Fisher Maritime's Fairleads

'Lessons Learned' Strategies & Ideas for the Marine Industry


LESSON LEARNED #38: Undertake Emergency Evacuations Without Delay

Lesson Learned

A shipyard was undertaking the replacement of insulation in reefer spaces on a vessel. After removing the stainless steel liners, the old insulation was ripped out. New insulation was being glued into place, using brushes for the glue that was sitting in an open bucket in the reefer space. A residential-type extension light was in use by the installers. No special ventilation of the glue fumes had been arranged. Upon being cautioned by the owner’s representative to immediately replace the extension light with a non-explosive, double-globe one, and to commence ventilation of the space, the contractor personnel were allowed to continue their work without attending to the light and ventilation issues. The next day, another reminder was matched by continuing indifference to the hazard. On the third day, an explosion in the reefer space caused significant burns to the workers.

In settlement of litigation, the ship owner as well as the shipyard had to compensate the injured parties. Unfortunately, this is not merely an issue of extra costs and schedule delays. This is a matter of personal injury or possibly death. Concerns by the owner’s staff about not interfering with the work or procedures of contractor personnel is, in those circumstances, irrelevant.

Lesson learned: personnel safety comes before concerns about contractual interference; when an explosive atmosphere is detected and imminent risk of explosion or fire is identified, everyone must immediately evacuate the entire vessel until appropriate measures have been taken by trained hazard-reaction personnel, regardless of the impact on project schedule.

 

 


Good Shipbuilding Practice (“GSP”) – Part 1

Many contracts for projects being executed in a shipyard include the requirement that all engineering services provided, all materials supplied and all workmanship accomplished are consistent with “Good Shipbuilding Practice” or “First Class Marine Practice” or similar lofty-sounding principles. Owner’s representatives often use that contractual requirement as a basis for pushing the shipyard to enhance the quality of workmanship, to modify initially-offered design details, or to purchase alternative (i.e., more costly) items of equipment or material. Having analyzed numerous contract disputes over the past 44 years, it has become obvious that many Shipowner’s representatives consider that obligation to be one-sided; that is, they perceive that it creates obligations for the Contractor but not for the Owner. That one-sided perception is, in fact, quite erroneous, and often is the underlying cause of disputes that arise during contract execution.

In order to appreciate the extent to which both parties to a contract are bound by the tenets of Good Shipbuilding Practice, a clear understanding of that principle is necessary. As seen below, this analysis is entirely consistent with published treatises on the subject. The several major elements of Good Shipbuilding Practice are these:

  • Purchaser’s pre-bid development of a comprehensive and internally consistent definition of the ship and bid package, including a clear definition as to where the Owner’s design definition rights end and the Contractor’s obligation to detail the design for production begins.
  • Contractor’s quantitative translation of the bid package into a bid sufficient to accomplish necessary engineering, purchasing, production and testing as unambiguously defined by the bid package.
  • Purchaser’s timely approvals of drawings and equipment selections made by Contractor (if required by the contract) and timely inspections based on the contractually-defined standards of acceptability.
  • Joint identification and cooperative resolution of problems arising from vendors, suppliers, errors, omissions and inconsistencies.
  • Contractor’s fulfillment of all contractually required objectives, consistent with the identified, well-defined standards.
  • Purchaser’s acceptance of the vessel or its modifications as contractually defined (not as wished-for by its representatives).

In multiple instances, Owner’s representatives have made demands of Contractors under the implicit admonition that the Contractor had to fulfill those demands in order to comply with the Contractor’s obligation to use Good Shipbuilding Practice. Often, compliance with those demands has resulted in the Contractor incurring extra costs and/or schedule impacts that the Contractor claimed to be the responsibility of the Owner. Concurrently, however, the Owner’s team has ignored its own obligations under the requirements of Good Shipbuilding Practice (“GSP”).

In order to appreciate why the costs and schedule impacts of fulfilling the Owner’s GSP-based demands are legitimate extras to the contract, the relevant industry custom and practice is reviewed by reference to the marine industry’s primary text on ship design and construction, Ship Design and Construction, published by the Society of Naval Architects and Marine Engineers.

