Financial Protections for New-Build Yacht Buyers
BRINGING BUSINESS SENSE TO EMOTIONALLY-DRIVEN PURCHASES...
Almost all contracts for the construction of a new yacht provide for an initial payment, plus several more “progress” or “milestone” payments during the course of the project.
Indeed, most contracts for the construction of new custom yachts have the buyer paying as much as 90% of the purchase price prior to final completion and delivery. Consequently, a key question for a buyer to answer prior to entering into a contract is:
“What financial protections are available to safeguard that up-front investment, between the time of contracting and receiving delivery of the yacht?"
In the U.S., a new build buyer who is paying a deposit and progress (milestone) payments can be protected under the Uniform Commercial Code (UCC) by “perfecting” a Preferred First Security Interest in the new yacht under construction. This form of security interest places the new build buyer first in line for the payout of any monies in the event of a shipyard reorganization or bankruptcy.
The legal perfection of a Preferred First Security Interest and the concomitant filing of a lien against the vessel in process is one of the best forms of protection for a new build buyer. The process is relatively straightforward, but keep in mind three key points:
1) An agreement by the builder to cede such an interest to the buyer should be written into the new build contract,
2) The filing and perfection of this kind of claim and associated lien is always best handled by legal counsel experienced in such matters, and
3) Writing the relevant provision into the new build contract doesn’t do any good if you don’t follow up to ensure that the appropriate UCC filings are actually made and perfected.
Elsewhere in the yacht-building world...
Outside the U.S., similar forms of protection for the new build buyer are available in Canada and many countries in Western Europe. In the EU, for example, protection is available under the Financial Collateral Arrangements Directive.
But as you move further away from the type of legal system found in the United States, the new-build buyer’s options in this particular regard narrow significantly. However, that does not mean that you have to forego financial protections entirely in an overseas new-build deal, even if outside of the U.S., Canada, and Western Europe.
There several other devices and techniques that can be employed to protect the financial interests of a new build buyer. These include the judicious use of Irrevocable Commercial Letters of Credit and the procurement of performance security bonds provided by insurance underwriters.
Once again, the best course of action for a new build buyer is to engage the services of an admiralty or business attorney who practices in, and is familiar with the laws of the country in which the selected shipyard operates and does business.
Many a new build buyer visits a large, well-established and well-capitalized shipyard to develop his or her project, and to negotiate and structure a deal, only to then sign a contract with a corporation that functions as a sales or marketing “arm” of the shipyard. Yet unfortunately, in too many cases, this sales company is a separate legal entity from the shipyard, and does not have adequate corporate assets to protect the buyer in the event of failure to perform on the terms of the new-build contract.
Another key element in providing financial protection to the buyer in a new build situation is the clear identification of the company from whom the new yacht is actually being purchased..
In such a case, the new build buyer may find him or herself with a claim against an essentially asset-less corporation, which has already sent the buyer’s initial and progress payments on to the shipbuilder. Therefore, a new build buyer does well always to make sure that his or her contract is directly with the shipyard that will be building the yacht, or that the contract is specifically guaranteed by the shipyard involved, and backed by all the assets of that shipyard, and any other parent or umbrella corporation.
A buyer needs always to watch out for elaborate asset protection schemes that effectively isolate the assets of the shipyard from claims by the buyer, in the event of financial problems and a failure to perform on the part of the yacht builder.
Such schemes often involve having a separate corporation own the hard assets and lease them to the shipbuilding company. Thus, the buyer contracts with, and pays his or her money to a yacht sales company, which in turn contracts with, and pays a shipbuilding company which only leases its yard and other operating assets from still a third, legally distinct company.
The result is that, in the event of financial difficulties befalling the shipyard, there are no, or nearly no hard assets to back the contract. In the absence of a contract performance bond from a reputable and substantial insurance company, a buyer's best protection is to ensure that the legal entity which owns the hard operating assets of the "shipyard" is one of the guarantors of the build contract.
A buyer should always secure the counsel of an appropriately qualified and experienced maritime attorney to assure that you do not find yourself in a contractual relationship with an effectively shell corporation...
There is, however, a difference between prudence and fear. And these recommendations for reasonable prudence should not be interpreted as occasions for fear.
Most new build projects go off without a financial hitch. Against that, the cost in time and money of providing the best possible financial protections for a new build buyer are generally small in comparison to the price being paid for the new yacht, and in comparison to the risk of loss, in the event that problems do arise.
Proper attention to such issues at the time of purchasing a new yacht that is not yet completed, or contacting to have one built from scratch, is the best way to ease your mind and put yourself in a position to enjoy the project. — Phil Friedman
Author's Notes: I am not a lawyer, and nothing said here is offered as legal advice. The tips and comments above are based on my 30 some years in the yachting industry, including my several year stint as president and CEO of a major, world-class megayacht builder.
If you found this industry-specific post of interest, you may want to read some of my other marine industry related articles:
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About me, Phil Friedman: With 30 some years background in the marine industry, I've worn numerous hats — as a yacht designer, boat builder, marine operations and business manager, marine industry consultant, marine marketing and communications specialist, yachting magazine writer and editor, yacht surveyor, and marine industry educator. I am also trained and experienced in interest-based negotiation and mediation. In a previous life, I taught logic and philosophy at university.
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Text Copyright © 2016 by Phil Friedman — All Rights Reserved
Images: Courtesy of Port Royal Group LLC, Dutch ShipYard, and Espinosa Inc.
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