ON THE HORIZON - The high seas

Introduction

The world of shipbuilding has finally slowed down. After several years of remarkably high order numbers, 2025 saw a significant decrease in new orders. This is perhaps not surprising. It has been quite the boom in shipbuilding in recent years, fuelled in part by the rush to alternative fuels, a boom that could not continue indefinitely. But that’s not to say the yards are not full. It will take years for the yards to work their way through their order books and for the ships to be delivered. And the problems have already started to emerge, with likely many more ahead.

Intellectual Property and Design Risk

As cargo interests seek to hit their emissions targets, Owners have placed orders for ships powered by methanol, ammonia, hydrogen, biofuels and even wind. These new projects, often in the form of a series of several ships, require new, innovative designs, which come with their own novel risks.

Take intellectual property. Under a traditional shipbuilding contract the yard would provide the design for a ship. In this new era of greener shipping it may be Owners (i.e. the buyer under the shipbuilding contract) who provides the design. The buyer may even procure that a third-party engineering company does so. Who will own the intellectual property in that design? If the design is a good one, it could prove very valuable indeed. As such, the intellectual property clauses in shipbuilding contracts now require careful review to ensure the buyer’s rights are protected.

Further, what if the design appears to be sufficient but ultimately the vessel does not work as anticipated? Who takes the design risk of the vessel not working as envisaged? Traditionally, that risk would fall to the yard. However, the typical commercial allocation of risk – the buyer agrees to pay for and take delivery of a ship, the yard agrees to design, build, launch, equip and complete it – may not apply and it may be that the design risk sits with the buyer. In addition, there is a difference between a flaw in the vessel that is obvious during sea trials and one that is not obvious until after acceptance when the buyer actually starts trading the vessel. For example, if a vessel has a dual fuel system (as many of the ships presently under construction do) then issues with that system may only become apparent when the vessel has been used over a long period of time/over long voyages. This in turn raises questions about the duration of the warranty period (assuming that the fault falls within the scope of the yard’s warranty obligation, and it is the yard that is obliged to fix the fault). A warranty period is often limited to twelve months. However, the buyer should push for a longer period, and also consider a longer period for latent defects (for example until the vessel has undertaken its first drydocking).

Liquidated Damages, Step-In Rights and Expectation Losses

There is an element of a journey into the unknown and the contracts are now much more complicated than they were before. A well-advised buyer should consider whether the liquidated damages regime for a newbuild vessel’s inability to meet certain performance criteria such as speed and consumption is appropriate. Does it include an aggregate cap and if so, why? Another issue is whether the contract provides for step-in rights, or even the ability for the buyer to take delivery of the half-finished vessel so that the buyer can have it completed at another yard (concepts more typically seen in the context of offshore energy projects). Further, if the design proves to be a particularly successful one, does the contract provide for proper protection for expectation losses, should the yard repudiate the contract? The danger here is that the buyer could find itself excluded from claiming its expectation losses (i.e. the losses it suffers in not receiving a vessel whose market value is higher than the contract value). As such the buyer should insist that their remedies, in the event of a yard termination, are not limited merely to refund of instalments already paid.

Series of Vessels

Where a fleet renewal project involves the construction of multiple vessels of the same specification, the parties should give careful thought as to how the various contracts interact with each other. If there is a problem in the construction on vessel one (already delivered and at sea) that causes a defect that the yard is obliged to fix under the warranty clause, should the yard be obliged to address that issue in a later vessel in the series that is still under construction? If so, who pays for additional cost and schedule delay? What about cr0ss-default provisions? The shipbuilding contracts are all independent contracts so it may be that the parties choose an umbrella agreement to consider these points or they could include additional provisions in each shipbuilding contract to link the contracts together. The key issue is that any agreement regarding cross-default is likely to be bespoke and require careful drafting.

Further, a series of vessels may be built over a number of years. Markets and politics will change. The contracts will therefore have to consider issues such as changes in the applicable law and class requirements, pricing for raw materials and the main equipment and currency fluctuations. It may even be that the project only has a certain number of firm vessels, with the rest to be confirmed via an option agreement. If there is a significant change in the market value of a particular type of vessel then the validity of an option agreement may be challenged. For example, is it binding or is it simply an agreement to agree? There are a number of English law authorities on these points and the buyer will want to ensure that the terms of their option agreements are sufficiently certain such that they are enforceable.

Retrofits and Conversions

And it’s not just newbuild projects. Similar issues – design risks, warranty issues etc., etc. – apply to retrofit and conversion contracts where Owners add new technology to older ships, often combining state-of-the-art new designs to aging tonnage. Retrofitting is becoming all the more common on younger vessels now as the market tries to keep up with constantly changing and developing technology, making the retrofit work even more complex. Careful consideration must be given to exactly which party is bearing which risk in retrofit contracts given the interaction between old technology and new.

Conclusion

The issues outlined in this article are just some of the issues that those in the industry are grappling with. It is a brave new world in shipbuilding and Owners should tread carefully through what may well be fraught times ahead. We continue to advise Owners in relation to their newbuild, retrofit and conversion contracts, advising on non-contentious project work and in disputes including, at its most extreme, in relation to termination disputes. Such disputes can be incredibly stressful as the parties test their respective rights and remedies, sometimes including whether their refund guarantees (the contractual backbone of the shipbuilding project) will pay out or not.