Clyde Co Guide to Superyacht Law - Fifth Edition

F I F T H E D I T I O N

CONTENTS

Design and build Design Intellectual property

Toys Jet skis

Proud sponsors of

7 8

53 54 56 58

Flyboards

Build contract

12 18

Drones

Warranty

Submarines

Sale and purchase Top tips

Insurance What are the possible risks? What insurances are required? Are there any insurance clauses that I need to pay particular attention to?

21 24 25 26

61 62

Points for sellers to consider Points for buyers to consider

64

Basics of superyacht sale and purchase

Finance At a glance

Tax Q&As

69 71 71

29

Points to consider Post-drawdown

Operational Superyacht management

35 36 40 42 44 46 48

Additional considerations Bribery

Crewing matters

73 74 75 76 78

Art on board

Brokerage Litigation

Flag

Arms on board

Multi-jurisdictions

Migrants

Brexit

Helicopters

Our team About Clyde & Co Our global reach

83 84

thesuperyachtlawfirm.com

1

This fifth edition of the Guide to Superyacht Law goes to press as the industry faces up to increasing scrutiny from the wider world, and increasing uncertainty in the broader economic and political scene. Whether you are looking to buy, sell, design, own or crew a superyacht, our Guide to Superyacht Law will help you navigate your way through this complex area of the law, and we are delighted once again to share our knowledge and expertise with you. Written by legal experts with more than 20 years’ experience in the superyacht sector who represent many of the industry’s leading builders, owners and designers and have advised on the leading cases involving the industry, our Guide covers almost everything you need to know at any stage in the process – from financing a superyacht and drafting design contracts, to safety and operational considerations, to resolving disputes if it all goes wrong. When we published the fourth edition, the Brexit referendum and (spurred by the release of the Panama Papers) tax avoidance and alleged tax evasion were the issues making the headlines. Bolstered by protracted negotiations on the one hand, and the subsequent release of the Paradise Papers on the other, these topics continue to dominate the narrative both in the industry and the wider world.

At the time of going to press, there was no real certainty regarding Brexit, and the shape of the proposed transitional arrangements had yet to be sketched out, let alone honed in fine detail. Accordingly we anticipate issuing an update to the Guide – whether in the form of the sixth edition or as a standalone Brexit guide – at a later date when the transitional arrangements are officially agreed. On the tax front, we have updated these pages to include numerous recent developments from across Europe. In the last edition, we noted that this industry had become the particular focus of policy-makers and politicians, and needed to respond by being transparent and ruthlessly professional in all its dealings. In the two years since this view was expressed, it has been – and continues to be – absolutely vindicated. On the insurance front, questions are being asked in the market on how it treats yacht insurance. More generally, the Guide to Superyacht Law has been refreshed and expanded to reflect the latest developments in case law and in best practice – the latter gleaned from our continued position front and centre in the superyacht industry.

John Leonida

3

Photographer: Andrew Johansson

5

DESIGN & BUILD

DESIGN It is important to understand what rights you have in any designs and to surround yourself with an experienced team to assist with the build process.

• Is the owner/builder protected from negligent design (including latent (or ‘hidden’) defects, of which particular care should be taken, especially by builders who can potentially be held liable for their failure to identify and correct technically flawed designs) or breaches of intellectual property? Does the designer have professional liability insurance cover in place? It is expensive but designers should have it. • Does the design contract protect the designer’s intellectual property? Does the contract provide that any licence of the intellectual property rights granted by the designer are subject to payment of the design fees, and that if the designer is not paid the licence will be immediately withdrawn?

• What is the owner expecting from the designer? Will the choice of the design have an impact on the superyacht’s performance or compliance with regulatory obligations? Hire the designer early. • What are the designer’s obligations? Is he or she only delivering the design, or should the designer also be responsible for ensuring the builder fulfils the design intent? • Does the design contract tie into the build contract? The designer should deliver the design in accordance with the design deliverables schedule of the build contract. Does the design contract clearly specify the designer’s responsibility towards the owner or towards the builder for defects attributable to the original design? Is there a clear and workable approval process for design drawings moving back and forth between designer, owner and builder?

