Contents
- Design and construction
- Design of a superyacht
- Intellectual property rights
- Building a superyacht contractual agreement
- Warranty
Design and construction
What does the owner anticipate the designer to deliver? Will the superyacht’s performance or adherence to legal requirements be impacted by the design choice? Early on, engage the designer or designers. Interior and exterior styling might be created by several design studios. Who is in charge of the naval architecture?
What responsibility does the designer have? Do they merely deliver the design, or should they also make sure the builder carries out the designer’s intent?
Does the build contract relate to the design contract? According to the build contract’s schedule for design deliverables, the designer must deliver the design. Is the designer’s obligation to the owner or to the builder for flaws due to the original design specified in the design contract? Is the approval process for design drawings that are passed back and forth between the designer, owner, and builder clear and practical?
Is the designer protected from the builder’s improper implementation of the design and from delays that aren’t their fault? to the fault of the designer? Does the design contract permit the designer to recoup design costs for changes to the design that the owner requests that go beyond the original scope of work and/or for additional work that the owner requests of the designer to help the builder implement the design?
Is the owner/builder shielded from negligent design (including latent (or “hidden”) defects, of which particular care should be taken, especially by builders who may be held accountable for their failure to recognise and correct technically flawed designs) or intellectual property violations? Does the designer have a policy in place covering professional negligence? Designers should ensure they have such a policy despite the cost.
Is the designer’s intellectual property protected by the design contract? Does the contract state that any licence of the designer’s intellectual property rights is subject to payment of the design costs and that the licence will be promptly revoked if the designer is not paid?
The shape of a superyacht, its hull, or its deck design, for example, may qualify for protection under design rights. Design rights safeguard the external appearance of a product deriving from its features, in particular, the shape, lines, contours, texture, colour, materials used and its ornamentation.
Intellectual property rights
Inventions, literary and artistic works, designs, names, and symbols that are employed in a commercial setting are all considered to be works of intellectual property (IP). By using copyright, designs, patents, and trademarks, for instance, IP can be legally protected. These rights can aid in ensuring that creators are credited for and paid for their work, as well as safeguarded from others misusing or stealing their creations.
IP encompasses such rights as copyright, database rights, design rights, domain names, know-how, patents, and trademarks. It also includes confidential information and trade secrets. With regard to the management, protection, exploitation, and enforcement of intellectual property rights in a superyacht setting as well as reputation management and privacy issues, our intellectual property lawyers have a plethora of knowledge.
Whether you are designing a superyacht’s interior or exterior, you should take the following factors into account:
- How to safeguard your IP
- How much use of your IP you wish to give to third parties and how you intend to utilise it moving
ahead - Whether to grant a licence for the use of your IP or transfer the IP rights to a third party
- You must be precise about how you wish to limit the use of your intellectual property (IP) to
prevent misuse and infringement - If you are only contributing to one part of a design, for instance, be explicit about who will own
the design in order to avoid the difficulties of joint ownership - Is a one-time payment sufficient compensation for using your intellectual property, or do you
need continuous payments in the form of royalties?
Keep in mind that when the Brexit transition period ended on January 1, 2021, a number of changes to UK IP law took effect. As the UK leaves the EU IP systems, these changes have been made to preserve continuity to the greatest extent practicable.
However, not all continuity methods are automated, so in some cases, the owners of the rights will
need to take action in order to maintain a sufficient level of IP protection. To ensure that your
intellectual property is still protected in the UK and the EU, IP solicitors are qualified to provide
advice on all facets of legal changes.
Without consulting a professional, a designer should never give up their design aesthetic or assign,
licence, or otherwise transfer their intellectual property rights. Owners consult designers for their
distinctive style.
Various components you have created or designed in relation to a superyacht may be protected by the following intellectual property rights:
- Copyright is the legal right to prohibit others from using your creations without your permission.
It is particularly crucial while developing and negotiating superyacht designs. As well as
computer programmes, databases, sound recordings, movies, and broadcasts, copyright
safeguards literary and artistic creations (including sketches, design drawings, pictures, images,
books, paintings, and sculptures). A work will have copyright if certain requirements are met,
such as that it is original, has been recorded, and qualifies for copyright protection (depending
on the nationality of the author or the country of the work’s initial publication). In the UK, there
is no need for registration because copyright arises naturally. - The shape of a superyacht’s hull or deck design, for instance, may be eligible for protection under
design rights. Design rights safeguard the external appearance of a product resulting from its
features, in particular, the shape, lines, contours, texture, colour, materials used, and its
ornamentation. The overall impression of the design must differ from any prior designs in order
for it to be considered a new design. Design rights give you a monopoly right and forbid others
from temporarily stealing your creation. You can register your design as long as it satisfies the
qualifying requirements. Design rights may be registered or unregistered. - Patents: For a period of up to 20 years, patents often provide inventors the only right to use
and/or economically exploit their ideas while also protecting such inventions. Patents are
accessible for the majority of industrially relevant methods and gadgets, and they cover both
manufactured goods and manufacturing processes. In order for an invention to qualify for a
patent, it must be novel, entail an inventive step, be suitable for industrial use, and not be
subject to any of the relevant exclusions, such as software or scientific procedures.
