Over the past 50 years, few sectors have seen the growth and development that the superyacht sector has witnessed.2 While the existence of luxury yachts is not per se a creation of the past half-century or even the last century,3 the existence of, and demand for, luxury yachts by wealthy private individuals and families of the size, scale, complexity and comparative value most certainly is.
There are, perhaps, many points in time that could be characterised as the birthplace of the large luxury yacht industry. However, the conversion of the Canadian anti-submarine River-class frigate, HMCS Stormont, into motor yacht Christina O4 by billionaire Greek shipowner Aristotle Onassis in 1954 would incontrovertibly rest comfortably among them.
Since 1954, the global superyacht fleet has grown consistently, with some reports5 estimating there to be in excess of 5,600 superyachts (yachts exceeding 24 metres in length) in existence as of 2019. The available industry data shows there to be an ever-increasing demand for larger yachts – in 1990, a 44-metre yacht would have put that yacht within the list of top 100 largest yachts globally. Now, the average length of all yachts in-build has exceeded the 50 metre mark, with over 30 superyachts in operation that exceed 115 metres in length. In addition, the past few years have seen a surge in orders and deliveries of long-range expedition and explorer yachts for purchasers looking to explore the far reaches of the planet.6
Throughout all of the above, English law has maintained a consistent foothold on the superyacht industry with many international contracting parties electing to have their yacht construction contracts, sale and purchase agreements, refit, repair and conversion contracts, charterparties, management and crewing agreements and other core yachting contracts governed by English law and subject to a dispute resolution regime seated in London – often London Maritime Arbitrators' Association arbitration.
Wealthy private individuals and families with ownership interests in superyachts are likely to have a considerable sum of money tied up in this increasingly complex and developing asset class. While we cannot possibly offer a complete guide to the law surrounding superyacht ownership within the confines of a single chapter, we hope to highlight some key legal considerations and common issues for owners of superyachts, their family offices and trusted advisors in relation to three areas of superyacht ownership: (1) superyacht sale and purchase transactions; (2) superyacht refit and repair projects; and (3) chartering (principally an analysis of the most common type of charter dispute, which may resonate with owners and charterer alike).
II Buying and selling superyachts
Perhaps the most common type of superyacht transaction is the sale and purchase of a pre-built or second-hand superyacht. This section explores the key legal and practical issues for buyers to consider during the purchase process.
i The sale contract
Many second-hand yachts are sold utilising one of small number of standard superyacht industry contracts, which are carefully amended and supplemented on a deal-by-deal basis. The most prevalent form is the Memorandum of Agreement approved by the Mediterranean Yacht Brokers Association (MYBA),7 informally known as the 'MYBA MoA' or the 'MoA'. This standard-form contract provides a basis for the parties to record the terms of their agreement. However, it was intentionally designed to be supplemented and amended depending on the needs of the parties. The text of the MoA expressly envisages a separate Addendum One that, among other things, lists the key title transferring and other delivery documents that the buyer requires the seller to produce at completion. This addendum typically forms the bulk of the negotiation between the parties in the lead-up to the execution of the MoA.
In negotiating the MoA and Addendum One, key issues for buyers to consider include the following.
What documents are the seller agreeing to provide? Are these documents sufficient to register the vessel in the buyer's name or to evidence the authority of the seller to sell the vessel?
Pre-existing charter commitments
Has account been taken of any charter contracts that may have already been entered into prior to an agreement in principle being reached for the sale? If so, is it clear that the buyer will perform those charters? Alternatively, is it clear that the seller will pay the charter deposits to the buyer or has provision been made for the relevant charter contract to be novated? All of these questions need to be considered when dealing with an active charter yacht.
Sea trial and survey
What rights of sea trial and condition survey does the buyer have? When do these rights expire and does the buyer's surveyor have sufficient time to complete all the surveys that the buyer wants to carry out, taking into account the time between signature of the MoA and completion?
