New Norwegian standard form shipbuilding contract – Ship 25

Ship 2000 is widely used in newbuilding projects in Norway and is often used by non-Norwegian yards when contracting with Norwegian ship owners. After 25 years, it was time for a modernisation to reflect the developments in working and business practices. Ship 25 also introduces several new concepts and regulations which make this a more substantial revision than merely a modernization of Ship 2000. Below we summarize a selection of key changes from Ship 2000 found in Ship 25.

Ship 2000 consist of 19 main articles given roman numbers (article I to XIX), where each main article is divided into sub-articles in Arabic numerals. Ship 25 has abandoned this format and consist of 25 main Arabic numeral clauses (article 1 to 25), which are divided into sub-clauses in Arabic numerals. In addition, there are two Appendices forming alternatives to provisions in the main contract (Appendix I Limitation of liability for design and engineering and Appendix II Progressive title). Although the structure of Ship 2000 is to a large extent maintained, there are some structural changes. The change in numbering style and the structural changes may result in users finding Ship 25 somewhat unfamiliar and a bit difficult to navigate between the two documents at the outset.

The increased number of clauses in Ship 25 is mainly a result of new provisions on business practices having been included. There are four new provisions regulating safety, human rights and transparency, anti-bribery and corruption, cyber security and export control and sanctions, which belong in a modern shipbuilding contract. The obligations under these new provisions are largely placed on the builder. It is worth noting that Ship 25 operates with specific caps on liability for several of these obligations. 

Ship 25 includes an Appendix I which applies if the parties have specifically agreed (i.e. opted in). In such case, the builder's liability for defects, deficiencies and delay in delivery of the vessel resulting from errors or omissions in the design documents shall be limited to the liability of the designer under the design contract entered into between the builder and the designer. Furthermore, the builder is entitled to fully rely on the design documents in producing the necessary detailed production drawings and in construction of the vessel.

This optional mechanism for a limited design liability addresses one of the key concerns of ship yards contracting under Ship 2000 and should be a welcoming addition. Under Ship 2000, the builder is expected to assume full design liability even where the design and the designer has been specified and selected by the buyer in advance, without the builder's involvement, and where the builder has a limited right of recourse against the designer in case of delays or defects.     

In addition to modernising the shipbuilding contract with provisions on compliance, Ship 25 has also modernised regulations on document management in line with current practices. The builder is to give the buyer electronic access to drawings, without specifying the details of how such access is to be given or managed. Similarly, Ship 25 provides for an obligation for the builder to give the buyer access to communication platforms with the classification society. 

Ship 25 introduces an updated price format, which provides for a more extensive possibility to adjust the contract price throughout the building process. Firstly, an index regulation of the contract price is introduced by reference to the Norwegian producer price index (or a similar index if the building yard is outside Norway), and an agreed threshold that is to be exceeded in order for the adjustment mechanism to become applicable. Secondly, part of the contract price may be on cost plus basis. This applies to systems or components which have been given a budget price and has been chosen by the buyer (referred to as "Budget Work"). 

Even though the payment regime from Ship 2000 is largely maintained in Ship 25, the introduction of Budget Work provides for payments in addition to the payment milestones. The builder may require payment of additional milestones if a subcontractor for Budget Work requires advances that does not correspond with the payment profile for the contract price (subject to providing an additional refund guarantee if the additional payment is above an agreed threshold). In addition, an increase of the price for the Budget Work is to be payable as separate instalments. Ship 25 does not contain detailed regulation on how such increases are to be notified and invoiced by the builder. 

It is worth noting that Ship 25 have included an obligation for the builder to include VAT on invoices when he is required to collect and invoice VAT on any part of the contract price. This is a welcomed improvement since several newbuilding tonnages are not exempted from VAT under Norwegian law. An initial observation, however, is that parties should carefully regulate potential VAT exposure to accommodate for the liquidity effect in the building process. The purpose for both parties should be to tailor a mechanism that aligns the VAT payment obligation with the VAT refund as much as possible. 

