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Introduction

This article is based on an analysis of arbitral awards rendered between the years 2009 and 2012 in six ICC cases involving shipbuilders.

In the shipbuilding industry, contractual freedom is traditionally the rule, except where the statutory warranty obligations incumbent on the shipyard are concerned. This means that the contract and any associated conditions and specifications will usually constitute the legal framework for the parties' relationship. Yet, such contractual freedom has a drawback: not infrequently the clauses and technical specifications are confused or ambiguous, leading to legal uncertainty over such questions as the ownership of the ship under construction and the time when ownership and risks are transferred, the delivery of the ship, and intellectual property rights in the ship's design plans. There can be uncertainty, too, over the legal nature of the shipbuilding contract, which has much in common with a contract of sale but often remains imprecise or even evasive as to the transfer of ownership once the construction has been completed. Not surprisingly, this lack of precision is fertile ground for disputes, which invariably concern two of the shipbuilder's principal obligations, namely those relating to conformity and delivery. The buyer, for its part, has an obligation to take delivery of the ship on the required date, pay the contract price upon delivery or in stages during the construction process, and use the vessel in a manner that is consistent with the builder's recommendations and warnings. When filling the gaps left by ambiguous and incomplete provisions in contracts, arbitrators rely on the lex contractus, as well as comparative law and professional practices in the industry, but also, as we shall see, on a large measure of pragmatism.

There are three main phases in the life of a ship under construction: the design phase (I), the building phase, culminating in the acceptance and handover of the ship (II), and finally the operating phase, during which a claim may be brought under the builder's warranty (III). The awards provide illustrations of the problems that may emerge during each of these three phases.

I. Design phase: limits to the designer's liability

At the outset, the ship is a virtual object which exists in the form of drawings and models. These reveal its resistance, show the design that will favour its performance in terms of speed or comfort, and indicate the interior fittings. Plans and models have repeatedly been a cause of contention over such matters as the transfer of intellectual property rights and technology, and compliance with the anticipated end-use that has determined the technical parameters.

ICC Case 169201 illustrates how important cooperation between the parties involved in the shipbuilding project is from the very outset of designing the ship. In this case, despite good faith on both sides, the parties asserted completely different views on the technical performance required of the ship. The question was whether damage to the ship resulted from abnormal use or inadequate designs.

The arbitrator first held that the parties had entered into a contract for the provision of services. After reviewing the correspondence between the parties prior to and at the time of signing the contract, the arbitrator concluded that the plans on the basis of which the ship was built were in full conformity with the owner's technical specifications. It was the owner's carelessness in failing to make clear that the ship would be subject to the loading of rocks in excess of 500 kilos that was the sole cause of the structural damage discovered ten months after the ship was put into use. The owner neglected to provide the respondent with information on the nature of the material that would be loaded onto the ship and the manner in which it would be loaded, leaving the respondent in ignorance of the actual loading conditions. If the owner had wanted a ship with a higher load-bearing capacity, then it was up to it to specify this in the contract and to bear the extra cost, as this would have presupposed more sophisticated and costly plans and designs. (It may be noted that the plans, calculations and designs produced by the respondent were approved by a renowned internationally-ranked classification society.)

Consequently, deficiencies in the technical specifications, which formed an integral part of the parties' contract, were the sole explanation for the structural damage to the ship during its use. As a professional specialised in sea and port [Page88:] infrastructures and familiar with split hull hopper vessels, the owner could not have been unaware of its duty of diligence and the obligation it had, from the commencement of negotiations, to provide technical information about the extreme conditions under which it intended to use the ship and to check that the vessel it ordered was adequate for the intended use. If the ship's design was found wanting, this was due to deficient specifications, not faulty design.

ICC Case 145002 illustrates the difficulties that may arise out of the follow-up expected of a designer after the delivery of technical documents. These include the obligations of communicating know-how, providing technical assistance, guaranteeing technological performance, and sharing technical improvements, which all presuppose a close and long-lasting collaboration between the designer and the builder.

