News / 10-02-2022 / London

On 11 January 2022, a fire broke out at Ferretti Shipyard in Cattolica, Italy, reportedly causing the total loss of a 30-metre yacht under construction, which was close to completion. Fortunately, it is understood that no one was injured.

Such an event is catastrophic for the Buyers and for the yard, and inevitably raises the question: what happens now?

Yacht Construction Contracts

Unlike in the commercial shipping sector, there is no industry standard form of yacht construction contract, and the build will therefore usually be documented on the Builder’s standard terms, as negotiated with the Buyer.

All forms of superyacht construction contracts should however contain a provision outlining the procedure for dealing with the actual or constructive total loss prior to delivery of the yacht to the Buyers: the so-called “Total Loss” clause. However, these clauses can vary greatly from Builder to Builder.

Total Loss Clauses

Total Loss Clauses in yacht construction contracts should generally deal with two issues: (1) the parties’ respective rights and obligations in relation to the incomplete build and (2) how the insurance proceeds of a claim made in respect of the total loss are to be allocated. The parties should think carefully about their preferred options when negotiating the yacht construction contract.

For the Builder, the most commercially astute position might be to be able to treat the construction contract as at an end, with no obligation on their part to complete the project. This is a commonly seen approach and certainly helps to reduce the operational risk of a Builder becoming over-subscribed.

On the other hand, the Buyers may want to retain the option to require the Builder to complete the project. This avoids the time and money involved in the preparatory work and negotiation of a new contract with a different Builder, as well as potential complications arising out of the ownership of the design rights of the yacht.  A superyacht has a unique status as a Buyers’ personal pleasure project. Simply going to a different Builder is not always acceptable where a Buyer has a particular interest and passion for the designs of their chosen yard.

The Importance of Insurance

Under English law, a contract for the construction of a yacht is a contract for the sale of goods and unless otherwise agreed, the risk of loss and damage to the yacht during its construction and until the transfer of title to the Buyers is borne by the Builder[1]. However, the contract terms may provide for title in the yacht to pass progressively to the Buyer during its construction as and when instalments are paid. Either way, insurance that ties in with and is responsive to the terms of the construction contract is of critical importance. The total loss of a yacht under construction, particularly one nearing its completion, presents both yard and Buyer with significant exposure.

As part of the Buyers’ due diligence at the contract stage, a Builder should be asked to provide details of their insurances covering loss and damage to the yacht (along with all materials, equipment and supplies), as well as third party liabilities and items such as launching failure. This may be referred to as a construction ‘all risks’ policy. If the Buyer plans to supply the yard with items to be included in the construction or otherwise placed on board, and/or the Buyer intends to engage its own sub-contractors to work at the yard, an additional premium may be payable to include these in the Builder’s cover, or the Buyer may need to arrange their own cover.  

The Buyer can be named as a co-assured on the Builder’s risk policies for two reasons: if the contract provides for the ownership of the yacht to pass progressively to the Buyers as the instalments are made; or to provide security to the Buyer for the instalments paid during the construction period. The contract terms should provide that claims are payable in accordance with the agreed outcomes in the event of damage during construction: for example in the event of repairable damage/ partial loss to the yacht the insurance proceeds would be paid to the Builder, whereas in the event of a total loss the proceeds would be paid to the Buyer to the extent of any instalments and additional sums paid.

Simply put, with an effectively drafted contract and appropriate insurance, a Buyer should receive an effective “refund” of all amounts paid to the Builder for the construction of the yacht. In the event that the parties do indeed decide to continue with the construction of the yacht, it can be agreed that the insurance monies will instead be paid to the Builder.

Incidents like these are a timely reminder about the risks for both parties involved in large yacht construction projects and highlight the importance of clearly considering these risks from the very outset of the project.