Australia: Managing shipbuilding project risk in a challenging market

As the number of shipyards in distress, and cancelled contracts, increase in the current difficult market, the risks associated with shipbuilding projects is on the rise. Even where the builder is still solvent and the buyer still wants the ship, the pressure on both sides is forcing them to take harder positons and amplifying the costs of managing these kinds of projects.

In this article, we cover a number of issues that give rise to difficulties in shipbuilding projects, many of which find themselves in the spotlight in the present environment. We also consider some practical points which may assist the parties involved.

Whilst contract terms vary, the issues discussed below are broadly applicable to all newbuilding contracts. That said, we refer to the most widely used form of newbuilding contract, the Shipbuilders' Association of Japan form (the SAJ). This form, or modified versions of it, are widely used in Asia where the majority of commercial ships are built. Comments made in this article as to matters of law and interpretation are confined to English law and practice as at the date hereof.

Common disputes: Liquidated Damages; Force Majeure days and ready for delivery

The SAJ, like most building contracts for large-scale projects, will entitle the buyer of a ship to an agreed amount of damages, often referred to as "liquidated damages", for each day that the ship is delayed from an agreed date (e.g. 30 days after the contractual delivery date). These liquidated damages will often be the driver of disputes, as they put a monetary value on lost time, albeit often subject to an overall cap.

Whilst liquidated damages may be the underlying reason for a dispute, one of the most common areas of shipbuilding disputes is in the attribution of responsibility for delay (i.e. which days of delay are for the buyer's account and which are for the builder).

When considering such delay cases, proper construction of the force majeure clause is frequently a key element. Generally, force majeure days will not count towards the buyer's liquidated damages, but will count towards the required time limit before the buyer has a right to cancel the contract for excessive delay.

As the SAJ, in common with most commercial shipbuilding contracts, does not promise interim performance of construction milestones, the focus of the parties (in terms of both liquidated damages and cancellation under the terms of the contract) must be on the contractually agreed delivery date. Prudent parties will wish to scrutinise, as it arises, the scope of any event which may allow deviation from that date, or which may contribute towards an early cancellation.

The question of whether the ship is technically ready for delivery is relevant to the delay cases discussed above (as this is when the clock stops for the accrual of liquidated damages), but it is also often important where the buyer seeks to cancel a shipbuilding contract for excessive delay. If disagreement over whether the ship is ready for delivery or not persists for long enough, the cancellation date will eventually arise, at which point the buyer must make an election as to whether to cancel the contract or take delivery of the ship.

If the buyer elects to cancel the contract for technical reasons, and it is later decided that the buyer did not, in fact, have the right to do so, the builder may then have the right to cancel the contract, leaving the buyer unable to call on its refund guarantee. This can make it a high-stakes gamble for both sides.

Understanding the importance of the Refund Guarantee

As title to the ship usually remains with the shipyard until delivery, virtually all buyers require the builder to procure a refund guarantee (there may be several) from an acceptable bank, to secure the return of their pre-delivery instalments (where the buyer is validly able to exercise its right to cancel the contract). Where the builder is encountering financial difficulties, the buyer will be especially keen to ensure its refund guarantee remains in place – and the refund guarantee may prove to be its sole realistic prospect of recovery.

As you might expect, the refund guarantee and the underlying shipbuilding contract are intended to be linked in most key respects. Notwithstanding this, one critical concept to understand is that the refund guarantee should be an independent obligation of the refund guarantor and entirely separate from the underlying shipbuilding contract. This is of course intentional, as the purpose of the refund guarantee is to provide the buyer with security from a source that is independent of the builder. However, this creates a risk that the refund guarantee may sometimes not operate as expected when changes are made to the underlying shipbuilding contract.

One such example is where a project is delayed, and the parties have agreed an extension to the contractual "Delivery Date" (often made in exchange for a discount to the purchase price of the ship). This is common practice and there may be a number of these agreements, for relatively short extensions, toward the end of a newbuilding project. However, serious problems can arise in cases where the refund guarantee has a fixed expiry date (as is the case with virtually all refund guarantees issued by Chinese banks). This is because the date on which the buyer's right to cancel the contract, is linked to the Delivery Date (being, usually, between 180 and 210 days after the Delivery Date). Where there have been extensions of the Delivery Date, the buyer runs the risk that its right to cancel the contract may be triggered only after the date on which the refund guarantee expires. Whilst this is an easy issue to avoid if the parties are careful with amendments, it can catch out even experienced buyers.

Another consequence of the refund guarantor's independence is that amendments to the shipbuilding contract, for example to the timing and amounts of instalments, can cause uncertainty. Due to protections afforded to guarantors under English law, such amendments may, absent consent from the refund guarantor, discharge the refund guarantor from its obligations under the refund guarantee (or give it an argument that it has been so discharged). Ultimately, the degree of amendments and the answer will depend on the interpretation of what has been agreed in the refund guarantee itself. In order to avoid argument, the buyer should, where practically possible, seek the consent of the refund guarantor whenever the underlying contract is to be varied.

An important caveat to the general link between the shipbuilding contract and refund guarantee is as follows. In circumstances where the builder has either fallen far behind the construction programme or failed to start work at all, the buyer may wish to treat the builder's conduct as a repudiation of the contract and elect to terminate the contract on this basis. The risk to the buyer in doing so, is that its claim for damages is not secured by the refund guarantee. Whilst the wording of some refund guarantees will be sufficiently wide as to cover a claim for damages, it is unusual for a refund guarantee to cover damages. Most refund guarantors will respond only to a demand for repayment of instalments of the contract price, usually (but not always) with interest. Faced with prolonged delay and continuing inactivity on the part of the builder, a buyer will be advised to persevere with the shipbuilding contract, await the contractual cancellation date to exercise its cancellation right and make timely demand under the refund guarantee.

As is seen from the points discussed above, there are a number of risks that can arise throughout the construction process, especially when commercial circumstances require changes to be made. Managing risk effectively in shipbuilding projects requires not only supervision of the technical construction of the ship, but also an ongoing consideration of the implications of changing contractual terms.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.