Designing and building a superyacht is a complex process.

7

INTELLECTUAL PROPERTY Intellectual property (IP) is concerned with creations, such as inventions, literary and artistic works, designs, and names and symbols used in a commercial context. IP can be legally protected, for example by way of copyright, designs, patents and trade marks. These rights ensure that inventors and designers are recognised for and profit from their work, and are protected against the misuse and/or misappropriation of their works by others.

The following IP rights may apply to various elements you have designed or invented in relation to a superyacht: • Copyright: Copyright is the right to prevent others from copying your work, and is especially important when creating and negotiating superyacht designs. Copyright protects, amongst other things, artistic and literary works (which includes sketches, design drawings, photographs, images, books, paintings, sculptures, computer programs and databases, sound recordings, films and broadcasts). Copyright will exist in a work if certain conditions are met, including: the work is original, the work has been recorded, and the work qualifies for copyright protection (which depends on the national status of the author, or the country of first publication of the work). Copyright arises automatically in the UK and there is no requirement for registration. • Design Rights: Design rights protect the outward appearance of an article resulting from its features, in particular, the shape, lines, contours, texture, colour, materials used and its ornamentation - for example, the shape of a superyacht hull or deck design may

qualify for protection. To qualify as a new design, the overall impression of the design must be different from any earlier design. Design rights provide a monopoly right and prevent a third party copying your design for a period of time. Design rights may be registered or unregistered and you can register your design provided it meets the eligibility criteria. • Patents: Patents protect inventions and give inventors the exclusive right to use and/or commercially exploit their inventions for up to 20 years. Patents cover both manufactured products and processes, and they are available for most industrially applicable processes and devices. For a patent to be granted in respect of an invention, the invention must be new, involve an inventive step, be capable of industrial application and

• How you want to restrict the use of your IP - you must be specific or you risk misuse and infringement. • Who will own the IP - for example if you are only contributing to one aspect of a design, be clear who will own the design and avoid the pitfalls of joint ownership. • What consideration do you want for the use of your IP – is a one-off payment sufficient or do you require payment on an ongoing basis via royalty payments. A designer should never surrender their design palette or assign or license their intellectual property rights without specialist advice. Owners go to a designer for their style, which is their signature.

IP includes such rights as: confidential information and trade secrets, copyright, database rights, design rights, domain names, know-how, patents and trade marks. Our intellectual property lawyers have a wealth of experience advising on the full range of intellectual property rights in a superyacht context, including the management, protection, exploitation and enforcement of IP, as well as reputation management and privacy issues. Whether you are creating the exterior design of a superyacht or the design of an internal feature of a superyacht, you should consider: • How to protect your IP. • How you want to use your IP going forward and the extent to which you want to allow third parties to use it. • Whether to license the right to use your IP or to assign the rights in your IP to another party.

not fall within any of the applicable exclusions, for example scientific methods or software.

The benet of a registered design is that the design may enjoy a larger period of protection.

9

• Trade Marks: Trade marks protect symbols, names and slogans are used to identify goods and services such as the name ‘AM37’ and the brand Aston Martin. They can also protect sounds (the Nokia ringtone), smells (Chanel No. 5) and shapes ( the classic Coca- Cola bottle). Consider the logo used on a superyacht or the logos which may be found on individual parts of a superyacht - they serve to distinguish the goods and/or services of one organisation from another. Not all trade marks are registrable and there are various legal requirements they must satisfy. Once registered, trade marks can be protected indefinitely provided renewal fees are paid every 10 years. – Be aware of the difficulties in protecting IP rights (particularly in an international context, which the superyacht industry almost invariably is) – certain types of claims (such as copyright infringement) can be extremely difficult to prove, and it is much better for a designer to protect their IP pre-emptively (such as by registering design rights) than to address the issue for the first time only once infringement occurs. Unregistered trade marks arising through use also provide a certain amount of protection.

