Role of an Owners’ Superintendent or Naval Architect – Walking the Line
There are two main areas of particular peril for an inhouse ship’s superintendent or naval architect when involved with a new shipbuilding project. The first is the design responsibility, and the second is the responsibilities surrounding the inspection regime.
1) Design responsibilities
When the design of a vessel is defective, the consequences can be severe. In September 1980, the 4-year-old bulk carrier the Derbyshire sank with the loss of all 44 lives onboard. The sinking of the vessel was so quick that no distress signal was sent. The cause was the failure of a small hatch, and then the cargo hold ventilation covers. In 1994, the MS Estonia, a ro-ro ferry sank in the Baltic Sea with the loss of 852 lives when the locks on the bow door failed, and in June 2013, the containership MOL Comfort split in two, due to a suspected design failure. The claims arising out of that one incident were between USD 300 – 400 million.
Whereas general deficiencies in workmanship tend to be picked-up during the building process, the consequences of a design failure are often felt sometime after the vessel has been delivered.
The starting point is that, although most often a vessel will be built to the standards and requirements of Class and the relevant regulatory bodies, the actual responsibility for faulty design can rest with either the Builder or the Buyer, depending on what is agreed in the contract. Under English law, the parties are generally free to allocate their risk between themselves as they see fit. Surprisingly, some of the standard shipbuilding forms are silent as to design responsibility. For example, the commonly used SAJ Form is silent on this point.
When no express mention is made of which party is to be liable for the design, the courts will seek to decide where such risk lies by interpreting the wording of the contract as a whole, against the background known to the parties at the time of contracting.
Commonly, it will be the case that, under English law, the design risk will fall on the Builder. The rational is that the design will often be seen as part of the duty of good workmanship falling upon the Builder. In Aktiebolaget Gotaverken v Westminster Corporation of Monrovia and Another, Donaldson J. held that the contract in question:
“…required good workmanship both in the design and the execution, and if there were design errors, I see no reason why these should not be characterised and attract liability as bad workmanship. The alternative view would be that [the shipbuilder] escaped all liability…which seems an improbable result for the parties to have intended.”
However, problems can arise where the vessel is to be built to a design that is provided by or on behalf of the Buyer. In those circumstances, it is possible that a court will find that the only obligation on the Builder is to build the vessel to the design provided – not that the design will be sufficient to meet the functional requirements of the vessel. This is more likely where the design is of a novel character.
Therefore, the Buyer’s superintendents/naval architects need to be careful if they are involved during the negotiations and they put forward specific designs to be used for all or part of a project. Express wording should be used to place the design risk back onto the Builder.
The more novel the design, the more likely that the contract will move away from the use of the standard shipbuilding forms, and that bespoke Engineering Procurement Construction (the “EPC”) contracts will be employed.
Under an EPC contract, there is often a complicated interaction between the Front End Engineering Design (the “FEED”), basic design, detailed engineering, the scope, and change orders. Often these EPC contracts are not particularly well drafted, and incorporate documentation and specifications poorly adopted from other projects. The potential for disputes is multiple.
In essence, the problem occurs because engineers produce the various key documents which are then incorporated or scheduled to the contract. The engineers produce these documents from their own technical perspectives and needs and, quite naturally, they are concerned with those technical issues and the commonly associated time pressures that usually accompany such negotiations. Lawyers then scrutinise the contract and the various schedules, applying rules and procedures that the engineers involved have little or no awareness of. There is no easy overall solution.
The situation can be dramatically improved by making clear where the overall liabilities for design and meeting the functional requirements lie. From a Buyer’s perspective, they will want to place responsibility for those two matters squarely on the Builder/the contractor.
One particularly good thing about English law is the basic rule that, if the parties are very clear about who is liable for what, then (subject to certain exceptions), the courts will generally try to give effect to those intentions. Therefore, being very clear about certain things (such as who has the ultimate responsibility for design and meeting the functional specifications) can go a long way to addressing the problems referred to above.
Returning to the standard forms, although the commonly used SAJ Form does not address the design risk (and therefore a clear clause should be inserted), the NEWBUILDCON Form sets out the allocation of design responsibility clearly. Clause 1 of that form states that “the Builder shall design…the vessel”, and Clause 20(f) specifically refers to “the obligations of the builder to design…the vessel”.
However, conversely, the CMAC form is not a happily worded provision with respect to design responsibility. The Buyer risks finding himself in a position where there has been a design defect, but where he has no remedy either against the Builder or against any third party that has been employed to provide the design.
The key is to check and adapt the shipbuilding contract wisely.
Where the Builder has assumed the design risk, the related clauses dealing with the rights of the Buyer to approve the plans and drawings generally do not then try to transfer the design risk back onto the Buyer. This is the true of:
a) Article VIII.1 of the CMAC Form, which provides:
“…The BUYER shall use its best efforts to approve the documentation related soonest within the above-designated time. Such approval shall not diminish the BUILDER’s responsibility for the VESSEL”; and
b) Clause 20 of the NEWBUILDCON Form, which provides:
“(f) The Buyer’s approval or deemed approval of any Plans and Drawings shall not affect the obligations of the Builder to design, construct and deliver…nor shall it diminish the Builder’s responsibility in respect of its obligations under this Contract…”
For all other forms (and for the avoidance of doubt, in the above forms), an express term should always be included, making it clear that the Buyers’ rights to review and approve plans will not affect the Builder’s design liabilities in any way.
