Covid-19 and the war in Ukraine have caused serious disruptions in supply chains worldwide. Not surprisingly, the yacht-building industry has been heavily affected. Even though many within the yacht-building industry have shown to be resourceful and found alternative options for their clients, many building projects are still affected by severe delay issues. Yacht builders often purchase their supplies from a multitude of manufacturers worldwide. Due to the complexity of a yacht-building project, delays of just one supplier often become a real issue. How can you deal with delay legally?
In principle, the legal background is fairly simple: The parties of a yacht-building contract have to fulfil their contractual obligations in time. If they do not, specific circumstances, as well as the relevant clauses in the building contract, will clarify what the legal consequences are. These consequences may be additional payments to be made by the party in default. Additionally, or alternatively, a remedy can be the right to terminate the contract.
The main contractual obligation of the buyer is to pay the instalments on time. The main contractual obligation of the shipyard is to deliver the yacht to the buyer without defects at the agreed delivery date. Delays on the part of the shipyard can have a variety of reasons. As a matter of principle, one can differentiate between reasons which are caused negligently and those for which the shipyard is not at fault. With respect to the first category, the parties normally agree that damages to be paid by the shipyard for the delay are either excluded (for some time), or limited, and/or capped.
Permissible delay and force majeure
It is not uncommon to include clauses in a building contract that allow the shipyard, under certain circumstances, to postpone the delivery – so-called “permissible delay”. For instance, a delay caused by a change order request by the buyer would be considered a permissible delay. Furthermore, shipbuilding contracts often grant the shipyard a few days of additional time to deliver the yacht without any legal consequences, a so-called “grace period”. However, not all delays can easily be attributed to the one party. When negotiating and agreeing on a shipbuilding contract, special attention should be paid to how delays caused by third parties, such as suppliers, are dealt with. Additionally, so-called acts of God can interrupt the building process. Such events are normally enumerated (exhaustively or not exhaustively) in so-called “force majeure” clauses. Due to Covid-19, force majeure clauses and related questions of interpretation have become the cause of many disputes. Not only should the definition of a force majeure event be carefully considered, but also the notification obligations that fall upon the party intending to rely on it. Usually, the party that intends to rely on a force majeure event has only a specific amount of time after the event to inform the other party about the circumstances.
Consequences for non-permissible delay
If the delay does fall within the responsibility of one party, it is normally not considered permissible delay. Therefore, the responsible party has to bear the legal consequences of such delay. As mentioned above, most often the parties agree on a limitation of the legal consequences. Three principal legal consequences can be found in yacht-building agreements that might apply exclusively or simultaneously:
- Liquidated damages: By agreeing on liquidated damages, the parties ex ante agree on which amount of damages is to be paid by day or week in case there is a breach of the obligation to deliver the yacht on time.
- Contractual Penalty: Some parties agree that contractual penalties are to be paid in case of delay. The concept is similar to that of liquidated damages. However, it is not permissible in every jurisdiction. Depending on the wording of the contract, further damages can be claimed in addition to the penalty.
- Termination/ Recission of the contract: The ultimate consequence of delay is the right to terminate and/or to withdraw from the contract. Even though such a right to terminate the contract might seem like the ultimate tool to abandon a delayed project, it is always important to diligently consider the particular circumstances as well as the solvency of the involved parties when considering rescinding or terminating the contract.
In a nutshell:
- Factually, delays can never be ruled out. Legally, the consequences of delay are manageable by negotiating appropriate compensation.
- However, pay attention to the applicable national law. Also, plan ahead and agree under which circumstances extensions of the delivery date are permissible. In addition, make sure that the wording of the force majeure clause is appropriate.
