Is A Shipbuilding Contract Considered A Sale Of Ship Contract? The Malaysian Law Perspective

• Published date: 24 January 2024
• Subject Matter: Transport, Marine/ Shipping
• Law Firm: Azmi & Associates
• Author: Fairuz Hanim Abdul Latif and Irdina Abdul Jamal

Introduction

The Malaysian shipping industry has been in decline with the steady reduction in Malaysian shipping tonnage and increasing number of shipping businesses in distress. This may be attributable, among others, to the weak global shipping market and the insufficiency of fiscal and legislative measures to address domestic shipping concerns. To address this issue, the Ministry of Transport of Malaysia with the support of various shipping organizations such as the Marine Department Malaysia, Malaysia Shipowners' Association and lkhtisas Kelautan Malaysia had established the Malaysia Shipping Master Plan ("MSMP") aimed to run from 2017 to 2022,¹ which has currently been extended to 2025.²

The vessel sale market plays a significant role in reaching the objectives set out in the MSMP. Generally, acquirement of a vessel may be done by way of purchasing a second-hand vessel via a sale and purchase agreement, or employing a builder to construct a new ship from scratch vide a shipbuilding agreement (new build), which will be tailor-made according to the purchaser's needs and specifications. Although these may be two different types of contracts, they may be regarded as the same category of contracts under Malaysian law. We will proceed to discuss this issue in this article.

Shipbuilding Contract

A shipbuilding contract, which is typically an agreement between the builder and the shipowner (purchaser), usually outlines the terms encompassing the design, building, commissioning and sale stage.

This type of contract is generally an industry norm as the shipping industry is a niche one, and purchasers would usually need customized ship specifications/features according to the different functions (e.g. cargo ships, oil tankers, or operational support vessels). The terms of such contracts would be more complex and akin to a full-blown construction agreement typically used for construction of buildings.

For instance, the payment terms would stipulate submission of progress reports and claims, verifications of progress reports and claims, and payment of the said progress claims according to the construction milestones. The purchaser would need to provide the relevant data / specifications / drawings for the construction process, and may also designate its officer to be a supervisor of the construction works. In addition, the builder would have to provide warranties as to equipment and workmanship and take out insurance policies such as builder's risk insurance to...