In this case, the shipbuilder brought claims against the licensor of technology for use in the construction tanks in methane carriers, on account of defects that emerged during the construction phase. Although the licence agreement set out in detail the parties' respective obligations and was supplemented by an industrialisation agreement defining the parties' collaboration in the development of industrial applications, the claimant (shipyard) argued that the respondent had obligations not only with respect to the design of the technology but also in relation to the building of ships equipped with that technology. It sought to take advantage of the interrelatedness of the parties' obligations and tasks, which was an inevitable result of their close collaboration in a project of this type, where they had to work together over a long period of time.

The arbitral tribunal first noted how the tasks and responsibilities were divided between the parties, as set down clearly in the contract. It was helped by the conduct of the shipbuilder: the fact that the shipbuilder had filed several patents relating to the implementation techniques developed during the construction phase showed that it considered itself responsible for the implementation of the technical process.

The arbitral tribunal defined the licence agreement as a contract for the lease of goods (within the meaning of Articles 1719 et seq. of the French Civil Code) and inferred that the licensor's principal obligation was to deliver technical documents, while the implementation of the technology was in principle the sole responsibility of the shipbuilder, save for any corollary obligations assumed by the designer. It was therefore the designer's job to give general instructions and the builder's job to develop operating procedures on the basis of the instructions contained in the technical documentation.

Given that the licensor's main obligation was to deliver technical documentation, the tribunal held that the licensee could invoke the contractual warranty only if it could prove that the deficiency of the licensed technology was due to errors in the documents or technical information communicated by the designer (which would be considered as a defect in the technical design), or to the designer's failure to communicate technical information or documents, or to the inoperability of the technology from an economic perspective. As the claimant did not provide evidence of such failings, the arbitral tribunal rejected all its claims for damages.

II. Construction phase: transfer of ownership, acceptance, notice of readiness

Once the virtual construction of the ship has been completed, its physical construction begins, at which point the ship acquires legal existence.

The parties' respective obligations during the phase of physical construction are governed by the contract, which may take one of several forms:

• a turnkey contract with a lump-sum price and detailed technical specifications (e.g. ICC Case 16920);

• a contract of sale, under which the builder generally owns the ship either until the signing of the sales contract or until delivery, at which point risks pass to the purchaser (e.g. ICC Case 16689);

• a contract akin to an off-plan sale, where ownership of the hull and the equipment is transferred progressively to the purchaser as the construction advances and payment instalments are received (e.g. ICC Case 15453).

Depending on the legal regime the arbitrator considers to be applicable to the contract, the time of delivery may or may not coincide with the time of transfer of ownership. [Page89:]

Transfer of ownership of the ship

In ICC Case 15453,3 the arbitral tribunal, in its partial award, considered that the purchasers (respondents) had acquired ownership of the elements forming an integral part of the ship progressively as the instalments of the price of converting the hull into a multipurpose support vessel were paid. As the shipbuilder had received 65% of the price of the work, and was not liable to refund this, it could no longer claim any right of ownership in the hull and any equipment that formed an integral part of the ship and could not be separated from it without causing deterioration. It is worth noting at this point that a ship is composed of the hull, which forms a single indivisible object at law by virtue of its intended use. The equipment and accessories constitute the ship's gear and tackles.

As the work on converting the ship had been interrupted in 2007 and the ship was therefore immobilised in a Brazilian shipyard and unfit to go to sea, the purchaser could hardly take physical possession of it or even assert ownership by means of an attachment order. It was as if the ship had been taken hostage by the shipyard, which claimed ownership of the hull even though the purchaser had irreversibly paid 65% of the contract price. This claim went against the common intention of the parties as set out in the contract, which clearly stipulated that payment of an instalment of the price would trigger the immediate transfer of ownership of the hull to the purchaser, even if the ship was neither completed nor delivered, or the contract had been terminated. The clarity of that clause could have saved the arbitrator from enquiring into the law applicable to the contract, which the parties had agreed was English law. Yet, he embarked on a long and unnecessary discussion of conflict of laws between, on the one hand, English law as the lex contractus and, on the other hand, Brazilian law as the lex rei sitae. He found that the Brazilian Civil Code added provisions that did not exist in the contract, making the purchaser's obligations more onerous by subjecting the acquisition of ownership of the hull and its equipment to a formalism not foreseen in the contract. If the tribunal had applied the Brazilian concept of constituto possessório, this would have constituted serious disregard of the contract and been contrary to the will of the parties and the content of English law, the lex contractus, as embodied in the Sale of Goods Act 1979.