Ship 25 provides for a more nuanced regulation of supplies compared to Ship 2000, with a new and separate provision for "Buyer's Elected Supplies". This term comprises Budget Work as well as any other supplies "where the choice of subcontractor and/or the design has been designated by the buyer and the builder is unable to make alternative selections". In case of delayed delivery of Buyer's Elected Supplies, the builder can claim permissible delay and compensation for costs incurred. However the Buyer's Elected Supplies will form part of the Vessel on completion and is not part of the Buyer Supplies. As a consequence, the risk relating to the quality of the Buyer Elected Supplies will be the same as for the other parts of the Vessel.

In order to reduce the possibility of future disputes when using this provision, parties may want to consider clearly defining (or listing) which deliveries that are to be considered as Buyer's Elected Supplies. 

Ship 25 includes an optional Appendix II which provides that the buyer shall assume progressive title to the vessel during the construction. This is an alternative to the default position that the buyer only assumes title to the vessel upon delivery. If the parties agree that Appendix II applies, the buyer shall have ownership and registered title to the vessel under construction and no refund guarantees shall be provided by the builder. If the hull, or major sections of the vessel, is built at a hull yard, the builder shall initially have title, but title shall be transferred to the buyer upon delivery from the hull yard to the builder. In case of termination of the shipbuilding contract, the builder is not obliged to re-pay buyer's instalments, instead the builder shall complete all works required as a minimum to permit the vessel to depart from the builder's yard and the buyer shall take delivery of the unfinished vessel and may have the works completed elsewhere. 

Whether the buyer's title has priority in case of the builder's bankruptcy may depend on the bankruptcy regulations in the country of the builder, and particularly whether the buyer's right can be registered in the relevant asset register in the applicable jurisdiction. Such registration is possible in Norway. When the builder has been unable, or unwilling, to provide refund guarantees, or when a buyer wants a firm right to take out the vessel, it has been common to agree similar arrangements under Ship 2000. But the new Appendix II offers a welcoming, pre-agreed starting point for further tailoring for parties wanting to agree to progressive transfer of title. 

In Ship 2000, unless specifically agreed otherwise, the builder will only receive compensation for modifications and change orders upon delivery of the vessel, and this may have significant liquidity consequences on the builder. Ship 25 includes as a default provision that for any change orders exceeding [0,25 %] of the original contract price, [50 %] of the cost of the change order shall be payable in advance while the remaining 50 % is payable upon delivery. For change orders exceeding [1 %] of the original contract price, the buyer can request a separate refund guarantee covering the increase in the contract price against paying the cost of the guarantee.   

Ship 25 includes a new provision obliging the builder to submit monthly reports to the buyer which must include inter alia an updated status on the construction progress, the amended building schedule, a status on progress showing actual vs. planned and a list of agreed modifications and changes.  

The default grace period before liquidated damages apply has now been increased from 30 days to 60 days. Furthermore, the buyer's right to terminate for delay, including force majeure delay but excluding other permissible delay, only occurs after 360 days instead of the default position of 270 days in Ship 2000. 

It shall also be mentioned that Ship 25 specifies that in case of delays caused by the buyer's non-fulfilment of its obligations, the builder can claim compensation for its increased finance cost and/or other additional costs, which is a significant change from Ship 2000.  

Ship 25 provides a much welcome modernisation and upgrade of the Ship 2000. Users should however assess the contract carefully, including the various alternatives for e.g. design liability and title provided in the Ship 25, and consider adjusting the contract to fit the particular project before using Ship 25. 

Schjødt has one of the largest shipbuilding legal practices in Scandinavia. Our team of more than 20 specialists, comprising Norwegian, Danish and English lawyers, covers the entire ship building project phase from contract negotiations, financing, contract execution, closing/delivery, claims handling and dispute resolution.