Intertwined with the outcome of the sea trial and survey are the acceptance criteria for the yacht, which detail the circumstances in which the buyer is entitled to reject the yacht or will be deemed to have accepted it post sea trial and condition survey. The default position under the MYBA MoA is that the buyer is deemed to have accepted the yacht unless he or she has tendered written notice of rejection, and it is important to note that, in its unamended form, the rights that a buyer has to reject the yacht are limited.8
Are any personal guarantees being requested in the addendum or is a personal guarantee considered necessary? Nearly all yachts are held within the ownership of a special purpose vehicle (SPV) incorporated for the sole purpose of yacht ownership. As a buyer, you might ask yourself whether you are happy dealing with a one-ship company. Similarly, buyers of yachts often contract via a shell SPV established for the same purpose. As the seller, are you happy contracting with a company with no assets?
There are, of course, many other smaller issues that arise as a result of a yacht sale and purchase. For example, consideration will need to be given to matters such as whether the buyer wishes to retain the yacht's name (the default position is that the buyer is to apply to change the name of the vessel within seven days of completion), whether the parties wish the vessel to be anti-fouled while out of the water for the condition survey and where the yacht is to be physically delivered.
ii The inventory
When yachts are viewed by prospective buyers, they will almost always be viewed with all of the furniture, artwork and personal belongings of the current owner – these viewings often take place at yacht shows where the yacht has been appealingly dressed for display. Buyers who agree to purchase a yacht following such a viewing might reasonably expect that the yacht will come largely equipped as seen. However, this is not necessarily the case and under the MYBA MoA it is the obligation of the seller to produce and provide to the buyer an inventory of items that will be included in the sale within seven days of signing the MoA.
The inventory should include 'everything belonging to the vessel on board and ashore and on order'.9 The buyer then has the opportunity to accept or reject the inventory, either expressly or via conduct. While few sale and purchase transactions result in there being a deal-ending dispute in relation to the inventory – principally because many of the yacht brokerage houses listing yachts for sale compile inventories early on in the sale process so that they can inform buyers of what is or is not included – difficulties can arise where the parties do not agree on the content of the inventory. Industry practice has, therefore, seen the parties amend the inventory regime set out in the MoA to reverse the presumption away from the seller listing everything that belongs to the yacht to the seller listing those items that are excluded from the sale, with everything not listed in that exclusions list being captured within the definition of the 'Vessel' and therefore included.10
Buyers and sellers should therefore pay particular attention to the inventory, and if there is something either party wants expressly included or excluded, they should inform the other party as early as possible in the sale process so that it can be appropriately documented.
iii Tax and value added tax
Tax – in particular value added tax (VAT) – is an incredibly important consideration for any yacht buyer. Failure to take proper account of it could result in the buyer having to make a payment of up to 20 per cent of the purchase price (in the form of VAT), plus penalties. It is an expensive thing to miss or not to have thought about, particularly when setting a budget for a yacht.
A detailed examination of the complex VAT regime and its application to superyachts is beyond the scope of this chapter. However, in basic terms, VAT is a tax imposed throughout the EU's Member States on the importation or sale of goods and services, with yachts falling into the former category. Each Member State has its own standard rate of VAT that it levies in accordance with the laws in force from time-to-time. If a yacht is brought into European Union waters, this is treated for VAT purposes as the importation of the yacht and, like other types of goods, gives rise to a potential liability for VAT,11 unless the yacht owner is able to avail himself or herself of an exemption or relief from such liability under EU law. There are a limited number of exemptions and reliefs available to yacht owners and, accordingly, it is important that professional advice is sought prior to the planned arrival of any yacht into the EU.
Key questions for buyers involved in acquiring a yacht will include whether VAT has been paid on the yacht, whether the yacht has been operating commercially, where she is currently flagged, how VAT was paid or accounted for by the seller and what evidence is available to prove the payment of any such VAT.
