New-Build Bible: Contract Do's and Don'ts

A solid, comprehensive yachtbuilding contract is essential to realizing your dream.
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A solid, comprehensive yachtbuilding contract is essential to realizing your dream.

A solid, comprehensive yachtbuilding contract is essential to realizing your dream.

By Dudley Dawson

"There comes a time in the life of every project when you must kill the engineers and start production."

That sign used to hang in the main office of a yachtbuilder where I did consulting work, and it jibes perfectly with the eagerness many owners feel about starting construction on their dream yacht. The whole point of building a custom yacht is to enjoy using it, which is why visions of cruising in Tahiti can—and often do—infiltrate the part of the brain that should be buckling down on details. The thought of killing off the engineers and simply getting on with the job can seem enticing, as can William Shakespeare’s suggestion to kill all the lawyers, too.

The reality, though, is that it’s risky to ignore either of their input. The penalty for rushing into construction without due diligence and professional guidance can be unexpected, jarring and severe. Late or over-budget delivery is bad enough, but failure to complete or bankruptcy are even worse.

In truth, you need both an engineer and a lawyer from the outset, working in tandem to ensure that everything you want from the shipyard is, in fact, on paper. If worse comes to worst and you do end up killing (or, more likely, firing) the original engineer and lawyer alike, then the thing you are left with is the contract—and it had better be as watertight as the custom yacht that you are trying to build.

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The first step toward success is hiring a lawyer and an engineer who not only are experts in their fields, but who also can work well together on your behalf. You’d be surprised how often an experienced engineer will find a problem with the legal documentation, and vice versa. Neither is beyond error, so having them backstop each other is a definite positive for you. They must be personally compatible, so watch for any early signs of competition rather than cooperation and, if necessary for unity, don’t hesitate to replace one or the other.

The next step toward success is realizing that the document you need before starting construction is actually multiple documents rolled into one. A yachtbuilding contract is no simple matter: Ideally, it’s three separate documents combined. Your lawyer and your engineer should be working on them all, simultaneously, to ensure that they complement one another. And the entire time, they should be taking your vision and articulating it into a highly detailed plan for the shipyard to follow.

A proper yachtbuilding contract’s three elements can be thought of as the basics, the drawing package and the specifications. Here’s a quick overview of each.

The Basics

This document outlines the basics of what the yacht is to be, as well as what is expected of it in terms of performance and capability. The document defines the rights and responsibilities of each party in considerable detail, and it lays out a schedule for each party, including deadlines and consequences for any divergence. It addresses all the “what ifs” that are likely to crop up in any project, with guidelines for resolving the questions and disputes. All of the legal boilerplate is included in this document.

The Drawing Package

This document defines the arrangement, appearance, construction, outfitting and finishing of the yacht. It is all too common that in the rush to commence construction, the contract drawing package contains bare information, with the intent that detailed drawings will be completed later. The reality is, however, that the more detail given at this stage, the less likely there will be conflict later. You cannot show every bracket and fastener, of course—those will be in the builder’s construction drawings—but do include all of the important details at this stage. Take the extra time necessary to develop all the drawings and clearly define the yacht.

The Specifications

This document can run to several hundred pages for a large yacht. Every piece of equipment will be itemized, including brand and model details, along with expectations for each item’s function and performance. All finishing, both interior and exterior, will be described, along with a quantitative definition of its level of quality. “To highest yacht finish/quality” is a phrase sure to create disagreements later. The expected performance of the yacht, including speed, range, displacement and stability, must be defined, with clear goals to be achieved during sea trials.

It’s all a bit more complicated than envisioning a shakedown cruise to Tahiti, right? This is why a good engineer and a good lawyer, working together on your behalf, are an invaluable investment from the start. They’re going to know things that you don’t, they’re going to anticipate problems that you can’t, and they’re going to insulate you from the most likely pitfalls to come in any large construction project.

If you’re the type of yacht owner who wants to understand every last detail in the paperwork, then I highly recommend grabbing a copy of “Fundamentals of Shipbuilding Contracts” by Kenneth Fisher, who owns Fisher Maritime Consulting Group in New Jersey. He offers no less than 44 chapters of great advice, all free to download at his website.

On the other hand, if you’re like most owners who think 44 chapters of contract language might explode your entire vision of even attempting to build a yacht, here’s my executive summary in seven quick paragraphs.

One: Contract documents should include a contract, a complete drawing package and detailed specifications. These are complementary documents, each one essential to the project.

Two: Contracts should be written. Verbal understandings, oral amendments and handshake deals have no place in yachtbuilding and will only lead to disappointment and dispute.

Three: Contracts should be legally binding. Consult a lawyer early in the process of project planning, and heed his or her advice.

Four: Contracts should be complete and unambiguous. The more clearly defined the project, the less the chance for problems and disputes.

Five: Contracts should be fair to all parties. Expectations should be clear, with reasonable means for resolution when they are not met. Consequences should be adequate but not punitive to either owner or builder.

Six: Contracts should allow for changes. Procedures should be in place to define changes requested by either owner or builder, in a timely and efficient manner, along with their expected effects on cost, delivery time and vessel performance (including speed, range, displacement and stability).

Seven: Contracts should anticipate problems and disagreements, and allow for a timely and amicable settlement. First discussion, then mediation if helpful, arbitration if necessary and, finally, litigation only if totally unavoidable.

And no matter what, remember this most important thing: Yachts are about having fun. Keep dreaming of Tahiti. No matter how long the build process lasts, you and your family will get there.

For more information: fishermaritime.com

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The Dispute

Kenneth Fisher, Ph.D., of Fisher Maritime Consulting Group in New Jersey, is a graduate naval architect and respected specialist in contract consultation and dispute resolution. He offers consultation, practical advice and intensive training for the development of successful contracts, and he handles failed projects when necessary, working to resolve disputes through mediation, arbitration and litigation.

On a less formal basis, I do the same, so it was perhaps inevitable that we would end up as co-arbitrators of a recent international dispute involving superyacht construction gone awry.

Many aspects of the dispute could have been spotted earlier in the project, saving us from sitting between the two tables of lawyers, had the parties recognized one or all of the signs that Fisher lists in his “Seven Signs of a Troubled Project.” If you sense one or more of these things happening in your own yachtbuilding project, take the scenario seriously and work with your lawyer and engineer to make any necessary adjustments sooner rather than later.

The contract work getting off to a slow start.

Equipment ordering or detail design falling far behind schedule.

Subcontracted work being assigned late or falling behind schedule.

The owner-furnished equipment/information arriving late or incomplete.

Numerous alleged changes failing to be negotiated or agreed upon.

The contractor and/or owner having cash liquidity problems.

The owner continuing to request substantial changes late in the project. —D.D.

Editor-at-large Dudley Dawson is not an attorney and does not offer legal advice, but his real-world experience as a naval architect, project manager, expert witness and arbitrator may help keep you afloat building your dream yacht.