Nanjing Maritime Court Report on Judicial Services to Support the Development of the Shipbuilding and Ocean Engineering Equipment Industry
December 2023
Foreword
Jiangsu's strategic position, adjacent to the Yangtze River and the East China Sea, coupled with its advanced manufacturing capabilities, has established a propitious foundation for the development of the shipbuilding and ocean engineering equipment industry (hereinafter referred to as the 'shipbuilding industry'). In recent years, Jiangsu has witnessed a continuous expansion of its shipbuilding industry, with impressive statistics in shipbuilding completion and other key indicators that consistently position it as a national leader. High-tech shipbuilding industry clusters have emerged in regions such as Nantong, Taizhou, and Yangzhou, solidifying Jiangsu's position as a prominent and globally influential hub for the shipbuilding industry.
Since its inception, the Nanjing Maritime Court has diligently and effectively adjudicated numerous maritime and maritime commercial cases related to the shipbuilding industry. Through the establishment of a systematic research mechanism, optimal allocation of judicial resources, implementation of a strategy aimed at achieving judicial excellence, development of an intelligent litigation and enforcement platform, and the promotion of regional maritime judicial cooperation, the court has continuously enhanced the legal framework and business environment. This judicial support has significantly contributed to promoting high-quality development within Jiangsu's shipbuilding industry and elevating its global competitive standing.
This report methodically reviews cases from 2020 to the first half of 2023, detailing the judicial initiatives supporting the shipbuilding industry's advancement. It encapsulates the unique aspects of industry disputes and offers judicial recommendations, alongside showcasing typical cases. The report aims to offer insight into the court's work in maritime justice, serving as a valuable reference and support for maritime legal services.
Table of Contents
I. General Introduction of Trials Involving Shipbuilding Industry
A. Overview of Case Initiation and Resolution
B. General Characteristics and Trends of Cases
II. Strategies for Supporting and Safeguarding the Shipbuilding Industry
A. Targeted Assessment of Industry Growth Demands, Continual Enhancement of Maritime Legal Services
B. Meticulous Adjudication of Complex Cases, Legal Safeguarding of Corporate Rights and Interests
C. Advancement of Diverse Dispute Resolutions, Contributing to an Optimal Legal Business Environment
D. Proactive Expansion of Judicial Functions, Ensuring Standardized and Healthy Corporate Growth
III. Legal Issues and Recommendations Pertaining to Shipbuilding Industry Disputes
A. Strengthening Rights Protection Awareness and Cautious Drafting of Shipbuilding Design Contracts
B. Reinforcing Awareness of Risk Prevention by Thoughtful Consideration of Market Risks and Self-Regulation Capabilities
C. Enhancing Safety Production Awareness and Strict Enforcement of Safety Production Responsibilities
D. Reinforcing Awareness of Modern Finance and Exercising Prudent and Rational Choices in Financing Channels
E. Strengthening Environmental Awareness and Actively Promoting Green Transformation and Industry Development
IV. Typical Cases
I. General Introduction of Trials Involving Shipbuilding Industry
The shipbuilding industry is a highly technology-driven and multifaceted modern industry with significant industrial interconnections. As a crucial component of China's strategic emerging industries and a focus area within high-end equipment manufacturing, this industry primarily employs metal and non-metal materials for the construction, repair, and dismantling of vessels and the production of equipment for maritime use. It encompasses shipbuilding and repair, maritime equipment design, ship-related components manufacturing, and more.
During the period from 2020 to the first half of 2023[1], our court registered a total of 1,673 cases related to shipbuilding and ocean engineering equipment. These cases encompass the entire spectrum of production and manufacturing processes, including the design, construction, repair, and disassembly of maritime equipment, as well as various downstream activities such as the buying, selling, leasing, pledging, and operating of finished vessels. To provide clarity and align with the industrial manufacturing nature of the shipbuilding and ocean engineering equipment sector, this report uses the term "cases related to the shipbuilding industry" to refer to disputes arising from the production and processing stages of maritime equipment, such as design, construction, and repair. [2]
A. Overview of Case Initiation and Resolution
From 2020 to the first half of 2023, our court received 755 new cases related to the shipbuilding industry, concluding 703 cases,[3] with a case conclusion rate of 93.1%. Specifically, the number of newly received cases in each year is as follows: 202 cases in 2020, 290 cases in 2021, 196 cases in 2022, and 67 cases in the first half of 2023, accounting for 11.48%, 13.45%, 7.63%, and 5.29% of the total newly received cases in their respective years. The number of cases concluded in the same years were 162, 238, 233, and 70, respectively, constituting 12.84%, 10.57%, 9.26%, and 6.40% of the total cases concluded during those years.
Among the newly received cases, there were 383 disputes related to ship material and spare parts supply contracts, 263 disputes related to ship construction contracts, 71 disputes related to ship repair contracts, 14 disputes related to construction financing contracts, 11 disputes related to personal injury liability resulting from ship construction, 6 disputes related to ship modification contracts, and 7 other disputes.
Of the cases concluded, 304 were resolved through judgments, 148 through mediation (including successful pre-trial mediations), 156 through withdrawal of the lawsuit (including cases where withdrawal was granted or handled as a withdrawal), and 95 through other means.[4] The case withdrawal rate stood at 43%, which is lower than that of other maritime and maritime commercial cases during the same period, reflecting the heightened complexity of resolving cases related to the shipbuilding industry.
Figure 1-1-1: Statistical Overview of the Initiation and Conclusion of Cases Related to the Shipbuilding Industry at the Nanjing Maritime Court from 2020 to the First Half of 2023
Figure 1-2-1: Breakdown of Newly Received Cases Related to the Shipbuilding Industry at the Nanjing Maritime Court from 2020 to the First Half of 2023
In terms of enforcement, from 2020 to the first half of 2023, our court detained a total of 476 vessels of various types. Among these, 79 vessels were physically detained, and restrictions were imposed on the transfer, mortgage, and bareboat charter of 397 vessels. Of the 79 vessels physically detained, they can be categorized based on their flag state as follows: 62 vessels were of Chinese mainland registry, 3 were of Hong Kong, Macau, or Taiwan registry, and 14 were of foreign registry. According to the source of the cases, our court directly accepted 38 vessels for detention, while 41 vessels were detained upon the request of local courts. Furthermore, a total of 32 vessels of various types were subject to auction, resulting in a total transaction amount of CNY 246,345,000, with an average premium rate of 22%. This total includes the auction of 2 foreign-registered vessels and vessels registered in Hong Kong, Macau, or Taiwan, which collectively amounted to CNY 34,600,000. In addition, 23 vessels were auctioned by local courts, with a total transaction amount of CNY 57,225,000.
B. General Characteristics and Trends of Cases
An analysis of the number of cases, case types, and litigation parties reveals several overarching characteristics and trends in cases related to the shipbuilding industry:
1. The number of cases is relatively stable, and the geographical distribution is relatively concentrated
In terms of case volume, our court received 755 new cases related to the shipbuilding industry over three and a half years. Excluding over 80 related cases triggered by a dispute involving ship material and spare parts supply in 2021, the annual average number of new cases was around 200. This places our court at the forefront of maritime courts nationwide.[5]
Regarding geographic distribution, 215 cases involved the Taizhou region[6], while 155 cases involved the Nantong region, constituting 28.5% and 20.5% of the total, respectively. In the category of ship construction contracts, 99 cases involved the Taizhou region, and 100 cases involved the Nantong region, collectively representing 58.5% of all newly received cases related to ship construction disputes in our court over three and a half years. This distribution aligns with the concentration of shipbuilding industry clusters in the Jiangsu Nantong-Taizhou-Yangzhou region. Out of the 755 newly received cases, 383 disputes pertained to ship material and spare parts supply contracts, accounting for 50.7% of the total, while 340 disputes were related to ship construction, constituting 45.0% of the total.
2. Emergence of New Types of Cases and Growing Importance of Judgement Rules
Among the 755 newly received cases, 207 cases involved disputes related to the sale of ship critical components and specialized items. These cases covered items such as ship steel plates, ship engines, and hatch covers designed exclusively for maritime vessels or shipbuilding projects. This illustrates the well-established foundation of the ship-related equipment and component industry in our province.
Concurrently, there has been an expansion in the types of case subjects, showcasing more diversity and modernization. For example, in a case involving a dispute between Qingdao Diyuan Petroleum Platform Engineering Co., Ltd., and Huisheng (Nantong) Heavy Industry Co., Ltd. over a ship construction contract, the subject matter of the case was the electrical and instrument engineering of a floating liquefied natural gas (FLNG) production, storage, and offloading unit (FLNG). FLNG is a critical maritime engineering equipment for offshore natural gas resource development, characterized by its complexity, high cost, and substantial added value among maritime gas equipment. In another case involving Honghua Marine Oil and Gas Equipment (Jiangsu) Co., Ltd., and Shengzhi Wind Power Technology (Shanghai) Co., Ltd., which concerned a ship modification contract and equity transfer dispute, the subject matter was a self-elevating wind power maintenance platform used for offshore wind turbine testing and maintenance. This type of equipment is capital and technology-intensive in nature. Disputes involving such subject matters often come with complex financing structures, and judicial rulings in such cases typically garner considerable attention from various stakeholders.