These are all questions that a prudent buyer will be asking of the seller, and will be questions most sellers should be ready to answer.
iv Pattern of use
As a buyer, you are likely to have a very clear idea about what you intend to do with the yacht; for example, you may know that you only ever want to use it privately with your family and friends in the Mediterranean. Alternatively, some buyers like the idea of offsetting some of the running costs through chartering it out to third parties and covering both the Mediterranean and Caribbean seasons. Either way, it is important to consider how the yacht will be used prior to it being purchased. This is because the manner in which a yacht is used has a direct relationship with its tax status and the certifications the yacht must have, namely, whether it meets the relevant standards for commercial operation or not and whether any of the VAT exemptions apply. All of the yacht's certificates will need to be checked during the purchase process to ensure they are valid, full-term and free of restriction.
III Refitting a superyacht
Most superyachts will undergo a refit during their lifespan – indeed, it is not unusual for an owner to undertake multiple refits during their ownership tenure or for an incoming buyer to wish to redesign or change certain areas of the yacht following its purchase. Some buyers and owners will engage in a refit process to modernise the vessel, perhaps by renewing interiors to accommodate a change in fashion or updating navigation or other equipment. However, sometimes more structural modifications of the yacht are planned – such as the addition of swim platforms or the redesign of the interior layout of the vessel to suit tastes and needs.
It is important for owners embarking upon refit projects to have clarity on and to identify the precise scope of work that they wish to undertake and, much like any other type of construction project, to ensure that where new designs are to be implemented into a pre-existing structure, those designs are workable in all respects with the yacht and her pre-existing systems. A refit project accordingly requires proper preparation and planning, both from a commercial and a legal perspective, in order to ensure its success.
i Choosing a shipyard
Identifying the right shipyard to carry out the refit is a principal consideration. Many owners elect to refit the yacht at the shipyard where the yacht was built – indeed, there can be some distinct advantages to doing so, including the yard being familiar with the yacht and her systems. However, there are now many long-established European and North American shipyards offering competitive pricing and attractive re-delivery dates to owners engaging in refits. While this means more choice for owners, it also involves an increased number of issues to consider when determining where to refit.
Chief considerations for owners when selecting a shipyard will include whether the shipyard has the experience, capacity and financial stability to take on, plan and effectively manage the project. This will require the owner's team to carry out a due diligence process including asking for references in order to confirm the reputation of a potential contractor and researching recent projects to check whether they were completed satisfactorily, within time and on budget. From a technical point of view, understanding whether the shipyard has the required workforce, plant and machinery and whether, and to what extent, work will have to be subcontracted, are all critical questions.
There are a number of practical and logistical considerations for owners as well. These include the yard's physical accessibility (whether the shipyard is located close to an airport is often an important consideration) and the facilities available to the yacht's crew during the refit. The willingness of the shipyard to assist with transport and obtaining any necessary visas for crew members should also be ascertained.
The owner will also want to understand the financial drivers by identifying both mark-ups and overhead charges in order to understand the shipyard's profit and to agree suitable milestones for the payment schedule. In this context, it is also important to confirm the position regarding tax and duty. All taxes and duties relating to the shipyard's supply should be included in the contract price, but clarification may be required in relation to items of owner's supply (and local tax advice may be necessary).
ii Regulatory considerations
It is important to clearly define in the contract the rules and regulations (most importantly requirements of the relevant classification society), which must be complied with. In this regard, the impact the refit might have on the yacht's classification certificate or any flag state certificates must be taken into account, as the addition of new equipment may have consequences for the compliance of the yacht, both in terms of vessel certification and safe manning. For example, alteration to the hull structure or machinery may alter the tonnage, affect stability or statutory fire safety requirements. Re-surveying or re-measuring may be required to ensure continued compliance, but it may also affect crew certification and thus the ability of some individuals to work on the yacht. It is, therefore, advisable to involve the yacht's flag state and classification society early on in the project in order to identify any aspect of the refit likely to have an impact on the yacht's certificates.
