The dos and don’ts when entering a superyacht construction agreement

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The dos and don’ts when entering a superyacht construction agreement

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HAVING A SUPERYACHT built is a significant investment. From a buyer’s perspective, it is vital that the Yacht Construction Agreement (YCA) ensures timely delivery of the desired superyacht and adequately protects the buyer’s rights and remedies. To help achieve this, there are many dos and don’ts when entering a YCA. Here are some of the more crucial points to remember.

Choose Yard Carefully
Do your homework on the yard you are considering contracting. A yard that has a good reputation and long, unblemished track record is likely to be a safer bet. A longer track record suggests financial and commercial strength. The yard’s experience should hopefully translate into the timely and trouble-free completion of your superyacht.

Due Diligence And Independent Guarantees
It is not given that the yard itself will be your contractual counterparty. If your counterparty (whether the yard or another company) has limited assets, steps should be taken to protect your position. This is especially important where you are making milestone payments during the construction process. If you have no protection, you are pouring money into a hole from which it likely cannot be retrieved.

To protect yourself, the YCA should make clear that milestone payments are ‘advances’ and refundable if the YCA is terminated. A third-party guarantee should be sought to secure refund in case the contractual counterparty fails to make refund.

Alternatively, the YCA could provide that title to the superyacht passes gradually to you during construction with each milestone payment. In that case, you have ownership of the superyacht. The downside is that you risk being left as Owner of a half-built superyacht at a yard in a foreign country. You will then need to arrange for towage to another yard for completion (possibly involving export to another country) – that might not be straightforward and could create more headache than a simple refund.

Naturally, if you ask for guarantees ensure the proposed guarantor is a substantial entity.

Never Accept Standard Term Contracts
These will often be biased unfairly in favour of the yard. There will be few situations in which a yard contract will not be negotiable.

Make Provisions For Changes And Delays
Changes are common in superyacht construction projects. The YCA should outline who is liable for which particular changes and the delays they cause. The effect of those delays should be agreed. Normally, if the buyer is liable, the delivery date is extended. If the yard is liable, liquidated damages should follow.

Where And When Delivery Should Occur
Place of delivery will impact on taxes that apply to the sale. Time of delivery will normally trigger the last instalment payment, and running of the yard’s warranties. As most issues are detected within the first few months of use, time of delivery should be when you intend to physically take over and start using the superyacht. Sub-contractor and supplier warranties should also be assigned to the buyer on delivery.

Consider Dispute Resolution Clauses
People normally pay little attention to dispute resolution clauses. However, careful drafting here could make the difference between having viable remedies and losing your entire investment. Most yards will, as a default, want to have their local law and court decide any disputes. In some countries, a yard’s ‘home-field advantage’ may be a serious problem for a foreign buyer.

Choosing a neutral third venue is usually an achievable compromise. England and Hong Kong are always good choices, with long legal traditions and a reputation for complete impartiality.

If privacy and speedy dispute resolution is desired, choose arbitration.

Consult A Maritime Lawyer Before Entering Contract
Maritime law is a specialised field with many subtleties. Experience of maritime construction contracts is vital to protect the buyer’s position properly. Remember, once you are legally bound, it is a lot more difficult to protect you from a bad bargain or unfavourable contract terms. You do not want to discover down the road that your rights are unenforceable.

At the end of the day superyachts cost millions. Engaging a maritime lawyer to protect your interest is a sound investment.

There are many world-class yards out there, and relatively few buyers. Your bargaining position should be strong. With the right professional team looking out for your interests, you can ensure smooth construction and delivery of your dream superyacht, and many years of luxurious yachting.

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Steffen Pedersen is a partner based in the Singapore office of Thomas Cooper. The firm was established in 1825 and is the oldest maritime firm founded in London. It has offices in London, Madrid, Paris, Piraeus, São Paulo and Singapore and is licensed to practice English, Hong Kong, French and Spanish law and run arbitrations under Singapore law. Pedersen represents clients in negotiations and advises on construction contracts globally, including handling disputes for yards and Owners in both court and arbitration. Dual qualified as a Hong Kong and English solicitor, he has spent his entire career in the Far East, where he grew up. He also speaks the Scandinavian languages and Mandarin Chinese.