Navigating complex German shipbuilding law

Ulrich Helm: Ulrich Helm: "A contractor has a fundamental interest in an effective limitation of his potential delay liability" Photo: Hogan Lovells LLP

When shipbuilding contracts are subject to German Law, parties need to be alert to the implications of the very strict and far-reaching German Law on standard terms and conditions (AGB), or face extensive delays.

That’s according to Ulrich Helm, head of infrastructure, energy, resources and projects, Hogan Lovells LLP.

In a new report, he said that these delays in offshore installation ship constructions are likely to occur, because of their technical complexity and often last-minute design changes.

“These design changes – which regularly happen despite party approval and the commencement of construction works – interrupt the ship-building progress and cause delays in completion,” he said.

“This, in turn, might result in substantial damage: the delayed completion of an offshore installation ship often negatively affects the completion of the entire windfarm and consequently, its power production start. Against this backdrop, a contractor has a fundamental interest in an effective limitation of his potential delay liability.”

Damage limitation

Mr Helm said that the limitation of this potential delay liability is of paramount importance for the contractor, especially with the increase of work on Baltic and German windfarms.

He said that opting out of German Law in its entirety is only possible under limited conditions. In particular, in cases where all relevant elements are linked to Germany, opting out of the German AGB Law is very challenging.

In this situation he said, parties might consider combining the choice-of law clause with an arbitration clause, which facilitates excluding the German AGB Law.

If the German AGB Law is generally applicable, it will be very difficult for the parties to individually negotiate the clauses to avoid the qualification as AGB.

Mr Helm said that against this backdrop, it is therefore important that the used contract clauses would withstand a judicial content control. To this goal, liquidated damages and penalties should be clearly distinguished according to their respective meaning under German Law. Hereto, it seems advisable to use German notions within brackets.

He pointed out that the contract clauses then have to be drafted in accordance with the statutory provisions applicable to the respective categories. If qualified as liquidated damages in terms of German Law, the statutory provisions for example require the amounts to correspond to the expected damage and to enable the other party to proof that the damage has not occurred or is substantially less.

If qualified as a penalty clause under German Law, one of the requirements would be not to exceed the maximum amounts set by German case Law.

Mr Helm said that drafting effective Force Majeure clauses is another key challenge in shipbuilding contracts with regard to the German AGB Law requiring a certain balance between the employer's and contractor's interests.

By Anne-Marie Causer

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