Search
Close this search box.

February 29, 2024

Applicable Law In Disputes Arising From Shipbuilding Contracts

INTRODUCTION

The construction of ships, which is an indispensable element of maritime transportation, is a very comprehensive process and the contracts concluded between the parties regarding the construction of the ships constitute the basis of the legal relationship between the parties. Shipbuilding is highly susceptible to being affected by the fluctuations in international trade, causes unique legal problems. During periods of economic recession, legal issues such as contract termination, change of ship type or restructuring of the loan is observed.   In our globalized world, it is frequent that the ship buyer and the ship builder are subject to different legal systems. Therefore, the issue of which law will be applicable in disputes arising out of these contracts is of great importance, and in this article, the issue of the applicable law in disputes arising out of shipbuilding contracts will be discussed.

A. THE NATURE OF SHIPBUILDING CONTRACTS AND RELATED DISPUTES

In essence, shipbuilding contracts are defined as a contract in which one party undertakes to build and deliver a ship to the other party in the manner agreed between the parties for a certain price, and the other party undertakes to pay a price and accept the delivery of the ship built in accordance with the contract. The definition of a ship is defined in Article 931 of the fifth book of the Turkish Commercial Code numbered 6102 (“TCC“) regulating maritime trade. According to this definition TCC a ship is defined as a vessel that is not very small and has the ability to swim, which is required to move in water for the purpose for which it is allocated. However, there may be different definitions for ships in the legal systems of different countries. Although this may cause hesitation in shipbuilding contracts with a foreign element, general opinion of the most shcolars is that in order for a contract to be qualified as a shipbuilding contract, the ship to be subject to the contract does not necessarily qualified as a ship under TCC.

Shipbuilding contracts are contracts of immediate performance with reciprocation, where both parties enter into an obligation. Although there is no dispute on this issue, there are different opinions among legal scholars on the characterization of shipbuilding contracts. In Turkish law, there is no special provision regulating shipbuilding contracts, and there are different opinions in the doctrine as to whether these contracts are contracts of work or contracts of sale. The Turkish Supreme Court characterizes shipbuilding contracts as work contracts. 

It will be important to examine the rights and obligations of the parties in order to accurately determine the applicable law for the resolution of possible disputes that may arise from shipbuilding contracts should these contracts have a foreign element. The obligations of the contractor, i.e. the shipbuilder, are to build the ship according to the technical conditions agreed upon by the parties and to transfer the ship to the buyer, i.e. to ensure the transfer of ownership to the buyer. The technical conditions agreed upon by the parties require a separate evaluation, and the shipbuilder may perform the technical design of the ship itself, or may receive services from third parties in this regard. However, in any case, the resulting design will be a work that must be protected under the intellectual property legislation.

In return for the shipbuilder’s obligation to build the ship and hand over ownership, the owner undertakes to pay a price for the ship and accept the delivery of the ship. After the construction of the ship is completed and the trial sailings are carried out, the buyer is required to accept delivery of the ship. If the ship is not received, the buyer will be in default.

The disputes that may arise from shipbuilding contracts will vary within the scope of the relevant provisions in each contract and which provisions are breached by whom. However, as a general framework, it may be possible to summarize the disputes arising from shipbuilding contracts as the ship being defective, the shipbuilder’s default in delivering the ship, the buyer’s default in paying the price or refraining from accepting the delivery of the ship. In cases where the owner fails to pay, underpays or pays late the agreed price for the ship, a breach of contract may occur. Similarly, a dispute may arise if the buyer refrains from accepting the delivery of the ship despite the shipbuilder’s proper performance of its obligations and notification that the ship is ready for delivery. This situation usually occurs during periods when the freight market is low and may arise from the buyer’s desire to avoid paying the balance due upon delivery. 

