How to make build contracts watertight
by Benjamin Maltby
Most yards have their own just sign here standard build terms, which vary in length and complexity and are reasonably fair, but given the amount of money at stake, such contracts should be viewed only as an opening to contractual negotiations as they often miss out crucial aspects.
Where the buyer is providing the plans to a yard for their superyacht, the following golden rules should be adhered to. These ensure a smooth build, and to protect the buyers intellectual property.
The build contract must set out who is going to be responsible for which elements of the design, in order to minimise the risk of a dispute over responsibility for any defects caused by defective design.
The buyer must make sure that the naval architect, plus any separate stylist(s), provides their final plans in good time.
The yard should be obliged to review the plans and check thoroughly for any likely deficiencies in the design, giving notice of any to the buyer, and be held contractually liable in the build contract where this has not been undertaken.
It should be clear from the build contract how the yard is to be compensated for putting right any design defects.
There should be a clear mechanism for agreeing to put back the delivery date where it becomes clear that a particular design is flawed.
The build contract should leave no room for doubt as to whether and how the buyer is to be compensated if a problem arises during the warranty period as a result of a defective design.
Most importantly, the buyer should put in place a system of active contract management to ensure that the various parties adhere to the contracts made with them, and cooperate between themselves as required.
One immediate concern not often covered is privacy. Shy buyers will need agreement on this even before full negotiations begin, and once incorporated these provisions will need to cover third-party suppliers. However, publicity about the yacht itself and any technical innovations will enhance its reputation and may boost its resale value.
To avoid confusion, the yard should be expressly liable for any of its suppliers or sub-contractors mistakes, and must be obliged to pay suppliers promptly
Design and specifications
If a designer is appointed steps must be taken to ensure that the yard does not interpret the designs in its own (possibly cost-cutting) way. Specifications must be highly detailed.
Further, a separate naval architect might have to be instructed to assess and modify the plans and agree the detailed specifications with the yard. A separate interior designer is normal.
Modifying a yacht after it has been built can be particularly expensive, so the detailed specifications which will dictate whether, for example, the vessel can be chartered must be set out in exquisite detail.
To maintain exclusivity, the buyer must ensure that the yard agrees to respect the designers intellectual property, and since a vast amount of equipment and spares will be purchased, what is to be supplied by the builder must be made absolutely clear.
As large projects can take several years to complete, buyers sometimes change their minds on various details. The contract must allow this to take place without the potential for misunderstanding. Flexibility to take account of cost fluctuations in materials and exchange rates is also wise, as putting the yard under financial strain is to no-ones advantage.
The yard will almost certainly need instalments to be paid to cover the cost of materials. It is better though to pay following the completion of specific stages, to encourage the yard to stick to the schedule, with stage completions confirmed by the classification society. A down payment before construction starts is normal.
To avoid confusion, the yard should be expressly liable for any of its suppliers or sub-contractors mistakes, and must be obliged to pay suppliers promptly. The materials provided must not be allowed to be subject to any form of title retention, to prevent anything being reclaimed later.