In yacht construction contracts, it is becoming increasingly common to include contractual clauses that serve to protect the yacht builder, both for possible delays and possible increases in production costs
by Federico Santini*
As everybody knows, the last three years have been characterized by important global events that have had and still have a very strong impact on the industry, so much so that there is now talk of a “recession” in most European countries and beyond. When the effects of the pandemic seemed to have stabilized, the war conflict broke out in Ukraine, with severe economic consequences as a result of the economic sanctions imposed by the United States and the European Union and of the counter-sanctions applied by Russia.
The pandemic and the most recent international crisis have undeniably affected the nautical industry. A first effect, evident to all operators and in some way surprising, was the huge increase in the demand from owners especially for second-hand yachts, but also for new constructions, which result in a true “boom” in sales of which we gave an account in a recent article a few months ago. A second effect, certainly less surprising, was the one that occurred in the new constructions sector and, above all, in the construction of custom yachts, where builders face, on the one hand, a high risk of delay in deliveries owing to various factors, in chronological order the restrictions due to Covid, the shortage of raw materials and components, and on the other hand an inevitable increase in production costs, due to the increase in the prices of raw materials and components, the increase in interest rates, the sudden increase in energy costs and the increase in inflation.
THE “FORCE MAJEURE” CLAUSE HAS SEEN ITS SCOPE FURTHER
EXTENDED TO INCLUDE CASES SUCH AS DIFFICULTIES
IN THE PROCUREMENT OF RAW MATERIALS, COMPONENTS
AND EQUIPMENT AND DELAYS IN THEIR SUPPLY.
Inevitably, these factors all impact the contents of building contracts, especially for custom yachts as said, where shipyards understandably tend to protect themselves from liability against customers. The inclusion of contractual clauses that move precisely in the direction of protecting the shipyard concerning possible delays and possible increases in production costs is becoming increasingly common. On the one hand, the “force majeure” clause, which as a result of the pandemic had already undergone a dramatic expansion with the inclusion of the so-called “Covid clause”, has seen its scope further extended, by increasingly including cases such as the difficulty of procuring raw materials, components and equipment and, therefore, delays in the supply of the same, but also instances of delays by subcontractors in completing works and processes entrusted to them, as well as restrictions or bans due to measures of national and supranational governmental authorities.
Yacht construction contracts also include clauses related to subcontractors’ delays in completing the works and processes entrusted to them, as well as restrictions or bans due to measures of national and supranational government authorities.
On the other hand, builders are increasingly proposing the inclusion of a price revision clause in the contract based on inflation increases, the so-called “Inflation clause” under which the risk of the increase in the prices of components, materials and equipment and also of labour that occurs after the signing of the contract is to be borne by the customer. Such a clause means that the contract price is subject to even significant increases in a historical period in which the inflation rate is steadily increasing everywhere with increases every month between 1% and 4%. The risk is obviously greater in the case of manufacturers operating in countries with a higher inflation rate, such as Turkey where inflation has increased by 83.5% annually (data recorded in September 2022) and a further future increase is expected. In these cases, especially where the construction has a duration of several years, it is advisable to limit the effectiveness of the clause by setting some limits, for example, by providing a minimum and maximum threshold within which the owner is responsible for the increase in inflation.
Increasingly, shipyards propose the inclusion of a price revision clause in the contract in line with inflation increases, under which the customer bears the risk of price increases in components, materials and equipment as well as the labour occurring after the contract is signed.
It is also appropriate to provide that in the event of an increase in inflation beyond the maximum threshold agreed upon by the owner, the shipyard will be responsible or the contract will be terminated. Finally, it is worth emphasizing that price revision clauses are becoming increasingly popular in response to the sudden increase in energy costs, raw materials (especially steel and aluminium) and financial charges. In conclusion, yacht construction agreements are gradually evolving with the introduction of mechanisms for revising the contractual price during construction which, since they can lead to unexpected increases, must be carefully considered and managed during the contractual negotiations.
(Yacht building contracts – Barchemagazine.com – January 2023)