THE LEGAL EAGLES
As the industry continues to grow, so does the complex nature of ownership and the yachts’ continued and successful operation. Luckily, expert advice is at hand from global teams of dedicated maritime and superyacht lawyers, tax advisers and accountants
There is no doubt that the financial and legal elements of owning and running a yacht whether private or charter are becoming more complex, and the need for expert advice is now more important than ever.
But, where to get the advice that is particularly relevant to the yacht/maritime sector is also key. And at a time when owning a yacht is on the rise by nearly 50%, now is the time to unearth the experts on the follies and faux pas to avoid when building, buying and owning a yacht.
These are the guys who flush out the faults in the small print, hunt down the uncrossed ‘T’s, and trail the transactions until the ink has dried. Onboard sniffed out the experts in this domain to quizz them on some of the more common questions, solutions and mistakes that are made by the people that buy boats.
COMMON CONCERNS
The list of concerns and questions thrown at the experts is lengthy and diverse. For Jessica Galea, Senior Associate at Dingli & Dingli these include; What is the difference between owning
a pleasure and commercial yacht? What are the obligations on the part of owners in each case? Where should the owner be registered for VAT? Is this necessary if the yacht is a pleasure yacht? Is VAT due on the yacht? What are annual fixed costs to own and operate a commercial or pleasure yacht?
Jay Tooker is co-head of HFW’s yacht team. He says unfortunately VAT is at the forefront of everyone’s mind. “Sometimes you get a call from someone asking a lot of questions about VAT and some time into the conversation you realise that actually what they are interested in is buying a yacht!” Tooker’s advice to clients is to focus on what, where, how and why they might want to own a yacht rather than just focusing on the VAT which is really only an incidental feature of owing or buying a boat.
Andrew Charlier who leads the HFW team in Monaco adds that another typical question from a yacht manager might be: “I manage a yacht which has just been arrested in Villefranche sur Mer by a crew member, what do I do?” This says Charlier is not uncommon and is linked to issues of French employment law. He explains, “If your yacht is registered in the Cayman Islands via a Cayman company and you are sitting in the USA, you probably don’t think you need to worry too much about employment law but you’d be wrong.” In fact, any yacht that spends considerable time on the French coast or has French based crew is subject to mandatory rules of employment law. Says Charlier, “That means that if there is a dispute between a crew member and an employer, the crew member can go to an employment tribunal, start an action of unfair dismissal and it’s fairly easy in France to go and arrest the yacht as security for your employment.” It’s Charlier’s job to defend the yacht owner from arrest and employment actions brought on behalf of the disgruntled crew member.
Tom Kelly, Partner at Preston Turnbull LLP works mostly with yachts during the build stage or soon after. The most common concerns he deals with are; disputes over responsibility for particular aspects of a project or work done by subcontractors, delays in the schedule/delivery of a yacht, problems that arise after delivery in terms of quality or performance – especially where the yacht has agreed various items or arrangements, but does not get the quality it wanted or the owner has a change of mind, which can get expensive.
Charlotte van Steenderen at Mainport Lawyers deals with both transactional and dispute resolution work. She says, “Common questions and issues are in respect of the wording of letters of intent, build slot agreements and yachting construction agreements.” She gets asked things like: Is there any binding effect of the letter of intent? If so, to what extent are parties bound and which part is still open for negotiation? How do you deal with VAT on owner’s supplies? She’s also quizzed on shipyard bankruptcy and what to do if the yacht fails on achieving certain performance criteria (speed, noise and vibrations, range etc.).
Expert Edouard Mousny at Gordon Blair is asked a similar range of questions, working as he does from yacht purchase onwards. He says, “The most common concerns are in relation to, on the contractual side, the warranties provided by the Builder/Seller both during the construction process and after delivery and on the structuring side, the ‘holy trinity’ of flag, VAT and crew.”
“Building or buying a luxury yacht in Italy is a complex procedure,” says Gianfranco Puopolo at PG LEGAL. “Clients frequently seek our legal advice in order to protect their investments, starting from the drafting /negotiations of the agreements for the design/ project management, for the yacht building or purchase, up to the financial guarantees and transfer of legal title of ownership over the yacht. We also support our client in dealing with ownership structures, registration and choice of flag, tax, as well as subsequent issues such as warranty for defects and yacht/crew management.”
Routine questions fired at Sarah Fairweather, Legal Director for Sales and Purchases at Shoosmiths have spiked with a rise in first time buyers during the pandemic mostly related to the financial/ tax implications of owning a yacht. Head of Luxury Asset Group, Elliot Bishop, also at Shoosmiths adds, “When it comes to dispute resolution, we receive regular instructions from family offices for issues that may have arisen during the sale or purchase of the yacht or following a charter which may not have gone according to plan. We also act for a number of the leading brokerages on commission disputes and again on charter disputes on behalf of the owner or charterer.”
WHAT TO WATCH
Mistakes to watch for include VAT paid status: If an EU status VAT paid yacht is to remain in EU waters, be sure that the VAT paid status has not been lost and can be verified by lawyers. The yacht must be transferred in EU waters to keep its VAT paid status, otherwise the new owner will have to re-import it.
