Superyacht supplier contracts – are your T&Cs fit for purpose?

Posted: 05/02/2024

This article was originally published on Onboard Online in February 2024.

In this article Sarah Allan, partner in the yacht team, provides an overview of key considerations those in the superyacht industry need to take into account when negotiating supplier contracts. 

At the start of a New Year, one usually has good intentions, not merely personally but also with regards to our businesses.

The superyacht industry is supported by numerous contractors providing a diverse range of services: naval architects, designers, surveyors, engineers, paint coating specialists, and AV and IT equipment and employment services (albeit the nuances of any bespoke contracts are not covered here), to name but a few. Frequently, refit yards and project managers also sub-contract elements of their services to sub-contractors.

I have heard frequent tales of such parties having no terms and conditions, or adopting precedents from others, or agreeing to contracts without subjecting the terms to review, or sometimes agreeing to terms that do not make sense or bear no relationship to the services performed. In the honeymoon period of a commercial relationship, all might go well; but if issues arise, the expense saved by overlooking a contract review may be easily eclipsed by the cost of the ramifications and damage to that relationship.

At the start of the year, it is worth considering whether our terms and conditions would benefit from an overhaul, and this article seeks to cover some key pointers that parties should have in mind. These points are equally relevant in any contract negotiation.

Law and jurisdiction

For starters, the law and jurisdiction provisions are often overlooked, which can be a costly omission. There is usually an international dimension to the provision of services to yachts with the vessel being owned and registered in different jurisdictions to the company supplying the services and the place of performance. If so, it is better to expressly choose a nation state’s law to determine how the parties’ obligations will be construed. If a governing law is not expressly agreed, then this must be determined under private international law, which may cause the interpretation of the contract to differ. A good example is the concept of force majeure, which under English law must be expressly defined in order to have meaning, whereas in some jurisdictions force majeure is already defined by legislation.

The same is true for the parties’ chosen jurisdiction as a forum for disputes along with the question of where ultimately enforcement of any judgment or arbitration award will take place. Where there is an international dimension, arbitration is worth considering, as the New York Convention provides for the recognition and enforcement of international arbitration awards, thereby making enforcement more straightforward, particularly for those affected by Brexit. 

However, one must ensure that the arbitration clause is correctly drafted to enable a workable appointment process and the arbitration process is not cost prohibitive. Frequently, in the maritime industry London Maritime Arbitrator’s Association terms are agreed to, although parties should be aware that the LMAA have several different rules of procedure (standard LMAA Rules, Small Claims Procedure, and Intermediate Claims Procedure).

Ensuring term and conditions incorporated, absent a formal contract

Under English law a contract exists when you have: an offer and acceptance, contractual intention, and consideration (ie the price or promise to do something in return). A contract can be evidenced by written communications or be a verbal agreement, which is relevant to the incorporation of terms and conditions.

An issue I have come across is terms and conditions being sent after a quotation to provide services is already agreed. Under English law, a party cannot unilaterally alter the terms of a contract after the agreement has been made. Terms and conditions therefore are normally only binding if they form part of the pre contractual offer, which must be accepted at the time the contract was formed. That is unless the parties agree after the event to vary the contract by adopting such terms.

Therefore, if the parties are not signing a written contract, it is important to ensure that terms and conditions are brought to the other party’s attention early on, ideally with written confirmation of the same. This also avoids any argument as to whose terms apply (ie a battle of the forms)! If and when additional services are subsequently agreed or the heads of terms are varied, then the terms and conditions should be referred to again. Some companies even refer to them on email footers, specifications or invoices to help ensure their terms are more likely to apply, in the event that a formal written contract is not in place.

Implied terms and consumer contracts

Under English law, terms will be implied into a contract for services by the Supply of Goods and Services Act 1982 requiring, inter alia, that the seller provides the services with reasonable care and skill, and within a reasonable time. It is worth noting that for business-to-business contracts, the parties may expressly agree to exclude certain statutorily implied terms.

However, if you are dealing with a consumer, namely an entity acting outside the bounds of their trade or profession, then the ability to exclude statutorily implied terms is limited, and, furthermore, any of your terms that are deemed to be unfair may be unenforceable. It is important to keep in mind the type of entity you are contracting with.

Limits of liability and insurance

For service providers, limiting the scope of liability under a contract is important, including for negligence, but there are legal restrictions on what liabilities can be excluded or limited, particularly in the context of non-business to business contracts. Equally, it is worth bearing in mind the particular legal obligations that arise in respect of product liability. By example important points to review in terms and conditions are limiting liability for economic losses arising from a breach, capping the level of liability for negligence, and limiting the duration of any warranty or period during which a claim may be brought. In most jurisdictions, it is not possible to exclude liability for personal injury caused by negligence.

These types of terms are usually central to any negotiation and if either party takes an extreme position, their terms are unlikely to be accepted. On the other hand, limitation of liability serves an important purpose, as a contractor is unlikely to be able to assume all liability for all losses that potentially could arise, say, if significant damage is thereby caused to a superyacht.

For this reason, insurance covering such risks as professional negligence and product liability are essential, and most shipyards will require proof that their contractors have such insurance. Usually, a contractor will want to align his liability with his insurance coverage. Although to be clear insurance will not be covering the consequences of a bad commercial bargain! Therefore, coupled with reviewing terms and conditions, service providers should carefully review their insurance policies to ensure they understand the cover they have in place.

Other boiler plate clauses

Terms and conditions ought to also cater for termination of the contract, for instance in the event of a company becoming insolvent. With that in mind, retention of title clauses may be useful in enabling an unpaid seller to retain security over goods. Without such provisions, time might be lost and additional costs incurred in ascertaining what action may be taken. Other standard boiler plate clauses include those dealing with third party rights, and whether a third party might be entitled to rely on a term of the contract.

Final thoughts

Parties are often reluctant to review contracting terms and conditions should that hold up reaching a deal. However, the process of scrutinising the underlying terms is important in enabling parties to know where they stand in advance of forming binding obligations and becoming better able to respond to problems when they arise. The additional effort of keeping such terms under review will more likely reap long term savings (or at least peace of mind), particularly having in mind global events occurring in recent years.

So, my message to service suppliers and contractors for 2024 is fear not the unknown by keeping under review your contracting terms and conditions.

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