After ruling out the application of Brazilian law, the arbitrator held that the purchaser was justified in sending a letter terminating the contract on account of the shipbuilder's failure to deliver in accordance with the contract. However, rather than considering the parties' relations to have been severed, the arbitrator very pragmatically went on to issue an injunction against the shipyard, ordering it to take all necessary steps to place the buyer in possession of the hull and all the ship's equipment, as well as the drawings, plans and certificates. This injunction, accompanied by an award of damages in favour of the buyer, also authorised the buyer to take over construction of the ship in order that its transformation could be completed. The arbitrator is to be commended for restoring the contract in this manner, despite just cause for termination, and giving priority to the parties' initial intention and the lex contractus.

Physical delivery and handover of the ship

The contractual clauses relating to the ship's readiness and delivery are without doubt those that, in practice, cause the greatest number of difficulties. This is why the delivery phase is characterised by a formal process of acceptance including sea trials involving both parties. This process is the final phase in the construction of a ship: it is not sufficient for the ship to be launched; strict compliance with a delivery protocol is also necessary. When the material conditions of this delivery phase are at issue, arbitrators look to the common intention of the parties, to check that it has been respected, as well as the spirit and letter of the contract.

An example is ICC Case 16542,4 which deals with the form of proper notification of a luxury yacht's readiness for delivery. Clause 3.3 of the parties' contract, which was characterised as a contract for the sale of a ship, required the seller to notify the buyer of the date on which the ship would be made available to it at least ten working days before the scheduled delivery date. Such notification consisted of a chronological sequence of steps, but did not need to take any particular form. Its purpose was simply to alert the buyer so that it could do what was necessary to take physical possession of its ship and pay the balance of the price. For this, the buyer had to be correctly notified a certain amount of time before the actual date of delivery. The buyer argued that it had not been properly notified and that this [Page90:] gave it grounds to terminate the contract. The buyer was also entitled to terminate the contract, pursuant to both the contract and Swiss law, if the seller failed to deliver the ship within 90 days of the final deadline for delivery. In that case, it had to return the title documentation to the seller and obtain the refund of all amounts paid plus interest.

The arbitrator held that the seller had fully complied with its obligation to put the buyer on notice to take delivery of the ship ten days prior to the scheduled date, and that the notification could take the form of an email since the parties had corresponded by such means throughout the performance of the contract and the contract did not lay down any particular requirements in this regard. The buyer, on the other hand, had shown bad faith by deliberately ignoring the invitation to inspect the ship and attend the sea trials on the agreed days and by sending a letter purporting to terminate the contract because of alleged defects preventing the ship from being ready in time, whereas it had in fact lost interest in the ship and was vacillating over an alternative vessel. Given that undue insistence on formalism in the notification process would have aggravated the harm already caused by the buyer's conduct and been contrary to the parties' intentions, the tribunal rejected the buyer's argument that it was entitled to terminate the contract on grounds of defective notification.

ICC Case 175425 is another example of the issues that can arise in connection with the handover of the ship. In that case, compliance with the contractual delivery time was of crucial importance to the buyer. The parties disagreed over the conditions of delivery, which occurred with a delay of over 100 days. The arbitrator found that no penalties were due for this delay, as it was caused by events of force majeure. This rendered moot the question of whether the delay was also justified by the buyer's failure to set up a bank guarantee as required by the contract. In a shipbuilding contract of this kind, which is a contract of sale for delivery on a specified date, it is the builder's responsibility to deliver on time and finance the construction operations. Its sole guarantee in the event of the buyer's insolvency or default on payment will be the vessel itself, which it will be entitled to retain until full payment of the contractual price.