The use of GSP is a procedural goal of nearly every shipbuilding contract. Since its use is one of the goals of shipbuilding contracts that are executed by two parties—the Purchaser and the Contractor—it is appreciated that both parties have expectations of benefits arising from its use. Also, however, when the elements of GSP are examined, it is realized that the development of GSP is dependent on a contribution by both parties through achievement or fulfillment of their respective obligations and responsibilities. That is, the achievement of GSP is not solely the responsibility of only one of the parties. This fundamental premise is stated in “Ship Design and Construction” at § 9.1.6, Purpose of Shipbuilding Contracts.

A shipyard and a shipowner enter into a contract for mutually-beneficial reasons; namely, the shipowner wishes to acquire a ship which is suitable for the shipowner’s needs, and the shipyard wishes to construct, for payment, a ship within its shipbuilding capabilities in order to earn a return on its investment in shipbuilding facilities…More formally, the purpose of a shipbuilding contract is to define the entirety of the temporary relationship between the Contractor and the Purchaser. Essentially, the contract in its entirety establishes the rights, responsibilities, rules of conduct and assignment of risks between the two parties pertaining to all foreseeable technical, cost and schedule matters, questions or disputes that may arise between the parties.

Next month we’ll continue with the beginnings of GPS during the formation of the shipbuilding contract and examine how obligations are responsibilities for both parties develop.


LESSON LEARNED #37: Geometry of Replacement Parts

Lesson Learned

A vessel owner arranged to have the heads of several ballast tank vents replaced with new ones. The owner’s team specified that the heads were to be the type to bolt onto an 8″ vent line. Upon arrival of the vent heads, it was found that the top elements of the heads were several inches larger in diameter than the original ones, although they mated to the 8″ line. In order to accommodate the larger vent heads, a number of nearby handrails had to be modified, requiring hot work when no hot work would otherwise have been needed. This resulted in considerable extra cost to the owner.

Lesson learned: the owner’s team should confirm in advance the suitability of all aspects of the geometry of replacement parts, not just one or two key measurements.

 

 


What Does “Approval” Mean

Many technical specifications for ship repair and construction require that the shipyard submit to the ship owner reports, equipment selection choices, or drawings showing proposed installations, for which the shipyard is to receive the owner’s approval before proceeding. The owner’s approval is usually construed to mean that the shipyard can proceed as suggested by the shipyard. However, there are other ‘approvals’ involved in the ship repair or construction processes, usually from classification and/or regulatory authorities, as well as possibly from technical specialists. When ’approval’ is used for multiple purposes, there may be confusion as to what it means. At the end of this article, a recommendation is made; but first, here is some discussion about the use of ‘approval.’

When a regulatory authority approves a drawing, or equipment installation, it means only that there is no immediately apparent inconsistency with the applicable regulations. It is not a guarantee of safety or seaworthiness. Further, it is not a guarantee that a regulatory violation or inconsistency will not be found later upon closer review. Regulatory approvals do not substitute for approvals by any other party, and certainly not a contractually required approval from a ship owner.

When a drawing receives approval from classification, it is a representation that the contents and depictions communicated by the drawing reasonably comply with classification’s own interpretation of its own rules. Subject to further review by classification’s on-site surveyor, the incorporation into the vessel of the features conveyed by the drawing will be acceptable for issuance of a certificate of classification. When equipment selection or workmanship is approved by classification, it has the same significance stemming solely from classification’s own perspectives. Certainly these classification approvals do not carry or even imply approval by the ship owner, although obtaining classification approvals is a necessary part of the shipyard’s workscope.

When a coatings manufacturer’s technical representative approves the conditions for application of coatings, the approval serves only to activate the warranty given by the coating manufacturer. The same is true of technical representatives of equipment manufacturers: their approval of installation means only that the manufacturer’s warranty is activated—the equipment has been installed in a proper manner.