iii Managing the risks
As noted above, there is a tremendous range in the scope of likely refit work. However, whether the project is simple or complex and whether undertaken by a specialist yacht builder or general shipyard, there will inevitably be risks inherent in the nature of the work to be performed by the shipyard from which substantial cost overruns and delays may result. Due diligence on the shipyard and documenting the project in a properly negotiated contract is, therefore, critical. 12
A refit contract should address, and therefore seek to mitigate, various commercial, financial and technical risks. Some key considerations in this regard can be briefly described. The contract needs to define the agreed project work-scope clearly and to incorporate detailed technical specifications. The timeline should be realistic and the contract must be clear as to the circumstances in which the shipyard may claim any extension of time. Another aspect that deserves particular attention is the re-delivery of the yacht. The contract should clearly specify the circumstances under which the owner is entitled to refuse re-delivery of his yacht if he or she is not satisfied that the shipyard has met the contractual requirements and usually provides for the shipyard to pay liquidated damages for any unauthorised delay in re-delivery. Liquidated damages are often a key focal point of negotiation of the refit agreement. Strategies to mitigate financial exposure will vary from project to project, but may include negotiation of the timing of the payment milestones and the provision of security by the shipyard. The risk of the shipyard becoming insolvent should always be considered, and the contract should provide for the owner to be able to terminate his or her obligations and remove the yacht where a defined insolvency event occurs. This is not always straightforward, as local insolvency law will be relevant.
There are important matters to consider when assessing the technical risks, given the dramatic effect poor workmanship can have on both the value and the owner's use and enjoyment of the yacht. A key part of the owner's project management will be the appointment of a representative to supervise the refit. This may be the captain of the yacht, but in more complex and extensive refits this really ought to be an external supervisor specifically employed for the project with suitable technical expertise appropriate for the scope of work. The shipyard's post-delivery warranty is also important – it should be extensive and have a duration of at least 12 months.
IV Charter Disputes
It is difficult to put a precise figure on the number of superyacht charters that are conducted annually, but with an estimated global commercial charter fleet of circa 3,000 motor and sailing yachts the number is likely to be significant. Charter fees range significantly from around €20,000 per week for smaller yachts up to €1 million+ per week for the largest and most luxurious superyachts in the world.
The vast majority of yacht charters run without a hitch. However, sometimes problems can arise. This section considers one of the most common types of dispute in relation to superyacht chartering – disputes arising out of cancelled charters, in particular force majeure cancellations made under the MYBA Charter Agreement.13 It is worth noting that there are no stand-alone limitation of liability or exclusion clauses in the MYBA agreement that limit either the owner's or charterer's liability to each other. As discussed below, certain heads of claim (e.g., claims for damages arising out of the cancellation of the charter) are limited via the liquidated damages regime, but outside of the confines of damages for delay in delivery and cancellation of the charter, the parties have broad exposure to liability to one another under the agreement. Accordingly, it is critical to take specialist advice on the terms of any charter contract that may give rise to liability (especially personal liability), in particular where such little protection exists in the standard form contract.
i Force majeure cancellation – the MYBA Charter Agreement
Hurricanes, storms and riots are but some examples of acts and events that neither party can control but can, for obvious reasons, lead to an owner cancelling a charter. Often, such acts and events are known as events of force majeure, a term that has no specific definition within English law and therefore requires contractual definition by the parties.
In the United Kingdom and Europe, the industry standard yacht charter contract, the MYBA Charter Agreement, contains a simple regime that details what is to happen when an event of force majeure requires the owner of a yacht to cancel a contractually agreed charter.
It provides that if, prior to the commencement of the charter, the owner tenders notice of cancellation and that notice is because of force majeure, then the charterer's exclusive remedy is to receive immediate repayment of the full amount of all payments made by him or her under the Charter Agreement. In other words, the charterer gets a full refund.
As is apparent, in order for the owner to avail himself or herself of the force majeure cancellation regime, the owner must be able to show that the reason for the cancellation is because of an event of force majeure.
