Arianna. American Issue. Mets BIRD OF PARADISE DISTINCTIVE BUILDS SHOW WITHIN A SHOW

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1 NETHERLANDS LEADING BUSINESS-TO-BUSINESS MAGAZINE FOR THE INTERNATIONAL SUPERYACHT INDUSTRY SYI 2012 volume 7 ISSUE 5 Arianna BIRD OF PARADISE American Issue DISTINCTIVE BUILDS Mets SHOW WITHIN A SHOW

2 For Owners Eyes Only Tailoring a New Build Deal After this year s Monaco Yacht Show a number of owners are looking at offers for a new build or a (costly) refit of their yachts. In this article Van Steenderen MainportLawyers Yacht Team provides an overview of the issues to consider during the negotiations of a refit or building contract. Whether constructing a commercial vessel or a superyacht, owners should not underestimate the complexity of a shipbuilding project. The Van Steenderen MainportLawyers Yacht Team has extensive experience in dealing with contracts for new builds and substantial refits. Penny Wise Superyacht owners have high expectations for the end result when commissioning the construction of a luxury yacht. But in many cases they forget to consult an experienced lawyer with the proper qualifications to guide them right from the first 30 SuperYacht Industry Volume 7 Issue 5

3 stages of the project through to delivery. In many cases this can prove to be penny wise. The only lawyers capable of providing value added legal services are those practicing in the jurisdiction for which the law is contractually applicable. According to Boat International s latest statistics, recently presented at the Superyacht Finance Forum in Monaco, there are 198 shipyards worldwide constructing yachts over 24 m of length. The top countries are Italy (> 10,000 m total length); the Netherlands (> 3,000 m total length); USA (> 2,500 m total length) and Turkey (> 2,500 m total length). Compared to the preceding year, orders for new builds dropped 20 percent (from 298 to 250), but statistics show an increase in custom builds under 40 m. The Dutch shipbuilding industry has an excellent reputation. The Netherlands-based Van Steenderen MainportLawyers law firm was involved in many projects leading to the delivery and acceptance of a fine yacht to the satisfaction of its owners. To ensure that the expectations are met, the yacht team outlines the following steps for owners. 1. Develop the Specification The technical specifications and drawings have to be incorporated into the contract. They should describe the yacht in great detail. If there is not yet an agreement about the Specification and the drawings, the owner should not sign the contract. However, shipyards sometimes push to obtain a signature on the contract without the owner having agreed on the final Specification. There should be consistency between Specification and contract. 2. Address the Design Risk Under most systems of law the parties are free to allocate the design risks between themselves. Even when custom building a yacht and the owner initially requests a design studio of his choice to draft the design package, it is still possible to let the yard assume the risks. These risks include the design not being approved by Class or by the flag state authorities, as well as the risk of the design not meeting the performance criteria of the contract. Also after delivery it is preferable for the owner to have only one possible party liable for design, labour and materials. 3. Form of Contract Owners should take the initiative to produce a draft for the building contract. It is much easier to negotiate down the alleys you know. For the same reason, shipyards are keen that the starting point of contract negotiations is their standard form. Do not take for granted that a reputable yard will have a reasonably well drafted standard contract at their disposal. In many cases, yards keep using a contract with certain boiler plate clauses until a court or arbitral tribunal hands down a decision which they do not like. From a due diligence at the premises of a well-known Dutch yacht builder, we also know that contracts may vary considerably in terms of number of milestone instalments, securities for the owner and length and terms of the post-delivery warranty. 4. Changes to the Specification In any substantial high-value marine construction project, there may be a need to make changes to the Specification after contract signing. In a commercial project, for example a container vessel, such modifications are normally driven by functional or Class related issues that come up at a later stage. In a superyacht construction project, the driver may be functional, but it may also be more emotional. Owners sometimes change their minds when they see what the yacht is going to look like. Changes to the Specification may have time consequences and price consequences. > SuperYacht Industry Volume 7 ssue 5 31