But a ship owner’s role in ship construction, conversion or repair is not as narrowly focused as are the roles of regulators, classification or manufacturer’s representatives. Typically, through the contract, the ship owner has required the contractor (shipyard) to obtain the approvals of representative of certain other organizations as previously described. Inasmuch as the ship owner is the party that has required the shipyard to obtain those approvals, a perception may have been created that a ship owner’s approval of a particular item is superior to, or in place of, the approval of one of the other organizations, such as classification, regulatory or manufacturers’ technical representatives.

Approvals of the Owner Do Not Substitute for Other Approvals Required by the Contract

That is, the approval of anything by a ship owner could easily (though improperly) be construed to mean that the owner considers the approval of the item to be in place of, or superior to, approvals by any other organization. It could be (and unfortunately has been) interpreted to substitute for approvals by other organizations. This is not the intent of owner’s approvals. The owner does not intend that its approvals are a substitute for any other approvals required by the contract.

Overall, then, it is realized that approvals are being obtained from the representatives of organizations that did not sign the contract with the shipyard, but whose approvals are a necessary part of the contract workscope. Thus, to avoid misunderstandings, the word approval should be associated only with those secondary organizations.

In order to avoid having any party improperly construe a ship owner’s approval to be in place of another organization’s approval, an alternate word is suggested: acceptance. That is, when (for example) the shipyard has to select an item of equipment, the specifications could state that it has to be ‘accepted’ by the ship owner. Similar word substitution of ‘acceptance’ for ‘approval’ could be made throughout the contract documents and specifications whenever it is originating with the ship owner. This word substitution eliminates the inadvertent substitution of actions by a ship owner for the actions of a secondary organization.


LESSON LEARNED #36: Two Owners Means Two Different Vessels

Lesson Learned

A shipyard, constructing an excursion vessel for an owner, was approached by a second owner that wished to contract for a second of the same vessel. Using the same contract drawings and specifications, the shipyard priced the second vessel assuming the benefit of a production learning curve and that nearly all the engineering for the first vessel would be directly applicable to the second vessel. This proved to be an erroneous and costly assumption. In the process of reviewing the construction details and testing/trials agendas, none of which were contractually defined with specificity, the second owner’s representatives were far more demanding than those of the first owner. These greater demands resulted in significant rework, excess engineering hours and more extensive tests and trials.

Lesson learned: even if the same drawings and specifications are being used for two or more vessels, the shipyard should consider each vessel to be the first of a series when it is being constructed for a different owner.

 


Conflicting Categories of Drawings in Contracts

Contracts for ship construction or conversion typically contain a series of “Contract Plans” or “Contract Drawings” that are listed and identified as essential elements of the contract.  However, often there is a second list of drawings categorized as ‘Contract Guidance Plans,’ ‘Guidance Plans,’ ‘Reference Plans,’ ‘Information Plans’ or some comparable categorization. Unless the intended use and purpose of the second list is clarified, the identification of two sets of plans or drawings within the contract is a starting point for significant problems. Let’s look at the fundamentals of this situation.

Multiple Plans Indicates Different Rights, Responsibilities, and Obligations

If the rights and obligations of both parties were the same for both lists, they would have been consolidated into a single list of Contract Plans. The presence of two lists of plans in the contract signifies that the contracting parties have different rights, responsibilities and obligations for each list. The problems associated with that second list of plans usually start to develop because the contractor (shipyard) has a different interpretation of those rights and responsibilities for the second list than does the purchaser (ship owner). The contractor cannot know what was in the mind of the owner’s technical team when it developed and/or provided the second list of plans unless the intended use of those plans — and how that is different from use of the Contract Plans — has been communicated in the contract documents.

Upon assisting in the resolution of numerous problems arising from the inclusion of two lists of plans within the contract, many different intended uses—or limitations on their use—have been realized. Unfortunately, in many instances this has occurred only after disputes had arisen. There are many possible interpretations of the intended use of such second categories of ‘guidance’, reference’ or ‘information’ plans that are listed in the contract documents.  The wide variation of possible intended uses of that category of plans raises questions that should have been explicitly addressed during contract formation.