A registered design has the advantage of potentially enjoying a longer period of protection. - Trademarks: Trademarks protect the logos, names, and catchphrases that are used to identify and
set one company’s goods and services apart from those of another. Trademarks contain names like
“Aston Martin,” “Microsoft,” and “Rolex,” among others. Additionally, they can shield shapes like the
iconic Coca-Cola bottle, sounds like the Nokia ringtone, and fragrances like Chanel No. 5. Think about the logos that are used on superyachts or that may be found on specific elements of a superyacht; they are used to set one company’s products and/or services apart from another. There are a number of legal requirements that trademarks must meet before they can be registered. Trademarks can be protected continuously after registration as long as certain conditions are followed, such as paying renewal fees every ten years. Unregistered trademarks that develop through use also offer some degree of protection.
IP regulations have historically been very standardised throughout the EU. However, there is a chance that the UK’s rules will depart from European ones after Brexit. Given the common understanding of the advantages of harmonisation, this is unlikely to happen in a very major way, but it is still vital to think about where further applications might need to be made in order to safeguard IP rights in both the UK and the EU.
The US is committed to adhering to a set of minimal IP protection rules as a member of the World Trade Organisation. Although the IP legal systems in the US and UK have many similarities, it is always advisable to consult with US attorneys to verify that IP is adequately protected in the US. Be aware of the challenges in defending intellectual property rights, especially in international contexts, which the superyacht industry almost always finds itself in. It is much preferable for a designer to protect their IP in advance (for example, by registering design rights) than to address the issue for the first time only after infringement occurs.
Other types of claims, including the tort of passing off, can also involve IP rights. If something does go wrong, act quickly to defend your rights. Our IP lawyers can advise you on the appropriate course of action to take if your intellectual property rights are misused or violated, from negotiating commercial remedies to the initiation of legal procedures. There are various modes of dispute resolution that are common to IP issues.
Building a superyacht contractual agreement
There isn’t a single superyacht construction contract that is used throughout the industry. Every
builder will have a unique standard contract that reflects how they conduct business. However, it is
typical for contractors to adopt clauses or even modified versions of commercial shipbuilding
agreements, such as the Shipbuilders’ Form for the Association of Japan (SAJ).
A good contract will appear to be reasonably balanced, but a bad contract, or one that is strongly
weighted in favour of one party, is more likely to cause disagreements during construction and
damage the parties’ business relationship down the road. The main contract, the technical
specification, the general arrangement plan, and any additional aspects like a construction timeline
and the format of delivery documents will often make up a superyacht building contract.
Never enter into a contract without first consulting a lawyer.
A construction contract should include the following fundamentals:
- Payment terms: The economics of the builder determine the stage payments needed to fund the construction of a superyacht. They can be based on a cost-plus basis, a monthly stage payment schedule, a percentage of the superyacht’s completion, or be related to building milestones. Timings, occasions, and the value of the superyacht as built should all be carefully taken into
account. - Specification: This can be negotiated with the aid of a maritime surveyor or a skilled project
manager for yacht construction. The specification will contain information on what will be
constructed and the materials, to the extent that it is possible to define them on the day the
contract is signed. The specification will outline every aspect of how the superyacht will operate,
how its quality will be determined, and the legal specifications established by the Classification
Society, Flag State, and Class designation with which the yacht must comply. - Regulations: Will the yacht be constructed in accordance with commercial regulations that apply
to vessels engaged in charter business or built for personal use? Is there a difference between
construction costs for commercial notation? How many guests and crew members can the yacht
handle? What classification rules apply, and which flag will inspect the construction? Both parties
should confirm before construction begins that if the Flag for fi nal registration is different such
Flag State will allow registration even though the Construction Flag and Flag for final registration
on delivery do not always have to match. Will the yacht be constructed in accordance with
United States Coast Guard regulations or the REG Code, which went into effect on 1 January
2019 and combined the Large Yacht Code (LYC) (as published by the United Kingdom Maritime
and Coastguard Agency “MCA”) and the Passenger Yacht Code (PYC) SOLAS? What are the
current rules on low emissions, and must the boat adhere to IMO Tier III of the IMO Nox
standards, or are there certain yachts that qualify for an exemption based on their size and year
of construction? - Insurance: The builder is in charge of procuring builder’s all risk insurance during the
construction process and is still liable for any partial or complete loss that occurs before delivery.