3. Diverse Range of Litigants, Primarily Comprising Small and Medium Enterprises, Highlighting the Need for Enhanced Risk Management
In terms of the parties involved, among the 755 newly filed cases, 539 cases, or 71.4%, involve defendants who are small and medium-sized enterprises. Cases involving individual defendants account for 238 cases, or 31.5%, while those involving large enterprises represent 89 cases, or 11.8%.[7] This pattern reflects, on the one hand, that the impact of the pandemic has made small and medium-sized shipbuilding and ocean engineering companies more susceptible to disputes during their business operations. On the other hand, it is attributable to the nature of shipbuilding and ocean engineering companies, characterized by a decentralized and modular production system. When shipbuilding companies undertake orders for complete vessels or ocean engineering equipment, they often subcontract the production of certain auxiliary components to small and medium-sized enterprises, or delegate tasks such as electrical and mechanical installations and ship coatings to smaller firms. This interconnected production process can lead to a series of disputes stemming from issues related to the supply of auxiliary components or subcontracted engineering work.
Regarding the monetary values involved in these cases, the total claim amount of the 755 newly filed cases is approximately CNY 1.37 billion. The largest individual case has a claim amount of around CNY 52 million, while the smallest case involves a claim of just CNY 10,000. Cases with claim amounts below CNY 100,000 account for 163 cases, or 21.6% of the total. Those with claim amounts ranging from CNY 100,000 (exclusive) to CNY 1 million comprise 365 cases, or 48.3%. Cases with claim amounts from CNY 1 million (exclusive) to CNY 5 million total 173 cases, or 22.9%. Cases with claim amounts from CNY 5 million (exclusive) to CNY 10 million amount to 30 cases, or 4.0%. There are 24 cases, or 3.2%, with claim amounts exceeding CNY 10 million.
II. Strategies for Supporting and Safeguarding the Shipbuilding Industry
A. Targeted Assessment of Industry Growth Demands, Continual Enhancement of Maritime Legal Services
In recent years, the layout of Jiangsu's shipbuilding and ocean engineering industry has seen continuous optimization. Key industrial zones have been established, including the Nantong Economic Development Zone's Marine Engineering, Shipbuilding, and Heavy Equipment Manufacturing Base, Chongchuan District's Shipbuilding and Ocean Engineering Industry Base, Wuxi National High-Tech District's China Shipbuilding Marine Detection Technology Industry Park, Yancheng Dafeng's Marine Engineering Special Equipment Industry Park, Sheyang Wind Power Industry Park, Dafeng Wind Power Industry Park, and Zhenjiang's Special Shipbuilding and Ocean Engineering Equipment Specialized Industry Base. In October 2022, the Tongtaiyang Marine Equipment and High-Tech Ship Cluster was selected as a national advanced manufacturing cluster, as Jiangsu strives to create a world-class shipbuilding and ocean engineering advanced manufacturing cluster.
To comprehensively understand the maritime judicial requirements of Jiangsu's shipbuilding and ocean engineering industry, the Nanjing Maritime Court annually conducts extensive visits and research activities, visiting over 30 shipbuilding companies, marine equipment companies, and relevant industry associations. These efforts provide an in-depth understanding of the industry's development direction, the challenges it faces, and difficulties encountered during its development. The court has used this information to fine-tune its maritime judicial services.
In response to the need for transformation and upgrading in the ship and ocean engineering industry, the NMC has developed and implemented the "Opinions on Fully Leveraging the Role of Maritime Trial to Provide Judicial Services and Guarantees for the Re-start of the Construction of New Jiangsu Province Featuring Strong Economy, Wealthy People, Beautiful Environment and a High Degree of Social Civilization." Making clear that "promoting the transformation and upgrading of the industrial chain of modern shipbuilding and ensuring the healthy development of shipbuilding" as a focal point of maritime judicial services. In response to the new situation of high-level opening-up and the development of the ocean economy, NMC introduced "Judicial Measures to Serve and Guarantee the High-Quality Implementation of the Regional Comprehensive Economic Partnership (RCEP)" and "Several Measures to Serve the High-Quality Development of the Marine Economy," providing specialized provisions to promote the development of the shipbuilding industry and offer robust judicial support for the comprehensive competitiveness of the ship and ocean engineering industry. To better integrate the ship and ocean engineering industry into the development strategy of the Yangtze River Delta, NMC jointly signed the "Yangtze River Delta Maritime Judicial Cooperation Agreement" and formulated the "Cooperation Opinions on Serving the High-Quality Development of the Shipbuilding Industry in the Yangtze River Delta Region." These initiatives aim to consolidate regional maritime judicial cooperation efforts continually.
B. Meticulous Adjudication of Complex Cases, Legal Safeguarding of Corporate Rights and Interests
In light of the complexity of maritime cases in the Tongtaiyang region, an area known for its flourishing shipbuilding and ocean engineering industry, the Nanjing Maritime Court established specialized collegiate benches within its Nantong and Taizhou Branches. These benches are responsible for the centralized adjudication of shipbuilding and ocean engineering cases from the Tongtaiyang region, ensuring that case judgments are professionally efficient and uniformly applied.
In a particular case involving a claim for compensation under a shipbuilding insurance contract, the insurance company argued that the shipboard fire accident should be the responsibility of the construction company that installed the "desulfurization tower, outboard pipes, and exhaust pipes" on the vessel in question. To ascertain the cause of the shipboard fire accident and the responsible party, the court conducted multiple site inspections and inquiries to gather information. Based on a thorough legal examination of the qualifications of construction personnel, the standardization of the construction process, and the implementation of fire prevention measures, the court concluded that the construction company had fulfilled its duty of care and should not bear any liability. This judgment was unanimously accepted by both parties involved.
To strengthen the intellectual support for specialized adjudication, the Nanjing Maritime Court has formed a team of judges specializing in shipbuilding purchase and sale contracts. They conduct research on common and complex issues encountered in case adjudication. One of the articles resulting from this research, titled "Research on Complex Legal Issues in Shipbuilding Contracts Disputes," was published in the "Law Application" journal and cited in several academic articles. The court has also recruited over thirty experts from the shipbuilding industry, who have been included in a consultative expert database, contributing their expertise to resolve the technical challenges associated with ship design, ship construction, and other specialized aspects of fact-finding.
C. Advancement of Diverse Dispute Resolutions, Contributing to an Optimal Legal Business Environment
Given that parties involved in shipbuilding and ocean engineering industry disputes are often commercial entities, they tend to favor quick dispute resolution methods such as mediation and arbitration. In line with an inclusive and open judicial philosophy, the Nanjing Maritime Court has signed cooperation framework agreements with the China Maritime Arbitration Commission's Shanghai headquarters and the Nanjing Arbitration Commission. It has established 44 diversified dispute resolution points along the coast, the Yangtze River, and the Grand Canal, facilitating effective connections between litigation, arbitration, and mediation. In completed shipbuilding and ocean engineering dispute cases, 41% were resolved through mediation or withdrawal of claims. In an international shipbuilding contract dispute, a Norwegian shipowner willingly changed the dispute resolution method from London arbitration to litigation at the Nanjing Maritime Court, applying Chinese law. The Nanjing Maritime Court resolved this international dispute, which had lasted over five years, in just 27 days, thereby earning the trust of the parties involved in China's maritime judiciary. This case was selected as one of the top ten typical maritime trial cases in China in 2020.
Due to the lengthy shipbuilding cycle, significant capital requirements, and high market volatility, shipbuilding contracts often face impasses related to price payments and vessel deliveries. The Nanjing Maritime Court fully utilizes the procedural advantages of maritime compulsory orders, known for being "quick, simple, and efficient," to expedite the performance of shipbuilding contracts. In one dispute regarding a shipbuilding contract for processing external materials, and with the shipowner providing sufficient guarantees, the court, on the one hand, issued a maritime compulsory order requiring the shipyard to deliver the vessel promptly. On the other hand, it actively facilitated mediation between the parties, resulting in a comprehensive solution within just three months. This solution covered ship registration and shipbuilding payment matters, maximizing the interests of both the shipyard and the shipowner. It successfully resolved a dispute that had persisted for nearly two years, earning high praise from the involved enterprises.
D. Proactive Expansion of Judicial Functions, Ensuring Standardized and Healthy Corporate Growth
The proactive judicial philosophy runs through the entire maritime trial and execution process. Focusing on the issue of insufficient risk prevention awareness among enterprises, the court has organized the compilation of "Legal Risk Advisory Manuals for Industries Such as Shipping, Ports, Logistics, and Shipbuilding" and "Legal Risk Advisory Manuals for Ship Management and Transport Operations." The court has published five typical cases related to the shipbuilding and ocean engineering industry, offering judicial suggestions to two shipbuilding and ocean engineering companies. These suggestions guide and assist enterprises in risk prevention and business standardization.
During the pandemic, to help companies overcome difficulties, the court promptly introduced the "Twelve Measures to Support the Development of Maritime Enterprises in Ports and Navigation." These measures optimized judicial strategies for stable enterprise development in four areas: facilitating the acceptance of maritime cases, reducing the cost of safeguarding the rights of maritime-related companies, carefully adjudicating cases related to the pandemic, and creating favorable conditions for resuming work and production. In the case of a shipbuilding company in Taizhou that was once among the top ten domestic private shipbuilding companies but faced bankruptcy due to a broken capital chain, the court creatively adopted the execution method of delivering the vessel and obtaining ship payment to help the company revive its capital and successfully restructure. In the case of a ship repair company in Nantong, which had been operating for more than 20 years without any litigation cases, but encountered operational difficulties due to the pandemic and fluctuations in the international shipping market, triggering a series of debt disputes, the court adhered to the principle of goodwill and civilized execution. It guided the enterprise to use debt-for-equity swaps and execution guarantees to comprehensively resolve 17 disputes. Through judicial means, it protected the industrial supply chain and helped the enterprise alleviate its debt pressure, supporting the reform and development of private shipbuilding companies. This case was selected as one of the top ten typical maritime trial cases in China in 2021.
