ON THE HORIZON - When the superyacht dream goes wrong. Newbuild terminations, unpaid deposits and drama.

Termination

There are many forms of construction agreement used in the industry. Most yards will have their own form. The buyer therefore needs to be careful. Is the contract very yard friendly? A buyer should be careful to negotiate its contractual terms.

In doing so, a key issue is the buyer’s right to terminate. No-one, let alone at the Monaco Yacht Show, wants to think about ending the contract before the buyer gets their dream yacht. But unfortunately newbuild terminations are a fact of the industry.

There are a number of situations that may end up in the buyer wanting to terminate. The most typical is excessive delay in the construction process but it could be other issues such as technical deficiencies.

A key question is whether the buyer can legitimately terminate the contract; is it sufficiently clear? Further, does the termination allow for a refund of the instalments paid, either under the contract or by way of a demand under a refund guarantee?

On this second point, it is crucial that the buyer has a means of getting its money back. Under a construction contract monies are usually paid by way of advance instalments. As security for these sums the builder will normally procure a refund guarantee, issued by a bank or a parent company. Indeed, the question of the duration of a particular refund guarantee can itself be an area of dispute. If a project is late, the refund guarantee may expire before the buyer terminates the contract. In those circumstances, is the yard obliged to procure an extension to the refund guarantee? What happens if it does not? Can the buyer terminate for that failure? These are not easy questions and much will turn on the precise terms of the contract signed.

It is also important to keep in mind that in a termination situation the relationship between the parties has almost always broken down. The contract is suddenly very important. If the buyer terminates, it will need to rely carefully on its contract terms. In short, does the contract actually work as the buyer wants it to? Is there any ambiguity in the buyer’s position that the yard can exploit? Is the buyer certain that it can legally terminate? The risk is high - if the buyer purports to terminate when it does not have the right to do so, then it may find itself in repudiatory breach with disastrous consequences.

A buyer must therefore ensure that its contract is as clear and as fair as possible before it signs. That way, should things go wrong, it has a much better chance of getting its money back. In our experience, however, too many contracts are signed that are not sufficiently clear or are too yard friendly.

So, for those considering a newbuild yacht it is worth spending the time to get the terms right before they sign the contract. ‘Well, a lawyer would say that’ says the broker or the client. Yes, a lawyer would. The SANDS team has seen a material increase in superyacht disputes in recent years, including termination disputes for newbuild projects that have gone wrong. Some of the contracts provide proper protection. Some, however, do not - the losses can run into the millions.

Failure to pay the deposit

Perhaps it is time to sell a yacht. Again, this is an area with significant pitfalls. A contract for the sale and purchase of a yacht will typically provide that the buyer pays the seller a deposit prior to completion of the sale of the vessel. The industry standard form - the MYBA Memorandum of Agreement (‘MOA’) - includes such a provision at clause 25.

Two issues may arise. First, the buyer signs the MOA and pays the deposit, but fails to complete the purchase. Secondly, the buyer signs the MOA but does not pay the deposit at all. It is this second point that this article is concerned with.

The seller will usually have an express contractual termination right, i.e. allowing it to terminate the contract for the buyer’s failure to pay the deposit. In the MYBA form of the MOA, this is set out at clause 31. The seller will likely also have the right to terminate at common law on the basis that a failure to pay the deposit is a breach of condition (i.e. an essential term of the contract), such that its breach allows the innocent party to terminate the contract and to sue for damages (see the High Court decision in the Selene G).

Let us assume that the seller does so terminate the contract. What happens to the unpaid deposit? There are two English cases (both Court of Appeal judgments) that deal specifically with the question of the seller’s remedy should the deposit not be paid before the seller’s termination of the contract. In The Griffon the deposit was to be paid into a joint account for the sellers and the buyers. It was not. In King Crude Carriers v Ridgbury the deposit was to be paid into an escrow account. Again, it was not. In both cases the Court of Appeal held that the seller could recover the deposit as a debt due and owing to it. The seller can also seek an amount equivalent to the deposit as damages for breach of contract. They cannot - of course - recover the sums owed twice. But, if the sums are due and owing as a debt, then the seller’s case is a simple one.

As such, if a seller is presented with a buyer who simply refuses to pay the deposit the seller ought to be able to obtain a judgment/award for those monies against the buyer relatively easily. It will not assist the buyer to say, but the seller managed to get the same price for the yacht from another buyer and so has not suffered any loss. The claim is a claim in debt.
A final comment, the King Crude Carriers v Ridgbury decision is presently under appeal to the Supreme Court. We shall have to see if the law remains the same after judgment is handed down.

This article is not intended as advice for a particular project/sale. If you have queries relating to a specific transaction or case, please do not hesitate to contact us.