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.
Congrats on your new blog. First rate info as always. Please send me a copy of the ebook.
Congratulations on another of your truly enlightening and essential resources for anyone considering a new build, refit, pre-owned yacht transaction, or most any other phase of the yachting industry.
Your knowledge, integrity, and energy are boundless; and you never hesitate to share your hard earned wisdom with clients and your DT&F team members.
Thank you for all you do, Phil. We are blessed to know you.