Another dispute that may be encountered within the scope of shipbuilding contracts may arise from the defect of the ship subject to the contract. As mentioned before, the shipbuilder has the obligation to manufacture the ship under the technical conditions agreed upon by the parties. In addition, the ship must be designed, constructed and maintained in accordance with the structural, mechanical and electrical requirements of the constructed ship within the scope of the Technical Regulation of Ships and other national legislation and international conventions. Otherwise, if the design is not provided by the owner, the shipbuilder’s liability for defect will be born.

B. DETERMINATION OF APPLICABLE LAW

Due to the requirements of the shipbuilding industry, maritime professional organizations have produced a number of standard forms for shipbuilding contracts, also known as type contracts over the years.  These forms are in the nature of a draft for the contracts and the parties should customize them by adding their own conditions to the form in order to build the ship they have agreed on. In these contracts, both the rights and obligations of the parties are regulated in detail and provisions for dispute resolution are also included. There are 4 types of contracts that are most commonly used in the world shipbuilding market and the type of contract chosen depends to a large extent on the country or region of the contractor. Many contractors are hesitant to use other than pre-prepared or recommended forms.  The most important of these type contracts are SAJ Contract, AWES Contract, CMAC Contract and NEWBUILDCON prepared by BIMCO.  All of these contracts contain arbitration or jurisdiction clauses for the resolution of disputes and also specify the applicable law. Therefore, there is no hesitation as to which law will be applicable in disputes arising out of a shipbuilding contract to which these contracts apply.

However, in a shipbuilding contract where one of the parties is Turkish and there is a foreign element, assuming that the parties have not made a choice of law, the Law on Private International Law and Procedural Law (“PILPL”) will be applied and the law most closely related to the contract will be applied in accordance with Article 24/4. According to the aforementioned article, this law shall be the law of the habitual residence of the characteristic performance obligor at the time of the conclusion of the contract, the law of the place of business of the characteristic performance obligor in contracts established as a result of commercial or professional activities, or if the characteristic performance obligor has more than one place of business, the law of the place of business that is most closely related to the contract in question. However, if there is a law that is more closely related to the contract according to all the circumstances of the case, the contract shall be subject to this law. Characteristic performance is defined as the performance that gives the contract its legal specification. Especially in cases where the performance of one of the parties is only the payment of a fee, it is accepted that the performance of the other party is the characteristic performance. Therefore, in terms of shipbuilding contracts, it can be said that the characteristic performance obligor is the shipbuilder who will build the ship.  Thus it is possible to say that in the scenario where the parties do not make a choice of law, the law of the place of business of the shipbuilder will be applied.

C. CONCLUSION

Shipbuilding contracts are contracts made for the construction of ships, which is one of the main elements of maritime trade, and may bring various legal problems according to the fluctuations of international trade. Since these contracts are usually concluded through one of the pre-made or receommended contracts and the applicable law is determined, there will be no dispute regarding the determination of applicable law. However, in a shipbuilding contract where one of the parties is Turkish and there is a foreign element, in the event that the parties do not make a choice of law, the relevant provisions of the PILPL will be applied. In this case, the accepted view is to apply the law of the place where the shipbuilder, the characteristic performance obligor, has its place of business.

REFERENCES:

Avşar, M. (2020). Atipik Sözleşmelere Uygulanacak Hukuk. H. S. Pürselim Arning & S. Özel, Gemi İnşa Sözleşmesine Uygulanacak Hukuk (s. 426 vd.). On İki Levha Yayıncılık

Açıkel, A. E. (2013). Gemi İnşa Sözleşmesi (Yayın No: 330892) [Doktora, Ankara Üniversitesi]. Yükseköğretim Kurulu. (Erişim Tarihi: 19.02.2024)

Misili, S. (2014). Gemi İnşa Sözleşmesinin Kurulması ve Tarafların Borçları (Yayın No: 376679) [Doktora, Marmara Üniversitesi]. Yükseköğretim Kurulu (Erişim Tarihi: 19.02.2024)

Authors

Duygu Doğan Şahiner

Duygu Doğan Şahiner

Partner

Laçin Özer

Laçin Özer

Lawyer