III. Legal Issues and Recommendations Pertaining to Shipbuilding Industry Disputes
The Nanjing Maritime Court conducted a comprehensive review of shipbuilding and ocean engineering industry cases filed and tried from 2020 to the first half of 2023. Based on the summarization of issues reflected in these cases,[8] the following opinions and suggestions are presented:
A. Strengthening Rights Protection Awareness and Cautious Drafting of Shipbuilding Design Contracts
In the cases the court has handled, such as disputes related to ship design, and quality issues in shipbuilding contracts, the following disputes frequently arise: Firstly, the terms of technology licensing, scope of use, and transfer conditions are often ambiguous. To protect technology and increase income, technology licensees often impose restrictions on technology applications through framework agreements. However, disputes frequently arise due to limitations on technology transfer and the boundaries of technology licensing. Secondly, ship design problems are often intertwined with disputes over ship quality. Determining whether there are design defects in a vessel often requires assessment by professional organizations. The cost of protecting the rights of the parties involved is high. Additionally, compensation for design defects or errors can be several times the contract value, leading to operational difficulties for some private design companies. It is important to note that technical regulations related to ship design and construction may change during the ship's construction process. If the keel installation date of the ship is delayed, resulting in the ship design no longer conforming to the newly enacted regulations, it often leads to disputes.
Regarding ship design and technical standards for ships, the following suggestions are provided by the court:
1. It is recommended that shipbuilding and ocean engineering companies clearly define the scope of authorized technology use. These companies should fully understand the risks associated with insufficient authorization and attach importance to the preparation of technology contract texts. Clear agreements should be made regarding technology usage, transfer conditions, and technical standards, which should then be strictly adhered to. This helps prevent technology infringement. Furthermore, companies should continually enhance their research and development capabilities to fill technical gaps and authorization voids, thereby increasing their competitiveness in the market.
2. It is recommended that ship design firms and construction companies strictly adhere to the standard drawing approval process. They should also pay attention to the technical standards stipulated in shipbuilding contracts. The ship design and construction processes should follow the strict approval processes of classification societies and ship inspection bureaus, ensuring that construction is carried out according to the drawings and processes.[9] If shipowners make new demands during the shipbuilding process and require changes to the drawings, it should only be done with the approval of the ship inspection organization. In such cases, shipowners, shipbuilding companies, and design firms should jointly confirm the changes in the drawings, account for the additional or reduced items resulting from the changes, and take into account the potential risk of delays in the delivery time due to changes in the drawings. It is essential to note that shipbuilding regulations include both statutory technical standards and the technical requirements and standards agreed upon by the parties involved in the contract. Ship design firms and construction companies should pay special attention to the agreed-upon technical standards proposed by the contracting parties, which are often higher than statutory technical standards. These standards should be clearly specified in the contract and adhered to accordingly.
B. Reinforcing Awareness of Risk Prevention by Thoughtful Consideration of Market Risks and Self-Regulation Capabilities
In the cases of shipbuilding performance disputes handled by our court, lawsuits often occur due to the influence of the industry chain and market fluctuations. They have collectively highlighted the following issues: Firstly, market fluctuations and extended performance periods frequently lead to contract breaches. The lengthy performance period and significant market fluctuations are the main causes of disputes in shipbuilding. Uncertainties related to raw material supply, personnel allocation, fund raising, natural climate conditions, and government regulations can all contribute to project delays for small and medium-sized shipbuilding enterprises. Secondly, the breach of shipbuilding contracts can also affect the performance of auxiliary product contracts. Given the long and closely interconnected nature of the shipbuilding industry, contract breaches or terminations in shipbuilding can significantly impact suppliers of ship auxiliary products.[10]
Regarding the performance of shipbuilding contracts, our court provides the following suggestions:
1. It is recommended that shipbuilding and ocean engineering companies carefully consider industry risks and establish contract terms reasonably. These companies should take into account risks such as fluctuating raw material prices, shipowners abandoning ships, or equipment supplier breaches, and focus on risk prevention. It is important to note that in judicial practice, price fluctuations are often considered normal business risks. Contract parties requesting changes or terminations of contracts due to changes in market conditions that cause them unfairness in continuing to fulfill the contract are generally difficult to be supported by the courts. There are a few practices worth considering: Firstly, setting up risk buffer or price adjustment clauses in contracts to reduce the risk of fluctuating construction costs. For instance, the contract could specify that "if raw material prices increase beyond a certain extent, the contracting party compensates the excess amount; conversely, if raw material prices decrease beyond a certain extent, the building party reduces the costs by a certain amount." This helps offset anticipated profits against potential losses, reducing the risk of shipbuilding performance. Secondly, it's advisable to conduct a preliminary assessment of equipment suppliers' performance capabilities and credit status. Recognizing that supply problems for significant equipment may affect critical phases such as drawing reviews, subsequent ship construction, and inspections, it's recommended to pre-select suppliers for critical marine equipment.
2. It is recommended that shipbuilding and ocean engineering companies accurately record significant shipbuilding milestones and promptly communicate and confirm factors affecting project timelines. These companies should accurately and comprehensively preserve critical milestones stipulated in shipbuilding contracts, such as drawing approval dates, ship construction commencement dates, drawing modification dates (if any), sea trial dates, inspection and acceptance dates, especially for inland vessels.[11] In the event of disputes, these milestones will affect the determination of whether there is a breach of contract and the allocation of responsibilities. Moreover, for factors specified in the contract that may affect project timelines (e.g., natural climatic factors[12]), accurate recording and confirmation with the contracting party are essential to avoid disputes over project timelines.
C. Enhancing Safety Production Awareness and Strict Enforcement of Safety Production Responsibilities
In the cases related to shipbuilding and production accidents handled by our court, several issues have been consistently highlighted: Firstly, non-standard subcontracting management often leads to accidents. Shipbuilding companies frequently subcontract tasks involving high-risk and challenging operations like pipeline manufacturing and installation, structural construction, welding, outfitting, and painting. When safety management regulations in the factory are lacking or subcontractors do not strictly adhere to the standards, production accidents are more likely to occur. Secondly, compensation claims and wage payments often lead to conflicts. Due to factors such as the lengthy duration of commercial insurance payouts,[13] personal injury assessments, and disability classifications, injured workers typically face difficulties in receiving compensation. Subcontracted work in shipbuilding generally involves labor-intensive tasks where labor costs are a significant portion of the total cost. Subcontractors often heavily rely on engineering payment and employee salary settlements. Disputes can easily arise when there are disagreements over engineering payment settlements and project quantity confirmation, which can involve issues related to labor rights and protection.
Regarding subcontract management and safety in shipbuilding, our court provides the following recommendations:
1. It is recommended that shipbuilding and ocean engineering companies emphasize their primary responsibilities, improve supervision and management of subcontracted work, and purchase insurance to mitigate risks. In legal practice, the court evaluates whether shipbuilding companies have fulfilled their supervision, coordination, and management responsibilities for the overall safety of the entire factory area based on the provisions of construction contracts and safety management agreements.[14] To ensure safety in production and manage subcontracted work effectively, shipbuilding and ocean engineering companies can take the following measures to reduce risks: Firstly, enhance safety management for subcontractors, strengthen the allocation of safety management personnel, establish and improve mechanisms for identifying and addressing safety hazards, routinely conduct safety hazard inspections, and enhance the overall safety performance of the company. Secondly, ensure proper insurance coverage for actual construction personnel. In cases where there are changes in actual construction personnel, companies should promptly contact insurance companies to adjust the list of insured persons. In the event of accidents, on-site evidence should be secured and the insurance company should be notified promptly.
2. It is recommended that subcontractors develop an awareness of evidence and maintain crucial documentation. In legal practice, subcontractors often find it difficult to prove the facts, such as increased engineering quantities and additional engineering costs beyond the "general contract price," because they fail to collect and maintain relevant evidence. The proportion of their claims for increased engineering costs being supported by the court is often low. Therefore, in the shipbuilding construction process, both parties should focus on collecting and maintaining evidence materials that reflect the quantity of engineering, construction progress schedules, construction orders, especially correspondence, meeting minutes, certificates, phone records, etc., related to the change of engineering tasks during the performance process, to effectively safeguard their own rights in case of disputes.
.D. Reinforcing Awareness of Modern Finance and Exercising Prudent and Rational Choices in Financing Channels
In the shipbuilding financing disputes and equipment supply payment recovery cases handled by our court, the following issues have been consistently brought to attention: Firstly, small and medium-sized private enterprises continue to face difficulties in financing. Commercial banks, in their risk mitigation efforts, often prefer state-owned shipbuilding enterprises with strong creditworthiness and a larger scale. Small and medium-sized private shipbuilding companies have to seek alternative ways to secure funds, often by using financing methods with names such as "joint contracting" or "equipment procurement," which, in reality, involve borrowing funds. In the shipbuilding industry, various financing models have emerged, including shipbuilding loans, financing leases, equity financing, and private borrowing. It's worth noting that many small shipyards, in their pursuit of orders, often provide advance funding for ship construction on behalf of ordering parties, and this funding typically comes from private financing with relatively high interest rates. If ordering parties fail to make payments in a timely manner or disputes arise in shipbuilding contracts, the high-leverage and high-interest-rate financing method can pose increased risks. Secondly, financing relationships involve numerous parties, complex legal relationships,[15] and there is a risk of misappropriation of shipbuilding financing funds. At the same time, the financial condition of shipbuilding companies directly affects equipment suppliers. Some equipment suppliers, when they lack confidence in the financial condition of the shipbuilding companies, demand advance payment on the grounds of refusing to supply equipment, thereby exerting additional pressure on the shipbuilding company's financial chain.
