Contract law and confidentiality between yard, broker and owner

2015-01-21By John Leonida
Privacy rules regarding contracts between builders and classification societies limit owners’ rights before delivery.

Picture this: you have commissioned a yacht and you’re expecting it will comply with certain regulations. You rely upon the builder, the flag state and the classification society surveyors to work together to make sure the yacht is legal and safe. You get a piece of paper that appears to show you the journey. But is that road map clear and true or is it hiding something?

Classification society rules, load line regulations, tonnage, MARPOL, the various iterations of the Large Yacht Code sometimes depend on opinion, interpretation, a certain point of view, but how far can you deviate from the original road map before it becomes a totally new and different journey? And if that journey has changed, how can you, as an owner, tell? Answer: you cannot.

Even if no-one is deliberately secretive, classification societies and flag states do what they do for money: they are commercial organisations which enter into contracts with builders to provide surveys and certificates. But in the middle of all this is a simple legal concept called privity of contract, which prejudices owners.

Under normal circumstances, a contract between two people is made to the exclusion of others. In this case, a perfectly legal contract between the classification society, or flag, and builder to provide services, excludes the owner.

How owners are excluded

Owners may be surprised to discover that despite commissioning a yacht to be built to a certain set of rules and regulations, they have absolutely no right, at any time, to examine the correspondence between flag state, classification society and the builder in relation to their yacht. Any decisions and reasonings are secret.

Owners also do not have the right to examine survey reports produced by classification society or flag state surveyors. When a builder agrees to construct a yacht to a particular set of class rules, it will sign a private commercial contract with the classification society. The classification society will be providing their services to the builder and will examine and survey the yacht for the builder – not for the owner.

A classification society needs to maintain commercial relationships with builders. This involves normal commercial pressures, in which there is nothing illegal. But classification societies have a quasi-official status.

In another case, the classification society said its contractual relationship with the builder prevented any disclosure of information to the owner

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Pre-delivery, the owner has absolutely no rights whatsoever vis-à-vis class – and even when the owner takes delivery he cannot enquire as to what happened during the build process.
Indeed, as I was writing this article, I received a letter from a classification society in respect to a request from a client to access the yacht’s in-build class records.

The yacht was being built at Yard X, but it couldn’t be finished and was moved to Yard Y for the work to be completed. In order for Yard Y to start the work, they needed to know what the class position of the yacht was, what had been approved or not approved, and what was outstanding.

The response from this particular classification society was: ‘We are unable to release at this time our files to yourselves as they contain proprietary information owned by Yard X.’

Therefore the owner, through no fault of their own, is faced with a classification society which will not release information about their yacht. The perverse thing is that this classification society would open itself up to be sued for breach of contract if it did what the client requested. So it isn’t acting illegally, but its behaviour raises suspicions about the information it holds about the client’s yacht.

In another case, the classification society said its contractual relationship with the builder prevented any disclosure of information to the owner and unless the builder consented to the release of information they would not do so.

If the builder has something to hide, an owner will not be granted access to class records. There are a few builders who are happy to allow access, but as a rule, owners have to trust the builder and the chosen classification society to behave properly and transparently.

Even when an owner takes delivery of his yacht, he can’t enquire as to what happened during the build process.

A confidential problem

This is not unique to the yachting world. Commercial ship owners have been battling with this issue for many years. When put to proof, the classification societies and the flag states will always rely upon years of contractual practice.

We had occasion to deal with a particular flag state that was responsible for approving a yacht for commercial use that, in our and our client’s opinions, made far too many concessions and gave far too many waivers to the point that the relevant regulations ceased to have meaning. When we asked the flag state to disclose the file to the owner of the yacht, it refused.

However, there is a way to circumvent this.

Breaching the confidentiality barrier

In recent months on new yacht building contracts that I have been negotiating, I have inserted contractual language that I would urge all owners to insist on.

Firstly, get specific ‘letters of authority’ issued by the builder in favour of the owner and addressed to the relevant classification society and flag state allowing the owner free access to the files held by class and flag for the owner’s yacht. These letters must be acknowledged by the classification society and flag state.

Further, in the event that the owner terminates the build contract, the letter of authority confirms that the classification society and the flag state must confirm that they will, on request, subject to all outstanding fees being settled, disclose their complete files to the owner to enable the build to continue.

The alternative, where you don’t have such a clause and you suspect something fishy, you can start proceedings against the builder and seek third-party disclosure order from the court to serve upon the classification society or flag state.

The right to know

In this era of transparency and full disclosure, owners should be provided with information from classification societies and flag states at all points during a yacht’s life.

I have a file that clearly shows a surveyor letting things slide provided the yard corrects the ‘defect’ on the next yacht. Would that surveyor have done the same thing if he knew that the owner would have full access to the surveyors’ decisions?

I don’t often agree with US Senator John McCain, but I agree with him when he says ‘excessive administration secrecy feeds conspiracy theories and reduces the public’s confidence in government’.

Among owners and their advisers, the secrecy of flag states and classification societies that is founded on simple contract law reduces owners’ confidence in the work that classification societies and flag states do. No one should be able to deny owners access to the very people who pay for the yachting industry to live. Remember: no owners, no industry.

Owners must contractually obligate classification societies and flag states to be transparent. There will be resistance to this openness, but the superyacht industry will, in the end, be the winner.

Originally published: November 2011.

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