NO-HOLE HANDSHAKES
Winkle pins are the favoured tool of legal experts who pick through the minutiae of contractual laws that bind agreements between owners and suppliers. While captains, management and owners can leave the devilish details to the experts, it’s good to know what kind of grit and grain they will be looking for
Words: Claire Griffiths
So we asked an international crowd of legal advisers about the stuff that keeps them picking away to find holes in the ‘handshakes’.
Every bullet point and clause is important in a contract but when it comes to entering a new build or refit project, what are the most critical legal considerations to be made?
THE CONTRACT IS KEY
Jens Meyer is the CEO of Marine Surveyor and Yacht Consultant firm Stefan ZUCKER & PARTNER in Hamburg, Germany. In his view the most critical consideration is legal safety for the customer in terms of delivery time, fulfilment of contractual performances and costs (including bank guarantees, etc.).
Clarity is crucial, suggests Marcel Vaarzon-Morel, Consultant & Principal Lawyer at the Australia based company, VM Legal. He adds, “The contract should clearly define the scope of work and quality, establish realistic timelines and payment schedules that allow for potential delays due to anti-money laundering laws, and implement robust contractual clauses that address potential risks such as build delays, defects and budget variations.”
Dr Tim Schommer, Managing Partner of Clyde & Co’s Hamburg office, agrees that ambiguities in a contract must be avoided under all circumstances. With more than 20 years of litigation experience, Tim knows that disputes often arise from imprecise wording. In addition to the requirement of detailed wordings, it is important that the parties to the contract, and not just their advisors, are familiar with the essential details of the contract. This prevents misunderstandings between all parties and helps to avoid hick-ups.
Massimiliano Grimalidi is founding partner of Grimaldi Studio Legale in Genoa, Italy. He specialises in navigation and transport law. “For me,” says Grimaldi, “the most critical legal aspects generally concern the regulation of liability for any defects or faults that may be found on the yacht once it has been built or refitted. These aspects are often illustrated in the technical specifications, but it is essential that they are clearly and specifically regulated within the construction or refit contract. It is therefore appropriate that the construction or refit contract regulates, for example, the liability profiles for defects arising from defects in materials, incorrect execution of the works or even design errors, with specific clauses for the liability of the shipyard or the designer, depending on the case.”
Elisavet Kapasakali, from SK Law in Piraeus, Greece, adds “In these agreements, we set out the technical specification of the yacht in detail, define the payment terms and obviously the delivery timeline which is very important for both private clients and commercial companies. We also include terms regarding the risk allocation, particularly for delays, defects, and liability of each party under the contract.” She adds with caution, “The insurance coverage during the build is also an important issue to cover. Last but not least, the jurisdiction and the applicable law the choice of which is of great importance and can affect the outcome in case of a dispute.”
Grimaldi adds that another very important aspect to be considered in the negotiation phase is linked to the definition of the time frame within which the owner or the shipowner can ask the shipyard or the designer for changes during the works. “The lack of a clear regulation of this aspect within the contract often leads to legal disputes,” he explains.
“Finally, another crucial element is the fact that yachts are not always built entirely in a single shipyard. In fact, it is common for a yacht to be removed from the shipyard and taken elsewhere for fitting-out and the all-important interior design, furnishing and finish. In this case, the fitting of the finished yacht may have been designed, built and installed by independent contractors under separate contracts to which a different law may well apply.
It is therefore advisable for the buyer to be assisted by a legal team specialised in yachting law right from the negotiation phase, in order to prevent legal disputes through a careful drafting or analysis of the various contracts.”
Tom Kelly is a partner at Preston Turnbull in London, legal experts in shipping, international trade, marine insurance, yacht/ship building and commercial litigation.
“Without wanting to be too obvious, the most crucial consideration is – the contract!” says Kelly. ‘The parties will obviously want to pin down potential tax liabilities, the requirements of Flag States and any local legal requirements that may impact the build – such as working hour restrictions, compensation packages and potential liabilities for accidents. However, primarily the split of risk and obligation between the shipyard and owner will come down to the contract between them.
Particularly for new yacht projects, there is a lot of excitement about getting going and the design, but the construction contract is the document that will really govern how that project proceeds, and which sets all of the parameters for both parties. If both sides have certainty, then it cuts out any scope for ongoing disagreements and is really helpful to allow collaboration between the owner and yard teams.
