I instinctively knew the moment I stepped out of the O2 store at Westfield Stratford City that I really didn’t need that particular mobile phone contract or the iPhone 5. I had just signed their standard terms and conditions but I knew that I had a seven-day ‘cooling off’ period within which to change my mind and not make the commitment over the next three years that O2 were hoping I would make. Unfortunately in signing a yacht build contract you do not have that seven-day cooling off period, but there are times when you, as an owner, will either want or need to walk away from a yacht build contract in its entirety or, using the mobile phone analogy, switch your airtime contract from one company to another; in other words, have the yacht finished at a yard other than the original builder.
The exit route from a yachtbuilding contract may be triggered by an event on the builder’s side – typically the insolvency or near insolvency of the builder or a material breach of the contract by the builder. Equally, the owner might want out or be forced out due to his own breaches or insolvency. I have never experienced a situation where a builder has just given up. However, I have dealt with several owners who just don’t want to continue with the yacht any more.
If the owner is to terminate (due to a builder problem), his remedies are normally one of two courses of action (provided that his Notice of Termination is absolutely legitimate). Cash or boat. He can either demand the builder pay back the aggregate of all the instalments thus far paid (normally with interest) or the alternative, obligate the builder to deliver to the owner the yacht in order to allow the owner to complete the yacht elsewhere.
If the builder is insolvent, unless you have full refund guarantees or the appropriate credit insurance, the ability to recover cash would be quite difficult, if not impossible. It is therefore imperative that such repayment be the independent obligation of a bank or a credit insurer, which would fall outside the normal rules of insolvency. Even so, do not expect anything but a compliant builder to allow you to plunder such instruments of refund. I well recall a war story of mine when the builder was in material breach of the contract (in this case the yacht was more than a year late and my client instructed us to terminate the contract and seek recovery of instalments by way of the bank’s refund guarantees). The builder in question sought, and won, an ex parte injunction preventing its bankers paying out on the refund guarantee, which its bankers duly obeyed. We were always slightly suspicious of the bank’s role in this, in that it appeared to delay responding to the demand for payment as if it were awaiting the injunction (which was later overturned) and then not before the yacht was ready for delivery. Often the refund guarantees are only guarantees if the builder sanctions the payout, or if a dispute is resolved in the owner’s favour. Never expect a builder to say, “OK, have your money back,” and, to be fair to builders, they don’t want the buyers asking for their money back just because they are bored.
Even in circumstances where an owner wants to shift the yacht and have her finished elsewhere, it will occasionally come as a rude shock that despite the contract often making provision for title to the yacht to be progressively transferred to the owner as the yacht is built (as happens in the event of the builder’s insolvency), unless the transfer of title is done in accordance with the laws of the country where the yacht is built, the owner may find he has no claims for his vessel. For example, in Italy, regardless of the law of the contract, you must register with the relevant harbour master a full copy of the build contract, translated into Italian, declaring that the yacht is being built for the person buying the yacht. Without such registration, the English law declaration in the build contract that the yacht is being built for the owner will have absolutely no effect against an Italian liquidator.
An alternate method of title transfer in Italy is by way of a notarial deed that transfers the part of the yacht that you have paid for. The problem with this game of musical chairs is that when the music stops the builder and the owner share title. The question is: how much title? If a liquidator has been appointed, the liquidator will claim part of the title in the boat. The boat will not be allowed to go anywhere until some resolution has been arrived at with the liquidator. And then, who will yield the sword of Solomon?
But what if it goes bad the other way – what if you, as an owner, for whatever reason take the view that either you cannot or will not continue with the build? What is your exit? For the past few years, I have seen a few owners who have chosen to walk away. Some of these exits have been enforced; that is, politically rather than financially motivated. Provided the relationship between owner and builder is amicable and there is transparency as to what is happening, normally the builder will behave in an elegant manner and will work with the owner to exit the piece. An owner may, for example, agree to the yacht being marketed while in construction with a view to getting as much money as possible from a hoped-for sale. However, in circumstances where the owner simply stops paying or cannot afford to proceed, the owner has to be careful as to how the builder exercises the termination provisions. In some build contracts the builder will have a ‘penalty’ which is portrayed as a cap on the owner’s liability. Owners should be wary. In my opinion pre-set amounts are not realistic and owners may find they are forced into suing their builder to claw back whatever percentage was agreed at the start. The law works in such a way that the builder can simply demand the damages from the owner, knowing that, if challenged, the court would simply have to ask the question: is a debt owed? A simple yes or no answer, without having to ask or look behind whether that debt was justifiable or not, would solve the matter for the builder. But the story does not necessarily end there. As a matter of English law if the money demanded is not a genuine preestimate of loss, the courts will adjudge that the amount demanded is a penalty and not enforceable. It would then fall upon the owner to try and argue that the amount demanded was not a good guess at what the pre-agreed damages were but were a penalty and thus illegal.
In normal circumstances where there has been a default on the part of the owner, the builder will either continue the build for its own account or sell the project in an incomplete state. Remember, though, that the builder does not have an obligation to get the best possible price in selling the project.
A yacht build is not a dinner party – it is not magnanimous. It is a cold business engagement with the consequences of failure set out in sharp relief in the contract. The cost of dispensing with a yacht build contract without troubling your honour with reproach is a delicate matter and should be considered, with all its consequences, in the same way as the prenuptial agreement before the wedding.
This article originally appeared in The Superyacht Owner.