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.