Equally, if things do go badly wrong (which obviously neither party wants to focus on at the beginning of a dream project), then both sides need to know where they stand and what their rights are. Certainty is key.”
Kelly adds that security for both sides is also key. He has seen plenty of projects fail and end up in litigation because either the yard or the buyer runs out of money and the provision of bank guarantees to secure refunds or payments is far less common in the yacht market than in commercial shipbuilding.
LAW OF THE LAND
Given the international nature of superyacht projects, and the limits or indeed the territory where authority can or can’t be exercised by the various parties, are jurisdictional challenges something to worry about?
Kapasakali outlines: “We have faced multiple issues among which issues with environmental compliance, VAT status and exemptions, can vary significantly between jurisdictions and cause delays or additional costs to the owners. In my opinion, choosing the right governing law and including the dispute resolution clause, are of the essence to protect the owner’s rights and interest throughout the project.”
Tom Kelly has been involved in cases where one party chooses to ignore the jurisdiction agreement in the build or refit contract and instead launches action in the local courts. Generally speaking, that does not end well. He explains, “I acted for a yacht owner in an arbitration where the yard started proceedings in breach of a London arbitration clause, which turned a dispute over perhaps €250,000 worth of warranty items where realistically both owner and yard were owed some money into an Award for over €1 million in favour of my clients, because all the costs of the local legal proceedings were added as damages.”
Kelly believes jurisdictional issues are perhaps overstated in a lot of superyacht conferences and articles – particularly in terms of enforcement. However, what is worth considering is the interplay with sub-contractors where the main build or refit contract is subject to English law, but then the sub-contracts are often under local law. “That can give rise to problems in itself, with yards struggling where obligations or liabilities are not ‘back to back’, and owners sometimes being potentially liable to sub-contractors under local jurisdictions despite the provisions of the contract.”
Grimaldi cites an example entrusted to Studio Legale in May 2025: “A major shipyard asked us for assistance in a civil lawsuit filed by the buyer of a yacht to obtain compensation for damages due to alleged flaws and defects in the hull. This is where the important legal issues related to (i) the recognition or not of the yacht’s flaws and defects at the time of testing and delivery of the yacht, (ii) the guarantees and (iii) the deadline for enforcing them come into play”.
To avoid, or limit jurisdictional challenges Vaarzon-Morel reminds us that while the commercial world speaks an international language, cultural and language barriers still exist and need to be navigated in respect to contract drafting and understanding. He adds, “Different legal systems need to be considered in respect to laws and regulations that govern areas such as warranty and build codes and enforcement. Importantly, it’s crucial to have clarity on the governing law and jurisdiction within the contract.”
These kind of problems happen when the contract is not unequivocal and leaves room for interpretation warns Meyer: “For example; let’s say the shipbuilding contract guarantees that the surveyor is allowed to inspect a new build project. In this particular case the country where the project is being built requires a visa for entry, which in turn needs an official invitation from the shipyard. But the shipyard refuses to send an invitation, hence there is no chance of a visa for the surveyor and consequently no chance of an inspection. “It may sound weird,” says Meyer, “but we’ve had this experience where the contract mentioned the right of inspection, but it did not mention that invitations were to be sent.”
AVOIDING GREY MATTER
Dealing with Prime Cost Sums (PCS) and Provisional Sums (PS) are also important to think about – those parts of the project not yet detailed enough to accurately cost. Vaarzon-Morel of VM Legal deals with them by focusing on ensuring maximum transparency and establishing clear mechanisms for how these sums will be managed, accounted for, and potentially adjusted as the project progresses. This often involves detailed specifications and approval processes.
Grimaldi at Grimaldi Studio Legale works in a similar way: Prime Costs Sums and Provisional Sums must be very carefully and precisely managed. Says Grimaldi, “This is why the phase of drafting the construction contract becomes crucial, since it will be necessary to define very accurately the payment schedule, establish the amounts specifying whether they are percentages of the total cost or fixed amounts and the payment methods (sums to be paid based on the progress of the work, etc.).”
