Shipbuilding in a sellers market
CJC Director Chris Kidd offers guidance on preparing for the issues that will rise out of current market trends.
Common issues in shipbuilding projects
Market volatility affects shipbuilding, with boom and bust cycles. Recent trends show a sellers’ market with increased prices and long order books due to fewer yards, aging fleets, and demand for lower carbon vessels.
Impact on contracts
In a hardening sellers’ market, buyers are less likely to abandon contracts due to delay risks and higher replacement costs. Builders might seek better deals elsewhere if production costs rise. Buyers should lock sellers into contracts early and negotiate realistic delivery dates and delay damages provisions. Buyers should also resist builders’ attempts to claim force majeure for subcontractor delays.
Construction defects and cost increases
In rising markets, defects may arise from builders being overstretched. Quality control clauses, defect remediation, and warranty provisions are crucial. Yards may claim additional costs due to supply chain inflation, so variation orders and price escalation clauses must be carefully negotiated.
Repudiation and risk management
To prevent yard repudiation, buyers should ensure the yard’s liability extends beyond repayment of pre-delivery installments. Buyers should amend refund guarantees to cover damages for breach of contract.
Speculative Orders and New Markets
Speculative orders increase risks if the market doesn’t rise. Contracts should limit buyers’ maneuverability. Moving into unfamiliar markets or new technologies can cause substantial disputes. Buyers should verify the yard’s experience with new technologies and include inspection rights during the design process.
Design risks and regulatory changes
New designs and regulations bring disputes. Contracts should clearly allocate design risks, including defects remediation, warranty provisions, and modification processes. Buyers should ensure performance criteria are met and negotiate provisions for post-delivery performance failures.
Negotiation in a rising market
In a sellers’ market, buyers might struggle to negotiate protective provisions. Effective contract operation during the project is essential. Contracts should not be neglected; proactive use strengthens positions in disputes.
Do you want to know more? Read Chris Kidd’s entire guidance here: https://www.cjclaw.com/site/news/shipbuilding-in-a-sellers-market
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