GLOBAL-WIDE: An Introduction to Yachts & Superyachts
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Global-Wide: Yachts and Superyachts
The practice of “yacht law,” reduced to its essence, is the practice of both domestic and private international law. It is not unusual for a superyacht transaction to involve the laws of an almost unheard-of number of jurisdictions.
For example, a yacht manufactured in Italy (1) may be sold through brokers in Switzerland (2) and New York (3). The offer to purchase may have been signed on behalf of a Cayman (4) company buyer, in Florida (5) by a Mexican (7) Ultimate Beneficial Owner (UBO) and be governed by Florida law, with dispute resolution in Florida. The seller may be a Maltese (8) company, formed for a Greek (9) UBO. The listing agreement might be governed by English (10) law with dispute resolution in London.
That yacht may be transported from Spain (11) to Florida on a Dutch (12) owned ship flying a Dutch flag with a contract governed by Dutch law, insured by a German (13) underwriter with a contract governed by German law. If financing is involved, the bank may be in another country, and the surveyor and the yacht management company might be in Monaco (14). And a decision must be made about the jurisdiction of the vessel’s registration, which may be moved from the Isle of Man (15) to the Marshall Islands (16). And it just might be that the Cayman company buyer is owned by a Canadian (17) trust and the Maltese company seller is owned by a Liechtenstein (18) foundation.
If that isn’t enough, there are corporate structure, liability, inheritance and tax issues (duties, sales tax and VAT) to deal with. And all of these issues arise in an industry which has evolved a great deal as the average size of yachts has increased dramatically and the number of superyachts has increased almost exponentially over the past several decades.
The volume of yacht sales increased dramatically during COVID period, riding higher even than during the “Trump bump” period, to the point where inventories of both new and used yachts are this year almost exhausted or simply not available, in the case of new yachts, for a year or even several years. While inflationary pressures did not slow demand in 2021, this year has seen much greater inflation and geopolitical uncertainty given the conflict in the Ukraine, the constantly expanding sanctions on Russian oligarchs and the complexity of dealing even with non-sanctioned Russians at this point – all on top of the confusion created by the disordered US withdrawal from Afghanistan. Given this backdrop, it is impossible to imagine that demand will continue to grow at the pace of the past two years.
There is virtually no talk of new markets in China and the Far East, as COVID has taken a major toll on the economy of the area. Government intervention in the form of shutdowns in cities as large as Shanghai and long mandatory quarantines have rendered the concept of yachting in China a tertiary subject for the time being. Sales in Europe have seen some decline relative to US growth.
On the other hand, the US customer base has been steady with US buyers continuing to represent an almost constant 70% of new superyacht buyers. The Mediterranean remains the steady cruising favourite, the Adriatic creating some misgivings given the conflict in Ukraine. As usual, there is significant growth among smaller superyachts cruising in Florida, the New York area, the Bahamas and the Caribbean, particularly with newer buyers.
As mentioned above, when yachts are built, financed and repossessed, the domestic laws of the jurisdiction where they are located come into play. For dispute resolution, the primacy of the London Maritime Arbitrators Association and American Arbitration Association continues to be challenged by the International Yacht Arbitration Council (IYAC), a project of the International Yacht Brokers Association (IYBA).
The IYBA’s efforts in modernising standard sales, listing and other contracts, has put pressure on MYBA to update their sales contract, which they have done, along with developing addenda to the long-standard MYBA charter agreement form resultant from the COVID crisis. These agreements, developed and updated periodically by committees of experienced yacht brokers and lawyers, comprehensively address most issues encountered in yacht transactions attempting to balance the rights of buyers, sellers and brokers in a manner consistent with historical market practices.
Not only have the multi-jurisdictional and contractual aspects of yacht law become more complex, so has the regulatory framework. Generally speaking, the larger the yacht, the greater the level of regulation. These regulations, which vary depending on where the yacht is located, and the nationality of its crew, increasingly address safety, health, immigration, environmental and labor issues. As the value of yachts has increased, so has potential liability when accidents or problems arise. This means that insurance issues and coverage-related disputes remain important and complex. And, of course, the insurance market has continued to tighten given loss-experience in the last decade.
As is the case when customers buy a business or real estate, despite yachts being essentially very large and expensive toys, the experience and knowledge of advisers familiar with a particular industry are invaluable. Qualified yacht lawyers assist not only with understanding the clauses of build and buy-sell agreements, but in helping their clients understand what is conventional or accepted in the market, and how to protect against the usual, and even the unexpected, risks associated with buying or owning a yacht. They advise not only with respect to contractual terms, but also with the myriad of certificates and approvals yachts require in order to navigate. They are also invaluable with respect to the assembly of the professional team buyers and owners need to manage the purchase, ownership and operation of their yachts.
For example, attorneys can advise regarding the selection of yacht surveyors (inspectors) and with interpreting the results of inspections and sea trials – translating those results into documents to help support transactions, warranty claims, litigation and arbitration, when such arise. They advise with respect to qualified insurance brokers and yacht management companies and, of course, with respect to flag selection. Beyond that, qualified lawyers can share their non-specifically legal experiences dealing with particular shipyards, sales executives, surveyors, insurers, yacht managers and jurisdictions.
When buyers and owners contemplate chartering their yachts, an entirely additional set of rules, forms, construction standards, inspection protocols, practices and customs apply. There are other important considerations to keep in mind, from the customer side, when chartering a yacht as well.
In short, “yacht law” is the epitome of complexity with respect to legal issues, an incredible diversity of fact patterns, and an almost impossibly complex regulatory backdrop, given the number of jurisdictions regulating these mobile mansions and multi-national businesses otherwise known as “yachts.”