INDEMNITY

As well as having to pay fines for breaching regulations, or even having his yacht detained, an owner can be subject to criminal liability where safety regulations have been breached. By being enforceable against the yacht itself, sanctions can also sidestep corporate and trustee owning structures. As a starting point, therefore, the manager should ideally agree to indemnify the owner faced with third party claims which arose because of the manager’s actions or inaction.

But there is no point handing some of the liability over to a manager, if that manager is an uninsured company without the assets to meet a large claim. In most cases, even if the individuals behind the company have been negligent, and own sufficient assets to make them worth suing, it is still only the management company which would be liable. Owners should therefore make sure that their manager carries sufficient indemnity insurance.

LIMITATION

Although managers may be able to limit their ultimate financial liability under the internationally-recognised Convention on Limitation of Liability for Maritime Claims 1976, there will still be many situations in which this will be unlimited. Understandably, therefore, a manager may wish to expressly cap liability to an owner in the contract itself. Although it is clearly in the interests of the owner to resist this, such a cap may be necessary to enable a manager to obtain indemnity insurance.

INSURANCE

Managers may seek protection from third party claims by being named as ‘joint-assured’ or ‘co-assured’ on an owner’s insurance policy, typically without significantly increasing the total premium. Whilst the manager’s premium savings can be passed onto the owner, as ‘joint assured’ the manager risks having to pay the owner’s unpaid premiums. As ‘co-assured’ the manager does not usually face this risk. This arrangement does not provide protection against claims by the owner.

CLAIMS HANDLING

Some managers may also like to add value by arranging insurance and handling the owner’s subsequent claims and disputes. This is not a matter of form-filling. It requires a detailed understanding of insurance law and practice. The owner should decide for himself whether the manager has the appropriately qualified staff.

PRINCIPAL

As far as possible, the owner should ensure that the manager agrees to deliver particular services as a fait accompli, rather than just provide advice and administrative support. This entails the manager contracting in its own name where possible, rather than the owner’s. To use the legal jargon, the manager should be obliged to act as ‘principal’ rather than ‘agent’ of the owner. Contractual disputes with third parties will not then have to involve the owner, subject to any liens which may have arisen on the yacht as a result of services rendered.

OUTSOURCING

After an owner has taken great care to appoint a reputable manager, there will be nothing to stop the manager then outsourcing responsibilities to anyone else. Of course, this may not be quite what the owner had in mind. The management contract should therefore state exactly what broad tasks the manager has the authority to sub-contract. Technical matters, such as the maintenance of specialist equipment, may be beyond even the crew’s or manager’s capabilities. Specifications and regulations do change over time, and the necessity for occasional expert third party advice should not be a cause for suspicion or alarm.

ISM CODE

The International Safety Management Code (more commonly, the ‘ISM Code’) applies to commercially-operated yachts over 500 GT. Although the ISM Code itself has no significant bearing on the balance of liabilities between owner and manager, it is vital to ensure that the manager assumes responsibility under it. This can be achieved by ensuring that the ‘Company’, as defined in the ISM Code, is said to be the manager in the relevant documentation.

The ISM Code requires the Company to have such adequate resources immediately available, meaning that outside advice must be expressly obtainable without further permission where circumstances dictate. Further, a bespoke Safety Management System must have been developed, implemented and maintained. This is a lengthy and complex task. There is also a specific requirement under the ISM Code for a shore-based Designated Person to be appointed, whose role in an emergency is pivotal. It is not enough to leave safety management to the captain alone. Non-adherence may lead to the detention of the yacht by port authorities, and insurance being invalidated.

CREW

Crew members may prefer to be the employees or contractors of the manager rather than the owner, especially as they may have known the individuals at the management company for many years. Should the worst come to the worst, it is also best that the manager is responsible for terminating a contract of employment, or reassigning a crewmember, to prevent relations between the owner and the remaining crew being soured.

Allowing a manager to employ the crew also allows for some comeback against an insured management company in the event of crew incompetence, rather than the individual crewmember who may not have much in the way of property or savings. Where the owner chooses to employ the crew, it must still be clearly stated in the contract of employment that the crewmember will obey all the manager’s reasonable orders, especially in connection with the operation of any compulsory Safety Management System in operation.

The manager must agree to ensure that the crew meets the standards of training and medical fitness, as required by the yacht’s flag state, at all times. Manning levels must also be satisfactory. Ensuring that the crewmembers have a sufficient command of a common language is not just matter of practicality, but an ISM Code requirement. It should also be incumbent upon managers to ensure that drug and alcohol laws and polices are strictly adhered to.

ACCOUNTS

Managers must agree to allow their accounts relating to the particular yacht to be available for inspection by the owner. In some jurisdictions, such accounts may be seen as the property of the manager alone, encouraging litigation and forced disclosure in the event of a dispute. Indeed, the manager must agree to hand over all vital documents relating to the yacht when requested, so that these are not ‘ransomed’ in the event of a dispute. More generally, the obvious should never be overlooked. For example, it must be stated that the management agreement (and therefore fee payments) will end if the yacht is lost. Further,

BALANCE

Striking the right balance is never easy. Compromises are inevitable. In commercial ship management agreements, by comparison, managers typically agree to use their ‘best endeavours’ to provide management services to the owners in accordance with ‘sound management practice’ and to protect and promote the interests of the owners. This is a fair and time-honoured balance. ‘Best endeavours’ means nothing less than the best, although ‘sound management practice’ is said to envisage competing priorities for a manager handling more than one vessel, which may not be acceptable to a demanding yacht owner.

CONCLUSION

Most agreements are entered into in a spirit of genuine goodwill, at a time when a lawsuit couldn’t be further from the minds of the parties. This is especially so with yachts, which promise a temporary escape from the litigious business world. Yet it still requires attention to detail at the outset to ensure that this promise is fulfilled.