Non-Legal Fine Points of Yacht New-Build and Refit Contracts - VII
FAILING TO DETAIL HOW EMERGENT WORK AND CHANGE ORDERS ARE TO BE HANDLED IS A STANDING INVITATION TO RENEGOTIATE TERMS MID-PROJECT…
As noted last installment, if a yacht new-build or major refit contract doesn’t detail how emergent work and change orders will be handled and priced, the governing contract has a hole in it big enough to drive a superyacht through.Without a well defined procedure to govern the development, acceptance, pricing, and scheduling of emergent work and change orders, the yacht buyer/owner is open to being forced to pay for such work at a unit rate much higher than charged in the original contract. Moreover, he or she may also be forced to accept unreasonable delays to the scheduled completion/delivery date.
On the other side of the coin (or shipyard desk, if you prefer), the absence of such a defined procedure leaves the shipyard open to having to accept additional, possibly unanticipated work and attendant potentially costly schedule dislocations, without adequate compensation and/or adjustment to its contracted delivery schedule. And if there are liquidated damages for late delivery called out in the contract, the result can be potentially disastrous for the shipyard.
Of course, no agreed procedure can assure 100% there won't be disagreements over pricing or scheduling when it comes to emergent work and change orders...
Nevertheless, some straightforward precautions can go a long way toward avoiding irreconcilable conflict:
- The original contract should specify clearly an all-inclusive hourly shop rate that is to be applied to emergent and/or change-order work. (Pricing differentiation by trade is a possible refinement.)
- The original contract should clearly lay out a reasonable procedure for calculating any schedule changes that will ensue from such work.
- There should be a detailed procedure established for the shipyard to develop and submit to the buyer, pricing quotes and proposed schedule modifications. (Such detail should also include specification of definite time periods to be allowed for submission, review, and approval or rejection.)
- The original contract should also provide for mediation and, if necessary, binding arbitration in the event an irreconcilable disagreement arises over emergent or change-order work.
However, getting an emergent work or change-order related dispute before an arbitrator can usually be accomplished much more quickly than getting the disagreement litigated in court. Consequently, when it comes mid-job disagreements concerning such emergent or change-order work, there are some very real advantages to arbitration.
I am personally not a big fan of arbitration in respect of the main body of a new-build or major-refit agreement...
Understand that this is not intended to be legal advice. But that said, in my experience, in order to avoid destructive delays to a project in-process, consideration should be given to incorporating a special provision into any arbitration clause relating to emergent work and change-orders. This provision should establish that, in the event of a dispute requiring arbitration, the shipyard's work will proceed under "protest", according to the originally agreed specification and schedule, subject retroactively to any pricing or schedule modification ultimately awarded by an arbitrator.
This removes schedule and cash flow based leverage on both sides of any potential dispute. It also, again in my experience, in and by itself encourages all parties to achieve negotiated resolution to any in-process disputes involving emergent work or change-orders.
The next installment of this series will touch on milestones and payments. — Phil Friedman
Author's Notes: The information, opinions, tips and comments here 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 find yachts and yacht building of interest, you may want to read some of my other marine industry related articles:
"Sizing Generators to Run Greener and Cleaner"
"Financial Protections for New-Build Yacht Buyers"
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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, and am currently supervising, as owner's representative, a new yacht build in Taiwan. In a previous life, I taught logic and philosophy at university.
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