We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
08 October 2008
One of a shipowner’s greatest fears when ordering a newbuild is cash-flow problems at the shipyard. If such a situation arises, the shipowner can protect its interests in various ways depending on whether its main concern is to have the instalments returned or to have the vessel completed.
Despite the booming shipping market in recent years, some Norwegian shipyards are barely making money. They are experiencing delays and cost overruns on lump-sum building contracts - eventually leading to cash-flow problems and the risk of bankruptcy, threatening the completion of vessels.
Building contracts often provide for the purchase price to be paid in instalments linked to certain milestones, with corresponding refund guarantees from a bank or other satisfactory security. The title to the vessel is registered in the name of the shipyard in the Shipbuilding Register until delivery and the vessel may be mortgaged in favour of the shipyard’s bank. If the shipyard is declared bankrupt, the mortgagee or the bankrupt estate may seize the ship and sell it on the open market. Hence, provided that the instalments are secured by refund guarantees, the main risk for the shipowner in such a situation is that the vessel will not be delivered at all.
One of the more dramatic options for the shipowner is to cancel the contract and invoke the refund guarantees. The building contract often entitles the shipowner to cancel the contract if winding-up or bankruptcy proceedings are commenced against the shipyard. However, the bankruptcy estate has a general right to accede to pending agreements and may be entitled to accede to the building contract. If so, the shipowner’s cancellation of the building contract will not be valid. Furthermore, even if the cancellation is accepted it could lead to more problems for the shipowner - for example, in relation to placing orders at another yard or liability against a charterer due to further delays.
An option at the other end of the scale is to pay the complete contract price in exchange for the title to the vessel under construction, free from encumbrances. The advantage is that the shipyard is supplied with liquidity, improving the prospects of having the vessel completed. Furthermore, by transferring the title, a seizure by the bankruptcy estate is prevented. This solution might, however, be risky for the shipowner. The supply of liquidity might not be sufficient to avoid bankruptcy. The shipowner may be forced to take over the incomplete vessel. This risk might be limited - but not necessarily excluded - by demanding a completion guarantee. There is also the risk that the arrangement will not be valid and will consequently be set aside in case of bankruptcy. Consequently, such arrangements should be thoroughly evaluated before being effected.
An alternative somewhere between the two options mentioned above is to accelerate the instalment schedule and maybe even agree to pay more than the contractual price for the vessel. This could turn out to be more economic for the shipowner than cancellation, provided that the vessel is completed. However, the risk of bankruptcy is not necessarily eliminated and consequently any accelerated or additional payment should be conditioned upon receiving corresponding refund guarantees. If this solution is considered, it might be useful to include the shipyard’s bank or banks and other shipowners having vessels built at the shipyard in the discussions in order to negotiate a financing package for the shipyard, increasing the prospects of having the vessel completed. However, even this may not prove sufficient to solve the shipyard’s cash-flow problems.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.