– There are also other kinds of claims that touch on IP rights, such as the tort of passing off. We have extensive expertise of the different forms of dispute resolution common to IP disputes and can advise you on the best strategy to adopt should your intellectual property rights be misused or infringed, from negotiating commercial resolutions to the commencement of legal proceedings.

If things do go wrong, take prompt action to protect your rights.

Image copyright Quintessence Yachts - proud manufacturer of the AM37, the first Aston Martin powerboat

11

BUILD CONTRACT There is no industry-wide standard form superyacht construction contract. Each builder will have their own standard contract which reflects how they work.

to recover any of its losses from the buyer, or claim liquidated damages if the buyer causes the project to overrun, increasing the costs to the business? Note that liquidated damages clauses no longer need to be a genuine pre- estimate of a party’s losses – although an extravagant provision could still be seen by the courts as a penalty (and therefore unenforceable). As a general point, you should be able to articulate legitimate commercial justifications for the level of liquidated damages. In addition, or as an alternative to retaining title and ownership of the superyacht, some builders, upon payment of each pre-delivery instalment, request performance bonds from the buyer guaranteeing the payment obligation of (at least) the next pre- delivery instalment. This gives some comfort to the builder in securing a minimum cash flow to continue the build if the buyer steps out of the contract during construction when the builder has already invested its funds. Alternatively, where the contract is entered into by a single purpose vehicle company (the norm in the industry) it is not unheard of for the builder to request a personal guarantee from the beneficial owner or a corporate guarantee from a parent company.

– Consider at this stage whether a helicopter will be used on board the superyacht so that compliance with the relevant regulations can be incorporated into the build contract. • Insurance: Should there be an accident during the build process, make sure you have the details of the builder’s insurance. Elements to consider are insurance levels, coverage of owner- supplied items, and whether the buyer is co-assured. • Protecting the buyer’s pre-delivery instalments: Progressive title transfer (getting ownership in the superyacht as she is built), bank refund guarantees - or a combination of both. Where title is being transferred, check with the relevant jurisdiction what requirements may impact title registration to ensure that it is validly transferred to the buyer. How best to protect your pre-delivery instalments and how effective is that bank refund guarantee? • Protecting the builder’s interests: Does the contract provide any mechanism to guarantee the buyer’s payment obligations during the build process? What if the buyer fails to pay the pre- delivery instalments when they fall due or if the buyer unlawfully terminates the contract or illegitimately refuses to take delivery? Will the builder be able

A good contract will appear fairly balanced, while a poor contract will limit the buyer’s rights as much as possible. A superyacht construction contract will usually be made up of the main contract, the technical specification, the general arrangement plan, and any other elements such as a construction schedule, the form of delivery documents and a makers list. Never sign a contract without seeking legal advice. There are some basics you should expect to see in a build contract: • Payment terms: Stage payments linked to milestones, on a cost plus basis, monthly stage payments or on a percentage of completion basis. Careful consideration should be given to timings, exact triggers of payments and the value of the superyacht as constructed. • Specification: A marine surveyor, or an experienced yacht construction project manager can help to negotiate this. The specification will include details of the flag and classification notation. When

choosing a flag, a number of factors should be considered including tax, intended use (i.e. chartering or not), flag reputation and the builder’s knowledge/ experience building with such flag. Advice should be sought on your choice of class on whether it will add or detract from the value of the superyacht and who will have access to the discussions between the builder and the classification society. • Regulations: Language confirming the regulations the superyacht will be built under and, in particular, whether she will be built as a commercial superyacht. If so, will she be, for example, Large Yacht Code (LY3) or Passenger Yacht Code (PYC) SOLAS compliant or regulations issued by United States Coast Guard? Note that the LY3 and PYC have recently been consolidated into the Red Ensign Group Yacht Code, which comes into force on 1 January 2019 – it should also be borne in mind that the implications of Brexit for Red Ensign Group-compliant yachts has yet to be decided.

