The maritime industry is a capital-intensive sector governed by exceptionally strict international standards, where massive engineering marvels meet the oceans. The construction of a ship or its comprehensive maintenance is not merely a technical project but also a multimillion-dollar commercial investment. The only way to secure this investment is through a contract with a flawlessly structured legal foundation.
An incomplete or poorly drafted shipbuilding or repair contract can lead to delivery delays, payment crises, and international arbitration cases lasting for years. In this blog post, we examine the critical dynamics of shipbuilding and repair contracts and the fundamentals of commercial risk management to secure your maritime projects.
The Legal Nature of Shipbuilding and Repair Contracts
Examined under the principles of global maritime commercial law and Turkish law, shipbuilding and repair contracts fundamentally possess the characteristics of a Contract for Work (Contract of Enterprise). According to the Turkish Code of Obligations (TCO Art. 470), while the shipyard (contractor) undertakes to build or repair a ship in accordance with the agreed purpose and specifications, the employer (shipowner/investor) undertakes to pay a price in return. The performance of these mutual obligations can only proceed smoothly with a contract whose boundaries are clearly drawn from the outset.
Standard Contract Forms Used in the Global Industry
In maritime practice, contracts are rarely written from scratch; standard forms prepared by international organizations are revised according to the commercial interests of the parties. The most frequently encountered forms in the sector are:
SAJ Form (Shipbuilders’ Association of Japan Form)
As the most widely used form worldwide, the SAJ form generally has a builder-friendly structure. When using this form, it is imperative for shipowners to meticulously negotiate additional clauses (rider clauses) that will protect their own rights.
NEWBUILDCON and REPAIRCON (BIMCO Forms)
Prepared by BIMCO, the world’s largest international shipping association, these forms distribute the rights and obligations between the parties more evenly. REPAIRCON, in particular, is one of the most reliable repair contract standards in the industry, specifically designed for drydocking and routine maintenance and repair work.
AWES Form
Prepared by the Association of European Shipbuilders and Shiprepairers, this form is predominantly preferred for projects in European shipyards.
Accepting standard forms as they are can create significant legal loopholes for shipowners. At Esenyel Consultancy, we remodel these standard forms in line with our clients’ commercial interests at the onset of a project, striking a fair balance in ‘builder-friendly’ contracts.
Critical Contract Clauses to Minimize Your Commercial Risks
Regardless of the contract type, the successful completion of the project depends on the following clauses being drafted comprehensively and unequivocally:
1. Description and Class
The ship’s speed, fuel consumption, deadweight, and the specifications to which it will be built must be clarified. Furthermore, it must be stipulated that the construction process is carried out under the supervision of an authorized classification society that is a member of IACS (International Association of Classification Societies) (e.g. Türk Loydu, DNV, Lloyd’s Register).
2. Price and Milestone-Based Payment Terms
Payments should be based on a ‘milestone’ approach. A typical secure payment plan is structured as follows:
Keel laying (10-20%)
Contract signing (10-20%)
Launching of the vessel (10-20%)
Commencement of steel cutting (10-20%)
Completion of delivery and passing of tests (Remaining Balance)
3. Delivery Date, Delays, and Liquidated Damages
Time is money for the shipowner. Daily ‘liquidated damages’ to be paid by the shipyard in the event of a delivery delay must definitely be included in the contract. When the delay exceeds a certain period (e.g. 180 days), the employer must be granted a unilateral right of termination, and force majeure clauses should be defined narrowly and clearly to cover current risks such as supply chain crises.
4. Title and Risk
As a rule, title belongs to the shipyard during the construction phase and passes to the shipowner upon delivery. The shipyard must be obliged to take out ‘Builder’s Risk Insurance’ against all physical risks that may arise until the vessel is delivered.
5. Warranty and Defect Liability
A guarantee period of at least 12 months must be obtained from the shipyard for latent defects arising from faulty workmanship or materials that may appear after the vessel is delivered.
The Unique Dynamics of Ship Repair and Maintenance Contracts
Unlike shipbuilding contracts, the time pressure is significantly higher in repair contracts. A vessel being off-hire directly results in financial loss for the shipowner. In these contracts:
drydocking periods,
standard tariff rates to be applied,
standards for cranes, electricity, water, and environmental protection to be provided by the shipyard must be regulated in much greater detail.
Current Legal Framework and Regulations in Türkiye
With its shipyards in the Tuzla and Yalova regions, Türkiye is one of the world’s leading centres for both repair-maintenance and special-purpose shipbuilding. Operations in Türkiye are subject to the Ministry of Transport and Infrastructure’s ‘Regulation on the Construction, Modification, and Maintenance-Repair of Ships and Watercraft’. According to the relevant legislation, processes such as project modifications, capacity increases, or vessel lengthening are directly subject to the permission of the port authorities and registration in the Ship Industry Database Program (GSVP). It is essential to manage the process with legal counsel to avoid the heavy administrative fines imposed for actions taken without permission.
Dispute Resolution: International Arbitration
No matter how well a contract is drafted, disputes may arise. Shipbuilding and repair disputes are generally resolved through arbitration rather than national courts that lack maritime expertise. The LMAA (London Maritime Arbitrators Association), which stands as the industry standard, and the SMA (Society of Maritime Arbitrators in New York), which is prominent in America-related projects, conclude processes much more quickly and confidentially thanks to their expert arbitrators.
We Are by Your Side to Secure Your Project
Shipbuilding and repair projects are the intersection of advanced engineering knowledge, heavy financial obligations, and complex international law. An uninformed signature on standard contracts can lead to irreparable commercial losses.
At Esenyel Consultancy, with our deep experience in international maritime law, we stand by your side at every stage of your project, from shipyard negotiations and contract drafting to risk management and potential arbitration processes. You can contact us to armour your investments legally and protect your commercial interests in the international arena in the strongest way possible.
Contact Esenyel Consultancy and manage success, not risks, in your maritime projects. Consult us, and let’s navigate your project together.
