Shipbuilding Agreement – "Variation" amendment procedure

Changes in the ship building contract are among the most sensitive areas of the entire shipbuilding contract. Failure to maintain the required "variation" procedure may deprive the yard of real financial claims, even if the modifications have actually been made. Against the background of the case law of English law, it has been shown when the requirement of written form becomes an absolute condition for the effectiveness of changes.

From the general clause to the formal "variation" procedure

In our study Amendments to the Shipbuilding Agreement — Modifications different contractual formulas related to changes are discussed ("modfications") ship building agreements. The form of these changes is usually clearly defined in the agreements, though not always. Thus, Article V of SAJ forms, provides that the contractual change "may" (and therefore need not) be made in writing, understood in a very broad context ("Exchange of letters signed (...) by the parties (...) or by cables confirmed by such letters demonstrating agreements of the parties ...). This kind of "loose" formula does not serve the stability and certainty of contractual arrangements. In particular, it "opens" a wide field for differences in interpretation, whether and in fact what has been contractually amended.

In order to avoid such difficulties, many contracts introduce a detailed procedure for modifying contractual terms, in particular if these changes are to concern detailed technical and structural arrangements (at the level of "Specifications" etc.). This detailed procedure ("variation procedure"), determines not only when and under what conditions of the shipowner ('),Buyer") may require certain changes when and under what conditions such changes should be deemed to have been agreed or not, but shall even introduce agreed standardized forms of order for amendments."form of variation order”).

In some contracts, parties with far-reaching contractual caution even foresee the so-called "disputed variety order". The essence of such forms is that the shipowner (‘Buyer’) confirms on the form that the shipyards are required to make certain changes to the design or construction work of the ship, even if there are discrepancies (and no findings) as to the contractual consequences (price, delivery time, etc.) of such changes.

Written form ‘variation order’ in the light of case law

Is, if the ship construction agreement provides that changes can be made effectively legally, after prior agreement and confirmation of these changes by written means (in the signed ‘variation order"), the rule must be strictly respected? Is it possible, in other words, even if the contract only provides for a written form for ‘variation order", citing a given change ("variation") made, indeed, by disregarding the required form agreement, but by mutual oral consent?

This issue was dealt with in the precedent "Rock Advertising Limited v MWB Business Exchange Centres Limited" [2018] UKSC 24. The case involved a lease. It provided, in particular, that any modification of the rent rate and the time limits for its payment may only take place by prior written agreement signed by both parties to the contract. The tenant was behind on the rent payments within the terms of the contract. However, he argued that by oral agreement with the tenant, a change of the rent payment deadline was set. The case went through the High Court, the Appellate Court, to finally go to the Supreme Court (the Supreme Court – converted from the House of Lords). The Supreme Court, repealing the decision of the Court of Appeal, ruled: ‘English law gives full effect to a contractual provision requiring specific formalities to be observed in order for it to be varied. A contract which requires that variations must be in writing can thenfore only be varied in writing" [muffled] Right English takes full account of the legal effectiveness of the contractual provisions imposing compliance (by the parties to the contract) with certain formal requirements allowing for effective revisions (contracts). According to the above agreement, which provides that a change can only be made in writing – only in this form can it be effectively amended”].

Thus, the Supreme Court did not rule out the possibility of derogating from this principle, which would allow the party to rely on an effective contractual change, despite the fact that the change in question was made without the form provided for in the agreement for the amendment. However, this would require proof by the party citing such a change that: "(...) some words or conduct by that party unequivocally presenting that the variation was valid notwithstanding its informationality, which would need to be something more than the informal promotion itself" [translation. ”(…) the specific words or behaviour of the parties (agreement) clearly indicate that a particular change is valid (legally effective), regardless of the fact of the deviation from formal requirements. However (in such circumstances), for its effectiveness, this requires more than an informal promise of change"].

Let us admit that by evidence, an attempt to demonstrate agreement "variation"with such jurisdictional criteria, it must in practice face significant practical difficulties, especially given the fact that, as with all exceptions to the rule, the procedural and evidence principle so-called "will apply.contra proferent" [that is where the burden of proof rests on the party that derives legal effects from it, and any doubt in this respect is interpreted to the detriment of the party who tries to demonstrate the exception].

It should therefore be accepted that it is laid down in ‘Rock Advertising Limited" [2018] the rule that, only «variation"established and agreed in the form of a contract, they are legally effective (by empowering the yard to claim for such changes) should be considered a binding legal principle subject to strict compliance with only the peripheral possibility of contesting it.

We mentioned earlier, in our paper on the modified form "variation order' – defined as 'disputed variety order". Such a form may be particularly useful in a situation in which the shipowner/investor/"Buyer" is determined to require specific design and construction changes (for example, due to certain requirements notified during construction, by the customer of the shipowner to whom the shipowner will put the ship into service after its construction and reception).

At the same time, in response to the proposed changes by the shipowner, the yard agrees to their implementation in exchange for a change in contract terms (for example, an increased price or an extended construction and delivery period) which the shipowner considers unjustified (in principle or in amount).

Therefore, in the face of a difficult dilemma, the need to make changes to the ship’s construction, subject to the contractual consequences of such changes proposed by the yard, the procedure ‘disputed variety order"allows a practical solution to such a "pata". Shipowner, introduces the full range of required structural changes into the form. The yard, for its part, supplements the provision with the contractual consequences proposed by it, the changes proposed by the shipowner (price, delivery time, change of other technical parameters of the ships due to the change proposed by the shipowner, etc.).

Thus signed ‘disputed variety order", allows for the uninterrupted continuation of construction (including changes provided for in the form) while launching a contractual procedure to determine and resolve the disputed contractual consequences of the technical amendments introduced. Admit it at once, a solution such as this, although not without solid practical pragmatism, is not without – for both parties of the contract (although much more for the shipbuilding side) significant financial risk, where the implementation of such changed technical conditions of construction is implemented without the possibility of predicting the final financial consequences of such changes.

NEWBUILDCON and settlement of disputes in contractual changes

The NEWBUILDCON form, in Clause 42, may be a response to this problem.Dispute Resolution"), which introduced an interesting optional formula for resolving possible disputes in the scope under consideration.

Firstly, the parties to the agreement may submit the dispute to a jointly elected expert (Clausula 42 ((b) – "Expert determination"). The procedure adopted here, highly deformalised and based on the documentation submitted by the parties and the presentation of their positions, allows, within 28 days, from the date of appointment of an expert (KL. 42 (b) (iii) (6), to receive a ruling. In terms of the temporary construction of the ship, it is a highly rational period allowing the parties, in due time, to determine the financial and technological implications (delivery deadline) of the construction currently carried out with the incorporated parties to the contract (in ‘disputed variety order") amendments.

Secondly, where the parties to the agreement do not agree to an expert settlement of the dispute, each party shall have the right to initiate arbitration proceedings under Kl. 42 (c) or (d) NEWBUILDCON. In this case, the procedure is obviously slower than by expert decision. However, this continues to allow the parties, in the final analysis, to determine the financial and organisational implications of the construction carried out, taking into account the introduction of "variations”. 

Marek Czernis – a lawyer specialising in maritime law and shipbuilding contracts, for years dealing with issues related to the construction of ships, shipping and contract liability in the shipbuilding industry. It advises shipowners and maritime industry, combining legal practice with an in-depth knowledge of the reality of the shipbuilding market.