Regarding shipbuilding financing and accounts receivable management, our court provides the following recommendations:
1. We suggest that companies closely follow the relevant financing policies issued by the Jiangsu Provincial Government. In 2022, the Jiangsu Provincial Government introduced a series of policy measures to enhance the competitiveness of the shipbuilding and offshore equipment industry. These measures include increased financial and fiscal support, the implementation of a combination of tax reduction and fee reduction policies, and strengthened financial special fund support. For example, the provincial government requires the establishment of a shipbuilding financing pledge system and the opening of a "green channel" for pledge registration. They encourage eligible shipbuilding and offshore equipment companies to expand low-cost financing channels through methods such as IPOs, stock offerings, and bond issuances. For companies that meet the criteria, the proportion of deductible research and development expenses was increased from 75% to 100%. We recommend that shipbuilding and ocean engineering companies stay informed about and follow relevant policies and choose suitable financing channels accordingly.
2. We recommend that financial institutions, shipowners, and guarantors jointly oversee shipbuilding-specific financing funds. To reduce risks, providers of funds often stipulate that the financing funds are to be used exclusively for the construction of specific vessels.[16] These funds are characterized by a specific purpose from the outset, and any disputes or misappropriation can have a cascading effect due to the multitude of legal relationships involved. We suggest that all relevant parties exercise joint oversight to ensure that the earmarked funds are used as intended.
3. We recommend that suppliers carefully assess the assets of their trading partners and manage equipment accounts receivable prudently. Ship equipment suppliers should exercise caution when assessing the business and asset conditions of their trading partners. They should not disregard financial risks solely based on long-term business relationships. However, given the strict construction sequence in shipbuilding, the suspension of the supply of critical equipment can disrupt the shipbuilding process, leading to significant losses. Therefore, equipment suppliers, when exercising the right to suspend performance due to insecurity, should meet the statutory requirements for its establishment.[17] Suspending performance without clear evidence, demanding advance payment of the full price, or refusing to supply the equipment may entail a risk of breach of contract.
E. Strengthening Environmental Awareness and Actively Promoting Green Transformation and Industry Development
In cases related to ship repair and ship dismantling that have been heard in our court, the following issues have been highlighted: Firstly, unauthorized and irregular operations are prevalent in the ship repair and dismantling businesses. This is especially evident in ship dismantling, where illegal ship breaking occurs. For instance, dismantling companies engage in ship breaking without clear ownership of the vessels. Some enterprises perform ship breaking without obtaining the required pollution discharge permits. Additionally, the regulation of the disposal and dismantling of some old vessels is inadequate, leading to frequent occurrences of illegal ship breaking. Secondly, ship repair and dismantling activities are closely related to environmental pollution prevention and control. However, some small and medium-sized private enterprises lack adequate environmental protection measures and essential pollution control equipment.
Regarding ship repair and ship dismantling, our court offers the following recommendations:
1. We recommend that repair companies and shipowners sign detailed contracts to standardize business undertakings. Delays in repair payments by shipowners and non-standard operations by small and medium-sized ship repair companies[18] are common causes of ship repair disputes. Therefore, when entering into ship repair contracts, it is essential to clarify and specify aspects such as repair cost standards, repair projects, repair timelines, repair standards, payment settlements, and liability for breach. Particularly, it is advisable to establish clear agreements regarding the ownership and disposal of old components and scrap steel removed during ship repair to avoid subsequent disputes.[19]
2. We suggest that environmental protection authorities further strengthen environmental pollution prevention and control in ship dismantling, guiding companies to transition and upgrade their eco-friendly processes. Ship dismantling is considered a high-pollution industry, and companies engaged in ship dismantling should adhere to relevant laws, administrative regulations, local regulations, and administrative rules. Business operations must comply with regulations governing the safe and environmentally friendly dismantling of scrap ships, as well as national environmental standards and specifications.[20] Before the dismantling of ships, inspections should be conducted to verify vessel scrappage certificates and property rights. After dismantling is complete, appropriate dismantling certificates should be issued promptly. We recommend that environmental protection authorities enhance their supervision and management of ship dismantling, encouraging companies to align with the trend of green ship repair and ship dismantling. This includes accelerating the upgrade and transformation of eco-friendly environmental protection technology processes. The use of more advanced processes for handling waste generated during ship repair and dismantling, such as garbage, residual oil, wastewater, flammable and explosive materials, should be gradually implemented to achieve a green transformation.
IV. Typical Cases
Case 1:
Utilizing the Advantages of Maritime Injunction System to Crack the Deadlock of Shipbuilding Contract Performance
— Application for the Maritime Injunction by Jangsu Yuanyi Ship Service Co., Ltd.
Case Summary:
In May 2020, Yuanyi Ship Service Co., Ltd and Meiermeitu Shipbuilding Co., Ltd. entered into a Shipbuilding Contract, stipulating that Meiermeitu Shipbuilding Co., Ltd. would construct a large vessel in 8 months by processing materials. The shipbuilding cost was calculated per ton, with a rate of CNY 2,980 per ton. Various factors during the shipbuilding process resulted in serious delays in the construction period. After negotiation, Meiermeitu Shipbuilding Co., Ltd. provided a "Shipbuilding Contact Reply" letter, committing to complete the ship's launch before July 10, 2022, and complete the handover procedures before August 10, upon receiving the additional payment of CNY 1.7 million from Yuanyi Ship Service Co., Ltd.. The ship construction payment shall be settled in accordance with the contract. On July 4, 2022, Yuanyi Ship Service Co., Ltd. paid CNY 1.7 million to Meiermeitu Shipbuilding Co., Ltd. Meiermeitu Shipbuilding Co., Ltd. completed the ship inspection on October 27, 2022, and obtained the certificate of ship's inspection. However, they withheld the ship inspection certificate on the ground that Yuanyi Ship Service Co., Ltd. failed to pay shipbuilding fee and refused to assist in handling ship registration procedures. Yuanyi Ship Service Co., Ltd. applied to Nanjing Maritime Court for a maritime injunction and provided a guarantee, requesting the court to order Meiermeitu Shipbuilding Co., Ltd. to deliver the ship, ship inspection certificate, and assist in processing ship ownership registration. Later, Yuanyi Ship Service Co., Ltd. withdrew its request for delivery of the vessel in view of its actual control of the vessel.
Judgment:
After examination, the court After examination, the court ruled to grant the petitioner, Yuanyi Ship Service Co., Ltd.'s application for a maritime injunction. Meiermeitu Shipbuilding Co., Ltd. submitted a reconsideration application, but the court held that the failure of Meiermeitu Shipbuilding Co., Ltd. to deliver the ship inspection certificate and register the ownership of the ship in accordance with the agreement had resulted in the inability of the ship built by Yuanyi Shipping Co., Ltd. with huge investment to operate normally, which had caused real and imminent damage to Yuanyi Ship Service Co., Ltd.. Meiermeitu Shipbuilding Co., Ltd. asserted its right to retain the ship based on unpaid shipbuilding costs, which did not conform to legal regulations or the agreement between the parties. The dispute regarding shipbuilding costs could be resolved separately. Therefore, the court rejected the reconsideration application of Meiermeitu Shipbuilding Co., Ltd. and upheld the original ruling.
Significance:
The long construction period, large capital demand, and high market risk of shipbuilding make it easy for parties involved to dispute issues such as ship price, ship delivery, and ship quality during the performance of the contract, resulting in the construction of ships that cost huge amounts of money but cannot be put into use in a timely manner. In this case, even though the shipowner had effectively taken control of the vessel, the shipyard refused to deliver the ship inspection certificate and handle the ship registration procedures, the ship could not operate normally, which not only greatly affected the legitimate rights and interests of the shipowner, but also directly transmitted the legal risks to the downstream of the ship transaction chain, resulting in a series of compensation disputes. Faced with the complex scenario, the court gave full play to the procedural advantages of maritime injunctions, which are "short, flat and fast", and ordered the shipyard to assist the shipowner in handling the relevant ship registration procedures. In order to protect the shipyard's claim for ship construction funds, the court required the shipowner to provide sufficient guarantees and informed the shipyard of its right to make separate claims, in order to properly balance the interests of both parties. In the face of the deadlock in the performance of the shipbuilding contract, the court adhered to innovation and put aside the disputes between the two parties, speeding up the turnover of the ship delivery. This is an innovative measure of judicial assistance to the high-quality development of the shipbuilding industry. At the same time, the court facilitated the mediation throughout the dispute resolution process, and finally reached a package solution on the handling of the ship registration certificate, the payment of the remaining ship construction funds and other matters, which completely resolved the disputes between the two parties.
