SuperyachtNews COVID-19 Advisory – new build and refit contracts
Sarah Allan, partner at Penningtons Manches Cooper, outlines issues that may arise with build and refit contracts…
During this extraordinary time of global uncertainty arising from the coronavirus pandemic, political and economic measures are being introduced that affect how we live and work in the short and medium term. The immediate priority is, of course, health concerns and following the guidance of our governments in limiting the spread.
However, these measures are having considerable impact on businesses and will affect the wider yachting industry being, for the most part, a leisure industry with social interaction at its heart. Many yachting events have already been cancelled or postponed, the Mediterranean charter season is likely to be limited and new builds and refit projects will inevitably be delayed or, in some cases, cancelled.
Existing build and refit contracts should be checked by all parties to review whether there are termination or force majeure provisions that apply. One also needs to check the applicable law and jurisdiction provisions in any contract and be aware that the law on these key terms differs from country to country. Key issues which may arise under such contracts are as follows:
· It is not inconceivable that, with the temporary cessation of all but essential business in many countries, all stakeholders in any project will have difficulties, whether it is a lack of cash flow to meet payment obligations, the inability to source materials or equipment for a build, or a general financial squeeze if a stakeholder is not paid by its creditors;
· Inevitably creditors will seek to protect their positions against a defaulting party. At worst, insolvency proceedings against the yard or suppliers may trigger the right to terminate those contracts and, if effected, the consequences could be quite serious. In the context of a new build, an owner will want to check whether the build contract provides they retain ownership in the yacht as built, or rights under a refund guarantee. One such difficulty in the context of refit or new build is that the ownership of equipment supplied to a yacht could still be challenged if suppliers to the yard have not been paid and have contracts with retention of title provisions;
· For yachts under construction or being refitted, it is advisable for all parties to review, at an early stage, what constitutes a “force majeure” event or “permissible delay” and to ensure notices have to be given to trigger the rights arising from such provisions. Exercising such rights may be preferable to termination, allowing some breathing space. As to contracts where building works have not commenced, one might want to review whether they can be cancelled or even if their purpose has been frustrated entirely;
· There may also be practical obstacles where surveyors simply cannot access yachts to ascertain the condition of the yacht or stage of works to satisfy payment obligations or even class approvals. In this regard, some classification societies are working to provide remote survey options;
· If an agreement is reached to stop works, it still may not be possible to remove a yacht from a yard and matters regarding continued storage/docking, the ability to attend the yacht and insurance will all have to be considered. If yards have not been paid they will most likely have the right to detain any yacht until they are paid in full;
· Yards and suppliers will also want to check whether they have any insurance in place that may cover losses arising from business interruption. A difficulty is that many policies only respond to physical damage, although some policies may be triggered by denial of entry. Such policies should be carefully reviewed.
Difficult decisions may need to be taken and all stakeholders should keep abreast of the latest government and WHO advice as this will impact on how contracts will be construed. There may also be changes in local laws that make the performance of existing contracts impossible and this should be monitored closely.
This is also not to say that such contracts should come to an end as parties may want to explore what can be done to mitigate losses or delay performance until restrictions are lifted, even though at this stage the timeframe for this is unknown. In short, it is far better to review all contracts at an early stage and take proactive steps to consider your position and take appropriate protective steps if necessary.
As a firm we are advising clients on wider issues including employment, immigration and insolvency law and our latest guidance on the legal and practical implications of the Coronavirus can be accessed via our online hub, which will be updated regularly with guidance on the issues as they arise with changes in legislation.
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