legal column in this section • Choosing a yard • Identifying risks • Refusing re-delivery How to identify a suitable yard The refit of a superyacht requires thorough preparation and planning — from both a commercial and legal perspective advises Justin Turner When searching for a yard it’s vital that you find one with appropriate experience, capacity and financial stability Most superyachts are likely to undergo a refit after a few years’ service. The owner may want to modernise the vessel, perhaps by renewing interiors or updating navigation or other equipment, but maybe more structural modifications of the yacht are planned. In any event, it is crucial to identify the precise scope of work to be undertaken and, where new designs are to be implemented into an existing structure, to ensure that careful consideration is given to the interface between old and new materials. 2 Choice of yard When planning a refit, identifying the right shipyard for the work is a paramount consideration. In recent years new players have entered the market challenging established European and North American shipyards, often offering competitive prices and attractive re-delivery windows. While this means more choice for owners, it also involves an increased number of issues to consider when determining where to refit. The owner will need to know www.SUPERYACHTBUSINESS.net | SEPTEMBER 2011 that his chosen shipyard has the experience, capacity and financial stability to take on, plan and effectively manage the project. It is, therefore, important for the owner’s team to carry out effective due diligence. A good starting point is to ask for (and follow up) references in order to confirm the reputation of a potential contractor and to research recent projects to identify whether these were completed on time and within budget. The focus is likely to be on technical questions, for instance, to establish whether the yard has the required workforce, plant and machinery or whether (and to what extent) work will have to be subcontracted. Depending on the type of work, it may also be important whether the dock or quay at the shipyard is (or can be) covered. Logistics will also need to be taken into account, such as accessibility (whether the shipyard is located close to an airport is often an important consideration) and the facilities available to the yacht’s crew during the refit. The willingness of the shipyard to assist with transport and obtaining any necessary visas for crew members should also be ascertained, together with understanding how the shipyard goes about its business — for instance discussing HSSE issues and how much work the crew can carry out itself during the refit. The owner will also want to understand the financial drivers both by identifying mark-ups and overhead charges in order to understand the shipyard’s profit and agreeing suitable milestones for the payment schedule. In this context it is also important to confirm the position regarding tax and duty. All taxes and duties relating to the shipyard’s supply should be included in the contract price but clarification may be required in relation to items of owner’s supply (and local tax advice may be necessary). Managing the risks Essentially, the risks of the shipyard’s non-performance can be grouped into commercial, credit and technical risks. The principal consequences of shipyard non-performance for the owner will be an exposure to unexpected costs and loss of the use and enjoyment of the yacht for longer than expected. The commercial risks comprise true ‘performance’ risks, i.e. the possibility that the yard will fail to re-deliver the yacht to its owner on time or (more rarely) fail to complete certain aspects of the refit at all. Credit risks include the possibility that the shipyard will become insolvent before the yacht is re-delivered. Technical risks include, for instance, the risk that the shipyard will deliver deficient workmanship or incorporate materials of inferior quality into the yacht. It is important to address these risks adequately both in due diligence on the shipyard and in any resulting contract. In order to mitigate the commercial risk, the contract should, as said above, clearly define the project workscope. This is usually done by reference to detailed is the re-delivery. The contract should clearly specify the circumstances under which the owner is entitled to refuse re-delivery of his yacht if he is not satisfied that the shipyard has met the contractual requirements and usually provides for the shipyard to pay liquidated damages for any unauthorised delay in redelivery. Credit risks are often addressed by firm negotiation of the payment milestones and provision of security by the shipyard. The risk of the shipyard becoming insolvent should always be considered and the contract should provide for the owner “Owners need to be aware of the challenges raised by refits. Time spent on due diligence is well spent” technical specifications which are incorporated into the refit contract. The project timeline is also an important consideration — it should be realistic and the contract must be clear as to which circumstances entitle the yard to an extension of time. Another aspect which deserves particular attention to be able to terminate his obligations and remove the yacht where a defined insolvency event befalls the shipyard. This is not always straightforward as local insolvency law will be relevant. There are important matters to consider in assessing the technical risks, given Regulatory considerations It is clearly important to define in the contract the rules and regulations (most importantly class requirements) which must be complied with. In this regard, the impact that the refit might have on the yacht’s classification certificate or any flag state certificates must be taken into account as the addition of new equipment may have consequences for the compliance of the yacht, both in terms of vessel certification and safe manning. For example, alteration to the hull structure or machinery may alter the tonnage, affect stability or statutory fire safety requirements. Re-surveying or remeasuring may be required to ensure continued compliance but it may also affect crew certification and thus the ability of some individuals to work on the yacht. It is, therefore, advisable to involve the yacht’s flag state and classification society early on in the project in order to identify any aspect of the refit likely to have an impact on the yacht’s certificates. justin turner Justin Turner is a partner in the specialist shipping law firm Curtis Davis Garrard LLP and leads the firm’s superyacht practice. He specialises in commercial shipping and has particular expertise in shipbuilding, conversion and repair and sale and purchase issues. Justin is routinely involved in the negotiation, drafting and management of shipbuilding contracts for most types of vessels, including superyachts. CDG’s superyacht team also includes Superyacht Business legal contributors Ellen Sofie Løkholm, Louise Elmes and Andreas Silcher. w Contact: justin.turner@ cdg.co.uk the dramatic effect poor workmanship can have on both the value and the owner’s use and enjoyment of the yacht. A key part of the owner’s project management will be the appointment of a representative to supervise the refit. This may be the captain of the yacht but in more complex and extensive refits this can be an external supervisor specifically employed for the project. The shipyard’s post-delivery warranty is also important — it should be extensive and have a duration of at least twelve months. Owners and their advisers need to be aware of the particular challenges raised by refit projects, but time spent conducting thorough due diligence on the shipyard (and on good planning) invariably proves to be time well spent at the end of the day. SEPTEMBER 2011 | www.SUPERYACHTBUSINESS.net 3
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