Thankfully, the MYBA Charter Agreement does not leave the parties to speculate about the meaning of the term. The agreement provides a definition at Clause 18, which states that force majeure means:
any cause directly attributable to acts, events, non-happenings, omissions, accidents or Acts of God beyond the reasonable control of the OWNER, the Crew, or the CHARTERER (including, but not limited to, strikes, lock-outs or other labour disputes, civil commotion, riots, acts of terrorism, blockade, invasion, war, fire, explosion, sabotage, storm, collision, grounding, fog, governmental act or regulation, contaminated fuel, major mechanical or electrical breakdown beyond the Crew's control and not caused by lack of maintenance and/or OWNER's or Crew's negligence). Crew changes and shipyard delays not attributable to the aforementioned causes, do not constitute force majeure.
Whether or not any particular act, event, etc., falls within the scope of the contractual definition of force majeure is, of course, always going to be a question of fact. However, it is clear that Clause 18 requires the cause of the cancellation to be both directly attributable to an act, event, non-happening, omission, accident or Act of God and for the same to be beyond the reasonable control of the owner, crew or charterer.
ii Non-force majeure cancellation
Where a charter is cancelled for reasons that do not fall within the scope of the force majeure regime, the MYBA Charter Agreement has a separate regime that details what is to happen. Clause 9(e) provides that in such circumstances the charterer is entitled to immediate repayment of all payments made under the terms of the agreement, plus liquidated damages.
The amount of liquidated damages payable by the owner depends upon how far in advance the notice of cancellation is tendered, ranging from 25 per cent of the charter fee if cancelled 30 days or more before the start of the charter up to 50 per cent of the charter fee if cancelled 14 days or less before the start of the charter.
For a non-force majeure cancellation of a €1 million per week, two-week charter that is cancelled seven days before the start of the charter, the owner's prospective liability would be to repay the charterer the €2 million charter fee and also pay liquidated damages in the sum of €1 million.
iii Why disputes arise
Difficulties – and the vast majority of yacht charter cancellation disputes – arise when charters are cancelled and either the charterer erroneously asserts that the relevant event, act, omission, etc., does not fall within the scope of the force majeure regime and that they are entitled to a full repayment plus liquidated damages or the owner erroneously asserts that the relevant event, act, omission, etc., falls within the scope of the force majeure regime and that their sole obligation is to repay the charterer the charter fee.
Again, it is important to stress that each dispute is unique and will turn on its own facts. However, the starting point in such situations is to look at precisely what happened and determine whether the force majeure regime covers such acts, events, etc.
The essential requirement of any claim to force majeure is proof. The onus is on the owner to be able to demonstrate that on the balance of probabilities (being the civil burden of proof) the cancellation arose directly from a force majeure event.
At an arbitral hearing it would not be enough for an owner simply to say that a cancellation was by reason of force majeure – he or she must also be able to prove the same with reference to evidence. The required evidence can take many forms, but ultimately the evidence will need to show that the definition of force majeure is met. Weather reports, survey reports, crew witness statements, etc., are all likely to be useful in discharging the burden of proof.
v Brokerage commission
Irrespective of the reason for the cancellation of the charter, the owner must be cognisant of their obligations under the MYBA Charter Agreement to the brokers. Pursuant to Clause 24 of the Agreement, a broker's commission is deemed earned by the broker and the stakeholder upon signature of the agreement by both parties and upon payment of the deposit funds. The commission is payable 'whether or not he [the owner] defaults for any reason including force majeure'.
So, when dealing with cancellations, whether or not they are force majeure cancellations, the owner will likely have an obligation to the brokers to pay their commission.
vi Dealing with cancellations
Cancellations, especially force majeure cancellations, can be tricky to manage. Ultimately, there is a disappointment factor at play for both parties. The charterer, his or her family and friends will no doubt have been looking forward to enjoying some well-earned rest and relaxation. Dealing with a last-minute cancellation of a charter is likely to be the last thing they had hoped to do. Also, they may have been excited to enjoy the amenities and facilities of the particular yacht in question. Similarly, the owner will be disappointed to have had to cancel the charter, miss out on valuable charter income and disappoint a charter client.