Kelly at Preston Turnbull skirts the issues by avoiding PCS and Prime Costs altogether: “Ideally in any new build project, there should be a decent pre-engineering period which should allow time for proper quotes for sub-contracted works, including interior outfitting which is where in most cases (I believe) these ‘uncertain’ sums tend to come in. Certainty in contracts is always better – so if at all possible, avoid any ‘Prime Cost’ or ‘Provisional’ sums.”
If due to timing or for any other reason they cannot be avoided, the key is to specify precisely what is covered, so that there is no room for uncertainty or argument later on, about what is included or excluded in the scope of (for example) the interior outfit work. “Often this is a cost issue,” says Kelly, “since asking a yard to deliver on a ‘turn key’ basis is often more expensive, but in my experience at least, efforts to cut costs and leave sub-contractors open as Prime or Provisional costs has tended to end up more expensive and in arbitration.”
Prime Cost Sums and Provisional Sums can introduce uncertainty into a build contract and create extra costs to the clients, confirms Kapasakali, saying: “We first define them in the contracts and secondly, we describe the procedure for their approval by the client while at the same time we set their maximum. It is important that the builder notifies the owner of any anticipated changes in scope or cost, and to obtain written approval before proceeding.”
PROBLEM PROTECTION
What about protection against delays, budget overruns or workmanship issues? How can that be factored into the contract?
“Well,” says Vaarzon-Morel, “we incorporate clauses that address potential delays ensuring all parties are continually communicating and include mechanisms such as liquidated damage clauses where clear breaches occur as a last resort. We also establish clear protocols for managing budget overruns including approval thresholds for variations. We define objective standards for workmanship with detailed inspection and acceptance procedures.”
For Tim Schommer, detailed clauses in the contract which will allow the owner’s representative to inspect and monitor the construction process are of utmost importance. Likewise, reporting requirements and regular project meetings should be agreed upon. If the contractual structure provides for these possibilities, many problems can be nipped in the bud. The payment of liquidated damages for contractual breaches and delay, can be avoided as a result.
Zucker & Partner works with timely verifications of time schedules and consequent pressure on the yard. Meyer adds, “Finally liquidated damages are mostly implemented in the contract. For cost control, fixed prices are ideally negotiated beforehand, however sometimes change orders are unavoidable. In terms of workmanship issues, a permanent control of works is vital.”
“Drawing up a clear, complete and balanced refit contract is all the more important the more complex the work the owner intends to carry out, and the legal issues that arise are only partly the same as those that arise in the case of new construction,” explains Grimaldi. “Currently, there are some standard contractual models prepared by the main trade associations at European and international level, such as the Icomia Standard Yacht Refit/Repair Contract. However, the clauses contained in these standard forms often need to be modified in relation to the concrete case, to meet the specific needs that the parties may have, also with regard to the discipline of delays, budget overruns or workmanship issues.”
Says Kelly, “I would expect any refit contract to include similar warranty provisions to a new build contract such that, at the very least, the refit work is guaranteed for a year or so after redelivery. While it is slightly more complicated because the yard will not want to cover the existing yacht structure, it is perfectly possible to word guarantees to cover the refit work.”
Kapasakali adds, “To protect against workmanship issues, we require warranties and a defined defect rectification period, along with mechanisms such as retention of sums before the payment of the balance of the purchase price to ensure any outstanding issues are resolved.”
LEGALLY LINKED
Managing the legal relationships between the various parties; owner, shipyard, designers, contractors / sub-contractors and naval architects, requires well-drafted contracts that clearly delineate each party’s roles, responsibilities and liabilities.
“It’s also important to establish effective communication protocols and mechanisms for resolving potential conflicts. That’s why VM Legal offers a special ‘Coffee Clause’ that allows for parties to meet over dinner to resolve their differences. “And,” explains Vaarzon-Morel, “while our contracts establish these protocols we provide an additional Build Management Advocacy service utilising experience as a sailor, shipwright and lawyer to assist in the smooth communication between all parties. In the past, this has proved to be a very welcome strategy.”
Usually the legal relationship is only between the owner and the yard, as the yard ideally acts as a prime contractor suggests Meyer at Zucker & Partner: “In the end, we act as some sort of mediator between the parties if needed in order to lead the project in the right direction for the customer.”