13

• Project management: Depending on the complexities of the project, during the build you may have an on-site project manager to supervise the build process. The build contract should allow access and office space for the project manager and their team. A complex and bespoke project of this nature requires all parties (owner, builder, designers) to work closely together from as early a stage as possible and a clear deliniation of each party’s obligations – particularly when it comes to deadlines for producing and approving work. • Performance warranties: Depending on the size of the yacht, the buyer should at minimum expect to see speed, range, noise and vibration warranties. Paint system warranties should also be considered. The liquidated damages and levels set will depend on what features are important to your superyacht. Our comments above regarding things a builder should consider when agreeing levels of liquidated damages apply equally to buyers. If an inherent flaw in the project Specification or underlying design means that the yacht could never comply with the performance warranties, then this does not discharge the builder from liability – the Supreme Court recently

during its original warranty period? Consideration should also be given as to whether the buyer should have limited rights when it comes to latent defects. • Termination: If it all goes wrong and the contract is terminated, what happens? If the builder terminates, what are the damages? If the buyer terminates and has the superyacht taken away, you need to make sure that they have access to all the design work, and all the class and flag files to continue the build. Do not forget that during the build, class and flag are contracted to the builder and their files are closed to the buyer. • Commission: While not generally mentioned in the build contract, if the buyer is introduced to the builder by an intermediary, a commission may well be payable by the builder. • Payments must come from an account in the name of the buyer entity, not from an account controlled by another company or by the ultimate beneficial owner. If accusations of money laundering surface, the builder will be put to proof that they are certain where the money comes from and may be required to offer up payment details to customs or other governmental authorities – without referring back to the buyer first.

confirmed that in this scenario, the project will need to meet the higher standard, and the builder has a duty to identify and correct or improve flaws in the design. • Jurisdiction, forum and technical disputes: You need to know the law that will govern disputes and whether (and where) you will go to court or arbitration. If you intend for technical disputes to be settled by a technical expert, be sure that the contract says so, and that there is no scope to appeal the technical expert’s decision. • Subcontractors for everyone’s benefit, the chain of command for subcontractor management should be clear (typically, management of subcontractors and liability for their work is solely the right and responsibility of the builder). Warranties (including performance warranties) should be tracked through from the build contract into any subcontractor contracts. • Delivery and VAT: Where will delivery take place and what VAT structure should be set up? As you will see within our section on tax, this should not be overlooked or viewed lightly. • Post-delivery warranties: What is the

A project of this nature requires all parties to work closely together from as early a stage as possible, and a clear delineation of each party’s obligations.

period? What will it cover? Does the warranty extend if an item is fixed

15

17

WARRANTY The financial and market problems over recent years have seen a run of unprecedented claims in the English courts and London arbitration that were absent pre-2008 addressing the nature and extent of the obligations of a builder in terms of after sales service to its buyer.

contractual documentation to avoid any ambiguity. This is an especially high risk where non-warranty works are co-mingled with warranty works.

While much of the attention in concluding a contract will focus on the specication and pricing, we recommend that equal attention is given to what could come aer delivery.

We have seen a rising number of contracts in which buyers have raised numerous and extensive claims that frequently go well beyond what the builder is obliged to perform. There is then a tension between the legal obligations under the contract and the commercial desire of the builder following a particularly interesting case in 2000 (recently reinforced in 2016), that a properly worded warranty clause can represent a complete code that governs what is or is not covered by the builder after delivery. With appropriate wording, the warranty clause replaces any liability on the part of the builder for breach of both express and implied terms of the contract with an obligation solely to repair or replace defective workmanship, and permits the exclusion of liability for broader losses ranging from towage fees to lost charter income. to assist and satisfy its customer. The English courts have indicated,

Essentially the clause becomes an indemnity under which all other damage or financial losses suffered by the buyer would be excluded and it is for the buyer to establish that it ‘qualifies’ for the assistance of the yard. However, with fairly small changes to the wording of a warranty, or a carelessly drafted clause, this complete code can be disrupted, such that the warranty becomes less effective, and potentially opens up the builder to liability for all of the losses suffered by a buyer in connection with a defect. The extent of the warranty is not the only issue to be aware of in this context: warranty works can also raise jurisdictional issues, and there have been instances of builders attempting to seize jurisdiction (undermining that of the build contract) by trying to characterise warranty works as local refit work. Ensure you maintain a consistent line in communications and in any new

