Table of contents
The Association shall cover legal and other costs necessarily incurred in establishing or resisting claims in connection with:
a building, purchase or mortgaging of the Ship, including claims in connection with the future employment of the Ship being built or purchased, provided always that the Ship has been entered in the Association for Defence cover at the latest on signing the relevant contract governing the building or purchase;
b sale of the entered Ship;
c conversion of the Ship, including claims in connection with the future employment of the Ship being subject to conversion, provided always that a separate agreement, pursuant to which the Association agrees to provide Defence cover for such legal and other costs has been entered into with the Association at the latest on the signing of the relevant contract for the conversion of Ship.
d alterations to the Ship, including claims in connection with the future employment of the Ship being subject to alteration.
(A) The Association shall cover legal and other costs necessarily incurred in establishing or resisting claims... (Rule 66)
Subject to the limits that are imposed by Rules 70.1 and 70.2 cover is available under a Defence Entry for legal and other costs that are incurred by the Member in relation to the various types of disputes that are discussed below. For an explanation of the phrase ‘legal and other costs necessarily incurred in establishing or resisting claims’, see (A) of the Guidance to Rule 65. However, it is emphasised that the phrase ‘legal costs...necessarily incurred in establishing or resisting claims’ includes legal costs that may be incurred by the Member’s opponent if the Member is obliged to pay such costs pursuant to an arbitration award, or the judgment, decree or order of a court or other tribunal, or pursuant to a settlement agreement that has been approved by the Association
(B) ...building, purchase or mortgaging of the Ship... (Rule 66.a)
Cover is available under Rule 66.a for legal and other costs that are incurred by the Member in connection with disputes that relate to the construction and/or purchase of a Ship.1
The disputes that can arise in connection with the building of a Ship include issues such as whether the Ship has been built in accordance with, and in fulfilment of, the agreed specifications, or issues relating to the time at which the Ship should be delivered to the Member. The disputes that can arise in connection with the purchase of a Ship include issues relating to its condition at the time of its delivery to the buyer, or in relation to the place of delivery, or the terms of payment.
Cover is also available for legal and other costs that are incurred by the Member in connection with a mortgage of the Ship. A mortgage is a contract whereby a third party such as a bank, is given a proprietary interest by way of security over the Ship for the repayment of the funds that it has made available for the purchase of the Ship.
(C) ...including claims in connection with the future employment of the Ship being built or purchased... (Rule 66.a)
Defence cover is also available for legal and other costs that are incurred by the Member in connection with claims that relate to the future employment of the Ship that is being built or purchased. For example, cover is available for a dispute that has arisen as a result of the cancellation by a contractual party of a future time charter of a Ship that is under construction, subject to the entry conditions that are specified below.
(D) ...provided always that the Ship has been entered...at the latest on signing the relevant contract governing the building or purchase2… (Rule 66.a)
Defence cover is available under Rule 2.4.c only in respect of events that occur during the period of entry of the Ship. However, in some circumstances, the disputes that are itemised in Rule 66.a may be the result of events that have occurred before a Ship as defined in Rule 1 can be entered with the Association.3 Therefore, to ensure that the Ship is entered in the Association for Defence cover prior to the occurrence of the event that gives rise to the dispute, Rule 66.a obliges the Member to ensure that the Ship is entered for Defence risks at the latest by the time that the building or purchase contract has been signed. This is often referred to as "pre-delivery Defence cover". However, cover is not available if the Member fails, prior to the conclusion of the contract of insurance, to disclose to the Association events that are likely to give rise to a dispute.4
In the case of disputes that arise in connection with the building of a Ship, it is also necessary to read Rule 66.a in the light of Rule 80.3.c which states that, if such a claim has arisen as a result of an event that has occurred before the contract has been signed, e.g. as a result of a misrepresentation by the shipyard of its abilities to carry out the contract works, the event that has given rise to the claim shall, for the purpose of Defence cover, be deemed to have arisen at the date that the building contract has been signed.
The Defence cover for "ship building" disputes falling within Rule 66.a will be subject to a special limit of USD 1 million per event as specified in Rule 70.2.