“If they are appointed independently,” says Kapasakali, “we draft separate agreements for each party, ensuring that indemnities and insurance clauses are included, to ensure that if something goes wrong, whether technical or cosmetic, there’s a clear way to resolution without exposing the owner to gaps between contracts.”
How you manage the legal relationship between the owner, shipyard, designers and naval architects really depends on how the owner approaches the project – whether they have their own designer or not, says Tom Kelly: “It is perfectly possible, for example, for the yard to manage the relationship with the owner and sub-contract the rest, which is often the simplest structure. The yard then essentially takes responsibility for design and engineering which streamlines the legal relationships.”
“If the owner has their own designer and wants their own sub- contractors on, for example, the interior, then that can work but it needs really clear contracts to set out how the different pieces fit together, who is responsible for delays in design (for example) and how the overall design is translated into construction drawings.”
KEEPING THE PROMISES
Finally, light at the end of the tunnel grows brighter as the project comes to a close. That’s when warranty provisions, post-delivery support and dispute resolution points have all been provided for in the contract, right? Well, yes. Hopefully.
VM Legal ensures comprehensive warranty periods, clear obligations for the shipyard regarding post-delivery issues, and well-defined procedures for dispute resolution (preferably starting with mediation before resorting to arbitration or litigation). “But, importantly we incorporate realistic handover periods to the captain and crew and encourage owners to run their vessels for several months in waters near the builder so as to facilitate warranty repairs and service.”
According to Tim Schommer, it is often the case that a number of minor or major defects need to be rectified after handover. In his view, it is important at this stage that the parties do not lose trust in each other. Again, both parties should be interested in avoiding a dispute. According to Tim, it is therefore helpful to create a win-win situation, for example by offering incentives for both parties to resolve the issues swiftly.
This can be achieved for example by asking an escrow agent to hold a certain percentage of the last instalment in escrow. Funds held in escrow then should only be paid out to the shipyard once the defects are rectified.
Kapasakali adds, “ Also, we include the warranty for hidden defects which, according to each case, must be notified within one year from their discovery. The warranty clause can set a timeframe and cover the cost of repair. For after sales support, the contract ensures the shipyard’s obligation for ongoing technical assistance and spare parts’ availability or arrangement of their order during a pre-specified time period.”
Grimaldi Studio Legale provides its customers with specialised legal advice and assistance with regard to the entire life cycle of the yacht, also with regard to judicial disputes that should arise. Grimaldi recently managed to resolve a major dispute by drafting and proposing a settlement agreement that allowed the client to be adequately reimbursed by the shipyard for a series of defects found in the yacht. This settlement made it possible to avoid a civil lawsuit that would have been lengthy, expensive and risky for the owner himself.
Warranty provisions are given by statutory regulations (sometimes mutual agreements are negotiated) explains Meyer at Zucker & Partner. The same applies for post-delivery supports. He adds, “Minor non-conformities, not remedied before delivery, forming a part of the closing documents should be done at the first possibility. Within the warranty phase, the vessel reports warranty claims either directly to the yard or to us, to be organised for remediation. A dispute, as far as not cleared out by the parties, is usually handed over to a so-called technical expert. This technical expert will have been agreed upon during the contract negotiations by both parties and is named in the contract accordingly.”
Unfortunately according to Kelly the commercial sector is a long way ahead of the yacht market in terms of clarity and responsiveness. “None of these issues are difficult,” he says, “but there is a huge variety of warranty provisions in individual shipyard contracts that vary considerably in terms of what they provide, how demanding they are on the owner and what protections they provide to the shipyard. Indeed, in the yacht sector many of the warranty clauses that I’ve seen simply don’t provide the protections that the yard thinks they do because the wording is wrong.”
The commercial sector has very standard wording for warranties which sets out a clear bargain of a limited period of responsibility for the yard, in return for clear obligations to repair, replace or pay for defective work during that period.
Kelly adds, ‘Again, dispute resolution gives rise to a huge range of contract clauses, many of which have limited effect. The common provision for a technical expert, for example, is often entirely meaningless, because if one party does not like the technical decision, they can simply start arbitration and run the dispute over again. As with everything else, keeping the provisions simple and clear is the best approach’.
With these legal advisers behind you, drawing up clear contracts, for the benefit of both parties, with a clear route map, can mean there will be no need for jurisdictional disputes, budget overruns or workmanship issues.