19

SALE & PURCHASE

The reality is that you must never underestimate the importance of having a thorough understanding of the legal processes, statutory certificates, transaction documents, tax position and various different forms required for the sale or purchase of a superyacht. TOP TIPS

• Surround yourself with people who know what they are doing and have a good track record including: surveyor, lawyer, superyacht manager, broker and VAT adviser qualified in the jurisdiction where the yacht is to be imported and used. • Make sure your form of agreement, special terms and document list are all in writing. • The most common form of agreement for sale and purchase of second-hand sale and purchase form, known as the MYBA Memorandum of Agreement (MYBA MOA). Any additional terms or amendments to the standard terms should be recorded (eg transfer of any charters currently booked for the season or specific artworks to be removed). It is important that any agreements made verbally are recorded in writing. • You should consider carefully before signing any personal guarantee which superyachts is the Mediterranean Yacht Brokers Association (MYBA)

underwrites the obligations of the selling or buying company. This may compromise the ownership structure you have carefully put in place, and it could cause not just tax problems on the sale but wider personal tax complications. • Are there any mortgages, charges or other encumbrances registered against the superyacht (as these will need to be discharged at delivery)? This is a question any prudent buyer should ask and if you are selling, you must ensure that you can present a Transcript of Registry (or equivalent) showing that your superyacht is unencumbered. • What is the process? Agreement signed, conditional upon sea trial and survey. Deposit paid (the standard deposit is 10% of the purchase price but a different sum could be negotiated). Always have the sea trial first and, if you’re happy, move on to the condition survey conducted by a marine surveyor. It is never advisable to do the condition survey before the sea trial, but if you cannot avoid it you must

The sale and purchase of a superyacht can be a highly emotional experience.

21

ensure that the MYBA MOA is amended to adequately deal with this. Typically, the MYBA MOA will have an addendum which will deal with all documents that will be delivered by the seller to the buyer and vice versa. or lawyer to hold it. However, you can commercially agree for it to be held by the buyer’s broker, lawyer or a professional escrow agent (who will receive a fee for doing so). Any party holding a deposit should be an established company and they are likely to need up-to-date customer information on both parties. If you cannot agree on who holds the deposit, you could get a bank to act as the stakeholder. The sale and purchase of a yacht is like buying or selling an apartment - it’s oating real estate and should be treated with the same respect. • Who should the deposit be paid to? It is customary for the seller’s broker

23

POINTS FOR SELLERS TO CONSIDER

POINTS FOR BUYERS TO CONSIDER

• With regards to VAT on the purchase price, should delivery be in international waters or within the EU? • Are all of the superyacht’s statutory documents in order? • Is the superyacht financed? If so, consent from the bank to sell is usually required. • Who is my broker? Should I enter into a central agency agreement? • Is the buyer known? Who is the ultimate beneficial owner? Do I want a personal/ parent company guarantee, if a single purpose company is the buyer? • What do I need to do if the buyer is changing flags? • What do I need to do if I am selling with charters in place post-closing? • What are the closing mechanics and how are funds released? Will it be through SWIFT or by waiting for funds to hit the account or conditional SWIFT (pre- placing funds but not received until the Protocol of Delivery and Acceptance is signed)?

• Is the superyacht VAT paid? Or is VAT accounted for? Has VAT been claimed back? • What will be my owning structure, and do I need a VAT structure set up? • Will this be a pleasure superyacht and registered private, or do I want to charter the superyacht? • Do I want to keep the same flag? Will the current flag affect the use of the superyacht? What is involved in changing flags? Will the new flag accept this kind of superyacht onto its register as a private or commercial superyacht? • Where do I feel comfortable with the deposit being held? • Are there any special conditions, or items I want left on the superyacht (i.e. transfer of upcoming charters or specific items fixed prior to closing)? • Do I want to keep the current crew? • Do I want a personal guarantee from the ultimate beneficial owner or a parent guarantee of the selling company? • Have all the vested interests in the deal been declared?