Case 2:
Efficiently Resolving Disputes Related to Foreign Ship construction to create the International Maritime Judicial Priority
— BOA BARGES AS vs. Nanjing Yichun Shipbuilding Co., Ltd. Dispute over International Shipbuilding Contract
Case Summary:
On April 18, 2007, Norwegian shipowner BOA OFFSHORE AS, ordered ships from Nanjing Yichun Shipbuilding Co., Ltd. and signed three Semi-Submersible Heavy-duty Deck Barge Contracts with a total price of nearly US$50 million. The contracts agreed that disputes shall be arbitrated in London and governed by English law. On May 17, 2010, Norwegian shipowner BOA BARGES AS, as the new purchaser, assumed the rights and obligations of the original three contracts. With the occurrence of the dispute over the contract performance, both parties decided to terminate the Contract on December 8, 2015, but failed to reach an agreement on a series of issues after the termination of the contract. By the beginning of 2020, the dispute cannot be solved by negotiation due to its escalation. Thus, both parties shall apply to the London Court of International Arbitration for arbitration in accordance with the relevant contract to solve the dispute. The outbreak of COVID-19 in February 2020 had a great impact on international arbitration. Especially with the increasingly severe situation of global epidemic, many European countries adopt entry restrictions and other prevention and control measures. Based on various factors, both parties signed the Supplementary Agreement on May 16, which agreed to submit the dispute to Nanjing Maritime Court for adjudication and apply Chinese laws. On June 11, the plaintiff BOA BARGES AS entrusted lawyers with a lawsuit to Nanjing Maritime Court, requesting the defendant Nanjing Yichun Co., Ltd. to return the advance payment and the accrued interest.
Judgment:
At the acceptance of this case, it was found through examination that the power of attorney of the plaintiff's attorney shall be notarized by the Norwegian notary office and authenticated by the embassy of the People's Republic of China in Norway. However, due to the influence of the pandemic situation, the plaintiff failed to submit the authenticated notarial documents to the court. In view of the actual impact of the pandemic on notarization and authentication and the complete specifications of other relevant filing materials of the case, and the plaintiff's attorney promised to complete the authenticated notarial documents before the trial, Nanjing Maritime Court decided to file the case first, allowing the attorney to delay submitting and authorization procedures. In the process of trial, in order to reduce the risks brought about by the flow and gathering of people during the pandemic, the court, on the basis of carefully examining the evidence materials involved in the case, facilitated the parties to reach a mediation agreement by handling the case through the Internet, and concluded the case in 27 days.
This case is an international ship construction contract dispute, the foreign party took the initiative to alter the dispute resolution method from arbitration in London to filing a lawsuit to Nanjing Maritime Court and applying Chinese law, which is based on not only the trust in China's efforts to build the International Maritime judicial center and optimize the judicial environment, but also the recognition of the Nanjing Maritime Court's service to ensure the construction of "the Belt and Road Initiative" and actively build a preferred place for maritime litigation. Facing the situation where the plaintiff was unable to submit the notarization documents due to the pandemic's impact, the Nanjing Maritime Court, in line with the " Guiding Opinions of the Supreme People's Court on Several Issues Concerning the Proper Trial of Civil Cases Involving COVID-19," allowed foreign parties to extend the submission of notarization documents, effectively expediting the resolution of the dispute. In this case, the people's court effectively employed online dispute resolution methods against the background of the pandemic. Through organizing multiple rounds of online negotiations, the case was finally resolved through mediation within 27 days after being filed, successfully settling a five-year-long international shipbuilding contract dispute，effectively helping enterprise overcome difficulties，fully demonstrating the role of the judicial system in promoting development, maintaining stability, and safeguarding people's livelihoods, demonstrating the superiority of the Chinese socialist judicial system to the international community.
Case 3:
Determining Force Majeure During Ship Construction and Proactively Mitigating Operational Risks of Shipyards
- Dispute Over Shipbuilding Contract Between China Ping An Property Insurance Co., Ltd. Jiangsu Branch and Yangzhou Longhe Shipbuilding Co., Ltd.
Case Summary:
In August 2019, Yangzhou Longhe Shipbuilding Co., Ltd. (hereinafter referred to as "Longhe"), as the builder, and Hengfa Company, as the owner, entered into a "Shipbuilding Processing Order Contract" to commission the construction of the vessel "Hengfa 18." Hengfa Company had insured the ship construction insurance at China Ping An Property Insurance Co., Ltd. Jiangsu Branch. In April 2021, the region where Longhe is located experienced severe winds, causing the overturning of the gantry crane onto the under-construction "Hengfa 18." This incident resulted in rope breakage and damage to the ship. China Ping An Property Insurance Co., Ltd. Jiangsu Branch filed a lawsuit with the Nanjing Maritime Court, seeking a judgment that Longhe should compensate for the loss of over CNY 650,000 and corresponding interest. Longhe argued that the incident in question, caused by a sudden and violent gust of wind, constituted force majeure and should be entirely exempt from compensation liability.
Judgment:
Upon examination, the court determined that whether accidents resulting from sudden natural disasters, such as severe winds, could be accurately foreseen and thus be deemed as force majeure should be assessed based on the general foreseeability capacity of ordinary people. This assessment should also consider weather forecasts, actual wind force, and the measures that the parties could take. In this case, although the parties could foresee the severe wind on the day based on the weather forecast, but the subsequent occurrence of a wind force exceeding the maximum value predicted in the forecast was still unforeseeable. Longhe had taken measures that could prevent ordinary strong winds, yet the accident occurred, causing damage. In such a situation, where no other breach or fault existed, it should be determined that the objective circumstances were unavoidable and insurmountable. Therefore, Longhe's compensation liability should be entirely exempted. Based on this, the court lawfully rejected all of China Ping An Property Insurance Co., Ltd. Jiangsu Branch's claims. After the judgment, neither party appealed.
Significance:
Jiangsu's shipbuilding enterprises，located in the middle and lower reaches of the Yangtze River, are often affected by the environment and climate，sudden strong winds in summer have caused damage to ships built in shipyards. In judicial practice, as weather forecasts become increasingly precise, it becomes more difficult for shipbuilding companies to prove the unforeseeability of accidents caused by invoking force majeure. Additionally, disputes often arise regarding the extent of foreseeability, the allocation of the burden of proof, and other practical issues. This case is a typical case of invoking force majeure to claim exemption from liability. During the trial, the court affirmed that the foreseeability of accidents caused by strong winds should be determined based on the cognitive capacity of an ordinary person. This reasonably allocation of the burden of proof helps to establish that shipbuilding companies can be deemed to have encountered force majeure when they can prove that they have taken reasonable and prudent wind prevention measures and yet the accident could not be avoided. This resolution effectively mitigates the systemic operational risks that natural disasters might pose to shipbuilding enterprises, protects the legitimate rights and interests of shipbuilding companies in accordance with the law, and serves as a regulatory example for handling such cases.
Case 4:
Legally Recognizing Priority Payment Rights - Resolving Disputes over Shipbuilding Advances
- Taizhou Hailing District Hengxing Shipyard vs. Mr. Huo, Mr. Guo, and Henan Changtai Container Shipping Co., Ltd. Shipbuilding Contract Dispute
Case Summary:
In 2014, Mr. Huo entered into a shipbuilding contract with Hengxing Shipyard, stipulating the construction of a bulk cargo ship through the supplied material processing method. After completion of the ship's construction, Mr. Huo and Mr. Guo mortgaged the ship to the Luohe Branch of China Post Savings Bank and obtained a loan of CNY 1.3 million. When settling the ship's payment in 2016, Mr. Huo and Mr. Guo issued promissory notes to Hengxing Shipyard. These notes outlined the agreement to pay the remaining CNY 150,000 for the ship's construction before the shipyard delivered the vessel. Additionally, the notes included an arrangement regarding the shipyard's advance payment of CNY 900,000, which was to be repaid over a three-year period with a monthly interest rate of 1.2%. After the promissory notes were issued, Mr. Huo only paid CNY 38,000. He subsequently lodged complaints with government authorities, citing quality issues with the ship as the basis. In response, Hengxing Shipyard retained possession of the ship. As Mr. Huo and Mr. Guo failed to repay the loan from the Luohe Branch of China Post Savings Bank, the bank applied for the detention and auction of the ship. Simultaneously, Hengxing Shipyard filed a lawsuit demanding Mr. Huo and Mr. Guo to return the shipbuilding payment of CNY 1.02 million and sought confirmation of their priority payment rights for the ship auction proceeds.
Judgment:
After deliberation, the court held that Hengxing Shipyard had completed the construction of the vessel in 2015 and had passed both the entry inspections conducted by the Anhui Maritime Safety Administration and the Henan Maritime Safety Administration, which declared the vessel met the standards. Mr. Huo, as the shipowner, had been actively involved throughout the ship's construction process. Despite raising quality concerns with multiple maritime authorities, investigations by these relevant departments concluded that the issues reported did not affect navigation safety or ship quality. Hengxing Shipyard's exercise of the right of retention was legitimate. Mr. Huo's claim that he did not need to pay the final ship construction installment due to alleged quality defects in the vessel was not justified. In the first-instance judgment, the court ruled that Mr. Huo and Mr. Guo must pay a total of CNY 1.01 million for ship construction and advances. It also confirmed Hengxing Shipyard's priority payment rights over the proceeds from the auction of the ship. The second-instance judgment upheld the original verdict.
Significance:
To secure orders, small and medium-sized shipbuilding companies often provide advance funding for ship construction on behalf of shipowners. These funds often come from private financing, and the shipyards agree to relatively high interest rates on these advances. Disputes arising from shipbuilding contracts can carry substantial risks when advance funding is involved. In this case, the court conducted a comprehensive assessment based on contract performance, agreed-upon interest rates, shipyard's advance funding, maritime department quality inspections, and other factors. The court confirmed that the shipyard had constructed the vessel as stipulated in the contract, and the vessel met the quality standards while the interest rate was in accordance with legal requirements. Consequently, the court supported the shipyard's request for the shipowners to pay for the ship construction and advances. Furthermore, it legally confirmed the shipyard's priority payment rights. This judgment sets a precedent for maintaining a proper balance between industry practices and financing security, thereby regulating the shipbuilding market.