(E) ...the relevant contract... (Rule 66.a. and c)
When considering whether or not to confirm Defence cover for disputes that have arisen under a particular contract, the Association may be influenced by the provisions of the particular contract. Whilst the Association has no proprietary interest in the subject matter of the dispute, it, nevertheless, has a responsibility to the membership as a whole to ensure that membership funds are not dissipated in relation to disputes that are caused either wholly or in part by the fact that the Member has agreed to terms that are considered to be unwise. Each case turns on its own facts and it is not possible to give specific examples of terms that are considered to be unwise. However, the Association would normally expect the contract to be written in the English language and to be subject to the law and jurisdiction of a country where the Member can expect to receive a fair and just hearing before a tribunal that has experience in the resolution of this type of dispute. Thus, choice of law and jurisdiction clauses may be of interest.
(F) ...sale of the entered Ship. (Rule 66.b)
Cover is available under Rule 66.b for legal and other costs that are incurred by the Member in relation to the sale of a Ship, but not in relation to the disposal of it by other means. In this context, a ‘sale’ means a contractual transaction that transfers the bona fide title to the Ship as from an agreed time in consideration for the payment of remuneration.5 However, it should also be remembered in this connection that the Member’s cover for Defence and P&I risks will cease automatically upon the transfer of the Ship to a new owner by sale pursuant to Rule 25.2.e. Consequently, the Association has no liability pursuant to Rule 26.2 for “anything occurring after cessation” of cover unless the dispute relates to events that have occurred before the time of cessation.6
(G) ...conversions of the Ship... (Rule 66.c)
For the purposes of Defence cover, contracts that relate to the conversion of a Ship are treated as a special risk. For that reason Defence cover is available for legal and other costs that are incurred by a Member in relation to conversion risks only if the Association has agreed to do so pursuant to a separate agreement that has been entered into between the Member and the Association no later than the date on which the relevant contract has been signed by the Member. The rationale for the need of this special clause is that a conversion of a ship carries risks that are inherently similar to those that affect ship building.
Consequently, Defence cover for conversion risks can only be made available if the pre-condition has been satisfied, namely that the Association has been given the opportunity before the Member has signed the conversion contract to consider the risks that are involved and has confirmed its agreement to make Defence cover available for such risks. Therefore, it is recommended that Members should discuss the probable terms of such contracts with the Association in sufficient time before the contracts are signed and should be guided by the comments made in (E) above as to the terms of the conversion contract.
The Defence cover for conversion disputes falling within Rule 66 c will be subject to the special limit of USD 1 million per event as specified in Rule 70.2.
(I) .... alterations to the Ship ... (Rule 66.d)
A distinction must be made between, on the one hand, ‘alteration’, defined by DNV GL as ‘….a change that does not affect the basic character or structure of the Vessel it is applied to’,7 and, on the other hand, ‘conversion’, defined by DNV GL as a ‘…change that substantially alters the dimensions, carrying capacity, engine power or the type of the Vessel’8 While ‘conversion’ disputes can be compared with shipbuilding disputes that shall be subject to special terms as specified in Rule 66 c and discussed under (G) above, the same will not be the case as far as ‘alteration’ disputes are concerned. ‘Alteration’ disputes do not necessarily represent a special risk necessitating special terms of cover.
For this reason, ‘alteration’ disputes are itemized separately in sub-paragraph (d) in Rule 66. The effect of the distinction between ‘conversion’ and ‘alteration’ disputes, as explained, is that cover for alteration disputes under Rule 66 d (in contrast to conversion disputes under Rule 66 c) is not dependent on the pre-condition that a separate agreement is made between the Association and the Member prior to conclusion of the alteration contract between the Member and the relevant yard or supplier. However, the Defence cover for ‘alteration’ disputes will be subject to the special limit of USD 1 million per event as specified in Rule 70.2.
(J) …… including claims in connection with the future employment of the Ship being subject to alteration…(Rule 66 d)
Reference is made to the explanatory notes under (C) above.
1 For the meaning of ‘Ship’ in this context see (D) below.
2 Contracts for the building of ships are often based on standard industry forms such as Ship 2000 (Standard Form Shipbuilding Contract 2000), SAJ Form (Shipbuilding Contract of the Shipowners Association of Japan), the AWES Form (Association of West European Shipbuilders) or the Bimco Newbuildcon 2007.
3 See the Guidance to Rule 2.6 above.
4 See the Guidance to Rule 6.
5 The form of remuneration is immaterial. It includes not only cash but also other forms of remuneration such as ship swap arrangements and stock or partnership share swaps.
6 See the Guidance to Rule 26.2.
7 See DNV GL Rules for Classification of Ships, section 1.2.
8 See DNV GL Rules for Classification of Ships, section 1.2.