25

BASICS OF SUPERYACHT SALE AND PURCHASE

Accept following rectification or price reduction for the yacht

Agree MOA

Pay deposit

Sea trial

Condition survey

Pay price

Title transfer

Complete

Agree rectification or price reduction or reject yacht

MOA terminated

Deposit repaid

Exchange documents

Reject

Defects

27

TAX

Q&As If you are building a superyacht in the EU, be cautious to avoid becoming involved in a tax-avoidant artificial exporting structure.

Can I avoid VAT on buying my superyacht?

these schemes for several years, and so they pose a particular risk for owners living there. More generally, the industry’s tax practices are under increasing scrutiny (from governments and journalists alike) worldwide, and we are aware of yachts caught up in tax cases in several countries. Owners would be advised to approach any tax minimisation scheme with caution, and not to put short- term savings above long-term legal, financial and reputational risks. By way of one example, the UK government has recently introduced ‘Unexplained Wealth Orders’ - a means of using civil powers (and their lower standard of proof) to investigate and confiscate the perceived proceeds of crime, including tax evasion. Is the VAT status of a superyacht preserved for life? • All sorts of events can compromise the VAT status of a superyacht even if it is VAT paid. A superyacht which has been declared to be for commercial use and has accounted for VAT, if at some point

• If you are an EU resident, you may be able to recover any VAT you are charged if you are legitimately operating the superyacht commercially in the EU, or you may consider participating in a leasing structure. Cyprus and Malta run broadly similar leasing schemes which can dramatically reduce the effective rate of VAT on the assumption that superyachts do not spend all their time inside the EU. However, the European Commission has recently commenced infringement procedures against these lease schemes (along with a separate practice in Greece having similar effect), signaling that these schemes may not be long for this world (at the time of going to press, Cyprus had reportedly abandoned its scheme in the face of this criticism), and that owners considering these options should approach with caution. It should also be noted that both the German and UK tax authorities have openly criticised

If you are an EU resident or you choose to operate your superyacht commercially in the EU, or any combination

of the two, you have to account for VAT.

29

in the future it becomes clear that you are not pursuing legitimate commercial business or you are only chartering the superyacht infrequently, you may be asked to de-register as a commercial yacht. At this point you would become liable for VAT on the hull unless you permanently export the superyacht or become eligible for VAT relief as a non- resident. Also, an EU tax paid superyacht sold outside the EU will lose its VAT paid status if brought back into the EU by a new owner. The only certainty in tax and superyachts is that there is no certainty. Recently (prompted by a request from the European Commission to bring its VAT treatment of ships into line with EU law), Italy amended the meaning of ‘sailing on the high seas’ in regards to its commercial VAT exemption. For this to apply at least 70% of the total number of ‘voyages’ in a calendar year must be on the high seas (i.e. more than 12 nautical miles offshore), and activities such as sailing to a shipyard for repairs and maintenance do not count. Significantly, the applicability of the ‘high seas’ exemption is to be reassessed each calendar year.

the sanctity of the corporate veil. They look at who directly or indirectly owns the company and draw their own conclusions. Even a tax paid superyacht if sold in the middle of a charter or as a chartering business can compromise the VAT paid status. Does the flag have anything to do with tax? • The flag only has an impact on tax if you are applying for TIR (Temporary Importation Relief) where you have to have a non-EU flag. Usually, tax is determined by how the superyacht is used as opposed to the superyacht’s flag. However, anecdotal evidence suggests that non-EU flags are having a tough time operating legally in some parts of Spain and Greece. Non-EU flagged vessels would, like EU-flagged vessels, need to establish a branch in Greece, thus potentially onshoring the activities of an offshore entity. To operate out of Greece requires a Greek charter licence, which means setting up a branch in Greece, appointing a Greek tax representative, and facing the risk of a luxury tax being imposed if less than 75 days’ chartering is undertaken during a three year period.