This human dynamic can often have as much to do with a charter dispute as the facts of the particular case. It pays for both parties to remember that the other party will often be as disappointed as they are with the cancellation. That said, the MYBA Charter Agreement is clear about the parties' respective rights and responsibilities.
V Outlook and Conclusions
The superyacht industry has enjoyed steady growth for the past 50 years, transforming itself from a largely cottage industry into a much more sophisticated, commercial and global business. The data clearly shows that the direction of travel in terms of new yachts is toward larger, more luxurious and more complex yachts. The authors have noted growth in the number of yacht purchasers opting to build yachts with greater expedition capabilities, which they attribute to purchasers becoming more focused on the experiential value of superyachts – utilising them as a tool for exploration and adventure.
For individuals and their advisors who are considering purchasing a superyacht, working through the questions and issues discussed above will contribute significantly to a smoother purchase process and a more enjoyable ownership experience.
When the time comes to embark upon the refit of a superyacht, being aware of the particular challenges raised by refit projects is important and time spent conducting thorough due diligence on the shipyard and on good planning invariably proves to be time well spent at the end of the day.
When it comes to yacht charter, in the event that charters have to be cancelled we would offer the following tips to both parties. Owners should make sure that any claim to force majeure falls within the definition of the term in the Charter Agreement and should take steps to document what happened as early as possible. If the cancellation is not a force majeure cancellation then one alternative to paying liquidated damages is for the owner to offer the charterer another charter period, perhaps at a reduced charter fee. Small gestures like this can make all the difference. Charterers should request as much information as possible from the owner as to why a charter has been cancelled so that they can assess whether it falls within the scope of the force majeure regime. If that information is not forthcoming, a formal request made by a specialist maritime lawyer is likely to be a useful starting point.
Overall, the yacht market continues steadily to grow and develop. The key to ensuring that this is a trend that perpetuates is to secure the best possible experience for those owners who are starting their superyacht journey. This often comes from careful planning, diligence and emotional intelligence by those representing and advising buyers, owners, sellers and the wider group of industry participants.
1 Mark Needham and Justin Turner are partners at Hannaford Turner LLP.
2 Between 2001 and 2010 it was said that the number of yachts grew by as much as 77 per cent (https://www.warsashsuperyachtacademy.com/about/superyacht-industry/industry-outlook.aspx).
3 Yachts are an invention of the 14th century Dutch. The Dutch used smaller, agile boats for chasing smugglers, pirates and criminals. Rich shipowners began using these small 'jaghts' as the Dutch called them to greet their returning merchant ships. It quickly became fashionable to use these jaghts to take friends out just for pleasure.
4 Christina O remains one of the largest yachts in operation today standing at 99.13 metres in length.
7 Now known as The Worldwide Yachting Association.
8 Disputes as to what constitutes a defect capable of rejection under the unamended regime are not uncommon. Accordingly, specialist advice should be sought in relation to the rights of rejection under the sea trial and condition survey regime.
9 Clause 16 of the MYBA MoA.
10 This approach reflects the position adopted both in standard contracts for commercial ship sale and purchase transactions such as Saleform 2012 (the current version of the Norwegian Shipbrokers' Association's standard memorandum of agreement for the sale and purchase of second-hand ships adopted by the Baltic and International Maritime Council (BIMCO)) as well as, in the authors' experience, in sale and purchase agreements used in private aviation sales.
11 Directive 2006/112/EC, Article 2(1)(b).
12 The International Council of Marine Industry Associations (known informally as 'ICOMIA') has developed a set of terms and conditions which operate as a starting point for large yachts refit work, which was updated in May 2017.
13 The MYBA Charter Agreement is the agreement of choice for the yacht charter industry. A very substantial proportion of all yacht charters are conducted under its terms, which are often unamended.