FINANCIAL PROTECTIONS for NEW-BUILD YACHT BUYERS
FINANCIAL PROTECTIONS for NEW-BUILD YACHT BUYERS
BRINGING BUSINESS SENSE TO AN EMOTIONALLY-DRIVEN PURCHASE — THE REST OF THE STORY
A friend of mine let me know that I had been quoted in the Business Section of a recent online edition of the Sun Sentinel. Naturally, I was pleased to be quoted — but at the same time, I was concerned because, while the quote was fairly extensive, it did not convey the full substance of what I said in my original article. Therefore, to keep the record straight, in the inimitable words of Paul Harvey, “here’s the rest of the story:”
Virtually all contracts for the construction of a new yacht provide for an initial payment, plus several more “progress” or “milestone” payments during the project. Indeed, most contracts for the construction of new custom or semi-custom yachts have the buyer paying in-total as much as 90% of the purchase price prior to completion and delivery. This involves a measure of financial risk and, consequently, a key question for a buyer is, “What financial protections are available to safeguard that up-front investment, between the time of contracting and receiving delivery of the yacht?"
New custom builds in the U.S., Canada, and Western Europe ...
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 (except for tax collectors and bankruptcy lawyers) 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 procedure of “perfecting” that interest claim by filing of a lien against the vessel in process, is one of the best forms of protection for a new-build buyer. The procedure is relatively straightforward, but keep in mind three key points:
An agreement by the builder to cede such an interest to the buyer should be written into the new build contract,
The filing and perfection of this kind of claim and associated lien is always best handled by legal counsel experienced in such matters, and
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.
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, Canada, and Western Europe, 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, outside of the U.S., Canada, or Western Europe.
Elsewhere in the yacht-building world ...
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. But 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. Provided, of course, that the amount of money innvolved is sufficiently large to warrant the cost of such legal services.
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. 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 is a separate legal entity from the shipyard, and does not have adequate corporate assets to protect the buyer in the event of a failure to perform on the terms of the new-build agreement.
In such a case, the buyer may find him- or herself with a claim against an essentially asset-less (shell) corporation, which has already sent the buyer’s initial and progress payments on to the shipbuilder (whose contract is with the sales/marketing corporation and not directly with the ultimate buyer). 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.
Buyers should always watch out for elaborate asset protection schemes that effectively isolate the assets of the shipyard from claims by a new-build buyer, in the event of financial problems and a failure to perform on the part of the yacht builder or the failure by any intermediary company to pay the builder. Such asset-protection schemes often involve having a separate corporation own the hard yard assets (including land) and lease them to the shipbuilding company. And in such cases, 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. With the result that, in the event of financial difficulties befalling the shipyard (or a financial failure of any of the cluster of companies involved de facto in the transaction, there are no, or nearly no hard assets to backup the contractual undertakings.
In the absence of a 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 parties to, or guarantors of the build contract. And a buyer should secure the counsel of an appropriately qualified and experienced maritime attorney to assure that he or she does not find themself in a contractual relationship with a shell corporation.
The difference between prudence and panic ...
Such recommendations for reasonable prudence should not be interpreted as occasions for fear. Most new build projects go off without a financial hitch. However, the cost in time and money of providing the best possible financial protections for a new build buyer are generally exceedingly 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. Paying proper attention to all such issues at the time of purchasing a new (not yet completed) yacht, 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
Copyright © 2014 - 2023 by Phil Friedman — All Rights Reserved
Note: An earlier version of this article was originally published on YachtbuildAdvisor.com and on my LinkedIn Newsletter. Please understand, as well, that this article is the expression of my 40-some years experience as a boatbuilder and marine business manager. It is not in any way intended to be legal advice, nor am I, in writing and publishing it, offering legal counsel to anyone reading it.