Can I charter my superyacht if I am in the EU under the Temporary Importation Regime (TIR)? • No. The TIR is a relief, that lasts for 18 months and is renewable, from import VAT based on you neither chartering or offering to charter, selling or offering to sell your superyacht within the EU. TIR is only available to a non-EU flagged superyacht, owned by non-EU residents. • You should not allow EU residents to use the superyacht if you are not on board. If you breach any of these conditions, the relief is removed and VAT on the importation of the superyacht is immediately chargeable, together with possible penalties and interest calculated from the date of the original importation. TIR for helicopters on board a superyacht is only six months. Can I charter the superyacht to myself? • Occasionally this is possible, but only if you pay an arm’s length commercial charter rate. However, if you are the only or principal charterer, the superyacht is not commercial. As an aside, chartering through a series of dummy companies does not count as arm’s length chartering or pursuing commercial business. The tax authorities do not always respect

The industry’s tax practices are under increasing scrutiny (from governments and journalists alike) worldwide.

31

33

OPERATIONAL

SUPERYACHT MANAGEMENT Providing services ranging from purely commercial and marketing services to full commercial, administrative and technical services such as: crewing, arranging superyacht and crew insurance, general administration, accounts, technical and ISM/ISPS services, superyacht managers can be an asset to the operation of the superyacht. Do I need, or should I have a superyacht manager? • Yes, an ISM-certified manager is required for commercially registered/operated superyachts over 500 GRT. the manager is prepared to provide a manager’s undertaking on standard market terms to your bankers. What should I expect from the management agreement?

• A manager is not strictly needed for privately registered/operated yachts. On a smaller day boat, a captain will normally suffice. However, on the bigger tonnage, engaging a manager is recommended, for example, if the superyacht has a large crew employed or is to undergo works. How do I choose one? • Are they reputable? Is he or she appropriate for the services needed and superyacht size, intended use and area of operation? Seek references from industry experts and your friends. • What is market standard? Ensure you know what the manager is providing for their fee. • If you are borrowing funds to finance the acquisition of a yacht, check that

• An adapted version of the standard BIMCO Shipman 2009 is a good place to start. • Do they have professional indemnity insurance in place? It is advisable to have it and for superyacht owners to request it. • Limitation of liability – get the relevant clauses or disclaimers carefully reviewed • Terms of the contract and termination provisions – ensure you are not locked into a contract for longer than you want to be. • Governing law and dispute resolution are also important, and advice from a local lawyer is advisable. to ensure the manager’s liability is not limited beyond what is standard or reasonable.

There aremany areas to deal with when operating a superyacht, some with increased media attention.

35

CREWING MATTERS The crew is part of a global workforce increasingly deployed and managed through a network that links owners, managers and labour- supply agencies. It is important to ensure compliance, as the crew is central to the successful operation of the superyacht.

Who will be covered by the MLC? • The MLC applies to all superyachts ordinarily engaged in commercial activities, but only superyachts over 500 GRT can get certified. This makes it difficult for sub-500 GRT superyachts to prove complete compliance. It covers all crew who are employed or engaged or work in any capacity on board. It is important to note that on employment matters, the MLC will apply to existing superyachts and that owners will need to ensure compliance. • The Marshall Islands and Cayman Islands offer the Yacht Engaged In Trade (YET) dual-certification regime (which allows yachts on these flags to switch from private to commercial registration), one of whose effects is to exempt yachts from the need to comply with the MLC whilst being used privately (although they must comply when being used commercially). In our opinion, best practice however is to comply fully with the MLC at all times, even while operating privately.

