbuilding contract, both parties must acknowledge that the solution sought should be acceptable on an international basis both in form and substance. The Norwegian shipbuilding contract is quality checked by UK-qualified lawyers; English law may thus also be used as the governing law.
Over the past few years non-Norwegians have increasingly accepted the Norwegian shipbuilding contract. Shipbuilding contracts based on the Norwegian shipbuilding contract (with only minor amendments) have been entered into by contracting parties from countries such as China, Germany, Russia, India, Turkey, Italy, Poland and Spain. In order to achieve neutrality in case of dispute, the contracting parties often agree on a different governing law and jurisdiction (UK, Danish and Swedish law have been the most widely used, with arbitration in the respective country).
An extensive commentary on the Norwegian shipbuilding contract has recently been finalized. The aim of the book is to provide shipbuilders, owners, brokers and lawyers with a useful tool and reference guide when negotiating shipbuilding contracts, during the construction of a vessel and in case of dispute. The book refers to precedents from Scandinavia and the United Kingdom and compares the provisions of the Norwegian shipbuilding contract to other forms such as the SAJ and AWES forms.
For further information please contact Øystein Meland, Gaute Gjelsten or Trond Eilertsen at Wikborg, Rein & Co by telephone (+47 22 82 75 00) or by fax (+47 22 82 75 01) or by email (email@example.com or firstname.lastname@example.org or email@example.com).
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