Case 5:
Determining the subject of Safety Production Liability and Ensuring Orderly Construction of Ships
- Ping An Property&Casualty Insurance Company of China., Ltd. v. Taixing Transport Machinery Factory
Shipbuilding Insurance Contract Subrogation Case
Case Summary:
Yangzhou COSCO Heavy Industry Co., Ltd. (hereinafter referred to as "COSCO") signed a "Supply Contract" with Taixing Transport Machinery Factory (hereinafter referred to as "TaixingFactory "). According to the contract, Taixing Factory was responsible for the production and installation of the "desulfurization tower discharge pipe and exhaust pipe" for the vessel N944, and COSCO insured the shipbuilding with Ping An Property&Casualty Insurance Company of China., Ltd. (hereinafter referred to as "Ping An"). In June 2020, Taixing Factory arranged its personnel to conduct flange welding at the shipyard. Before starting the welding, the workers conducted an on-board survey to check fire prevention measures that iron sheets, fireproof cloth, and fire extinguishers, were properly placed below the welding points. Once everything was confirmed and after receiving directives from COSCO, the welding work commenced. However, they did not inspect and confirm the interior situation of the desulfurization tower. During the construction process, sparks fell into the interior of the desulfurization tower through a gap of the exhaust pipe, igniting the plastic packing material and causing a fire, resulting in property losses. After compensating COSCO, Ping An claimed Taixing Factory to pay compensation of CNY 5 million for the loss resulting from the ship's fire accident.
Judgment:
The court held that safety production liability in the shipbuilding factory does not entirely shift to the subcontractor during subcontracted construction work. In this case, Taixing factory, as the subcontractor, had performed its obligations of inspection, examination, and confirmation at the shipbuilding factory. They had also carried out construction under the direction of COSCO. Given these circumstances, when a fire caused by subcontracted construction results in property damage, and Ping An, as the insurer, was subrogated to claim compensation on behalf of the insured party (COSCO) from Taixing. The court did not support this claim. After the judgment, neither party filed an appeal.
Significance:
Shipbuilding processes involve multiple steps, complex construction environments, and significant property value. Hazards are prevalent in production operations such as high-altitude work, work in confined spaces, and hot work. Furthermore, shipbuilding companies often subcontract various high-risk and difficult tasks, such as the manufacturing and installation of pipelines, welding, ship outfitting, and painting. Clearly defining the primary safety production liability within ship construction becomes crucial. In this case, the court, by examining factors such as the qualifications of the construction workers, the implementation of fire safety measures, and the level of standardization in the work processes, determined that large shipbuilding companies, acting as the contracting party, should bear the primary liability for safety production. This is due to their comprehensive safety production management systems and their familiarity with the production processes and environment. The court emphasized that this responsibility for risk prevention should not shift to the subcontractor just because subcontracted construction is involved. This judgment serves to reinforce the primary safety production liability of shipyards, encourage effective safety supervision within shipyards, and ensure the safe, green, and intelligent development of the shipbuilding industry, which is of significant importance.
Case 6:
Confirming Undesignated Contractual Costs, Ensuring the Sound Operation of the Shipbuilding Market
- Shanghai Changhang Minnan Shipyard vs. Haikun Shipping Co., Ltd., and Others Ship Refurbishment Contract Case
Case Summary:
In 2015, Haikun Shipping Co., Ltd. (hereinafter referred to as "Haikun Shipping") and others, acting as the contracting party for ship repairs, signed an agreement with Shanghai ChanghangMinnan Shipyard (hereinafter referred to as "Minnan Shipyard"), stipulating that Minnan Shipyard would provide repair and refurbishment services for the vessel "Haike 108." Mr. Yu acted as the performance guarantor for the contracting party. In 2019, Shanghai Haiying Shipping Co., Ltd. (hereinafter referred to as "Haiying Company") and Haikun Shipping signed an agreement, appointing Haiying Company to carry out the subsequent repair and refurbishment work for the ship and to handle payment for the completion of the ship's engineering. After the ship's repair and refurbishment work was completed, Minnan Shipyard did not receive any payments. Following unsuccessful attempts to collect the outstanding fees, Minnan Shipyard filed a lawsuit, seeking a total of over CNY 8.66 million from Haikun Shipping, Mr. Yu, Haiying Company, and others, to jointly bear the expenses for ship repair and refurbishment, dock fees, and vessel shore power supply fees.
Judgment:
The Court held that while dock fees and shore power supply fees were not stipulated between Minnan Shipyard and the contracting party for ship repairs, considering that the time taken for the ship repair and refurbishment significantly exceeded the estimated duration and the vessel's occupation of the dock had caused losses to Minnan Shipyard. Furthermore, the ship's crew needed shore power supply during its stay in port, incurring shore power supply expenses as a natural consequence. Based on the actual circumstances, the court, in its discretion, recognized the specific amounts and supported Minnan Shipyard's claim for dock fees and vessel shore power supply fees.
Significance:
Ship repair and refurbishment refer to maintenance work performed to enhance vessel performance or alter the vessel's intended use. This process typically involves occupying shipyard docks, which can be complex and time-consuming. For shipyards acting as contractors, the contracting party not to make timely payments for repair and refurbishment work poses significant legal risks. Additionally, during the process of recovering owed payments, new and substantial expenses may continue to accrue. In this case, the contracting party's default in paying for the repair work resulted in the ship not being delivered promptly. During its stay at the port, the vessel incurred dock fees and shore power supply expenses, which led to further losses for the shipyard. Although these expenses were not explicitly outlined in the contract, the court, after reviewing the reasonableness of the related costs, exercised its discretion to recognize them. This judication effectively protected the shipyard's legitimate rights and interests, offering robust judicial support for promoting the healthy and sound operation of the ship repair market.
Case 7:
Accurately Defining the Contract Termination Liabilities to Resolve the Long-Term Dispute between Supply Chain Companies
— Case of Dispute over Ship Materials and Spare Parts Supply Contract between Taizhou Port and Shipping Transportation Co., Ltd. and Taizhou Zhongran Clean Energy Co., Ltd.
Case Summary:
In October 2015, Taizhou Port and Shipping Transportation Co., Ltd. (hereinafter referred to as "Port and Shipping Transportation Co., Ltd.") entered into a contract with Taizhou Zhongran Clean Energy Co., Ltd. (hereinafter referred to as "Zhongran Co., Ltd."), in which Zhongran Co., Ltd. agreed to provide Port and Shipping Transportation Co., Ltd. with a custom-built ship natural gas auxiliary system. In the same month, Port and Shipping Transportation Co., Ltd. entered into a shipbuilding contract with a third party, Jingjiang Huaxin Ship Repair Co., Ltd. (hereinafter referred to as "Huaxin Co., Ltd. "). During the performance of the contract, Huaxin Co., Ltd. experienced an explosion incident and was ordered to cease production, rendering it unable to continue with the ship construction. Subsequently, Zhongran Co., Ltd. filed a lawsuit with Wuhan Maritime Court seeking the termination of the ship materials and spare parts supply contract with Port and Shipping Transportation Co., Ltd. and requesting compensation for losses. Following the judgment of Wuhan Maritime Court, the ship materials and spare parts supply contract was terminated, and Port and Shipping Transportation Co., Ltd. was ordered to compensate Zhongran Co., Ltd. for its corresponding losses. After the judgment became final and enforceable, Port and Shipping Transportation Co., Ltd. fulfilled its compensation obligation; however, it contended that Zhongran Co., Ltd. was obligated to deliver to it all remaining undelivered equipment under the contract. Consequently, it filed a lawsuit with Nanjing Maritime Court, requesting that Zhongran Co., Ltd. return the equipment.
Judgment:
Upon trial, Nanjing Maritime Court held that, during the construction of the natural gas auxiliary system, while Zhongran had delivered certain equipment to Port and Shipping Transportation Co., Ltd., it still retained some equipment. Given that Port and Shipping Transportation Co., Ltd. had compensated Zhongran Co., Ltd. for the corresponding losses after the supply contract was terminated, Zhongran Co., Ltd.'s continued possession of certain custom-made equipment was without legal justification. As a result, the court judged that Zhongran Co., Ltd. shall pay Port and Shipping Co., Ltd. the discounted amount equivalent to the value of the undelivered equipment.
Significance:
Shipbuilding is a typical discrete production process. When an unexpected event occurs causing the shipbuilding contract unenforceable, it is of paramount importance to appropriately balance the interests of the shipowner, shipbuilder, and material suppliers. This is crucial for creating a stable, safe, rapid, efficient, and cost-effective shipbuilding industry chain, which plays a vital role in advancing high-quality shipbuilding industry development. In this case, an explosion incident during shipbuilding process rendered the contract between the shipowner and the shipyard unenforceable. Concurrently, the supplier of ship-specific equipment engaged in related litigation with the shipowner. Based on a comprehensive examination of the case facts, the court accurately determined that, following the termination of the ship materials and spare parts supply contract, all clearing and settlement responsibilities between the shipowner and the spare parts supplier were duly ascertained. This led to a substantive resolution of long-standing disputes between the companies. The case holds significant importance in regulating the order of ship materials and spare parts supply markets and creating a stable, fair, transparent, and predictable legal business environment.
