Showing posts with label contract. Show all posts
Showing posts with label contract. Show all posts

Saturday, July 15, 2017

WHAT FINANCIAL PROTECTIONS ARE AVAILABLE TO A NEW BUILD BUYER?




Almost all contracts for the construction of a new yacht provide for an initial payment, plus several more “progress” or “milestone” payments during the project. Therefore, most new build situations have the buyer paying for construction of the yacht out ahead of its completion and delivery. Consequently, a question that commonly arises is, “What financial protections are available to the buyer between the time of contracting and receiving delivery of the yacht?”





NEW BUILDS IN THE U.S., CANADA, AND WESTERN EUROPE

In the U.S., a new build buyer who is paying a deposit and progress (milestone) payments can be protected under the Uniform Commercial Code (UCC) by “perfecting” a First Priority Security Interest in the new yacht under construction. This form of security interest places the new build buyer first in line for the payout of any monies in the event of a shipyard reorganization or bankruptcy.

The legal perfection of a First Priority Security Interest and the concomitant filing of a lien against the vessel in process is one of the best forms of protection for a new build buyer. The process is relatively straightforward, but keep in mind three key points: 1) An agreement by the builder to cede such an interest to the buyer should be written into the new build contract, 2) the filing and perfection of this kind of claim and associated lien is always best handled by legal counsel experienced in such matters, and 3) writing the relevant provision into the new build contract doesn’t do any good if you don’t follow up to ensure that the appropriate UCC filings are actually made and perfected.

Outside the U.S., similar forms of protection for the new build buyer are available in Canada and many countries in Western Europe. But as you move further away from the type of legal system found in the United States, the new build buyer’s options in this particular regard narrow significantly. However, that does not mean that you have to forego financial protections in an overseas new build deal.

ELSEWHERE IN THE YACHT BUILDING WORLD

There several other devices and techniques that can be employed to protect the financial interests of a new build buyer. These include the judicious use of Irrevocable Commercial Letters of Credit and the procurement of performance security bonds provided by insurance underwriters. Once again, the best course of action for a new build buyer is to engage the services of an admiralty or business attorney who practices in, and is familiar with the laws of the country in which the selected shipyard operates and does business.

Another key element in providing financial protection to the buyer in a new build situation is the clear identification of the company from whom the new yacht is actually being purchased. Many a new build buyer visits a large, well-established and well-capitalized shipyard to develop his or her project, and to negotiate and structure a deal, only to then sign a contract with a corporation that functions as a sales or marketing “arm” of the shipyard. And unfortunately, in too many cases, this sales company is a separate legal entity from the shipyard, and does not have adequate corporate assets to protect the buyer in the event of failure on the part of the shipyard to perform on the terms of the new build contract.

In such a case, the new build buyer may find him or herself with a claim against an essentially asset-less corporation, which has already sent the buyer’s initial and progress payments on to the shipbuilder. Therefore, a new build buyer does well always to make sure that his or her contract is directly with the shipyard that will be building the yacht, or that the contract is specifically guaranteed by the shipyard involved, and backed by all the assets of that shipyard. Always watch out for elaborate asset protection schemes that effectively isolate the assets of the shipyard from claims by a new build buyer, in the event of financial problems and a failure to perform on the part of the yacht builder. Once again, your best protection is to secure the counsel of an appropriately qualified and experienced maritime attorney to assure that you do not find yourself in a contractual relationship with an effectively shell corporation.

PRUDENCE, NOT FEAR

Such recommendations for reasonable prudence should not be interpreted as occasions for fear. Most new build projects go off without a financial hitch. However, the cost in time and money of providing the best possible financial protections for a new build buyer are generally small in comparison to the price being paid for the new yacht, and in comparison to the risk of loss, in the event that problems do arise. Proper attention to such issues at the time of purchasing a new yacht that is not yet completed, or contacting to have one built from scratch, is the best way to ease your mind and put yourself in a position to enjoy the project.    

Saturday, September 28, 2013

Major Refits: Dealing with Emergent Work


Your yacht is headed to the shipyard for a major refit. You’ve had a pre-job inspection completed, and all items identified for repair or replacement are covered under a firm fixed-price agreement. The project is planned, budgeted, and all wrapped up. Well…maybe not. Not if you haven’t considered "emergent work" and how it is to be handled once the refit begins.



Emergent work is critical work that needs to performed, but the need for which is discovered only after a refit has started. It can involve anything from corroded piping or electrical connections to tank leaks or even structural issues that were not visible until, for example, certain interior joinery panels were removed as part of the planned refit. The important point to understand is that, as any candid shipyard manager will tell you, emergent work is often the icing on the refit yard’s cake, when it comes to profit.

The reason is pretty clear. Once a build or refit is underway, the shipyard no longer finds itself subject to the same competitive pressures it felt leading up to the original contract. Consequently, if your refit agreement doesn’t detail how emergent work. and change orders related to it, will be handled and priced, your agreement has a hole in it big enough to pilot a superyacht through.

Unless a procedure governing the acceptance, pricing, and effect on schedule of emergent work is incorporated into your refit agreement, you are open to finding yourself paying for emergent work at a unit rate much higher than in your original contract. Moreover, you may be forced to accept unreasonable delays to the scheduled completion/delivery date. And if that scheduled completion/delivery date is linked to plans for a date-sensitive cruise or charter, the true cost of the refit may end up to be much more expensive than you anticipate. So what to do?

The original refit contract should specify clearly an all-inclusive hourly shop rate that is to be applied to emergent work and related change orders. The original contract should also lay out clearly a reasonable and mutually acceptable procedure for calculating any schedule changes that are to ensue as the result of the yard’s accepting the emergent work. And there should also be a detailed procedure for pre-submission of pricing quotes and proposed schedule modifications to the vessel’s owner or his/her representative. Such detail should include specification of definite time periods to be allowed for submission, review, and approval/rejection of change orders related to such emergent work.

Dealing effectively with emergent work requires that both the shipyard and the yacht’s owner act reasonably and in good faith. To avoid unnecessarily delaying a project in mid-stream, consideration should be given to incorporating provisions in the refit agreement to the effect that, in the event of a disagreement over emergent work, the shipyard's work on the yacht will proceed as originally schedule, subject retroactively to any pricing and schedule modifications ultimately awarded by an agreed upon arbitration procedure. If nothing else, this sort of provision brings significant pressure upon all parties to achieve a negotiated resolution to any disputes involving emergent or change-order work. It also avoids unnecessarily delaying the progress of a refit due to a disagreement about the pricing and timing of emergent work.