Acceptance of the ship

The acceptance process can sometimes lead to Kafkaesque situations or a total stalemate, which can block the transfer of ownership, leaving the shipyard with an abandoned and unsaleable vessel that can put its survival in jeopardy. In such instances, arbitrators show considerable pragmatism by taking great account of the opinions of technicians, experts and classification societies. Their reliance on technical opinions obtained and produced by shipbuilders in good faith allows them to rescue the contract in certain instances (ICC cases 15453, 16542, 16920). Faced with the flagrant bad faith of a buyer who no longer wants a ship and raises spurious allegations of non-conformity or cosmetic defects to delay delivery or simply ignores requests to take part in the acceptance procedure (this is particularly common in the yachting field), arbitrators refuse to be straightjacketed by excess formalism that would be fatal to the fulfilment of the contract (ICC Case 16542). They have been prepared to accept technical opinions as evidence even when they do not come from legal experts, provided they are the result of impartial investigations conducted by knowledgeable persons or classification societies (ICC Cases 16542, 16689 and 16920).

This pragmatism can also help to unblock the lengthy immobilisation of a ship which, as already mentioned above, could put a shipyard's very existence at risk. By ordering a reticent buyer to take possession of a ship, an arbitrator can put an end to the increasing damage caused to a shipbuilder by a long period of immobilisation during which the shipbuilder remains responsible for the care and custody of the vessel against its will.

A perfect illustration of how an arbitral tribunal can defuse a potentially very harmful deadlock is found in ICC Case 16542.6 Here, the question arose as to whether the parties had entered into a contract of sale or a contract for services. The question was relevant to the application of damages and penalties. The arbitrator found that the parties' intention was to conclude a contract of sale, notwithstanding the subsequent amendments made to the contract during its performance and as it evolved. The present author takes a different view: rather than a contract of sale, this was a shipbuilding contract with the shipbuilder subject to delivery and warranty obligations. Regardless of the label given to it, a shipbuilding contract is one that is [Page91:] performed in successive stages, not all at once, as would be the case if it were a contract for the sale of a newly built ship.

The shipbuilder's core obligation is to deliver the ship that has been ordered on the day and under the conditions that have been agreed, following sea trials in the joint presence of the parties. This is expressed, for example, in Article L 5113-3 of the French Transportation Code, which is a default rule that will come into play if the parties have not provided otherwise in exercising the contractual freedom they are given under French maritime law. The obligation is also found in Swiss law (which was applicable in this case) and in all the standard shipbuilding contracts. It is thus an essential ingredient of a contract of construction since it triggers the warranty period for hidden defects and the contractual warranty period.

The importance of this phase lies also in the fact that it effects the transfer of ownership and risks, which pass from the builder to the buyer only when the buyer takes possession of the ship after satisfactory completion of the sea trials. By contrast, under a contract of sale, the transfer of ownership and the transfer of risks may not necessarily coincide, as the transfer of ownership could occur when the contract is signed, whereas the risks will not be transferred until the ship has been accepted and delivered.

In a shipbuilding contract there is the additional financial risk that if the buyer refuses to take delivery, the storage of the ship may extend beyond the term of the contract at great cost to the person who has the physical and legal custody of the vessel.

What is particularly noteworthy about ICC Case 16542 is that the arbitrator fixed a date for the taking of possession (the first day of the month following the award), thereby setting a term for storage and insurance costs and, at the same time, ordered the owner to take possession of the ship. It is relatively rare in practice for an arbitral award to issue an injunction to perform, particularly in maritime matters. Here, the arbitrator was only too aware of the difficulties that would have arisen for the seller if the contract had been cancelled and it had been necessary to find a new purchaser for the ship - even if the building costs had been repaid with damages - given the customised interior decoration of the yacht, which was the prototype of a new line of yachts being launched by the seller. The seller could not be expected to go on bearing the cost of keeping the ship for ever. The best way of overcoming this was to order the buyer to take physical possession of the vessel and to definitively transfer the ownership and financial risks to it once the money it owed had been paid. We do not know whether the buyer duly complied with the award and paid its dues. However, it had no real choice if it wished to avoid forfeiting the money it had already paid and its right of ownership.