Galea at Dingli & Dingli adds that additional duty applies to yachts imported from the US to the EU. Galea suggests consulting customs experts in the country of import to ensure compliance with the necessary obligations.
She also urges, “If you’re buying a yacht for commercial purposes, remember coding a yacht comes with its obligations/expenses, so ideally an owner has a good idea of such expenses, even from a coding perspective before purchasing the yacht to know what costs will be incurred in order to code the yacht.” Remember too that certain ports have their own commercial licensing/ compliance rules, in addition to those of the flag state. “Don’t forget,” adds Galea, “the ownership/operation of a yacht has ongoing obligations which come with constant running expenses. If a yacht owner is not mentally and financially prepared then owning a yacht is perhaps not for that person. Chartering might be the best option!”
Not paying proper attention to the contract that has been agreed with a yard or charterer is another common tripping point suggests Kelly: “The focus tends to be very much on the specification and finish of a yacht, and the price for a new build, and the same for charter (price). However that can mean that specific parts of an agreement and limits on what can or cannot be done get ignored. It’s not enough to have an experienced captain or representative on board, you need to know what legal obligations or rights you have too.”
A change of mind during build projects comes at a cost: “I’ve seen plenty of quite substantial redesigns that add millions on to the price and months on to the delivery date,” says Kelly. Make sure to agree things up front. Discussions of work to be done and improvements to be made are fine, but if they are not clearly defined or arranged in terms of cost and responsibility then the bill at the end can be a shock.
Van Steenderen recommends hiring legal advice to negotiate with the shipyard at the very beginning. “To give an example,” says Van Steenderen, “when financial consequences of late delivery have already been discussed, we frequently see that the yard has already reached agreement about relatively modest liquidated damages both in terms of grace period, number of days and cap on the total amount of liquidated damages. Another example is the use of sub-contractors; has the yard built several projects with the same sub-contractors or is it the first time the yard works with the electric sub-contractor? If there is already an agreement on the milestones for payment of the contract price we often see that this schedule of instalments is heavily frontloaded and not very favourable for the owner.”
“Sometimes,” says Galea, “owners forget that the port/flag state rules and legal obligations must be complied with 24/7, not only from any ownership perspective when they buy the yacht, but for the duration of the ownership/operation of the yacht.”
It’s important to be as clear as possible about who is going to be responsible for specific parts of a build project and how any changes will be dealt with suggests Kelly. “Make sure everything is agreed up front. Agreements to defer final resolution to later on in order to avoid delays almost always end up going badly.”
FAMOUS FAUX PAS
Puopolo and Tooker both warn of examples in recent years where owners have experienced problems with the financial reliability of some Italian shipyards, especially with respect to the risks of non-delivery of the yacht due to the shipyard’s insolvency. Also the matter of the warranty works and relevant timing/compensation is very sensitive. Says Tooker, “Let’s say an owner wants to build a yacht in Italy and is advised it would be a good idea to have a Caymans Island company to own this yacht and put the Cayman Island flag on the yacht. And he goes to a shipyard in Italy and asks ‘What security will you give me for all of the payments I’m making during construction?’” So the yard agrees that he can become the owner of the yacht while it is being built. “And then,” adds Tooker, “the question is ‘How do I protect my ownership?’”
“The answer is you can register your ownership and that registration is good against the shipyard of course and it is also good against the shipyard’s creditors or a liquidator in case the yard ever goes bankrupt. But, the Cayman Islands flag will also allow you to register your ownership, And I’ve seen a number of cases over the years where people who really ought to know better will decide to register it in the Cayman Islands. It’s a big mistake because questions of ownership to a yacht that’s under construction in Italy depend completely on Italian law and if you haven’t bothered to register your ownership in Italy and the shipyard goes bankrupt your claim against the liquidator is void. You can’t enforce the security. That’s a pretty fundamental mistake and I am always surprised at the number people that make it.”
Charlier remembers an example of a yacht in Cannes where the yacht structure meant it couldn’t benefit from the VAT exemption and the owner ended up paying the VAT on the hull value. “It turned out that the owner had taken advice from the yacht broker. It’s important to get the right kind of advice from people who know.” On another occasion a client was persuaded do buy the owning company rather than the yacht itself without taking any legal advice. Fair enough you might say, it’s not a complicated thing to do. But he found there were inherent problems with the crew and very quickly the cost of the yacht was put in the shade by the amount that was claimed by the crew members and the yacht was under arrest. “That,” says Charlier, “is completely avoidable if they’d gone to a marine lawyer at the outset.”
Tom Kelly at Preston Turnbull talks of an arbitration he had worth over 1 million euros simply where the owner and yard had not agreed whether work done after delivery was to be under the warranty or represented modifications, and how exactly costs of getting to a yacht show were to be paid. He says, “The yacht got arrested over relatively small amounts and the following dispute ended up being far larger and more costly than it needed to be because of the lack of clarity in the written contracts and agreements about subsequent work.”
