The Satisfactory Quality Test
Before starting about common terms and conditions, let’s continue what was left from the previous part. Unless the owner loses its right to reject by express or implied acceptance of the yacht, and always subject to express clauses to the contrary, section 14 provides for a sharp and strong remedy, particularly when the return of the purchase price is covered by a performance guarantee.
Traditional Building
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Remedies Available
Section 15A of the Act provides that, where the buyer has the right to reject goods, by reason of a breach on the part of the seller of a term implied by section 13, 14 or 15 of the Act, but the breach is so slight that it would be unreasonable for him to reject them (burden on the seller), the breach may be treated as a breach of warranty. If the discrepancy falls within the known de minimis allowance implied by the common law, the buyer would not be allowed to reject the goods. It is clear, however, that section 15A is an attempt to considerably broaden the scope of the de minimis (minimal) allowance, to avoid so-called technical rejections. On the other hand, this section only applies unless a contrary intention appears in, or is to be implied from, the contract. Yacht-building contracts invariably contain clauses imposing on the buyer the duty to notify the builder of any “minor defects” in the build and imposing on the yard the duty to use its best endeavor to remedy any such defect within a reasonable time. If a clause of this sort were to be found in the contract, it is suggested that the parties intention is that of allowing remedial work to take place in the first instance, failing which the owner will be entitled to rely on sections 13 or 14 and to serve notice. In any event, “minor defects” clauses often provide for a comprehensive remedial code with timing, price reductions as liquidated damages and termination. In this case, the contract will be clear and the clause given full effect within the context of the contract as a whole. In the following pages, the yacht-building contract, its structure and basic terms will be discussed in more detail.
Common Terms and Conditions of Sale – Structure of the contract
As in every contract for the sale of goods, a yacht-building agreement focuses on the key duties of the seller (often referred as “builder”) and the buyer (also referred to as “owner”). On the seller front, the yard must deliver the yacht described in the contract and pass on to the buyer unconditional title to the new-build. The buyer must take delivery and pay the contract price as agreed in the contract. Given some peculiarities of this particular area of shipping business, a great deal of space in the contract is usually devoted to the matter of transfer of title and mutual securities for payment on one side, and against bankruptcy on the other. Provisions as to warranties against defects are also rather sophisticated. Some contracts further provide for detailed clauses dealing with tax matters or allowing the yard to use the yacht for publicity purposes. Most agreements will also contain jurisdiction and arbitration clauses, force majeure provisions and clauses regulating the assignment of rights. Issues regarding the description of the yacht and her satisfactory quality have been discussed above. In the following pages of this chapter, the analysis will focus on those most common provisions of yacht-building contracts which are peculiar to this niche market.
Payment
The buyers principal duty is to pay the price as agreed in the contract. In the context of ship sales, payment and delivery are concurrent conditions, and hence non-contractual payments entitle the yard to terminate the contract. The contract would typically provide for a deposit and the remainder of the purchase price is usually to be paid in installments according to what is often referred to as a “Progress Schedule”. The yard will prepare regular invoices with specific reference to the actual progress of the construction of the project by reference to such schedule, and payments shall be made accordingly. It is important to note that under English law, property in the goods sold passes when the parties intend it to pass, and hence any such clause will be read in the context of the contract as a whole and may substantially affect issues related to the passing of title over the yacht. Where property only passes on delivery of the new build, the installments paid according to the progress report are considered advances against which the builder would sometimes be required to provide a refund guarantee. Delay in construction may entitle the buyer to a discount or–more commonly–to a deferment of the payment of the installment concerned. Delay in payment against due progress usually entitles the yard to interest, in the percentage agreed in the contract.
Passage of Title
Under the Sale of Goods Act 1979, section 17(1), title in the goods passes when the parties intend it to pass. It is increasingly common for yacht-building contracts to make express provisions for progressive transfer of title at the time of payment of the relevant installment, in accordance with the progression report.67 In traditional shipbuilding contracts the practice used to be that title would pass only on delivery; but in recent years, due to the difficult economic conditions, the practice of allowing progressive passage of property over a period of time has become the preferred option. This has its benefits; for example, in the event of the builders bankruptcy, a transfer of title provision will strengthen the owners position, vis-à-vis a liquidator. From a legal perspective, there are two factors to be considered: (i) clarity and (ii) security.
(i) Contractual Clarity
The contract should spell out unequivocally the moment in time and the extent to which title over the yacht as it is constructed, and all of her equipment, will pass to the buyer. This is crucial to ensuring that proper security is in place at all times and that the yacht has appropriate and effective insurance cover. Even where the contract is clearly drafted, however, passage of property before delivery and acceptance of the finished yacht would be conditional upon the buyers acceptance, and hence subject to any express or implied warranties discussed above.
For relatively small yachts, production and semi-custom boats, the contract may simply provide for payment of a reasonable deposit, typically of 10 per cent, on the placing of the order and for property to pass on acceptance of the finished product. In the absence of clear stipulations in this sense, the law implies progressive passage of property.
(ii) Collateral Securities
The main risk to be taken into account for any shipbuilding project is that of default by either of the parties. In yacht-building contracts this risk might take the form of the insolvency of the yard, or nonpayment by the buyer of all or part of the purchase price. To alleviate the adverse consequences of a yard finding itself in financial difficulty, a buyer should consider the possibility of obtaining a parent company guarantee, where the yard is a subsidiary of a more substantial company. Alternatively, a refund guarantee from the yards bank might provide security for the return of stage payments in the event of financial default or an act of insolvency on the part of the builder. Given that many large yachts are ordered by shell companies or special purpose vehicles (“SPVs”), a buyer may well be faced with a request from a yard to provide a performance guarantee to avoid the risk of financial default by the buyer itself. The chapter on mortgages deals with this issue from the perspective of a lender, where the need for collateral security during the construction period is of particular concern. It should be added that in some jurisdictions it is possible for a yacht to be registered whilst under construction and a mortgage registered over the vessel, in order to provide security for a third-party lender.
[Stay tuned for Part Five, the last in Yacht Building Contracts]
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