III. Operational phase: calling on the builder's warranty

The acceptance of a ship is a distinct, formal, legal procedure that requires good faith and cooperation between the parties in checking that the ship conforms with the contract. No matter whether it is a shipbuilding contract, a contract for the provision of services, or a straightforward sales contract, there then follows a third phase where the ship passes into the hands of the shipowner. This is the period covered by the seller's warranty. It commences with the signing of the delivery record.

The warranty obligation is twofold. It includes, on the one hand, a contractual warranty, whose duration can vary from one contract to another and from one country to another (see ICC Cases 16689 and 17542) and, on the other hand, a statutory warranty against hidden defects (see ICC Case 16689).

ICC Case 166897 dealt with the highly practical and fundamental question of the starting point for the warranty against hidden defects. Article L 5113-5 of the French Transportation Code (the contract was governed by French law) provides that any action under the builder's warranty for hidden defects must be brought within a year of discovering the defect. The parties sought to clarify this matter by inserting in their contract a clause stating that the date of discovery of the defect would be the date of its determination. Yet, this did not entirely dispel the uncertainty: what was meant by discovery of the defect? Was this the date on which the damage occurred? Or was it the date of delivery of an expert's report making the parties aware of the existence of a defect? And if so, which expert? [Page92:]

The arbitrator first looked to the parties' intention when entering into the shipbuilding contract. However, this was to no avail, as there was nothing specific on this point. So, the arbitrator then turned to French law, in particular Articles 1158 and 1162 of the Civil Code, and to the ordinary meaning of the various expressions used in the clause, and to legal literature.

As for the meaning of 'discovery of the defect', there were three possibilities:

• It could mean the appearance of initial disorders. This would be hard on the buyer, as merely noting a disorder does not necessarily say anything about its significance.8 Case law has never adopted such a position.

• It could mean the delivery of an expert's report identifying the defect and indicating its extent and its seriousness.9

• It could mean the moment when the buyer has become aware of and has understood all aspects of the hidden defect, that is to say its existence, its extent and its seriousness.10

Case law is predominantly favourable to the buyers of ships, as the courts consider that it is the filing of the expert's report that triggers the limitation period.11 It is argued that the existence of a hidden defect can be established only by expert appraisal, after the person mandated to carry out that appraisal has excluded all other hypotheses. The mere appearance of damage is not sufficient to affirm that a defect has been discovered.

Some authors take a different view. Professor Rémond-Gouilloud, for example, argues that it is not necessary to wait for the expert's report to be filed: the defect needs to have been discovered, but that is enough; it is a matter of knowing that the defect exists, not understanding its cause.12

In a number of cases, the courts have considered that the limitation period starts to run on the date on which the defect became apparent. This was the position taken by the arbitrator in ICC Case 16689. The arbitrator refused to take the filing of the expert's report as the starting point, as it was necessary to ascertain whether, on the basis of the expert reports received from the shipowner's insurer in 2007, which reported facts that could be explained by an inherent defect, the shipowner might have obtained information that could reasonably have given it cause to suspect the existence of a hidden defect.

The principle in French law is therefore that the one-year statutory warranty period starts running when the buyer has been able to convince itself of the existence of a defect that is not immediately apparent. What this means in reality may vary. It could be the date on which the report of a court-appointed expert is filed or, as in ICC Case 16689, the date of submission of a report issued not by a court-appointed expert, but clearly establishing the origin and cause of the defect.

Most court decisions on this question consider that the limitation period begins to run when it has become possible for the injured party to become aware of all aspects of the defect (existence, extent, seriousness). Clearly, the filing of a report, whether by a court-appointed expert or someone else, will logically coincide with the moment at which that awareness becomes certain. If a court considers that the buyer knew of the defect previously, the starting date will not be the date of the report but that on which the buyer acquired such awareness.

