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Specific units — specific contract requirements
Author:Marek Czernis
Unlike the construction of conventional units, such as bulk carriers or tankers, the construction of specialised units, designed to build and support offshore wind farms, often requires a different approach to the construction process. When implementing such projects, it is also necessary to take into account changes which the parties intend to introduce to the contract specification.
Already at the stage of preparing the ship building agreement, the parties face first difficulties. Standard forms used for this purpose as a contract "base" (type – "SAW form", "NEWBUILDCON form", "AWES form", SHIP 2000 form" or "SHANGHAI form"), prepared for the construction of standard ships, do not meet in many parts the requirements which impose design-construction and operational risks of specialised vessels. Hence the need for a far-reaching "intervention" in the forms. In many cases, the scale of the changes required is so large that in fact the contract is written "again", with little similarity to the form, which was its starting point ("bespoke contracts").
In a situation where a newly built specialist unit is often only an "element" of a large investment process (a offshore wind farm, a tunnel under the seabed, etc.), the issue of the provisions on the construction date and the extent of liability for any delay in the ship's delivery requires special editorial attention when formulating the relevant contractual provisions, due to a totally different scale of the impact of possible infringements in this respect.
The construction of specialised units, often a "hybrid" of a conventional unit, with a system of equipment intended for special use (e.g. a "jack-up system" – for heavy lift jack-up vehicles – "HLJV" – a self-supporting vessel, etc.), may not only change the structure of contract obligations (e.g. with a separate design and design entity responsible for the separate systems to be installed on the ship, etc.), but also complicate the issue of establishing appropriate regulations, technical and classification standards to apply to the newly built unit.
For the above reasons, inter alia, in many contracts for the construction of specialised units, the scope of the shipowner's mandate to request contractual changes is extended, in particular, including unilateral powers to demand from the yard changes in planned construction works and modifications in the already completed part of construction and construction works, or finally, to make appropriate production changes in order to speed up the construction and delivery dates of the unit.
With this type of competence, equipping the shipowner with unilaterally contractual "shaking" powers, it is important to bear in mind certain limitations (and associated risks) resulting from the common law rules. First of all, too far-reaching unilateral powers can lead to the application of the so-called "prevention principle" ["Dodd v Charlton" [1896] 1 QB and "Holme v Guppy" [18] 3 M&W 387]. The essence of this principle is that the yard will be entitled to postpone the time of surrender of the ship (as ‘permissible delay’) or to change the price (additional remuneration), if this is due to unilateral action (or omission) of the shipowner (under the ‘shaking’ authority).
In addition to this general, traditional restriction, a shipowner with a contractual right to unilaterally demand that the yard introduce structural and construction changes (for example, in the form of a ‘disputed variety order’, or even a ‘variation order’, but without the yard's signature) is subject to further substantial judicial restrictions. It recalled that the ruling in the case of Blue Circle Industries Plc v Holland Dredging Company (UK) Limited [1988]. The Court of Appeal, in this case, made it very clear that even the shipowner's contract right granted effectively by law to require the yard to carry out certain changes or modifications to the design and contract must not "be outside the general scope of the contract". Moreover, as confirmed in the precedent of "Thorn v Mayor and Committee of London" [1876], additional construction and installation works or changes in work, construction or equipment of the ship are subject to the contractual amendment procedure. In general terms, this procedure is either a separate formalised formula called "Modification"/,Variation" or a general rule for amending the contract.
In the first case, on the part of the yard, particular attention should be paid to the need for contractual safeguards against situations in which the shipowner could, in this mode, force the implementation of certain changes, without having determined the final consequences of those changes in advance (in terms of implementation time, price, etc.). In the event of changes in contractual changes, the strictness of the situation is so clear that without the relevant changes to the contract agreed by both parties, the yard will not be required to accept and implement the changes proposed by the shipowner.
Designated by the "Thorn v Mayor" [1876] and the "Blue Circle" [1988], the "border line" of contract freedom of the shipowner ("buyer"), equipped with the appropriate power to shape the nature and content of the shipbuilding design and construction work, is an important practical determinant. The shipowner should always consider it (with natural inclinations to extend its contractual rights to the maximum). On the other hand, the yard has an effective legal argument to curb the unjustified "retreat" of the contract shipowner.
The above-mentioned, highly specialized and far from standard constructions (and operational objectives) nature of the built units often results in a situation, not only changes or modifications extending the scope of work originally provided for in the contract, but vice versa, to limit their scope. Of course, always in such cases, the parties by contract (changes to the contract) may make the appropriate modifications. However, if there is no consensus between the parties and the agreement itself does not provide for such possibilities (that is to reduce the scope of the work and the resulting price reduction, etc.) then, in principle, one party to the contract (armator) is not entitled to lower the contract price of the vessel by simultaneously limiting the required design and construction work. Moreover, even if it can be presumed (based on the so-called "implied terms") that the shipowner, under the contractual and factual circumstances in question, is in fact entitled unilaterally to limit the design or construction scope of the ship currently being built, this does not mean that he is entitled to reasonable law of the appropriate (corresponding to the scale of the reduction of construction work) reduction of the unit price.
In the case of "SWI Ltd. v P&J Services Ltd." [2007], Lord Waller (J) stated: "As a standard, without separate contractual provisions allowing a change in the contract price, the contracting party shall not be entitled to make such changes by reducing the scope of the work. In such circumstances, the builder shall be fully entitled to declare that he has accepted the contract price on the basis of the determined scope of the work envisaged to be performed and is ready to perform this whole range of work for such a fixed price. Of course, if the contracting party resigns from part of the commissioned work, the builder will be entitled to a full contractual remuneration without being liable for the unexecuted part of the work.”
It is precisely the above-mentioned, juridical conclusions that make it possible to establish separate, precise arrangements for the conditions and scope of possible reductions in the scope of construction work (with a corresponding reduction in the unit price). The judgment in the Maidenhead Electrical Services Ltd. v Johnson Control Services Ltd case [1996], however, recalled that even the existence of such a contractual power, does not at the same time authorise, ex contract, to order this limited by the shipowner, part of the work, of another yard (where the shipowner obtained a more favourable ‘quotaation’ price for such a construction service) [see also ‘Amec Building Ltd. v Cadmus Investments Co. Ltd.' [1996] 51 Con. L.R. 105].
A separate issue is the significant practical problems which the contracting parties may face in determining the final amount to be reduced by under contract (Purchase price) due to the limited scope of design and construction work. In particular, the introduction of a precise mechanism for determining (and making) the appropriate price reduction (amendment) in the contract is recommended for the "solid/flat-rate valuation" ("lump sum"), see "MT Hojgaard A/S v E.On Climate and Renewables UK Robin Riggs East Ltd." [2014] EWCA Civ 710).
Written by Marek Czernis
