Key Shipbuilding Contracts: What Shipowners Must Know Before Ordering a Newbuild

My name is Davide Ramponi, I am 20 years old and currently training as a shipping agent in Hamburg. In my blog, I take you with me on my journey into the exciting world of shipping. I share my knowledge, my experiences, and my progress on my way to becoming an expert in the field of Sale and Purchase – the trade with ships.

Ordering a new ship is one of the most significant investments a shipowner can make. It’s a process that involves extensive negotiations, detailed planning, and complex legal agreements. At the heart of this process lies the shipbuilding contract (SBC) – a legally binding document that defines the expectations, rights, and responsibilities of both the buyer and the shipyard.

But what exactly makes a good shipbuilding contract? What are the most important clauses, and where do disputes often arise? In this post, I’ll break down the essential elements of newbuilding contracts, explain how they are structured, and highlight the common points of contention – and how to resolve them.

Understanding Newbuilding Contracts: The Foundation of a Successful Project

When a shipowner orders a newbuild, the relationship with the shipyard is governed by a shipbuilding contract (SBC). This contract is designed to ensure that both parties clearly understand their obligations, timelines, and financial commitments.

1. What is a Shipbuilding Contract (SBC)?

• A Shipbuilding Contract (SBC) is the central agreement between a shipowner (buyer) and a shipyard (builder).

• It outlines the design, construction, delivery, and payment terms of the vessel.

• The contract protects both parties by defining performance expectations, penalties, and dispute resolution mechanisms.

2. Standard Clauses and International Guidelines

To minimize risks, shipbuilding contracts often follow **standardized clauses**, such as those provided by:

• **BIMCO’s Newbuildcon** – a widely used shipbuilding contract template that standardizes key terms.

• SAJ Form – used by Japanese shipyards.

• CMAC (China Maritime Arbitration Commission) standards – often referenced in contracts with Chinese yards.

These standardized clauses help reduce legal uncertainty and ensure fairness in negotiations.

Structure of a Shipbuilding Contract: Key Components

A well-structured SBC is essential to avoid misunderstandings and disputes. While contracts can be highly detailed, they typically cover the following core elements:

1. Price and Payment Terms

• The total contract price is usually divided into milestone payments, linked to construction progress (e.g., keel laying, launch, delivery).

• Payments may be secured through refund guarantees, ensuring that if the shipyard defaults, the buyer is compensated.

2. Technical Specifications

• The contract should include a detailed description of the ship’s design, including:

✅ Engine and propulsion specifications.

✅ Cargo capacity and equipment.

✅ Compliance with IMO and classification society regulations.

3. Construction Schedule and Delivery Date

• A clear timeline for construction is crucial to avoid delays.

• The contract must specify penalties for late delivery (liquidated damages) and incentives for early completion.

4. Warranties and Defect Liability

• Shipyards typically offer a warranty period (often 12-24 months after delivery) to cover construction defects.

• A strong contract ensures that the shipyard is obligated to rectify faults* without additional costs.

Common Disputes and How to Resolve Them

Even with well-drafted contracts, conflicts between shipowners and shipyards are common. Here are some typical points of contention – and how they can be handled effectively.

1. Delays in Delivery

🚢 The Problem: Shipbuilding projects often face delays due to supply chain disruptions, labor shortages, or technical setbacks.

💡 Solution: The contract should include delay penalties (liquidated damages), incentivizing the shipyard to meet the deadline.

2. Cost Overruns and Contract Modifications

🚢 The Problem: Unexpected changes (e.g., new IMO regulations, material price increases) may raise costs.

💡 Solution: Contracts should specify who bears additional costs for design changes and how modifications are approved.

3. Quality Disputes and Defect Rectifications

🚢 The Problem: Buyers sometimes receive vessels that fail to meet agreed specifications.

💡 Solution: The contract must provide a clear inspection and rejection procedure, ensuring non-compliant vessels must be rectified before final acceptance.

4. Breach of Contract and Refund Guarantees

🚢 The Problem: If a shipyard fails to complete construction, the buyer risks financial losses.

💡 Solution: Refund guarantees from reputable banks ensure that, in case of default, payments made to the yard are reimbursed.

Real-World Case: When a Strong Contract Saves Millions

A European shipping company recently faced significant delays in the construction of an LNG-powered tanker ordered from a Chinese shipyard.

Scenario:

• The contract included strict penalties for delays.

• The shipyard attempted to invoke a force majeure clause, citing supply chain disruptions.

• The buyer, backed by a refund guarantee, was able to recover a substantial portion of their investment.

Outcome:

✅ The shipowner renegotiated a delivery date with additional compensation.

✅ The shipyard accelerated construction to avoid further penalties.

✅ The dispute was resolved without lengthy arbitration.

This case highlights the importance of a well-structured contract – ensuring that buyers are financially protected, even in worst-case scenarios.

Conclusion: Why a Strong Shipbuilding Contract is Essential

A shipbuilding contract is far more than just a formal agreement – it is a strategic tool that defines the success of a newbuilding project.

🔹 A well-structured SBC protects shipowners from delays, cost overruns, and legal disputes.

🔹 Standard clauses (e.g., BIMCO Newbuildcon) provide transparency and reduce negotiation risks.

🔹 Clear warranties and refund guarantees ensure financial protection in case of disputes.

For any shipowner considering a newbuild, investing time in understanding and negotiating the right contract can save millions in potential losses.

What are your thoughts on shipbuilding contracts? Have you encountered contract disputes in the industry? Let’s discuss in the comments! 🚢⚓