The relationship between commercial shipbuilding and superyacht building, by Giovanna Cabbia, Consultant Clyde & Co and John Leonida, Consulting Superyacht Advisor at LP Squared…
Those of us who live in the superyacht ecosystem would be forgiven if we are not all consumed by it, but the reality is we are but a small part of the shipping world. In February 2021 The Superyacht New Build Report (issue 206) put the superyacht fleet at 5718 superyachts with, currently, 140 new superyachts being delivered each year. However let’s put that in context. The UK Department of Transport currently puts the global commercial fleet at 62,100 ships strong. This year, 28 cruise ships will be delivered with a total contract value of US$10.3bn and according to Bloomberg (16th February 2021) there are 201 container ships on order with an average build time of 2 years and a per vessel cost of $150m.
Can we look to the commercial shipbuilding world for some inspiration? The truth is that we always have. All the major law firms, technical experts and banks understand and work in both worlds as do some of the superyacht builders whose owners sell commercial and military ships as well as superyachts. The superyachts benefit from commercial experience. The Damen/Amels nexus is case in point, Lurssen are as well known for their military ships as they for their yachts, arguably the 2002 built superyacht SKAT stylistically owed more than a little to Lurssen’s naval traditions.
The entire regulatory regime for superyachts starts in the commercial world and generally filters into the superyacht world. Much of the technology and engineering in superyacht fleet originates in the commercial fleet and seeps into superyachts, but in many respects the superyacht world is a different country where they do things differently, but should they? In the late 1990s contractually we looked to the commercial ship building contracts for inspiration.
Should superyachts revisit commercial ship building and be more aligned with the practices of the commercial fleet. In particular is there a case for a standard form superyacht building contracts that might defeat mischiefs that arise in so many superyacht disputes?
It is often argued that the economics and logistics of each individual superyacht yard demands bespoke contracts BUT that can be said of every single commercial shipbuilder, whether they are in South Korea, China, France or Norway.
It is said that yachts are unique whereas commercial ships are little more than commodities BUT, can that be said of cruise ships or vessels built to carry specific cargoes, or specialist ships sailing only in particular waters or carrying out unique tasks, such as a heavy lift ice class pipe laying vessel? Commercial ships are as varied and sometimes more complex. What is often hugely important is that commercial ships are built for specific tasks or charters which must start on a particular date and failure to deliver could have huge commercial ramifications for the buyers and they must comply with specifications with little wiggle room.
In commercial shipbuilding the leading standard contracts are the SAJ (Shipbuilders Association of Japan), SHIP2000 (Norwegian Standard Shipbuilding Contract) and the lesser used buyer friendly BIMCO NEWBUILDCON. Although each builder will slightly modify their version of the standard contracts and what becomes important in the negotiations are the key commercial terms and there is less left to chance in the specifications. Fewer schedules to be completed later. Fewer buyers’ decisions to be made after contract signature. Few provisional cost sums to be allocated. Any contract thrives on certainty. A contract descends into possible fertile ground for dispute where decisions are still be made and strict chains of command are not observed. There is a very clear delineation between the builder and the buyer. There are very clear processes for warranty works that everyone adheres to. It may be because on the one side one has a professional shipbuilder and on the other side one has a professional ship buyer where the management of the ship is not determined by the person who navigates. It is true that luxury is the output of the superyacht builder, but it is still a ship.
The major difference between commercial shipbuilding and superyacht building is the refund guarantee. A refund guarantee is the independent obligation of the builder’s bank. Shipbuilders will normally provide the buyer, at contract signature, a guarantee which will refund in full the predelivery instalments of the contract price if the buyer lawfully terminates the build contract. It is expected. The terms of guarantee are negotiated but progressive title transfer, which is the norm in superyacht builds, hardly ever happens.
The cost of those guarantees are wrapped up into the cost of the NewBuild. The refund guarantee forms part of the economic model of the builder. Ultimately the buyer does pay for the guarantee, but yards that successfully deliver ships regularly and on time find that the cost of the refund guarantees diminish. By removing the credit risk the economic balance of power between Builder and Buyer is balanced. In the superyacht the default position, generally, is not to offer refund guarantees unless it is to cover the first instalment before the buyers’ interest can registered. If a buyer does ask for a refund guarantee either a builder does not have the credit line with his bank to secure it or it is so expensive that it might dissuade a buyer from choosing the superyacht builder in question.
In the superyacht world the dominance of the buyers spend is the predominant feature in the relationship between builder and buyer because the buyer is taking the credit risk on the builder. This allows buyers to blur the lines as to who controls the build as some builders are keen to please the luxury customer and some of the buyer’s team may test the extent of their influence beyond what is strictly set out in the build contract. This sometimes causes the parties not to follow the strict terms of the contract. Not something that often happens in commercial shipbuilding.
The fact is that everyone in the commercial shipbuilding market understands what is expected and what is acceptable and that is often contained in the standard form contracts is perhaps something that might be worth revisiting.
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