He has also seen huge problems where an owner wanted complete control and responsibility over fit out and subcontractors but the contract didn’t clearly arrange how that was to work – especially when subcontractors underperformed. “That led to huge overpayments to subcontractors and more litigation over the costs,” says Kelly.
He has also seen huge problems where an owner wanted complete control and responsibility over fit out and subcontractors but
the contract didn’t clearly arrange how that was to work – especially when subcontractors underperformed. “That led to huge overpayments to subcontractors and more litigation over the costs,” says Kelly.
As Van Steenderen from Main Port Lawyers points out, there are a plenty of cases of costly mistakes that have ended up in court. She says, “We do see a lot of problems and discussions arising out of warranty provisions in the contracts and the interpretation thereof. We have seen arbitration awards where the arbitral tribunal did not consider that the Protocol of Delivery and Acceptance applies to latent defects.” Her advice is an owner should always insist on including a certain issue on a punch list to avoid being unable to make a claim later in respect of a particular issue.
“We also stress the importance of looking into the question of whether the warranty given excludes defective design. Particular issues may become apparent in relation to the builder’s guarantee liability arising from defects in design. In many cases, the builder extends a guarantee in respect of ‘defects’, which are contractually defined as ‘any deficiencies or defects in materials and/or poor workmanship’. Basically, it’s important to get the wording right.”
Van Steenderen also has experience of yards expressly excluding consequential damages as a result of defective design such as loss of charter hire or obligation to pay crew during repairs.
“We have been involved in a case whereby an owner had taken delivery of a yacht a few months earlier but was still waiting for the yard to sort out the root cause of a technical problem, with the assistance of its main subcontractors. At the time of delivery, everything looked fine but after a short maiden voyage the captain had lost control of the yacht due to steering and propulsion problems leading to a short black-out. Not only was this owner’s first season spoiled, but he was also told by the yard that he would have to claim compensation for damages from his own hull and machinery underwriters since the warranty clause covered only repair and replacement of parts and labour and not no consequential damages.”
While Puopolo points out that when a shipyard goes bankrupt problems arise regarding the progressive transfer of ownership and the possibility to finish the yacht elsewhere, Tooker has another example to watch out for.
He says, “Let’s say you have an owner building a yacht at a yard which goes into administration, not full bankruptcy, but it’s under supervision of the court in order to resolve its affairs. The owner meets with the directors of the company and they sign an agreement about the yacht under construction. What the owner fails to realise is that once the company is under supervision of the court of administration the directors no longer have the power to sign agreements without authorisation from the court. And so in this case the owner signed an agreement with the directors, for all I know in good faith, but the company did go into bankruptcy and the agreement was unenforceable.”
Puopolo adds, “We also assisted a client whose new yacht was unavailable for two years due to major defects. Upon delivery of the yacht, the client assigned the sale contract to another company also owned by him. The warranty clause provided for the non-assignability of the warranty to new owners and for a limitation of liability in favour of the shipyard. Unfortunately for our client, having a contract not properly negotiated, led him to a long and complex dispute that could have been avoided by seeking legal advice at an early stage.”
Fairweather has had recent examples of VAT issues not only with the yacht but also pieces of art on board that ‘raise the interest of zealous tax inspectors along the Mediterranean in particular’ Bishop adds, “At the lower end of the market, simple errors by prospective new entrants to the market have been costly when non-specialist lawyers are retained who may be unaware of unique rules relating to marine law such as yacht finance and maritime liens which may pass with the vessel on a transfer.”
BRING OUT THE BIG GUNS
Whether or not the legal and finance experts form a permanent part of the yacht’s management team or not, depends of course on the client. Kelly is called in when disputes come up in the build or operation of the yacht. But during contract or build projects he’s more involved on a day to day basis, resolving disputes over cost or delays, or what spec is required. He says, “If the owner and builder teams work well together, then there is no need for heavy lawyer involvement. If they can’t agree then they tend to need more mediation, which is usually where I am involved more.”
Mousney believes he is viewed as part of the yacht’s management team, especially during a shipbuilding process.
Says Charlier, “We see all sorts of different decisions being taken, and depending on that decision you can get the right outcome or not the right outcome. It’s important for the owner to have the right advisers around him whether that be a yacht
surveyor or a marine lawyer, a broker. We don’t always know who’ll we be up against on the other side of the transaction and that can be one of the fun parts of it, because you don’t necessarily have someone with the same knowledge or expertise on the other side.”
Some see the lawyers as an evil and extra cost and try to use them as little as possible. “I don’t mind that,” says Tooker, “as long as they have an organisation to deal with things and don’t at the very last minute dump a whole load of problems on your desk with no time and no proper background to resolve them. It’s not the way to get the best advice from a professional adviser.” Van Steenderen agrees, “There are still too many owners out there who come to us too late.”
Says Fairweather, “We see mistakes – and often costly ones – when non-specialists become involved in this niche area. Conversely, those family offices or captains who appreciate the requirement for specialist advice at an early stage, will see the benefits in overall legal spend.”
The message from all sides is well clear: Get the right expert on the job at the right time to save on anxiety attacks, time and money. Do it before the horse has bolted, or indeed, before
… that ship has sailed.