4 Charlotte van Steenderen, Senior Associate and Member of the Superyacht Team of Van Steenderen MainportLawyers. The contract should contain detailed provisions for dealing with modifications during construction. These contract clauses should be carefully drafted to ensure a fair and reasonable balance between the yard and the owner s interests. All consequences of a modification agreed upon should be in writing and become part of the contract. 5. The Performance Criteria A contract for the construction of any vessel may contain certain performance criteria the yard must meet at delivery otherwise the yard will be in breach. Since such a breach could lead to an unlimited liability in damages, building contracts have another solution to deal with delays in construction and failure to meet the performance criteria set in the contract. It is the forfeiture of liquidated damages if a certain result cannot be achieved by the builder. Performance criteria of a yacht may be in respect of paint application, noise, vibrations, speed and fuel consumption/range. Performance clauses containing certain agreed upon tolerances and liquidated damages require a skilled draftsman. The concept of liquidated damages for deficiencies which are not material enough to entitle the owner to terminate the contract is almost universally applied, but be aware that you will need to pay attention to the law applicable. In some jurisdictions, the amount of liquidated damages will be mitigated in the end to real proven damages. In other jurisdictions, courts and arbitrators may interpret a liquidated damages clause as a penalty clause upon request of the builder, this may lead to the mitigation of the liquidated amount agreed upon. 6. Registration During Construction The Netherlands is the only country where it is possible to register a seagoing vessel while it is under construction (art. 8:194 section 1 of the Civil Code). The ship owner must request registration and submit a signed declaration to the effect that, to the best of their knowledge, the vessel is registrable as a seagoing vessel. This declaration must be accompanied by proof that it is a vessel under construction in the Netherlands. Shipbuilding contracts in this jurisdiction usually contain Theunissen premium brands in marine equipment Cable transits Marine lighting Navigation lights Onboard communication Watermakers Fire detection Searchlights Straightline window wipers Fire extinguishing systems Order now in our new web shop! Theunissen Technical Trading BV PO Box 70, 6580 AB Malden, The Netherlands T +31(0) F +31(0) info@tttbv.nl 32 SuperYacht Industry Volume 7 Issue 5

5 a provision allowing the commissioning party to register the vessel in their name as a seagoing vessel under construction upon payment of a certain milestone instalment. The earliest possible moment therefore is the laying of the keel of the vessel. As the main legal consequence, this makes it possible to register a mortgage over the vessel under construction. 7. Price Increases Does the builder have any statutory remedies available to charge the owner for price increases of labour and materials despite the contract having a fixed price? After entry into the building Owners sometimes change their minds when they see what the yacht is going to look like. delivery were not discovered. This assumes that the prudent owner took reasonable precautions to avoid such defects from escaping their attention. The liability of the shipyard for latent defects known to the shipyard and not disclosed cannot be excluded or limited and neither can it be made subject to shorter prescription period as provided for by law (art. 7:761 of the Civil Code). Owners Only Van Steenderen MainportLawyers focuses on the large yacht sector. The boutique law firm has chosen to accept instructions from owners only. Its services range from drafting and negotiating the building contract, advising on ownership and tax structures, and domestic or international arbitration/ litigation. i. contract, circumstances may arise or become apparent that increase costs. If these costs are not attributable to the builder, the court may adjust the stipulated price to the cost increase in whole, or in part. This is provided that the builder, in setting the price, was not obliged to take the likelihood of such circumstances happening into account. This only applies if the builder warns the customer of the necessity of a price increase as soon as possible. The customer can exercise in good time their right to propose to limit or simplify the works. 8. Acceptance of the Yacht The owner s signature of a protocol of delivery and acceptance will not be final and binding if defects latent at the time of MainportLawyers partner, Arnold van Steenderen: Owners should take the initiative to produce a draft for the building contract. < SuperYacht Industry Volume 7 ssue 5 33