MORE EXTRAS  (PART TWO)

  Westcoast Mariner July 1997

In my last article appearing in the June 1997 issue of Westcoast Mariner, I reviewed some general rules for determining whether or not work performed by a shipyard or repairer can be charged out as an extra.  This article reviews some of the common areas of dispute regarding extras and suggests how terms can be added to shipbuilding contracts to avoid, or at least, minimize, such disputes.

 As discussed in the previous article, one of the most common sources of disputes between shipbuilders and ship owners is the  determination of  whether or not an item is an extra or part of a fixed price contract.  In this situation, the best way to resolve the problem is for the owner and builder to reach an agreement to continue with the work and sort out the dispute at a later time by either arbitration or litigation.  Unfortunately for the shipyard, if the owner refuses to make such an agreement, the shipyard may lose its right to later claim the item was an extra, even if it does the work under protest.  Furthermore, if the shipyard refuses to perform the work without an agreement to treat it as an extra, it runs the risk of a substantial damage award for non performance being awarded against it, if it turns out it was wrong in treating the work as an extra.  Accordingly, from a shipyard’s perspective, it is important to have a clause in its shipbuilding contract which allows disputes over whether or not an item is an extra, to be resolved by way of arbitration after completion of the project.

 Assuming, that the parties have agreed that the requested work is an extra, an important issue is the question of whether or not the owner of a vessel should be given the right to make any alterations at all from the original contract during the course of construction.  From the perspective of the shipyard, it would be desirable to be able to refuse to make any alterations.  This would give the shipyard extra bargaining power when setting a price for the alterations and prevent conflicts with other jobs which may have been taken on by the shipyard.   However, given the relative shortage of work at shipyards these days, the bargaining power of shipyards is such that  most shipbuilding contracts do allow alterations at the request of the owner.  Some building contracts provide that the shipbuilder does not have to perform alterations unless the alterations are reasonable and within the capacity of the shipbuilder, and an extension of time is given for completion.  The shipbuilder may also require an alteration of the payment schedule so as to allow for early payment for extras.

 Assuming a shipyard has agreed to provide extras, another difficult issue is  the  determination of  a fair price for the extras.  From the perspective of the shipbuilder, it would be best if it could refuse to perform any alterations unless the owner first agrees to the builder’s price.  This type of provision would put the shipyard in a very strong bargaining position when negotiating price. However,  a more common provision is the requirement that the price be determined by arbitration if the parties fail to reach an agreement. If delay is not of concern, it would be advantageous to the owner to arbitrate the price prior to commencement of  the work, so as to maintain the option of not proceeding if the price is too high.  However, even though arbitration is faster than litigation, it is often not practical to delay completion of a project until the completion of an arbitration.  Since arbitration can be costly, these type of provision create some incentive for the parties to reach an acceptable price by way of agreement.

 As an aside,  if it is necessary to litigate or arbitrate the value of an extra, good time records are very important.  Detailed time records should be kept for each worker which allow one to identify and quantify work done on extras.   Similarly, records should clearly show what materials were used on extras.   A slightly more difficult problem is the quantification of any labour or material saved as a result of the extra.  It is best to document these savings as closely as possible while they are still fresh in everyone’s minds.  

 One potential trap for the unwary shipyard or repairer is the question of whether or not surveyors, marine architects and engineers acting for the owner are properly authorized to order extras.  In the absence of such authority, it is likely that the owner will not have to pay for the extra work, although the shipyard may have an action for breach of warranty of authority against the person who ordered the work.  Accordingly, it is best to include a term in the shipbuilding contract which specifies exactly who is authorized to approve extras.  If such a term is not in the contract, a separate written authorization from the owner should always be obtained.

 Although this article has been written largely from the perspective of a contract to build a ship, many of the contractual provisions discussed are equally applicable to contracts to provide modifications to ships of all sizes.  These contracts could be with a shipyard or with other contractors who supply services to ships such as electricians and suppliers of hydraulic services.

 As with most business relationships, when it comes to agreements between ship owners and shipbuilders, an ounce of prevention is worth a pound of cure.  Some advance discussion of the issues of extras and a contract to document the results of those discussions can save many dollars spent on litigation at a later stage.

Brad M. Caldwell is a former Fisherman and Tow Boat Worker who's Vancouver based law practise is devoted primarily to maritime matters.