THE LAW OF SHIPBUILDING CONTRACTS PART 1 The nature of the shipbuilding contract

4th Edition, 2012

Chapter PART 1

The nature of the shipbuilding contract

The nature of the shipbuilding contract
In English law certain distinctions exist between contracts which are categorised as relating to the sale and purchase of goods and
those relating to the supply of workmanship and materials. In particular, contracts for the sale of goods may, depending in part upon
their terms, fall within a detailed statutory regime for such contracts,1 which may alter or supplement the agreement that the parties
have themselves reached.
It may, however, be difficult in practice to determine into which of these two categories a particular contract should fall. This is
especially so where, as in the case of a shipbuilding contract, the agreement provides that one party, A, will not only undertake a
complex manufacturing process under the supervision of the other party, B, but will also sell and deliver the manufactured item to B
once the process has been completed. In such a case, it is plain that neither of the categories in question exclusively defines the nature
and scope of the transaction.
Until relatively recently, however, shipbuilding contracts could quite safely be regarded as contracts for the sale of goods. Thus,
according to Diplock J. in McDougall v. Aeromarine of Emsworth Ltd (1958)2 it seems well settled by authority that, although a
shipbuilding contract is, in form, a contract for the construction of the vessel, it is in law a contract for the sale of goods .3 On this
analysis, shipbuilding agreements are very similar to contracts for the sale of existing or second-hand ships, which are also clearly
regarded as goods in English law.4
A significant proportion of the content of most shipbuilding contracts is nevertheless directed towards the regulation of a
substantial and complex construction project, in which each party assumes long-term obligations to the other and bears significant
commercial risks. Although the ultimate purpose of such a contract is to transfer legal title to a good (i.e. a ship) in return for payment
of an agreed price, the nature and extent of the commitments assumed by both parties in order to achieve this objective are more akin
to those of a non-marine construction project than a mere agreement of sale and purchase.
Since McDougall these features have been recognised in two House of Lords decisions, Hyundai Heavy Industries Co. v.
Papadopoulos and Others (1980)5 and Stocznia Gdanska S.A. v. Latvian Shipping Co., Latreefer Inc. and Others (1998),6 which have
cast some doubt on the traditional categorisation of shipbuilding contracts as pure sale contracts.
The issue to be decided in Hyundai and Stocznia Gdanska was whether unpaid instalments of the contract price which had accrued
due to the builder prior to his termination of the contract remained payable by the buyer after such termination had taken effect. In
both cases, the House of Lords held that the instalments did indeed remain payable because consideration (i.e., value) had been given
by the builder to the buyer in the form of the work it had undertaken in partially constructing the vessel.
In Hyundai the House of Lords declined to follow a long-standing authority7 dealing with exactly the same issue in the context of
contracts of sale and distinguished it on the ground that the contract considered in the earlier decision was a contract for the sale of
goods, which, unlike a shipbuilding contract, did not require the vendor to perform any work or incur any expense on the subjects of
sale.8 Further, Viscount Dilhorne stated that the shipbuilding contract under consideration was not just for the sale of a ship [i]t
was a contract to build, launch, equip and complete a vessel and to deliver and sell her .
The conclusions reached in Hyundai were affirmed and applied in Stocznia Gdanska, where it was held that the shipbuilding
contract under consideration was not simply a contract for the sale of a ship but rather a contract under which the design and
construction of the vessel formed part of the yards contractual duties, as well as the duty to transfer the finished object to the
buyers.9

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Both Hyundai and Stocznia Gdanska nevertheless dealt with a very specific issue, namely, the parties rights and obligations upon
termination of the shipbuilding contract, and (it is submitted) neither decision has changed the categorisation of such a contract in
English law. Thus, in Hyundai Lord Fraser simply spoke of the similarity of the contracts there in question with contracts for work
and materials so far as the present issues [were] concerned. Similarly, Viscount Dilhorne stated that the shipbuilding contract in
question was a contract which was not simply one of sale but which so far as the construction of the vessel was concerned,
resembled a building contract.
According to the leading English law textbook on the sale of goods, the Hyundai and Stocznia Gdanska decisions establish that
a contract to build a ship, though a contract of sale of goods, [has] also some characteristics of a building contract,10 which (it is
respectfully submitted) represents the correct legal analysis. These characteristics mitigate the impact upon the builder of certain
principles of English law relating to the sale of goods, but do not alter the fundamental nature of the contract itself.
Reflecting this categorisation, the impact of construction law principles in the historical development of English shipbuilding
contract law has been very limited. Although an important recent decision of the High Court11 has indicated a judicial willingness to
embrace the application of non-marine construction law principles to shipbuilding contracts, it has, for better or worse, largely been to
the rules underlying contracts for the sale of goods, rather than those for the provision of work and materials, that English courts and

Simon Curtis

THE LAW OF SHIPBUILDING CONTRACTS PART 1 The nature of the shipbuilding contract

4th Edition, 2012

arbitration tribunals have customarily looked for guidance in determining shipbuilding contract disputes.12