Case 8:
Determining the Invalidity of Contracts to Regulate the order of Offshore Wind Power Engineering Construction
- Dispute between Jiangsu Longyuan Zhenhua Marine Engineering Co., Ltd., and Shengzhi Wind Power Technology (Shanghai) Co., Ltd., and Zhongcheng Non-Financial Guarantee (Shenzhen) Co., Ltd.
Case Summary:
In June 2021, Jiangsu Longyuan Zhenhua Marine Engineering ., Ltd. (hereinafter referred to as "Longyuan Co., Ltd.") signed an Engineering Construction Contract with Shengzhi Wind Power Technology (Shanghai) Co., Ltd.(hereinafter referred to as "Shengzhi Co., Ltd."). for the installation of wind turbines for an offshore wind power project. The contract stipulated that Shengzhi Co., Ltd.. would provide vessel equipment to support Longyuan Co., Ltd.'s construction work. Zhongcheng Non-financing Guarantee(Shenzhen) Co., Ltd. (hereinafter referred to as "Zhongcheng Co., Ltd.")., commissioned by ShengzhiCo., Ltd., provided a guarantee to Longyuan Co., Ltd., which made a prepayment of 5 million RMB for the construction. In August of the same year, the vessel "Shengzhi 1" arrived at the offshore wind farm for construction purposes. However, it has been discovered that the actual configuration of the vessel did not meet the technical requirements. Despite the multiple assurances from Shengzhi Co., Ltd., "Shengzhi 1" remained to be unsuitable for the lifting requirements of offshore wind turbines. In September of the same year, Shengzhi Co., Ltd. applied for the contract termination to Longyuan Co., Ltd.. Both parties confirmed that, "Shengzhi 1" failed to meet the on-site construction conditions and no on-site construction was carried out until the wind turbine installation was completed. Due to Shengzhi Co., Ltd.'s failure to refund the payment, Longyuan Co., Ltd. filed a lawsuit to Nanjing Maritime Court, seeking to confirm the termination of the contract, requested that Shengzhi Co., Ltd. should refund the prepayment for the project, and pay the liquidated damages, and hold Zhongcheng Co., Ltd.’s responsibility for guaranteeing the refund by Shengzhi Co., Ltd..
Judgment:
Upon trial, the court determined that, in accordance with relevant legal provisions, those engaged in offshore wind turbine installation must possess the appropriate qualifications. As Shengzhi Co., Ltd. lacked the professional contracting qualifications and subcontracting qualifications required for offshore wind power engineering, the contract they entered into with Longyuan Co., Ltd. for the construction should be invalid. Consequently, the guarantee provided by Zhongcheng Co., Ltd. was also invalidated. Based on these findings, the court ordered Shengzhi Co., Ltd. to return the 5 million RMB advance prepayment made by Longyuan Co., Ltd. and rejected Longyuan Co., Ltd.'s other litigation requests. Neither party filed an appeal.
Significance:
Based on the goal of "dual carbon", the offshore wind power has become a crucial sector for promoting renewable energy development in China. The lawful regulation of the offshore wind power construction market is of paramount importance in ensuring the high-quality development of the marine economy. The engineering quality is the lifeblood of construction projects. Compared to onshore wind power, offshore wind power facilities have higher construction costs and greater construction complexity. Companies must possess the requisite qualifications and construction capabilities to undertake the offshore wind power, coastal, and nearshore construction projects. In this case, Shengzhi Co., Ltd. lacked the qualifications for offshore wind power engineering construction and the corresponding capability. During the construction process, Shengzhi Co., Ltd.'s construction platform was unable to meet the construction requirements, leading to the disruptions in the originally planned construction schedule and to render the contract unenforceable. Although the parties sought the termination of the contract, the court, on the basis of a comprehensive investigation of the facts, determined the invalidity of the contract according to the relevant law, and reasonably determined the rights, obligations and legal responsibilities of the parties. The handling of this case is of positive guiding significance in regulating the order of offshore wind power and other marine engineering constructions, helping market players to prevent and defuse risks, and creating a fair and orderly market competition environment.
Case 9:
Fairly Determining of Intermediary Fee Payment Conditions to Regulate the Order of the Offshore Vessel Leasing Market
— Case of Dispute over Intermediary Contract between Jiangsu Yufeng Maritime Engineering Co., Ltd. and Mr. Wei
Case Summary:
In 2021, in order to undertake the installation of wind turbines for offshore wind power projects, Mr. Wei negotiated the lease of offshore wind turbine lifting vessels with Jiangsu Yufeng Maritime Engineering Co., Ltd. (hereinafter referred to as "Yufeng Co., Ltd."). The parties agreed that once Yufeng Co., Ltd. facilitated the leasing contract for the engineering vessels, Mr. Wei would pay an intermediary fee of CNY 3 million per month. The contract also stipulated that if Mr. Wei, using the trading platform provided by Yufeng Co., Ltd., circumvented the direct signing of contracts with the shipowners, he would still be required to pay the full amount of the compensation. Following negotiations by Yufeng Co., Ltd., the shipowners of the engineering vessel "Haixin Lifting 1" entered into a ship leasing agreement with Mr. Wei's cooperating company, Jiangsu Zhenyuan Electric Power Technology Co., Ltd. (hereinafter referred to as "Zhenyuan Co., Ltd."). However, the shipowners did not arrive at the Shengsi No. 2 wind farm construction site as agreed and received a letter of contract termination from the project department. Subsequently, Zhenyuan Co., Ltd. temporarily relocated the engineering vessel to the Xiangshan No. 1 wind farm for construction. However, after adapting to sea conditions, the project department sent a letter stating that the vessel's performance did not match the conditions in the construction area, rendering it incapable of completing the wind turbine installation task. Yufeng Co., Ltd. filed a lawsuit, seeking payment of the intermediary fee as per the agreement.
Judgment:
After careful examination, the court determined that the parties had a dispute regarding the payment conditions for the intermediary fee in the intermediary contract at issue. The contract stipulated that, once Yufeng Co., Ltd. facilitated the engineering vessel leasing contract, Mr. Wei was obligated to pay Yufeng Co., Ltd. a monthly fee of CNY 3 million. Considering the contractual provisions for monthly payments and the length of the leasing period, it was evident that the clause did not imply a "pay upon conclusion" interpretation of the intermediary fee. Instead, the payment of the intermediary fee should be determined based on the actual performance of the leasing contract . In this case, the engineering vessel did not arrive at the construction site as scheduled, leading to the termination of the construction contract by the project department. After changing the construction site, the vessel was forced to leave due to its own performance limitations, rendering it incapable of completing the wind turbine nacelle installation task. Mr. Wei's purpose for leasing the vessel for offshore wind turbine installation was not realized. Therefore, the ship leasing contract was never properly executed, and the conditions for paying the intermediary fee were not met. The court, in the first-instance judgment, rejected Yufeng Co., Ltd.'s litigation request. Following the judgment, neither party appealed.
Significance:
Offshore engineering, as a strategic emerging industry with high technological content and strong technological innovation, relies on the support and guarantee of maritime engineering equipment. In the competitive market for maritime equipment (vessels), securing engineering vessels that match the project is a crucial aspect for the timely completion of offshore wind power projects, and yet the lessee need to pay high rent ,even high intermediary fees linked to the leasing period. These vessel leases are associated with high costs, and intermediary contracts often stipulate high intermediary fees, which are linked to the leasing period. In this case, the court, through the systematic interpretation of contract terms, clarified the fact that specialized offshore engineering vessels fail to meet the agreed conditions and cannot actively participate in maritime engineering project construction, then reject the intermediary's request for payment of high fees. The judgment result protects fairly and reasonably the parties' legitimate rights and interests and provides judicial support for the orderly development of maritime engineering construction and the maritime equipment leasing market.
Case 10:
Facilitating the Rehabilitation of Private Enterprises through Good-Faith and Civilized Enforcement
- Series of Cases on Coordinated Execution and Bankruptcy Reorganization of Taizhou Port Ship Co., Ltd.
Case Summary:
Taizhou Port Ship Co., Ltd. (hereinafter referred to as Port Co., Ltd.) was previously among the top ten private shipbuilding enterprises in China and the first large-scale private shipbuilding company in Jiangsu Province to obtain the "Four Permits" from relevant authorities. In recent years, the company faced severe operational and management difficulties due to fluctuations of the international shipping market, leading to a significant amount of debt disputes. In early 2020, various creditors filed multiple lawsuits and applied for property preservation in Shanghai Jing'an District People's Court, Taizhou Intermediate People's Court, Taizhou Gaogang District People's Court, and Nanjing Maritime Court. Nanjing Maritime Court handled 82 lawsuits and 58 enforcement cases, with the total amount in dispute reaching as high as CNY 590 million. Simultaneously, based on applications for preservation and in compliance with other courts’ instructions, Nanjing Maritime Court lawfully seized four vessels under construction owned by the Port Co., Ltd.. Subsequently, the Port Co., Ltd. applied to Nanjing Maritime Court, stating that its TK0630 vessel had met the delivery standard to the shipowner, However, due to judicial detention, it could not be delivered. If the vessel were not delivered on time, the Port Co., Ltd. would need to compensate the shipowner with over 8 milliondollars, including the prepayment and interest. Additionally, it incurred daily maintenance costs of approximately CNY 20,000 . The Port Co., Ltd. specifically requested, under the court's supervision, to proceed with the delivery and change the execution target from "vessel" to "purchase price."
