When does title in the ship pass from the shipbuilder to the shipowner? Can the parties agree to change when title will pass?

Unless otherwise agreed by the parties, title to the vessel passes when the shipbuilder delivers a completed vessel to the shipowner and the shipowner accepts delivery. However, the contracting parties are free to negotiate the terms of when title and risk of loss may transfer. Even though a contract may provide that title to a partially built ship and parts intended for a ship be transferred to the prospective shipowner as payments are made, risk of loss typically remains with the shipbuilder until delivery of the completed vessel. Since interpretation of contract terms is a matter of state and not federal law (see question 3), there is no uniform rule. The United States does not have a shipbuilding registry.

What formalities need to be complied with for the refund guarantee to be valid?

Any refund guarantee is governed by its contract terms and the laws of the state governing interpretation of the contract. Refund guarantees are typically secured by an undertaking by a third party, such as a bonding or surety company. The guarantee can also be in the form of a bank letter of credit or a parent corporation guarantee. Ideally, conditions to payment of a refund guarantee should be limited to the shipowner’s certification of a default. Refund guarantees typically provide that, if the shipbuilder challenges the shipowner’s certificate of default, the guarantee will be paid only in accordance with a final judgment of an arbitration panel or applicable court. The contract terms and the terms of any third-party undertaking should provide that the refund guarantee remain in full force and effect during the pendency of any court or arbitration proceedings.

Are there any remedies available in local courts to compel delivery of the vessel when the yard refuses to do so?

Under United States law, a contract for the construction of a vessel is not a maritime contract and, as a result, the matter is governed by the Uniform Commercial Code (UCC) (in force with variations in all 50 states and the District of Columbia) and other applicable state law. The remedies would depend on the contract’s choice of law provision, or if none, then the law of the state where the judicial proceeding or arbitration is located or the contract is made or performed. In general, the buyer may have a right to recover possession if the vessel is unique or has been ‘identified’ to the contract with no substitute vessel being reasonably available on the market. The buyer may also be entitled to recover the vessel if it has been identified to the contract and the yard becomes insolvent within 10 days of receipt of the first instalment of the price. Generally, the yard will have a possessory lien against the vessel (a mechanic’s lien) for any unpaid amounts due under the contract.

Originally published in Getting the Deal Through: Shipping 2014.

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Topics:  Arbitration, Contract Drafting, Contract Formation, Contract Interpretation, Shipping, Shipyard Industry

Published In: General Business Updates, Transportation Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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