Newbuilding supervision contracts

What the manager's insurer looks for

Charlotte Kirk of International Transport Intermediaries Club (ITIC) looks at the clauses which ITIC, as the liability insurer for ship managers, believes should be incorporated in a newbuilding supervision contract.

IN the past two decades, the role of the shipmanager has greatly expanded. The cornerstone of the legal relationship between managers and owners is the shipmanagement agreement. As the industry has matured, the BIMCO Shipman and Crewman forms of contract have become established. These cover the main shipmanagement activities. Many shipmanagers, however, are now engaged in the business of newbuilding supervision, where standard form agreements have not yet emerged.

The first recommendation is to keep it simple. If this basic outline of the agreement is correctly drafted, then each partyshould be clear about their role.

The next basic requirement is to set out the scope of the work each party will do. A newbuilding supervisor is doing just that - supervising. The brief should be properly defined, with the supervisor's duties often being fully stated in an appendix. If these duties are not clearly set out, the obligations can become blurred. Many disputes arise because the contract has failed to adequately specify what the supervisor is to do. A common problem seen by ITIC is where clauses have been drafted to suggest that the supervisor is responsible for the failings of the builder.

The contract should contain a limitation of liability clause to allow the role of the supervisor to be insured. ITIC has seen situations where the buyer has waived rights against the builder in return for a reduced price. The buyer has then tried to bring an action against the supervisor for insufficient build quality. Supervisors receive a limited fee for the job they do and they cannot be expected to face an unlimited liability. The BIMCO Shipman 98 contract provides a limitation of ten times the annual management fee. In newbuilding supervision contracts, the limitation amount is also related to the fee the supervisor will earn or the percentage of the value of the ship. The limit should strike a balance between the funds received by the supervisor and the exposure for insurance purposes.

A useful addition to the liability provisions is a time bar for claims. When ITIC has seen these, the clauses tend to provide that, if the owners have any claim, it should be made within twelve months of the termination date of the contract. A clause which provides for proceedings to be commenced within the period is preferable to one which says that it should be notified to the supervisor.

In dealings with third parties, the supervisor is acting on behalf of the owner. The supervisor should therefore receive an indemnity from the owner for any liability which is incurred as a result of carrying out the owner's instructions.

It is one thing to accept liability to an owner, but another to accept liability to third parties. For example, reports prepared for principals should be solely for the use of that principal and for the agreed purpose. There is a danger that the principal can use the supervisor's report in his dealings with other parties, such as financiers, in circumstances which are unknown to the supervisor. If the third party feels the report was misleading, it is possible that they may seek to bring a claim against the supervisor. In this context, the supervisor should be entitled to both an indemnity from the principal and an undertaking not to circulate such reports to third parties without the supervisor's express agreement.

The supervisor also needs the protection to extend to his employees, agents and subcontractors. Contracts should therefore contain a Himalaya clause, or other provision to achieve this.

ITIC often sees contracts with ill-considered jurisdiction and arbitration clauses. BIMCO Shipman 98 provides the option of English, US, or another mutually agreed law and jurisdiction. Avoid clauses which provide for a contract to be governed by one law and subject to arbitration or litigation in another. If a dispute arises and has to be dealt with under the terms of such a clause, the supervisor will probably need to employ twice as many lawyers, and a legal dispute will cost twice as much.

There are obviously many other commercially important clauses to consider, particularly with regard to payment and termination. ITIC sees many newbuilding supervision contracts. The most straightforward and unambiguous have "borrowed" their clauses from BIMCO Shipman 98, particularly the limitation of liability, indemnity and law and jurisdiction clauses. The final recommendation, like the first, is to keep it simple.