Judgment:
Nanjing Maritime Court attached great importance to the Port Co., Ltd.'s application. It immediately formed a special task force to research the necessity and feasibility of adjusting the preservation measures. Through various investigations, the court discovered that timely delivery could not only reduce the depreciation of the vessel's value but also secure payments from foreign shipowners and benefit from export tax rebates. This approach would more broadly safeguard the legitimate interests of the shipowners, the Port Co., Ltd., and all creditors. In order to reduce the company's losses, preserve asset value, and protect the rights and interests of creditors, Nanjing Maritime Court legally approved the Port Co., Ltd.'s application and actively coordinated with relevant parties to formulate a comprehensive and detailed vessel delivery plan. In the end, in collaboration with the Taizhou Gaogang District People's Court, which received the Port Co., Ltd.'s bankruptcy application, Nanjing Maritime Court successfully completed the actual delivery and subsequent matters of vessels such as TK0630, helping the Port Co., Ltd. get the full purchase price from the foreign shipowners. After the Port Co., Ltd. and its related entities entered the bankruptcy proceedings, Nanjing Maritime Court, based on the bankruptcy administrator's application, promptly released the vessels under detention and efficiently concluded 44 related enforcement cases, actively supporting the consolidation and reorganization of the companies involved in the cases to quickly restore their production capacity.
Significance:
Jiangsu is a major shipbuilding province, with ship completions accounting for nearly half of the national total each year. Currently, it has developed a billion-dollar shipbuilding industry chain, with private shipbuilding enterprises playing a crucial role in driving rapid industry growth. This case represents a successful practice by Nanjing Maritime Court, demonstrating good-faith and civilized enforcement to establish connection between the enforcement procedure and the bankruptcy procedure, facilitating the bankruptcy reorganization and swift recovery of production capacity of private shipbuilding companies. During the case's adjudication, Nanjing Maritime Court diligently implemented the Central Committee's "Opinions on Strengthening Comprehensive Management and Effectively Resolving Enforcement Difficulties at the Source" and the Provincial Committee's implementation guidelines, along with relevant documents from the Supreme People's Court. The court actively explored enforcement measures involving "prior disposition for preserving purchase prices." ensuring that detained vessels were smoothly transferred and purchase prices were efficiently delivered, while simultaneously aiding the recovery of the companies' reputation. In full protection of the applicant's rights, the court minimized the impact of the enforcement on the production and lives of the executed parties. Through a series of good-faith and civilized enforcement measures, the court allowed private enterprises to go through the bankruptcy reorganization process in a stable and orderly manner, fostering a sense of judicial compassion within the enforcement process for private enterprises.
[1] The term "2020" as used in this report refers to the period from January 1, 2020, to December 31, 2020, and the same applies to the respective years mentioned below. The term " the first half of 2023" refers to the period from January 1, 2023, to June 30, 2023, and similar references are applicable.
[2] This footnote refers to the types of disputes included and excluded from the statistics in the report: Included in the scope of cases considered as " cases related to the shipbuilding industry" in this report are mainly disputes related to ship design, shipbuilding, shipbuilding subcontracting, shipbuilding inspection, ship modification, ship repair, ship dismantling, offshore equipment and ship-related supply, shipbuilding financing, and personal injury disputes arising from shipbuilding.
Excluded from the scope of this report are disputes related to the trading, leasing, mortgage financing, operation of completed ships, ship sales contracts, ship leasing contracts, ship loan mortgage contracts, ship operation contracts, ship ownership disputes, as well as transportation contracts for maritime and navigable waters involving the use of completed ships for cargo and passenger transport, once they have been removed from the ship production and manufacturing chain.
[3] Unless otherwise specified, the statistical data for the cases referred to below include the number of cases for pre-litigation mediation, cases involving pre-litigation property preservation, first-instance civil cases, first-instance administrative cases, cases related to administrative compensation, special civil procedure cases, and cases for the recognition and enforcement of foreign arbitration awards.
The statistics in this judicial report regarding the number of cases do not include enforcement cases unless explicitly indicated otherwise.
[4] This primarily refers to the methods of concluding pre-litigation property preservation cases.
[5] This data is sourced from the China Maritime Trial Network and is based on cases categorized under various dispute types, such as disputes related to ship materials and spare parts supply contracts, ship inspection contracts, ship construction contracts, ship repair contracts, ship renovation contracts, ship dismantling contracts, etc. The number of cases filed at various maritime courts is separately counted based on these case categories.
[6] When referring to cases involving the Taizhou region, it means that either the plaintiff's or defendant's place of residence is located within the city of Taizhou. The same principle applies to the following statements.
[7] Due to the fact that some cases involve parties who simultaneously fall into two or three categories, there may be duplicate statistics in this section. The classification of small and micro (micro) enterprises is based on the standards for industrial enterprises outlined in the "Method for Classification of Large, Medium, Small, and Micro Enterprises for Statistical Purposes (2017)" issued by the National Bureau of Statistics of China (No. [2017] 213), which considers enterprises with fewer than 1,000 employees or annual revenue less than 400 million RMB as small and micro (micro) enterprises.
[8] We have reviewed our judicial practice and formulated recommendations, taking into account various policy measures such as "Several Policy Measures for Further Enhancing the Competitiveness of the Shipbuilding and Offshore Equipment Industry in the Province" and "Development Plan for the Shipbuilding and Marine Engineering Equipment Industry in Jiangsu Province during the 14th Five-Year Plan." These recommendations align with several key aspects closely related to our court's case handling, including "enhancing innovation capabilities and levels," "raising the overall industry chain competitiveness," "promoting the safe development of the industry," "maintaining stable financial support," and "facilitating green transformation and upgrading."
[9] In practice, it has been observed that common reasons for disputes related to shipbuilding quality include design flaws in ship design, initiating construction work before completing the entire design approval process, changes in blueprints due to new requirements during the shipbuilding process, and instances where the ship construction deviates from the approved blueprints.
[10] In a shipbuilding case involving a dispute over the custom natural gas auxiliary system that was adjudicated in our court, an explosion incident occurred during the ship construction. As a result, the contract between the shipowner and the shipyard could not be executed, leading to litigation between the ship's exclusive equipment supplier and the shipowner. This dispute lasted for several years and gave rise to a series of lawsuits that had a significant impact on business operations.
[11] Currently, for the construction of ocean-going ships, there is a "Four-Party Confirmation Letter" in which maritime authorities, ship inspection organizations, shipyards, and shipowners jointly confirm the critical dates of the ship. As for inland waterway vessel construction, there are currently no relevant mandatory requirements in place.
[12] For example, when a shipbuilding contract stipulates that "rainy days or other days when construction is impossible are not included in the shipbuilding period," the construction company should keep records of rainy days during the construction period and communicate with the ordering party for confirmation.
[13] In practice, there is a high risk of personal injury in subcontracted construction. Construction teams often do not purchase work injury insurance and instead rely on commercial insurance methods such as group accident insurance and employer's liability insurance.
[14] In judicial practice, shipyards that argue against assuming liability for compensation often use reasons such as "being the contracting party for self-construction and claiming that the contractor, which is themselves, should not be held liable for damages they have suffered, and, as the ordering party, they are not liable for compensation without fault" or "having fulfilled relevant safety management obligations."
[15] The subjects involved in ship financing relationships not only include shipowners or shipping companies but also fund providers and even guarantors. Due to the high-risk nature of ship financing, fund providers typically require ship enterprises or shipowners to provide guarantees to ensure that the financing party has sufficient debt repayment capability. The involvement of guarantors complicates the interest relationships. Within a primary contract, usually a loan contract, there are typically multiple related contracts, including guarantee contracts and mortgage contracts.
[16] However, in practice, due to inadequate or ineffective regulation, cases of shipping companies defaulting and misappropriating financing funds for the construction of specific vessels other than those intended, or even diverting the funds for projects unrelated to ship construction, have occurred.
[17] According to Article 527 of the Civil Code of the People's Republic of China: A party who is required to perform the obligation first and has clear evidence to prove that the other party falls into one of the following situations may suspend performance: (1) severe deterioration of its business operations; (2) transfer of property or withdrawal of funds to evade debts; (3) loss of business credibility; (4) other situations in which the ability to perform the obligation is or may be lost. If the party does not have clear evidence to suspend performance, it shall bear the liability for breach of contract.
[18] For example, unclear provisions in the contract regarding repair cost standards and repair project details can lead to disputes between shipowners and shipyards over repair payments. Some small and medium-sized shipyards may fail to complete ship repairs in a timely manner according to the contract's specified deadlines or standards, resulting in disputes over damages and compensation. Repair companies subcontracting ship repair projects arbitrarily may lead to quality defects and subsequent disputes over compensation. Disputes over subcontracting settlements can also arise due to the lack of proper subcontracting management in the repair business.
[19] According to the joint notice issued by the Ministry of Ecology and Environment, the Ministry of Industry and Information Technology, and the General Administration of Customs at the end of 2020 regarding the supervision of waste steel generated from the repair of foreign ships within the country, qualified repair waste steel can be stored, transferred, utilized, and disposed of within the country without being managed as solid waste. This provides a regulatory framework for ship repair companies to utilize the waste steel generated from ship repairs as resources.
[20] Including but not limited to: applying for the environmental protection completion acceptance certificate for shipbreaking projects approved by the ecological and environmental authorities and obtaining the shipbreaking discharge permit; the actual shipbreaking site should be consistent with the production and operation location address on the discharge permit; equipping or setting up necessary facilities to prevent pollution from shipbreaking, such as oil containment devices, waste oil collection equipment, oily wastewater collection and treatment facilities, and waste recycling and disposal sites.