THE SALE OF GOODS ACT 1979

The English rules governing contracts for the sale of goods derive from common law principles13 as codified and supplemented by
parliamentary statute. The most significant source of law in this area is the Sale of Goods Act 1979 (the 1979 Act),14 the principal
successor in title to the first major codification of the common law, the Sale of Goods Act 1893.15
Before considering in detail the principles of the 1979 Act as these relate to shipbuilding contracts, a number of preliminary points
must be made regarding the classification of such agreements within the overall statutory framework.
First, the 1979 Act draws a distinction between sales, in which property passes to the purchaser at the time the contract is
concluded,16 and agreements to sell, in which the transfer of the property in the goods is to take place at a future time or subject to
some condition later to be fulfilled.17 Although this distinction is not of great practical significance,18 almost all shipbuilding
contracts take effect as agreements to sell, even if property to the vessel is to pass to the buyer continuously throughout the course
of her construction.19
Secondly, the 1979 Act differentiates for a number of purposes between unascertained and specific goods (i.e., those
identified and agreed upon at the time a contract of sale is made).20 Unascertained goods are not defined, although the statute
makes clear that these comprise two sub-categories, existing and future goods, the latter being goods to be manufactured or
acquired by the seller after the making of the contract of sale, 21 which obviously includes newbuilds. A contract for the sale of
future goods always takes effect as an agreement to sell.22
Finally, it should be noted that an agreement to sell future goods may be a sale either by description or by sample. In the case of
a large manufactured item such as a ship, the sale will, for obvious reasons, be undertaken by description. In relation to agreements of
this type, the 1979 Act implies (in particular) a condition that the goods should comply with the agreed description.
In summary, therefore, in English law a shipbuilding contract is an agreement of sale, incorporating certain characteristics of a
construction contract, by which one party, typically the builder, agrees to sell to the buyer future goods, i.e., a vessel, by description.
The legal principles applicable to agreements of this type are examined in detail in the chapters which follow.
1 Principally contained within the Sale of Goods Act 1979; see below.
2 [1958] 2 Lloyds Rep. 345.
3 At pages 355356; see also Reid v. Macbeth and Gray [1904] A.C. 223, Sir James Laing & Sons Ltd v. Barclay, Curle & Co. Ltd [1908] A.C. 35 and Re
Blyth Shipbuilding and Dry Docks Co. [1926] 1 Ch. 494 (where the shipbuilding agreement was said to be unquestionably a contract for the sale of future
goods, per Romer J. at page 499). The proposition applies equally to contracts for the construction and sale of machinery and equipment for a newbuilding
(e.g., a propeller), Cammell Laird & Co. Ltd v. Manganese Bronze & Brass Co. Ltd [1934] A.C. 402.
4 Behnke v. Bede Shipping Ltd [1927] 1 K.B. 649. Shipbuilding contracts relate, however, to the sale of future rather than existing goods (see
Moore-Bick L.J. in Stocznia Gdynia S.A. v. Gearbulk Holdings Ltd [2009] EWCA Civ 75, at paragraph 12 of his judgment); there are obviously other
differences (e.g., the builder provides a post-delivery warranty and retains the copyright in the vessels plans and drawings), although these are of limited
importance in terms of legal classification.
5 [1980] 2 Lloyds Rep. 1.
6 [1998] 1 Lloyds Rep. 609.
7 Dies v. British and International Mining and Finance Corporation Ltd [1939] 1 K.B. 724, which established that a purchasers repudiatory breach of a
contract for the sale of goods does not prevent him from recovering his pre-paid instalments of the price to the extent that these exceed the vendors recoverable
damages.
8 Per Lord Fraser at page 13.
9 Per Lord Goff at pages 619620.
10 Benjamins Sale of Goods (8th edn.) at paragraph 1041.
11 Adyard Abu Dhabi v. S.D. Marine Services [2011] EWHC 848 (Comm). See further, Curtis and Elmes, Construction Law Principles and Shipbuilding
Contracts, Lloyds List, 11 May and 18 May 2011 and pages 6668, infra.
12 Shipbuilding agreements are nevertheless maritime contracts in the sense that these fall within the Admiralty jurisdiction of the High Court (s. 20(2)(n)
of the Senior Courts Act 1981); a shipbuilder may thus bring proceedings in rem to enforce his claims under a shipbuilding contract.

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13 That is, the general body of English judicial decisions creating legal precedents which, if not distinguished or overruled, are binding in subsequent cases.
14 The common law rules are nevertheless preserved except in so far as they are inconsistent with the provisions of [the] Act (s. 62(2)).
15 The 1979 Act has since been supplemented by the Sale and Supply of Goods Act 1994 (the 1994 Act).
16 Section 2(3).
17 Section 2(4).
18 Both are, for example, contracts of sale into which the statutory terms contained in ss. 1215 of the 1979 Act (as amended by the 1994 Act) may be
implied see pages 115121, infra.
19 See pages 135143, infra. An exception is where the buyer purchases a partly-built ship on terms that title will vest in him immediately and that the
builder will thereafter complete her. In this unusual situation, the sale may neither relate to future goods nor be undertaken solely by description.
20 Section 61.

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THE LAW OF SHIPBUILDING CONTRACTS PART 1 The nature of the shipbuilding contract
21 Section 5(1).

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22 Section 5(3).

Simon Curtis

4th Edition, 2012