Should the buyer’s materials be covered by the builder’s policy? Builders should consult their
insurance companies to determine what is insurable and whether valuables or works of art
should instead be insured by the buyer. Does the contract call for the buyer to be assigned the
builder’s insurance proceeds, or should the buyer be listed as co-assured in regard to the value of
the buyer’s supplies? It is crucial to take into account the insurers’ credit standing as well as the
dangers that the policy specifically excludes. - Keeping the buyer’s advance payments secure: Bank refund guarantees, progressive title transfer
(acquiring ownership in the superyacht as she is being built), or a combination of the two. To
guarantee that title is properly transferred to the buyer and that such title registration can be
challenged by third party creditors, confirm with the relevant jurisdiction what restrictions may
effect title registration where title is being transferred. Similar to this, if the buyer receives bank
refund guarantees, take into account the terms and circumstances for enforcement as well as
any occasions that would permit the buyer to seek payment from the issuing bank. How can you
safeguard your pre-delivery payments, and how effective is that bank’s promise of a refund? If
there is a good basis to seek payment under the bank return guarantee, make sure the demand’s
format complies with the guarantee’s rules. Additionally, customers should not approve any
contract modifications unless they are certain that they won’t impair their ability to cancel under
the return guarantee. - Defending the interests of the builder: Does the contract contain any provisions ensuring the
buyer’s payment obligations throughout the construction process? What happens if the
customer breaches the contract by refusing to accept delivery or by paying the pre-delivery
instalments when they become due? Will the builder be able to recoup any of its losses from the
buyer or pursue liquidated damages if the buyer pushes the project over its scheduled
completion date and raises the project’s costs for the company? Notably, liquidated damages
clauses are no longer required to represent an accurate estimate of a party’s losses; yet the
courts may still view an exorbitant provision as a penalty (and so render it unenforceable). In
general, you should be able to justify the amount of liquidated damages using sound commercial
arguments. Additionally, or as an alternative to keeping title and ownership of the superyacht,
some builders require performance bonds from the customer upon payment of each pre-delivery
instalment, ensuring the payment obligation of (at least) the following pre-delivery instalment.
This allows the builder some peace of mind in the event that the buyer terminates the contract
while construction is still underway and the builder has already invested its monies. As an
alternative, the builder may ask for a personal guarantee from the beneficial owner or a
corporate guarantee from a parent company to secure the buyer’s payment obligations when the
contract is entered into by a single purpose vehicle company (the norm in the industry). - Project management: Depending on the project’s complexity, you might employ an on-site
project manager to oversee the construction phase. The build contract should permit the project
manager and their team access and office space. All parties (owner, builder, and designers) must
collaborate closely on a complicated and bespoke project from the beginning, and there must be
a clear understanding of each party’s responsibilities, especially with regard to production and
approval timelines. - Performance warranties: Depending on the yacht’s size, the buyer should at the very least
anticipate seeing speed, range, noise, and vibration warranties, taking into account the unique
type of superyacht and its application. A fast day boat will concentrate on speed, whilst an
explorer will concentrate more on range. It’s also important to take warranties and paint quality
parameters into account. The elements that are crucial to your superyacht and the application
for which it is intended will determine the amount of liquidated damages and tolerable
deficiencies. The same considerations that we mentioned above for builders to take into account
when deciding on liquidated damages amounts also apply to buyers. - Technical disputes: You must be aware of the law that will regulate them, as well as if (and
where) you will go to court or arbitration. Make sure the contract specifies this and that there is
no room for appeal of the technical expert’s decision if you plan for technical disagreements to
be resolved by a technical expert. An instance of “where the customer is always right” customer
service could have unanticipated contractual ramifications that could get beyond a builder’s
protections. We go into greater detail on these topics in our pages on litigation and Brexit. - Subcontractors: The builder will outsource some aspects of the construction and be accountable
for both the quality and timeliness of the subcontractors’ work. The administration of
subcontractors should follow a clear line of command; traditionally, the builder is entirely
responsible for managing subcontractors and is liable for their work. Builders must stop owners
from ignoring that connection. - Deliveries and VAT structure: Each party is responsible for paying taxes that arise in its own jurisdiction. However, if a buyer claims that VAT is exempt on the boat purchase but then fails to meet the requirements for that exemption, will the builder be required to pay VAT? This shouldn’t be ignored or taken lightly, as you’ll see in our section on taxes.
