Understanding the complexity of yacht build contracts

20 January 2015By Benjamin Maltby
Finance is an important part of a build contract, buyers must pay attention to who is responsible for what during a build.

Naturally, prospective owners want to engage the very best individuals and companies to create their beautiful superyacht. There are, of course, many more parties involved in builds than the buyer, the naval architect and the yard. There will be interior designers, classification societies, tank testers, vibration analysts, and erudite engineers of every description.

With so many people providing opinions, potentially over a number of years, numerous technical issues may arise, which could lead to a disappointed buyer. It could be that objective specifications have not been met, or that the general build quality is lacking. It is also possible for the project to have cost more money or have taken more time than was originally envisaged. But perhaps the most serious potential issue is that the design contains inherent flaws which have only become evident during the build or following launch.

When a build doesn’t go to plan

When a build goes wrong, the responsibility has to lie somewhere among the many parties involved. This will, of course, be governed by the contract(s) by which they were all engaged. It may be possible to sue parties with whom the buyer hasn’t contracted for negligence, but this will be far harder.

Much depends on the applicable law, but normally liability under a contract is said to be ‘strict’: whether or not the contractor did what was agreed is a black-and-white issue. Without a direct contract in place there may be the need to prove that the party at fault owed a ‘duty of care’ to the buyer – a surprisingly difficult process.

Because some yachting lawyers are principally shipping lawyers, there can be a tendency to treat superyachts like supertankers. It’s tempting to try to save time by using standard shipbuilding contracts – which are available without charge on the internet if one knows where to look.

Such contracts are drafted for use where only very basic specifications must be met, relating to cargo capacity, speed and fuel consumption, and responsibilities can be unclear from the vague contract wording – or left out altogether. Trading ships are designed to meet specific technical criteria, using tried-and-tested designs.

But yachts are unique combinations of novel designs and innovative materials – and there’s always a risk particular combinations won’t work. Superyacht build contracts differ widely, and as they are always treated with the utmost secrecy, industry norms have never truly crystallised.

Allocating responsibilities

The clear allocation of responsibilities is vital if parties aren’t to blame each other for miscalculations.

In an ideal world, the yard would agree to take responsibility for every part of the design and build: this would leave all responsibility resting with one party and any liability would be clear-cut. But yards have widely differing views as to their function.

While some yards aspire to be an all-encompassing provider of the finished product, others see themselves as mere fabricators. Some yards prefer not to take on particular levels of responsibility for no other reason than because that’s how they have always approached builds, while others may have limited capabilities.

Using a subcontractor will speed up the build process, but can add another level of complexity to the project.

Sub-contractors

Yards can always try to subcontract parts of the process, while retaining ultimate responsibility. It may be necessary to use third parties in order to speed up the build or reduce costs, and there will, of course, be a huge amount of complex equipment to be purchased.

Indeed, buyers should be wary of yards without much superyacht building experience, who sometimes think that the fit and finish need only meet the standards required for trading ships. This happens all too frequently when commercial yards look to diversify. Filling, fairing and painting is a good example of a job which almost always needs a specialist yacht team.

Some buyers may wish to contract directly with all the various parties because of the sense of control this can provide, or because the yard is contractually or commercially bound to use only certain designers or suppliers.

Other buyers may wish to ensure that ‘their’ design is not used in future builds or that, if it is, then they see some profit through ownership of the design. They may also wish to ensure that yards do not add unjustifiable hidden mark-ups.

Certain supplies will always be provided by the buyer. These often include items such as the audio-visual system, tenders and toys, loose furniture, linens, tableware, stores and consumables. There must be a clear demarcation in the build contract between buyer and yard-supplied items. The yard should be obliged to store these items on their premises – in a secure and well-protected area. The yard should also be responsible if these are damaged before launch, taking out the appropriate insurance.

Role of the project manager

Even if the yard is to be responsible for all aspects of the design and build, buyers should always appoint a project manager to be present throughout the build.

A well-briefed representative may also be required if the buyer is too busy to answer endless specific, detailed questions.

The stage at which a build captain is required is hotly debated, but mid-way through the build is normal.

While buyers should make sure that there is a close and efficient working relationship between their team members and the yard’s, a distance should always be maintained so that lines do not become blurred.

Build negotiations

Buyers are in a very strong position when negotiating the build of a superyacht. There is a tendency for yards to offer their standard terms first, which may not favour the buyer.

Unlike numerous other industries, there is no clear consensus as to the form and contents of superyacht build contracts and how responsibilities should be spread. Opinions vary wildly, so it is important to seek the advice of a dedicated yachting expert and make sure that everyone’s responsibilities are clearly understood from the start.

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: July 2010. Updated August 2012.

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