2) The Inspection Regime
The various standard shipbuilding forms generally provide for the Buyer to be permitted to have a representative onsite during the building process. The exact role and authority of the representative will depend on the particular wording of the contract and the particular form used. By way of example, the SAJ Form provides for the representative to be authorised in connection with:
a) Modifications of the specification;
b) Adjustment of the contract price;
c) Approval of the plans and drawings; and
d) Attendance at tests and inspections.
The NEWBUILDCON Form, on the other hand, leaves it to the parties to define whether or not the Buyer has a representative, and what authority such representative is to have, if any.
Neither of the above two forms (the SAJ or the NEWBUILDCON) require the representative to be kept at the yard until the end of the project. On the other hand, the CMAC Form provides that a representative of the Buyer “shall” be sent in good time and the Buyer must “maintain” the representative at the yard.
Discovery of Defects
The position under both the SAJ Form and the CMAC Form are of particular note. Under these forms, provided the Builder agrees with the Buyer’s assessment of the particular non-conformity then, once notified, the Builder must correct the non-conformity. However, if the Builder does not agree with the Buyer’s assessment of the non-conformity, the two forms approach the position slightly differently.
Under the CMAC Form, the matter is to be referred to the Classification Society, whose decision is final. Under the SAJ Form, nothing is said as to what is to happen if the Builder does not agree with the Buyer’s assessment of the non-conformity. However, under that form, unless the parties agree to submit the dispute to the Classification to decide, the disagreement is to be referred to arbitration.
If the Buyer’s representative discovers any non-conforming materials, workmanship or construction, they need to be extremely careful, as there may be a requirement to report this to the shipyard immediately in writing.
Under the SAJ Form, there is no specific sanction expressly set out for failure of the Buyer’s representative to make such notification. However, it is possible that such failure could expose the Buyer to liability. In Aktiebolaget Gotaverken v Westminster Corporation of Monrovia and Another, the contract stated “claims on account of asserted defects or deficiencies of material or workmanship shall always be given immediately after such defects or deficiencies have been discovered”. The High Court held that this placed upon the owners:
“…an obligation…breach of which sounds in damages…but does not bar a claim [under the guarantee…]. If, for example, the owners know that the engine bedplates are defective but allow the engines to be installed before saying anything, they may be liable in respect of the additional cost of remedial work.”
Therefore, if the Buyer’s representative is aware of a non-conformity, they must report it or let the Buyer face the consequences of rectifying the defect at a much later (and more expensive) stage.
Under the CMAC Form the position is made even more clear in the event of a failure by the representative to report a non-conformity. The relevant Article IX-2 provides that the representative shall act in a way to “minimize any increase in building costs and delays in the construction of the VESSEL”.
The position is somewhat better for the Buyer/the Buyer’s representative under the NEWBUILDCON Form, which provides under Clause 23(d) that:
“Neither the Buyer’s Representative and/or assistants’ inspection and/or attendance at any inspection, test or trial, nor the Buyer’s Representative’s and/or assistants’ failure to notify the Builder of any non-conformity shall relieve the Builder from its obligations under the Contract or be deemed to be or construed as a waiver of any objection to, or any acceptance of, faulty design, construction, material and/or workmanship, or any admission that any materials or workmanship are of the standard required for the due performance of this Contract.”
It is obviously good practice for a Buyer’s representative to notify any defects in materials, workmanship or construction during the building progress. Depending on the exact wording of the contract and the particular form used, the potential consequences of not notifying a potential non-conformity could be extremely significant and expensive.
Protecting the Buyer/the Buyer’s representative
In summary, the best way for the Buyer and the Buyer’s representative to try to protect themselves is:
a) To ensure that wording is concluded in the shipbuilding contract making it clear that:
(i) In all circumstances, the design obligations fall on the Builder/the contractor;
(ii) That any rights of the Buyer’s representative to inspect and/or approve the plans will not detract from the Builder’s/the contractor’s design obligations; and
(iii) Any failure of the Buyer/the Buyer’s representative to detect or notify any defect does not detract from the Builder’s/the contractor’s design obligations;
b) To obtain legal advice in relation to the wording of the shipbuilding contract;
c) To promptly notify in writing any defect in the materials, workmanship or construction found by Buyer’s representative; and
d) Where rights of approval of plans or attendance to testing exist – ensure comments are provided within the contractual time-frames, and ensure that tests are attended by the Buyer’s representative.
Ultimately, the obligations and liabilities between the parties are decided by the wording agreed between them in the shipbuilding contract. Although the above points will assist, nothing can replace a well drafted and thought-through contract. That said, the reality of large-scale shipbuilding projects, with the usual costs and time pressures, is that they are not always conducive to achieving the ideal contract.
In such circumstances, attention during the negotiations need to be focused on the design risk, and if the contract is already concluded, attention needs to be focused on active engagements in the plan approval stages and inspection/testing phases. In particular, all non-conformities should be notified immediately to the Builder.
  2 Lloyd’s Rep. 505