Legal risk prevention in the shipbuilding and repair industry

Since the financial crisis, the shipbuilding industry has remained in the doldrums, prompting numerous shipbuilders to move to the ship repair market, causing the build up of competition and an increase in the number of ship repair contract related disputes. For the shipyard as the repairer, the lack of clarity as to who is the contracting party is a major legal risk in ship repair contracts. In practice, the party entrusting the repairs may be the registered owner of the ship, the ship manager, the bareboat charterer, the actual controller of the ship, or the personal representative of the client company. Different contracting parties may present different legal risks for the shipyard in respect of performance of the contract and recovery of amounts owed.

Registered owner of the ship as contracting party. For the shipyard, execution of a ship repair contract with the registered owner of the ship ensures that the shipyard has the right to apply to the court for arrest of the ship undergoing the repairs. However, in international shipping practices, most registered ship owners are single ship companies and their available assets to discharge debts are very limited, solely being used towards the ship undergoing repairs.

Ship manager as contracting party. It is common for a ship manager to enter into a ship repair contract with the shipyard, and in some cases, the ship manager confirms the settlement statement as the representative of the shipowner. From the perspective of the legal relationship, the ship manager is appointed by the shipowner or the bareboat charterer, and executes and performs the ship repair contract as the agent of the shipowner or bareboat charterer. Should the ship manager breach the contract, this agency relationship may affect the shipyard’s selection of the liable entity, and if the shipyard seeks recourse only against the ship manager after the ship has left the yard, it may forfeit its rightful opportunity to apply to the court for arrest of the repaired vessel.

Zheng Lei is a senior partner at Co-effort Law Firm