  1. Is the Contractor is expected to achieve full compliance with the Guidance Plans unless there is an interference between a component shown on the Contract Plans and one shown on the second category plans?
  2. Can the Contractor rely on the accuracy and/or completeness of those second-category plans and use them without alteration for the construction or conversion?
  3. Can the Contractor rely on those second category plans being entirely consistent with the Contract Plans and Contract Specifications?
  4. If used for a ship conversion or repair, can the Contractor rely on those second category plans being consistent with the actual arrangement and condition of the vessel?
  5. Does the Contractor have to receive permission from the Owner to vary from the second category plans?…and if so, is a formal Change Order necessary?
  6. If it is necessary to vary from the second category plans in order to remain consistent with the Contract Plans and Contract Specifications, which party has responsibility to analyze, understand and take responsibility for the operational consequences of the necessary variations?

Those are some, but not all of the possible interpretations of the intended use of second category plans that are listed in the contract documents. The wide variation of the intended use of second category plans raises questions that need to be addressed when the intended use is not explicitly stated. These problems are generally avoidable if the contract documents describe, in plain and simple words, how the Contractor is to use the plans in that second list, and how that usage is different from the use of the Contract Plans.


LESSON LEARNED #35: Confirm With Vendors Before Specifying

Lesson Learned

A vessel owner’s team set out to increase the refrigeration capacity of the vessel. Among other new components, this required the installation of several additional 250-amp breakers identical to ones already on the vessel. The owner’s staff read the part number for the existing breakers, and directed the shipyard to order additional breakers using that part number to ensure commonality. What arrived, however, were only the casings for the breakers, not fitted with the internals. A separate part number was need for the internals, or an alternate part number for the combination of the internals plus casing. A last-minute contract amendment and extra installation costs were incurred.

The lesson learned: the owner’s specification writers should confirm from the vendor that the identified part number is the appropriate one and that the product is currently being manufactured.


Floating Drydock Module Replacement

Fisher Maritime assisted a shipyard in the resolution of a dispute over the value of repairs to their floating drydock which was severely damaged while lifting a vessel. The damage to the drydock was found to have been the result of lack of compliance with the dock pumping plan; the ship was not damaged.  Due to limits on a loss-of-use insurance policy, the shipyard’s survival was dependent on the drydock not being out of service for an extended period. Upon assessing the extent of damage to the floating drydock, the shipyard immediately arranged for and managed repairs by wholesale replacement of modules of the floating drydock. This was commenced before reaching an agreement with the underwriters as to the amount to be reimbursed by the Hull and Machinery insurance policy.

The shipyard’s method of repair seemed extreme to the underwriter but, in the end, was demonstrated by Fisher Maritime to have been technically-superior and far more economical than the underwriter’s suggested method. The full extent of the damage to the drydock was not known when the underwriters initially developed a cut -and-patch repair specification based largely on an external visual inspection only.

The anticipated cost of repair of the initially identified damage under this method already approached half the value of the policy.  However, there was a high probability that the drydock was damaged to a greater extent than visually noted at the outset, thereby making it beyond economical repair with the underwriter’s proposed cut-and-patch method. It was likely that there would be considerable growth work and the dry dock would be declared a constructive total loss sometime before completion of the proposed repair. This would leave the shipyard without a drydock for an uncertain amount of time. Instead the shipyard took action to obtain a more timely, successful repair.

Using less-expensive replacement modules obtained from an oversees shipyard having low steel work costs. the drydock was repaired for a cost below the total constructive loss threshold but above the underwriter’s initial estimate for a patchwork repair.  Those total costs were lower even though they included transportation of the entire floating drydock across the ocean on a heavy lift ship for replacement of the structural modules.