It is acknowledged that parties may validly agree to shorten, or even waive, a limitation period.13 In France, despite reforms in the law relating to limitation periods, the one-year statutory warranty period remains longer than elsewhere, where it averages from six months to a year. [Page93:]

In ICC Case 16689, in addition to setting a limitation period of one year for warranty claims against the builder for hidden defects, the contract stated that the effects of the warranty clause would cease four years after the expiry of that one-year period. Little did it matter that the shipowner had brought its action within that four-year period. As the action had been bought more than one year after the discovery of the hidden defect, which occurred on the date of delivery of the report of the experts appointed by the shipowner's insurer, and no action had been taken that would have interrupted that one-year limitation period, the claim was time-barred.

Despite the principle in French law that, in the event of doubt, an agreement should be interpreted in favour of the party that has assumed an obligation and against the party that has requested it,14 the arbitrator appears to have wished to protect the builder against the shipowner's lack of diligence by interpreting the meaning of the relevant clause with some latitude. Already heavily burdened by French law, which increases the risk of an action in liability on account of the length of the limitation period, the shipbuilder deserved to be protected in this case. The buyer's allegations of harm were made frivolously and gave the builder no chance to present its position or carry out investigations itself, or to take action against its suppliers.

Conclusion

The weight of the obligations incumbent on the shipbuilder/seller led the tribunals in most of the awards analysed above to redress the balance by not insisting on excessive formalism or rigour in their interpretation of ambiguous or unclear contractual provisions, so as to be able to protect, where appropriate, the interests of shipbuilders who have completed their design or building work.

Such a stance in most cases accorded with the parties' original intentions. Over time and as the building work progresses, those original intentions may change and cause harm if, as we have seen, the ship is abandoned before delivery or, after delivery, is subjected to misuse or use for which it was not intended. It also allowed the tribunals to resolve in a satisfactory manner the question of the construction costs, whether the ship in question was a passenger ferry, a multipurpose vessel or a luxury yacht.

1
See hereinafter and full text of award at http://www.iccdrl.com/.

2
See hereinafter and full text of award at http://www.iccdrl.com/.

3
See hereinafter and full text of award at http://www.iccdrl.com/.

4
See hereinafter and full text of award at http://www.iccdrl.com/.

5
See hereinafter and full text of award at http://www.iccdrl.com/.

6
See full text of award at http://www.iccdrl.com/.

7
See hereinafter and full text of award at http://www.iccdrl.com/.

8
R. Achard, Annotation of Cass. com., 25 June 1991, Le Droit Maritime Français [hereinafter 'DMF'] 1993, 41: 'The discovery or the coming to light of a hidden defect, is not the damage, which is only the consequence thereof.'

9
Cass. com., 13 June 1977, DMF 1978, 141 (Annot. R. Rodière); Douai, 14 Dec. 1989, DMF 1990, 17 ; Cass. com., 25 June 1991, DMF 1993, 41 (Annot. R. Achard); Rouen, 27 May 1993, DMF 1994, 50.

10
Cass. Com., 27 Nov. 1973, DMF 1974, 276; Poitiers, 5 Oct. 1983, DMF 1985, 339; Rouen, 25 Apr. 1985, DMF 1986, 301; Aix-en-Provence, 8 Apr. 1993, Revue de Droit Commercial, Maritime, Aérien et des Transports 1993, 41; Cass. com., 16 May 1995 (no. 93-14487), DMF 1995, 184.

11
Cass. com., 27 Nov. 1973 (two decisions), DMF 1974, 273 and 276; J.C.P. 1974, G, II, 17887 (Annot. P. Malinvaud); Cass. com., 13 June 1977, DMF 1978, 141 (Annot. R. Rodière). See also P. Bonassies, DMF 1990, 17.

12
M. Rémond-Gouilloud, Droit maritime (Pedone, 1993), § 109.

13
See e.g. Articles 2251 and 2254 of the French Civil Code. See also Cass. com., 21 Mar. 1995, Bulletin Rapide de Droit des Affaires 1995:8, 6.

14
Civil Code, Article 1162.