Deciding contractual consequences of builds in advance

While most builds proceed relatively smoothly, given the complexity of projects and the importance of the correct construction sequencing, delays are always possible. So it’s best to accept this and agree in advance which causes of delay are permissible, how much delay is acceptable, and how much money will be deducted from instalments when delays occur, and include these factors in the build contract.

Force Majeure

Events beyond the control of the yard are known as force majeure events and these may or may not be defined by law. When they are not, the parties need to ensure that all possibilities are covered and decide what their effects will be.

Typically, the contractual delivery date will be extended, but the parties will need to clarify whether this is in reference to the number of days the force majeure event continued or the affect it had on the project’s critical path. And even when a delay is caused by a force majeure event, such latitude should be subject to a cap. so that the point where ‘enough is enough’ is clear.

The exception to this will be delays due to modifications ordered by the buyer.

Buyer modifications

While there is a temptation to simply discuss modifications, as this is more convenient, cost overruns and disproportionate delays may result in changes being made to a yacht’s design and/or specifications.

Modification procedures must be clear and adhered to. Numerous changes may also start to affect the yard’s other projects, so it may want terms in the contract to stipulate that such modifications will only take effect if it agrees to the proposed adjustment to the contractual price and delivery date.

The yard may also want to reserve a right of refusal if other projects would be affected, and additional payments may also be required. Clearly a yard could be put in an overly dominant position if such a clause is not well drafted.

Delivery on completion

Sorting matters out with a yard after the final instalment has been paid can be especially difficult, so it is crucial that all the correct documents relating to legal title are presented before payment is made. Otherwise the new yacht cannot be registered and will not be allowed to sail anywhere. The place of delivery may also have tax implications, and must be agreed upon.

At the point of delivery, the yacht should not only function and appear as envisaged but it should meet all the relevant classification society and flag state regulations, especially if it is going to be chartered.

Build contracts should not only allow access to the yard for the buyer’s representative, but also for reasonable tests and inspections, as well as allowing any necessary access to subcontractors’ and suppliers’ premises. The representative should also be allowed to require the yard to rectify evident faults immediately.

Rectifying faults after delivery

Ultimately, if faults are not put right, the buyer must have the right to refuse delivery, so the build contract must make it crystal clear whether each particular requirement will have the legal status of a condition, entitling the buyer to refuse delivery – especially as small defects are inevitable in any large project.

Unfortunately, the laws of most jurisdictions are vague on such matters, involving considerations of whether the yacht is of ‘satisfactory quality’ and ‘reasonably fit’ for purpose and therefore in a ‘deliverable’ condition, and this problem is made even worse by the critical importance of aesthetic elements.

The newly completed yacht will also have to be formally tested at sea to ensure that the performance matches the specification. This is the buyer’s opportunity to determine whether the yacht has been built to conform with the agreed specifications and to check whether it meets the contractual performance criteria. An expert representative with the right qualifications and testing equipment should thus be appointed to attend.

As no two yachts are ever identical, their performance in terms of speed, noise levels, vibration and range are difficult to predict, even with today’s computer-aided design techniques, so a practical solution is to agree a fixed compensatory sum that the yard must pay if the performance criteria aren’t met, but fall within certain limits.

The alternative is to try to put a figure on any disappointment later on, which will be difficult.

Material and workmanship guarantees

Not all of a new yacht’s inevitable little faults will come to light during the trials, as it is only over time that all the equipment and systems on board will be used in varying weather conditions. The yard should therefore guarantee materials and workmanship for a period of warranty of at least a year after delivery, during which time it will usually agree to correct defects but not to compensate.

In return, the yard may demand that (otherwise automatic) legal rights are given up and stipulate that no further responsibility will rest with it once the warranty period has expired. It may not wish to compensate for loss of use and charter income, and a detailed notification procedure may have to be complied with.

Such demands should be considered carefully, and where the buyer grants significant concessions, the contract should ideally allow for the last payment to be withheld until the end of the warranty period. And as it may be necessary to bring the yacht into a yard or even a dry dock, the buyer must be entitled to have work carried out a yard other than where the yacht was built, if cruising schedules are not going to be interrupted.

Using independent experts for checks

Disputes between the buyer and yard are most likely to be technical in nature, as other factors such as the lustre of paint can be objectively measured. Since courts are better at deciding points of law rather than fact, it thus makes sense to decide which points would be better decided by an independent expert.

For example, a representative from the classification society is typically agreed on to decide points upon which the society has created technical rules, while the use of another mutually agreed expert should be agreed for other technical matters. However, complex rules for the expert’s instruction are more likely to provoke allegations of non-adherence by a party not getting its way, and should be avoided.

Any expert brought in should be asked to provide just an opinion and not to act as arbitrator. Arbitrators decide upon matters of law and evidence, and this requires the expertise of an experienced legal expert. It should be agreed that matters which are non-technical or which involve large sums of money should be arbitrated either according to the rules of an established arbitrators’ association or referred to court.

The choice of arbitration or litigation may depend on the enforceability, or otherwise, of an arbitrator’s decision compared with a court judgment in the home states of the parties involved. Sometimes, an arbitrators’ decision will be the more powerful of the two, and unlike court proceedings, arbitrations are confidential in nature.

It is no easy task in a cast-iron contract to include long-term flexibility and an acceptance that some flaws will be evident in the finished product, so time spent discussing and agreeing on matters at the start will be a sound investment compared with the potential arguments that could bubble up later on.

Benjamin Maltby is an English barrister with consultants MatrixLloyd, providing impartial guidance on all aspects of large yacht purchase, building, ownership and operation.

Originally published: May 2008.