Key Innovations in SHIP25: An overview

In general terms, SHIP25 formalises and codifies several matters that are now considered standard practice in the shipbuilding industry. Among other things, SHIP25 addresses the interaction and cooperation between the Builder and Buyer, refund guarantees, sanctions and human rights, and a revised liability regime for Buyer's elected subcontractors. In addition, SHIP25 has several optional provisions (Opt-Ins) that make it a more flexible contract, including design responsibility, transfer of title, and pricing mechanisms.

Below, we highlight some key amendments and innovations in SHIP25.

Buyer's Elected Supplies 

SHIP25 introduces the concept of "Buyer's Elected Supplies", which reallocates the risk for any supply where the Buyer designates the subcontractor. If such a designated subcontractor fails to deliver on time, the Builder will be entitled to claim compensation for costs and permissible delay caused by such failure. This will most likely encourage the Buyer to give the Builder at least two choices for the respective supplies.

In practice, we see that Buyer's supplies can be of significant importance in various shipbuilding projects – especially for offshore vessels. Where the Buyer desires to designate a specific supplier for a particular piece of equipment or system, this clause represents an important reallocation of risk between the parties.

Design Responsibility (Opt-in)

SHIP25 introduces an optional mechanism in Appendix I that allows the Builder to limit its design responsibility, provided the vessel design is provided under a separate design agreement. Under this alternative, the Builder's obligations are limited to conducting a professional assessment of the design documents provided by the designer, submitting these to classification societies, and notifying the Buyer of any risks associated with the design documents that the Builder has become aware of. In addition, and of significant importance, the Builder's liability will correspondingly be capped at the level of the designer's liability under the design agreement.

This Opt-in will primarily benefit Builders without in-house designers by enabling them to more accurately price risk in their bids, making their bids more competitive. It will also be interesting to see how this influences the design agreements concluded by Buyers; with this Opt-in, Buyers will be incentivised to negotiate the liability limits in the design agreements to an acceptable level for themselves.

Project Management and Reporting

Monthly progress reporting has become mandatory. Moreover, the Builder shall ensure that the Buyer has electronic access to drawings and documentation, replacing previous paper-based methods. SHIP25 also establishes that the Buyer's representatives who discover non-conformities in the drawings and documents must promptly advise the Builder. Failure to do so entitles the Builder to permissible delay and compensation for any increased costs caused thereby.

Extended Grace Period for Late Delivery

If the vessel's delivery is delayed beyond the delivery date, the contract price shall be reduced. While SHIP2000 had a 30-day grace period for late delivery before the reduction in the contract price, SHIP25 provides a 60-day grace period. This is a significant amendment in favour of the Builder.

Refund Guarantee 

SHIP25 introduces an extended set of regulations for refund guarantees. The contract includes default terms that will apply if the parties do not include agreed-upon terms in an appendix. In our view, this is of minor importance, whereas the refund guarantee is often of great importance to the parties. However, it is noteworthy that interest is not covered under the default terms, which represents a departure from established industry practice. Furthermore, a renewal obligation has been incorporated. If delivery has not taken place within 60 days before expiry, the Builder must procure an extension no later than 45 days before the guarantee's expiry. Non-compliance entitles the Buyer to terminate the contract and call on all guarantees.

Progressive Title (Opt-in)

SHIP25 provides an optional progressive title mechanism in Appendix II. Under this mechanism, the Buyer may acquire ownership and title to the vessel during construction rather than upon acceptance and delivery. This provides an alternative arrangement for Builders who are unwilling or unable to finance construction and provide refund guarantees.

Parties considering this option should carefully evaluate the legal and practical implications of such a mechanism. Regarding the legal implications, it is important to evaluate the gradual transfer of ownership and right of retention under the applicable jurisdiction. Regarding the practical implications, a key consideration is that a partially completed vessel may have substantially reduced recovery value compared to a completed vessel in the event of the Builder's insolvency, and other builders may be reluctant to complete the vessel. 

Selmer's shipping and offshore team has longstanding experience assisting both Buyers and Builders with shipbuilding contracts and is ready to support new and ongoing shipbuilding projects.