The Private Wealth & Private Client Review: Superyacht Ownership: Legal Issues 2020–2021
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 34 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 facing the industry in 2020–2021. At the time of writing, the superyacht industry is being heavily impacted by the 2019/20 coronavirus pandemic and, accordingly, we thought that it would be helpful to focus this year's review on the legal issues being faced by yacht owners and charterers.
II CORONAVIRUS AND FUTURE YACHT CONSTRUCTION PROJECTS
The coronavirus pandemic of 2019–2020 has resulted in numerous countries imposing lockdown measures that have had significant effects on economies worldwide, affecting global supply chains and most manufacturing sectors. Maritime construction is no exception and, if the proliferation of force majeure notices issued in relation to existing projects is anything to go by, delay in delivery is likely to be an issue confronting many owners in the months ahead. Contracts will no doubt have been scrutinised but, at the time of writing, it will be the case that the effect of delay arising from the pandemic will still be being evaluated in many current projects.
Much has been written about the legal issues concerning the extensions of time a builder may claim in these circumstances. But what next? The forward orderbook looks secure for the largest yards but, whatever the scale of project planned, it is clear that negotiations for future contracts are going to have to take the coronavirus pandemic of 2019–2020 into account. What the actual contract will need to contain will not only vary from project to project in light of yacht specification and shipyard location, but is also, at present, not entirely clear as, at the time of writing, the virus is still circulating with lockdown measures still widely in force in most of the principal superyacht building jurisdictions. This is an area to which we may return in a later review, but clearly drafting around delays and extensions of time for delivery, including the contractual force majeure mechanism, will need to be closely scrutinised by parties to such contracts. However, an area of real focus for those considering new building or conversion and large refit projects is a thorough evaluation of the builder in question in light of its performance during the coronavirus pandemic. Also, whether looking ahead to a new build project or re-appraising a current one, it is worth addressing the practicalities of properly administering a yacht construction contract once the project gets underway.
i Not yet in contract? Enhanced due diligence advisable
Before starting a superyacht construction project, it is, in our view, essential to establish how the proposed shipyard's recent projects might have been affected as a result of the coronavirus pandemic. Ask around; the industry is relatively small and many yacht brokers will be happy to share their experience. It would be prudent to try to elicit not just how long the builder's other projects were delayed (and whether any of its contracts were terminated for excessive delay) but, if possible, what steps the builder took in the face of the pandemic and, crucially, how successful any such measures were. Good questions to ask include:
- What enhanced health and safety measures did the builder implement at its shipyard? Did they work?
- How did these impact on any other supervision teams working on other owners' projects?
- How resilient did the builder's supply chain prove to be (e.g., what was the position with its suppliers and subcontractors)?
- What steps did they take to mitigate any delay (e.g., by increasing its own inventory of material and parts or accelerating deliveries from suppliers)?
- How did they manage the return to work of any affected member of staff?
- Did any builder affiliate lend support?
ii New contract or in build already? Review and operate the contract procedures
The time it takes to build a modern superyacht reflects the increasing complexity and sophistication involved. It is therefore quite likely that as the build progresses any number of issues and potential disputes may arise, usually technical in nature. These could perhaps be in relation to the owner's designer's designs for the yacht, in respect of the builder's standard of workmanship or because of delay caused by external events. The more sophisticated the yacht, the greater the scope for such disputes to emerge, which highlights the importance for both builder and owner to implement a proper system of contract administration.
The extent of such administration will depend on the project but will, in particular, be likely to be much more involved for larger, bespoke yachts. Here follows some of the important ones.
Keep good records
The builder or the owner's aim should be to ensure that its record keeping in any given situation is good enough to substantiate its position in the event that a problem arises. In the first instance, this paper trail will enable that party to set out its claims and display their merits realistically, but if necessary, the documentation can form the basis of submissions in any dispute resolution procedure. The contract will typically provide for regular meetings between the parties, more frequently during certain stages of construction. There should be a requirement for minutes of the meetings to be recorded and a time limit for the builder to produce them.
Control your team
It is equally important that the owner actively manages the project and project team and advisers, and ensures all representatives adhere to the necessary contractual procedures and provisions. This can be illustrated from the owner's perspective by the need to ensure that all drawings and plan approvals and comments are submitted in the agreed form and according to the agreed timeline and that requests for modifications are made as early as possible with agreement on any consequential changes to the contract being properly recorded. It is also important that the owner's representatives are able to provide the necessary link between the owner's designers and the shipyard to ensure that the interior and exterior design is successfully incorporated into the builder's construction programme. Although many designers have a good understanding of the yacht building process, it is essential that the designers are properly managed to ensure that their supply is delivered on time and in a manner that complies with the contractual requirements.
