It is fair to say that throughout the COVID-19 pandemic, uncertainty has been a common thread of the resulting market commentary. There are, however, some certainties. For instance, we can say for certain that the 2020 Mediterranean charter season will be profoundly affected by COVID-19. We can also say for certain that, once the dust has settled, the market will not be the same as it was.
In the first virtual instalment of Reading Between the Wines, SuperyachtNews shared a glass with Adam Ramlugon and Mark Needham, Partners at superyacht and luxury asset law firm Hannaford Turner, and talked about how the new build market might look on the other side.
“Within most new build contracts, provided the contract has been negotiated properly, you have provisions from cumulative delay. Cumulative delay accounts for the total of permissible delay [the amount of delay allowed on a given build] and non-permissible delay [delays which are not considered appropriate],” starts Needham. “The cumulative provision will specify the number of acceptable days of delay, after which, if the shipyard is in breach, the buyer has a right to cancel the contract and, therefore [in most cases], trigger the refund provisions. There is the very real possibility that, as a result of COVID-19, there will be many shipyards in breach of their cumulative delay provisions.”
Rory Jackson, Mark Needham and Adam Ramlugon raise a glass
The unprecedented nature of COVID-19’s impact on the superyacht market means that, to a certain extent, predicting the market outcome requires some educated guess-work. For example, it is likely that a number of shipyards will be left with no alternative than to break through the cumulative delay cap, and hope that their clients do not wish to stand on their strict legal rights. Given that, for now at least, there is no new political apparatus to protect those businesses who are in breach of contract as a result of COVID-19, many shipyards may find themselves in a scenario where their survival has as much to do with brand equity and customer loyalty as the terms of their build contracts.
It must be noted that there will be no one-size-fits-all solution for owners, or indeed shipyards, in this eventuality. As with everything else in the superyacht market, specific situations require bespoke measures that will be dependent on each client's financial, legal and emotional position. For some owners, who are near the completion of their vessels, we may find that they are willing to waive, or at least reserve, their legal rights for termination because they are determined to take delivery of their pride and joy. Other owners, who may have taken a significant financial hit from the fallout of COVID-19, may seek to unwind their build projects by invoking the termination provisions triggered when a cumulative delay cap is breached. Another option may be to seek completion of their projects whilst reserving their rights to seek damages that might flow from the halt in production caused by COVID-19.
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“There may be certain yards, specifically those with strong order books and liquidity, who will be able to honour the terms of a refund guarantee without too much trouble” continues Needham. “However, even these yards would require the narrow margins made on a number of projects to refund a single significant build. Having to refund a number of projects could well be a business-ender, especially for those smaller yards that are not so well funded. If this proves to be the case, these yards will be forced into insolvency, which begs the question of how any owner who has not secured a cast-iron refund guarantee might be able to recoup their investment.”
When discussing the desire to buy a superyacht, people often describe how emotional the purchasing decision is. Indeed, it may be the industry’s emotional investment that becomes the saving grace for some businesses.
“If the client is engaged in a build project with a struggling shipyard, that was already having issues with the build, whether that be in terms of delay, failure to meet budgetary requirements, or simply because they have not been treating the client correctly, the client may well not grant the shipyard any legal leeway,” explains Ramlugon. “They may simply ask for the money back because it provides them the opportunity to begin a project elsewhere. Equally, they may simply want their money back to offset any losses that have occurred as a result of COVID-19. That being said, an owner that enjoys a strong working relationship with their yard and who has been impressed with their work may well decide, not unreasonably, that the right decision is to stick with the yard and wait until they are able to finish the project. They may require some further assurances, or indeed some variations to the underlying build contract, but I can certainly see this being the case for the majority of well-run projects.”
In this sense, the survival of certain shipyards may have more to do with brand loyalty and customer care than it does with watertight contractual clauses. Could it be then, that COVID-19 becomes a free market force for the good? Those shipyards that may have taken the good will of their clients for granted during the days of relative stability, may find those same owners are unwilling to support them through the bad times. However, those yards who have managed projects and clients with respect and efficiency, as well as making the process enjoyable, may well have garnered the good will and support that will surely be required to weather such a storm.
We will all feel the sting of the COVID-19 pandemic. Some, however, will feel it more keenly than others.
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