- Guarantees after delivery: What’s the duration of the warranty? Will it include anything? If a
product is fixed during the original warranty period, does the warranty still apply? Which party’s
warranties, the builder’s, or the original manufacturer’s, apply to major equipment (such engines
and gensets)? When it comes to warranties, how long do they last? Even though there are
warranty terms in place, what happens if the buyer makes repairs without first consulting the
builder? Whether the buyer should have restricted rights in regards to latent problems should
also be taken into account. - Contract termination: What would happen if everything went wrong and the contract was terminated? Is the builder
adequately safeguarded so that it can recoup its losses and damages if it terminates owing to a
buyer’s default? How much of the builder’s losses can it recoup? Is the customer protected to get
all of his money back if the contract is broken due to the builder’s negligence or to remove the
yacht in progress and finish it somewhere else? The buyer will receive all the documentation,
design work, and class and FLAG certified drawings to finish the project elsewhere if he chooses
to accept delivery of the unfinished boat. - Commission: Even though it is uncommon for the build contract to state it, the builder may be required to pay
a commission if an intermediary connects the buyer and the builder. A buyer should have access
to transparency on the commission amount, even though it may not always be available. - Buyer entity: Payments cannot be made from an account owned by another business or the ultimate
beneficial owner, but rather from one in the name of the buyer entity. If allegations of money
laundering are made, the builder may be asked to provide payment information to customs or
other government agencies without first consulting the buyer if they can demonstrate that they
are certain where the money originates from.
Warranty
Financial and market issues in recent years have led to an extraordinary number of claims in English courts and London arbitration that weren’t there before 2008. These lawsuits concern the nature and scope of a builder’s obligations in terms of after-sale assistance to its buyer.
Furthermore, the builder is able to limit or exclude liability for breach of some implied terms in a contract for the sale of goods, such as that the goods correspond to their description, are of satisfactory quality, and are fit for their intended use, thanks to the exclusion of implied terms in a business-to-business contract.
The number of contracts where buyers have made multiple, substantial claims that frequently go much beyond what the builder is required to do under their post-delivery guarantees is on the rise. Therefore, there is a conflict between the builder’s business motivation to help and satisfy its customer and the legal requirements under the contract.
Following a particularly intriguing case in 2000 (confirmed in 2016 in the commercial shipbuilding case known as Star Polaris), the English courts have indicated that a properly worded warranty clause can serve as a comprehensive code that regulates what is or is not covered by the builder after delivery. Thus, it appears that English courts favour a more flexible interpretation of wellestablished legal principles, placing emphasis on the significance of the parties’ intentions at the time of contract formation.
With the right wording, the warranty clause allows for the exclusion of liability for broader losses, such as towage costs and lost charter income, and replaces any liability on the builder’s part for breach of express or implied terms of the contract with an obligation only to repair or replace defective workmanship.
In essence, the condition turns into an indemnification under which any additional losses incurred by the buyer in terms of damage or money are excluded, and it is up to the buyer to prove that it ‘qualifies’ for the yard’s aid.
This complete code, however, can be disrupted with relatively minor wording changes to a warranty or a poorly written clause, making the warranty less effective and possibly exposing the builder to liability for all losses incurred by a buyer as a result of a defect.
In this context, it’s important to be aware of more than just the scope of the warranty because warranty work can also raise jurisdictional concerns. In some cases, builders have attempted to claim jurisdiction over warranty work, undermining the authority of the build contract. To avoid any ambiguity, make sure you keep your communications and any new contractual material on the same page. When non-warranty work is mixed in with warranty work, the danger is very severe.
Both parties have found it difficult to manage warranties under construction contracts because there are procedures for warranty claims that must be followed by the buyer in order to maintain their contractual rights. The builder should also take great care to deal with the contract’s warranties and make sure they are resolved promptly.
Due to yard closures or the lack of supplies during the numerous COVID-19 lockdowns that were implemented around the world, the owners were unable to exercise their warranty rights.
Although a commercial fix was frequently developed, parties are now urged to appropriately address this issue.
While the specification and price will likely receive the majority of attention when a contract is finalised, we advise that consideration also be made to what might happen after delivery.
Should you need further guidance please feel free to contact Frei Solicitors.