Read and follow the contract
Where problems emerge, it is sometimes the case that the builder's existing procedures used on previous projects have not been adequately adapted to the circumstances of the current build. Accordingly, unless the project in question is a repeat of one the builder has previously undertaken, the parties should thoroughly review the various processes set out in the contract before signing to ensure they are suitable. There will also be specific procedures for drawing and plan approvals and comments (for both the owner's designers' drawings and builder's own construction drawings) and rights of the owner's representatives to supervise, inspect and reject any workmanship or materials for non-conformity to the contract or to the yacht's specifications. These provisions usually provide time limits by which a party must respond, failing which rights to object are waived, or the other party's initial supply is deemed accepted. A yacht construction contract will also set out a regime for modifications and claims for an extension of the delivery date by certain agreed events (usually defined as 'permissible delay', including agreed events of force majeure). Each of these procedures will entail compliance with form, content and time limits.
Force majeure is a hot topic. These provisions have been in the spotlight as the coronavirus pandemic has taken hold as builders across all sectors have scrambled to ensure they preserve their rights to claim extensions of time under the contract. It is important to appreciate, however, that, unlike most civil law jurisdictions, English law has no legal doctrine of force majeure; the parties must expressly provide for it in their contract. Most shipbuilding contracts governed by English law therefore set out a series of events of force majeure, together with related provisions, typically requiring the builder to notify not just the occurrence, ending and duration of a force majeure event, but also to provide information about the nature and cause of the episode and the likely effect on construction (usually by reference to the critical path of the yacht's construction), as well as the steps taken to mitigate any delay. Many such clauses also provide that failure to observe the time limits for notification prevents the builder claiming an extension to the delivery date. Ensuring that the contract includes appropriate events of force majeure (particularly in light of recent events) in the first place and seeing to the proper administration of the force majeure clause itself are, therefore, of key importance to the builder. Similarly, the owner will be concerned to see that the clause is strictly observed. It is vital that the owner's representatives investigate and, where appropriate, challenge any claims by the builder for force majeure and other permissible delay, observing all relevant time limits; they must ensure that notice is given formally in accordance with the contract. The importance of strict compliance with any contractual notification provisions cannot be over-emphasised.
Contract administration may be seen as an unglamorous part of any yacht building process. All too often it seems that the contract, which will no doubt have been negotiated at some length, is filed away once executed until a serious problem develops, rather than being used as an important reference document throughout the project. Time spent getting to grips with the parties' respective contractual rights and obligations will prove to have been well worth it if problems emerge.
III superyacht charter disputes – CANCELLATION, COVID-19, FORCE MAJEURE AND FRUSTRATION
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 – particularly when faced with a global pandemic – problems can arise. This section considers one of the most common types of dispute in relation to superyacht chartering – disputes relating to cancelled charters, in particular force majeure cancellations made under the MYBA Charter Agreement.7 These disputes have become particularly prevalent since the emergence of covid-19 and in this section we delve in to the rights that both the owner and the charterer have under the MYBA Charter Agreement in an effort to offer some guidance on the parties' respective contractual positions.
i Owner's cancellation rights
Clause 9 of the MYBA Charter Agreement separates an owner's cancellation rights and the remedies associated with such cancellations into two categories, namely (1) cancellation for reasons of force majeure and (2) cancellation for all other reasons.
As noted in the section above, the term force majeure has no specific definition within English law and accordingly, in order for the clause to be understood, contracts must specify the events that are to be deemed force majeure events. Thankfully, the MYBA Charter Agreement does not leave the parties to speculate about the. Clause 18(a) provides a definition, 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.8
Whether or not any particular act or event 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 (1) directly attributable to an act, event, non-happening, omission, accident or Act of God; and (2) for the same to be beyond the reasonable control of the owner, crew or charterer.
In terms of epidemics and pandemics such as coronavirus covid-19, it is highly arguable that, in respect of any charters booked prior to the outbreak of the disease, the spread of the virus and the closing of borders, are things that are beyond the reasonable control of the owner, crew or charterer. Accordingly, where a yacht owner finds him or herself unable to perform their obligations and carry out the charter directly as a result of the 2019/20 coronavirus pandemic, that owner is likely to be able to cancel the charter on the grounds of force majeure.
However, it is worth pausing here to note that for any charters that are booked after the date on which it had become apparent to the parties that the 2019/20 coronavirus pandemic could interfere with the charter, a yacht owner may find it harder in any resulting arbitration to successfully assert that any cancellation was as a result of an act of force majeure. Accordingly, for any yacht owners who are currently booking charters for the months ahead, care must be taken to ensure that an appropriate addendum to the MYBA Charter Agreement is drawn up amending the terms of the agreement and fully providing for what should happen should the charter have to be cancelled for reasons relating to the 2019/20 coronavirus pandemic.
If an owner is able to demonstrate that it is required to cancel the charter for reasons of force majeure, Clause 9(d) of the MYBA Charter Agreement provides that upon tendering notice of cancellation, the charterer's exclusive remedy will be to receive immediate repayment without interest of the full amount of all payments made by him or her under the terms of the agreement. In short, the owner is obliged to provide the charterer with a full refund.
