KEY PROVISIONS

As with yacht building, there is no standard conversion agreement for parties to use and adapt. Elements of standard shipbuilding, and standard yacht refit, agreements could be used but the parties should take advice at the outset so that fair and workable terms are agreed – including some of the following key terms.

PRICE

Works are typically carried on for fixed fee, payable in instalments following the completion of particular stages of the conversion. Changes in specifications are reflected in adjustments agreed to the fee. Owners should insist on unit prices for labour and key materials being fixed at the outset, in order that the yard cannot raise these unduly in respect of additional works.

SCOPE

Setting out the scope of the works to be completed is key. There is no alternative to drafting a detailed technical specification – including plans, objective performance and/or finish standards to be achieved.

It's helpful to divide the scope into two distinct components:

• A repair scope, setting out the elements needing repair following the thorough pre-purchase survey; and

• A conversion scope, setting out what needs to be added – or removed – in order for the vessel to become a yacht.

The repair scope will need some inherent flexibility as the repairs themselves may reveal further issues which weren’t apparent during the survey, while the conversion scope can, and should, be very rigid.

In addition, the conversion agreement will have to describe standards to be met by the yard in respect of the works. Vague standards often used in the context of trading vessels – such as “first class” shipbuilding standards – should be avoided, and objective standards used. Comparisons can be made to other existing vessels. But ideally, reference should be made to Classification Society Rules or other objective standards and measurements. There are few, if any, aspects which can’t be measured objectively – which is crucial especially where the yard isn’t used to the very high standards expected by yacht owners.

Converting a vessel into a yacht may pose “interface risks”. These are the risks of a failure of materials and/or design where new materials and equipment are installed into an existing structure. So, if possible, the yard should bear such risks. Yards can require owners to warrant that plans and specifications of the vessel as it comes into the yard are accurate – meaning that additional expenses arising from any inaccuracies will be for the owner’s account.

TIMEFRAME

Parties will need to agree that the works should be finished by a specific date, typically referred to as the Redelivery Date – with fixed amounts of money (known by lawyers as “liquidated damages”) payable for each day that the project overruns. This avoids otherwise lengthy and expensive arguments about quantifying loss of use. And if the overrun goes beyond an agreed date, the owner must be allowed to cancel the agreement and take the vessel for completion elsewhere.

Yards will need to prepare for the vessel’s arrival well ahead of time. In particular, other projects may need to be relocated within the yard to make space. Manpower will need to be arranged. Supplies will have been ordered and/or delivered, and third-party contractors may have been booked or will be on standby. The yard will therefore want to be notified of the actual arrival date – and be updated on her progress towards the yard – irrespective of the specific agreed starting date.

The agreement will typically specify what will happen if the vessel is delivered late, with the yard usually being allowed to extend the contractual redelivery date by the same amount of time. Alternatively, the redelivery date may be replaced by an obligation on the yard’s part to finish the work and redeliver the vessel within a reasonable amount of time.

FORCE MAJEURE

Force majeure clauses automatically retard the redelivery date by an amount of time equivalent to that of the delaying event – where such event is due to certain circumstances beyond the yard’s control. As with the timeframe for the works, it is wise to have a long-stop date, beyond which the owner can cancel the agreement and take the vessel away elsewhere for completion.

SECURITY

It must be expressly agreed that the owner at all times retains title in the vessel, and all her machinery, equipment and items awaiting installation. Indeed, the owner may need to keep a skeleton crew on board, at least a build captain, for the duration of the works. The conversion agreement should also state that the owner acquires title to the works and equipment that are continuously added as the project progresses.

As owner, should you wish to cancel the project prior to completion, your remedies are normally limited to removing your project for completion at a second yard, and suing the yard for any additional completion costs over and above the outstanding balance of the price agreed with the first yard. This will take time – especially where enforcement proceedings are required in the yard’s own jurisdiction – and some legal costs may not be recoverable. 

Far better, then, to obtain a performance guarantee or completion bond, giving security against major cost overruns when finishing the vessel elsewhere.

MATERIALS

With a steady throughflow of materials at the yard, there is scope for disagreement over who owns what at any given time. It is vital to establish this, as such materials must be insured, and protected from the yard’s creditors in the event of insolvency. The yard must ensure that such provisions in the conversion agreement do not contradict the terms under which such materials have been bought by the yard form third party suppliers. Where ownership has passed to the owner, the yard may want to have a contractual lien over such materials in case of a future non-payment by the owner.

INSURANCE

It’s vital that the owner and yard agree on how the risks of loss or damage to the vessel and materials will be covered. This includes owner-supplied items being stored ashore at the yard. Owners usually maintain their Hull & Machinery (first party) and Third Party Liability policies. And it’s vital not only to discuss the works in detail with insurance brokers, but to be as certain as possible that the underwriters themselves have been notified and agree to the scope of the works, which yard is to be used, etc. Particular attention must be paid to policy terms, especially any requiring the vessel to remain fully crewed at all times. It would be unwise to assume that underwriters will overlook such a requirement just because the vessel is subject to extensive works.

WARRANTY

A warranty period of twelve months is typical – during which the yard is contractually obliged to remedy faults arising – as is normally found in build agreements. However, the warranty will need to be carefully drafted to avoid disputes over whether is it the new or original parts or equipment which have failed, and if it’s the original elements whether this is due to the presence of the new elements. Yards will often only agree to limit its liability to the repair of its own defective materials or workmanship.