The shipyard and underwriter had disagreed as to the fair value of the repairs.  Without adequate reimbursement being offered, the shipyard sued the underwriter. The law firm representing the shipyard, being familiar with Fisher Maritime’s capabilities and successes from previous assignments, asked it to provide expert assistance. Fisher Maritime developed an analysis of the shortcomings in the underwriter’s repair specification and the associated repair estimate. The Fisher Maritime report then assessed the reasonableness and subsequent cost-effectiveness, as well as shorter schedule, of the shipyard’s repair method.  Following presentation of the Fisher Maritime analysis, the matter was resolved before trial to the satisfaction of the shipyard.


LESSON LEARNED #34: Owner Furnished Equipment

Lesson LearnedA tanker owner’s plan to modernize a vessel resulted in the decision that the owner would supply a certain large item of new equipment to be installed by the US west coast shipyard. The owner selected a vendor based on low pricing, anticipating a savings of about $60,000 below what the shipyard’s charge would have been. After the project commenced, however, the owner’s team discovered that the selected vendor was unable to demonstrate that the component met the required testing and certification standards.

The vessel owner’s team then had to re-order the component from another manufacturer, paying a premium for rushed completion. Moreover, because the newly selected vendor was far from the shipyard, the vessel owner’s team had to charter an aircraft to rapidly transport the component from Texas to the US west coast. In the end, the anticipated savings of about $60,000 was replaced by extra costs in excess of $100,000 above what the shipyard’s charge would have been.

If instead the vessel owner’s staff had spent time to write a precise specification and had given the shipyard the responsibility to acquire the component in accordance with that specification, any and all those extra costs would have been for the shipyard’s account.

The lesson learned: Vessel owners should not use anticipated cost-savings as a basis for deciding to provide equipment as owner-furnished.


$340 Million Award-With Our Help

In two separate but concurrent contracts, a national oil company contracted with a shipyard in the same country to convert a supertanker into an FPSO and to convert a drilling rig into an offshore production platform.  The shipyard experienced significant liquidity problems and consequential delays, primarily due to underbidding, but also due to currency risks and local inflation.

To keep the conversions moving forward, the oil company pumped cash and management resources into the shipyard to ensure the work was completed.  When it became obvious that the budgets would be far exceeded, the shipyard’s surety was advised that the purchaser would look to the surety for repayment of the extra-contractual funds; but the surety refused to take action.  After the completion of the two conversion projects, with over $300 million of extra costs in dispute, the matter went to US federal court because the surety was an American entity.

When Fisher Maritime was engaged, three experts, previously engaged by the attorneys, had already produced their reports.  One was an experienced shipyard manager; the second was a naval architect experienced in the design of offshore production equipment and vessels; while the third was a forensic accountant who identified the extra-contractual costs for the completion of the conversions. While each of the reports answered the important questions that were addressed to the experts; they were not collectively suitable for a court presentation in such a high value case; they need to be integrated for a comprehensive and more pointed presentation in court.

Fisher Maritime was asked to evaluate whether the proposed expert testimony clearly supported all aspects of the oil company’s case to obtain the proceeds of the performance bond issued by the surety.  Fisher Maritime reviewed the work of the three experts, determined how to strengthen the presentations, how to tie together the work of the three other experts to convey the overall picture without giving up salient details, and how to cross examine the surety’s experts to exploit the weaknesses of the other party’s case.

Fisher Maritime met with each of the experts, reviewed their findings and the data and correspondence that led them to their conclusions.  The result was that Fisher Maritime worked to integrate the work of the three experts to provide a readily understood presentation to show that the owner, by working with the shipyard, had proceeded diligently and economically to complete the conversions.  It was established that there was no other, more economic alternative available to the owner than to provide the substantial financial assistance to the shipyard that had been done by the owner.

Fisher Maritime prepared a presentation utilizing and integrating the findings of the previously engaged experts for the attorneys’ opening statement. We also provided extensive lists of questions to be used in the cross examination of the sureties’ expert witnesses. The result was a court award of $340 million in favor of our client.

This was the second time that Fisher Maritime had been central to the successful outcome of a litigated matter valued at over $300 million, in addition to the many lesser matters in which Fisher Maritime has brought success to its clients’ challenges.