Where the owner's need to cancel is not based on force majeure reasons, the situation is, however, very different. Pursuant to Clause 9(e), where the cancellation is for any reason other than force majeure, the charterer shall be entitled to immediate repayment without interest of the full amount of all payments made by him or her under the terms of the agreement and shall additionally be entitled to liquidated damages from the owner based on a percentage of the charter fee and calculated on a sliding scale that increases depending upon how close to the commencement of the charter period the notice of cancellation is given. If cancellation is given 14 days or less before the commencement of the charter period, the MYBA Charter Agreement provides that the owner is to pay an amount equivalent to 50 per cent of the charter fee.
ii Charter's cancellation rights
Curiously, the MYBA Charter Agreement does not provide the charterer with any right to cancel that does not involve the charterer forfeiting monies that have been paid to the owner. In other words, once the charterer has signed the MYBA Charter Agreement and paid its deposit, that deposit is at risk. There are no provisions in the MYBA Charter Agreement that afford the charterer the right to invoke the force majeure provisions of the agreement in the same way that the owner can.
Accordingly, were the charterer to find themselves in a situation where, say, they were unable to travel out of their home country because of their government having closed the borders, the MYBA Charter Agreement does not offer the charterer any relief from its obligations or any ability to obtain a refund.
Does this therefore mean that the charterer simply loses out and loses the money paid for the charter? Not necessarily. English law evolved a doctrine of frustration of contracts in the nineteenth century to recognise that there are certain events which, if they occur after the formation of the contract, render further performance of the contract impossible, illegal or something radically different from what was contemplated by the parties when entering into the contract.
Frustration is not a straightforward doctrine on which to rely. It is reliant on the correct construction of the terms of the contract, taking into account the context in which the contract was made and the wider circumstances. If there is a significant difference between the original contractual obligation and the performance that is possible because of the change in circumstances, it may be possible to rely on the doctrine of frustration. Successful reliance will, however, be dependent upon the parties not having made provision in the contract for the specific circumstances that are allegedly preventing the contract form being performed. Equally, the doctrine of frustration only applies where the supervening event is beyond the control of both parties. It cannot be relied upon by a party who simply wants to try and escape what they now view as a 'bad' deal.
The application of the doctrine of frustration needs to be considered on a contract-by-contract basis, as it impacts different contracts in different ways. In essence, as pointed out above, it depends upon whether the event in question renders the further performance of the MYBA Charter Agreement impossible, illegal or something radically different from what was contemplated by the owner and the charterer when they signed the contract. In the case of the existence and outbreak of the coronavirus covid-19, as we are all too aware, the pandemic has resulted in quarantines, travel restrictions, governmental decrees, the cancellation of major events and the introduction of a suite of emergency legislation in many different countries. Over the years, many cases have come before the courts in which frustration of a contract has been pleaded on the basis of the occurrence of one or other of these type of events. While it would be beyond the scope of this section to look at all of the developed case law in relation to frustration, two cases merit mention in the context of the superyacht industry:
- In the 1920 case of Ralli Bros v. Compania Naviera Sota y Aznar, the English courts had to grapple with the question of whether an agreement for the payment in Spain of chartered freight beyond the maximum permitted by Spanish law was enforceable or not. The courts held that such an agreement was not enforceable in England as performance of that contract was illegal under the law of the place where it had to be performed. This judgment would clearly be of significance in the context of superyacht charters that were booked to take place somewhere where travel or gathering in public is illegal.
- In the famous 1903 case of Krell v. Henry, the English court was asked to resolve a dispute relating to a contract for the hire of an apartment on Pall Mall in London which was rented for the purposes of viewing the coronation of King Edward VII. The court held that the contract was frustrated when the coronation procession was cancelled because of the illness of the King. The take-away for the yacht industry is that where yacht charters have been booked for a specific purpose (e.g., a major sporting event) and it was clear to the parties that this was the purpose of the charter, the subsequent cancellation of that event could very well be a frustrating event.
If a charterer is able to demonstrate that the contract has been frustrated, the contract will be set aside and neither party will be required to perform. In other words, the charter fee will not be due (and where it has been paid in advance, it will become refundable) and the owner will not be required to make the yacht available for the charter.
iii 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 and to work proactively with the other to reach an amicable solution.
IV Outlook and Conclusions
2020 is undoubtedly going to go down in the record books as a bumpy year for the superyacht industry. The summer charter season has been heavily impacted by the outbreak of covid-19 and several newbuild projects have been delayed as a result of workforces being forced to quarantine, socially distance or reduce staff numbers. That said, we remain of the view that the long-term direction of travel for the industry is onward and upward. The data clearly shows that there is significant appetite for larger, more luxurious and more complex yachts. The key to ensuring that this is a trend that perpetuates remains ensuring that yacht owners and those who are starting their superyacht journey have a positive experience with their acquisition. 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 (www.warsashsuperyachtacademy.com/about/superyacht-industry/industry-outlook.aspx).
3 Yachts are an invention of the fouteenth 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 The Charter Agreement issued by the Mediterranean Yacht Brokers' Association (MYBA) 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. MYBA is a global trade association founded in 1984 by a group of yacht brokers with the aim of promoting standards in the yachting industry both throughout the Mediterranean and worldwide.
8 Clause 18, MYBA Charter Agreement.