Often placed at the bottom of the payment chain, it is commonplace for subcontractors to find themselves victims of late, reduced or non-payment at the hands of shipyards, managers or owners when a project encounters financial difficulty. Whether a yard is having solvency issues, or the ultimate vessel-owner is hiding behind an offshore-based ownership structure, there are a number of scenarios where a party might not pay a subcontractor for work conducted without good reason.
The services that subcontractors provide to superyachts are diverse, and the potential financial exposure to any one contractor varies greatly. “The more valuable the services provided, the more likely the parties will undertake due diligence and ensure that there is a proper contract in place,” explains Sarah Allan, partner at Bentleys, Stokes and Lowless.
“Even so, in our experience we find that contractors sometimes cut corners that might protect them from the outset, as they are under commercial pressure to secure a contract or because of an element of familiarity or trust. However, this potentially comes home to roost when the contracting party does not pay.”
From the outset, subcontractors should ascertain who they are contracting with and who is paying them. When contracting with a shipyard, a main consideration should be the solvency and creditworthiness of that yard. “One of the main factors during the due diligence phase is to look at the ongoing work situation in the yard: does the yard have too few projects or too many?” asks Michael Moore of Moore and Co. “If a yard is too hungry for business, they may price contracts too low so that they cannot afford to pay for the work performed on the particular vessel under contract. Very rarely do we see vendors run credit checks on yards.”
This is a particularly real threat in today’s marketplace, where there is a proliferation of yards operating on a hand-to-mouth basis; the Superyacht Intelligence Annual Report 2016 found that, in 2015, 51 yards out of a total of 126 active shipyards had only one yacht on their books. “The realities of the current financial market favour the old guard,” adds Moore. “By this I mean that the established yards are the best option for both buyers and subcontractors to work with.”
If a contractor agrees to supply goods and services without ascertaining who they are contracting with and their financial viability to pay, they run the risk of not being paid. They may also have difficulties enforcing a judgement or award against the defaulting party’s assets, which may be found in other far-off jurisdictions. Contractors should, therefore, make pre-contractual enquiries with any entity they supply services to.
With the right information at hand, a subcontractor can assess what financial risk they are prepared to take and agree on contractual terms that may better protect them. “They might wish to request a guarantee from another third party (but take legal advice on the terms of the guarantee so that it may be enforceable), such as a parent company, a bank or the actual owner,” explains Allan.
One important element for subcontractors to consider is to have a Retention of Title (ROT) clause written into any contract. This will ensure that ownership of the relevant component will not pass from the subcontractor to the builder until the subcontractor is paid.
“However, there is no ‘one size fits all’,” cautions Allan. “A party supplying and fitting an expensive piece of equipment on a yacht might seek to have a ROT clause in the contract under which ownership passes on payment. Whereas a repairer that takes possession of the yacht or equipment might like to have a possessory lien in the contract. However, in that case, the contractor must ensure that the payment terms are consistent with the right of lien.”
Subcontractors can, therefore, best protect themselves by seeking at the outset to negotiate a robust contract with the yard. However, given the yard’s ultimate responsibility and obligations under the main build contract, Thomas Willan, senior associate at Holman Fenwick Willan, believes it is unsurprising that a yard will be reluctant to agree terms with subcontractors that leave it exposed or that might prejudice its own ability to perform the build contract.
“The bargaining power of a subcontractor will depend upon its market [and performance] reputation, and the value and availability elsewhere of the goods or services to be provided,” Willan continues. “The subcontractor’s bargaining power will, in turn, have a huge impact on the extent to which it can realistically hope to secure attractive commercial terms with the yard. Save for any protections arising as a matter of law (for example under the UK Sale of Goods Act or other relevant statute), a subcontractor will only enjoy whatever protections its bargaining power enables it to agree.”
“A subcontractor is better protected if they assess their counterpart risk in the first instance, clearly define their scope of work and have a written contract on clear terms in place,” concludes Allan. “Subcontractors should also take steps to protect their position as soon as there is any indication that paying may be a problem. In that regard, conducting due diligence and keeping this under review is essential.”
The steps to secure payment in default should hopefully be an option of last resort, and they are often best employed to come to an agreement rather than incurring the expense and risks of pursuing the contracting party to the ultimate conclusion. This does involve additional work and investment at the outset, but it can save a lot of unnecessary effort, costs and angst in the end.