Can the owner avoid liability by registering a superyacht with a flag state that has not approved the MLC? • No, all superyachts will be subject to inspection in the ports of any country that has approved the MLC. Even purported flag exemptions from MLC may not protect an owner from crew action or port state control. What paperwork is required? • Following an inspection, a certificate will be issued by the flag state certifying that the working and living conditions of crew satisfy the mandatory requirements. • A declaration, as approved by the flag state, which states the national requirements for the working and living conditions for crew and sets out the measures adopted to ensure compliance. Is the MLC really important? • Yes, penalties and corrective measures for breaches or obstructions will be imposed. • The superyacht could be detained in port until breaches are rectified. • Non-compliance of some parts of the MLC can lead to criminal sanctions on the captain and owner (for example breaches of hours of work and rest obligations).

What protection is there for the crew? • The employment contract will set out the crew members’ contractual rights. Further mandatory employment rights, for example protection against dismissal, may also be afforded to them. • There is no model contract, however, certain flags require contracts to be approved by their relevant authorities. For example, UK flagged superyachts require contracts to be approved by the MCA. What jurisdiction will govern a dispute? • The express election of jurisdiction and choice of law in the contract is one factor. However, either party may be able to challenge this on a number of grounds, such as where the crew member carried out his or her duties, and where the owner is based.

What is the Maritime Labour Convention (MLC)? The MLC provides a globally applicable standard for: • Minimum requirements to work on a ship. • Conditions of employment. • Accommodation, recreational facilities, food and catering. • Health protection, medical care, welfare

and social security protection. • Compliance and enforcement.

The aim of the MLC is to set a standard for seafarers’ working conditions regardless of which flag they sail under. The MLC came into force on 20 August 2013.

37

contributions are being paid there already) regardless of the yacht’s flag state or the crewmember’s nationality. There are some exceptions: if social security is already being paid in an EU state, or a non-EU state with which France has a reciprocal social security treaty (these include some of the popular superyacht flag states such as the Isle of Man) then this is an acceptable alternative, although proof may be required. Alternatively, private insurance is available from a (so far) small number of providers as an alternative to the French public system. You must carry on board the following: Maritime Labour Certicate, Declaration of Maritime Compliance, two copies of the most recent inspection, medical certicates for crew, employment contracts, records of hours of work and rest, complaints procedure.

Is there anything new with the MLC? • As the MLC is known as a ‘living’ document, we can expect developments and amendments as issues arise and levels of compliance evolve. • Since its implementation, the MLC has financial security to cover abandonment of crew, as well as death or long-term disability of crew due to occupational injury and hazard, which took effect in early 2018, while other recent amendments give a greater emphasis on inspections to the health and safety risks of bullying and harassment of crew. Are there any other crewing matters I should be aware of? Depending on where your yacht operates and your crew’s nationalities and/or countries of residence, there may be other costs and compliance issues to be aware of. For instance, the French government recently enacted a decree requiring the employers of non-French seafarers (including yacht crews) resident in France for more than three months to make social security payments there. This applies to crews whose vessels are within French territorial waters, and (unless these are states with which France has reciprocal agreements and social security been amended to add a mandatory requirement that shipowners have

39

ART ON BOARD For some owners, housing their art collection on board is a necessity. It represents the style and tone that they wish to impart upon the superyacht. In doing so, there are a number of factors to consider to ensure art on board the superyacht is properly owned and maintained. • Ownership: It is necessary to consider • Tax: If the art is not physically part of the superyacht, it may have its own

vibration (not to mention human error) on board could cause irreversible damage to a priceless piece if not properly managed and controlled for. If you have a significant collection, consider enlisting the assistance of an art specialist. If your art is covered by your standard insurance policy it is worth checking what limitations apply to its cover. For example, geographical limitations may apply.

who owns the art work on board the superyacht to ensure they are aware of any tax, customs or insurance implications. Will the ultimate beneficial owner of the superyacht own the artwork? Or will it be the superyacht owning company or a different company altogether? • Security: A robust security system on board the superyacht to prevent theft is essential. The captain should also keep an inventory of all artwork on board with appropriate documentation. It is also worth educating the crew about correct methods of care for different art pieces to ensure they are not inadvertently damaged. • Insurance: You may need to have separate specialist cover for high-value items. This will require you to declare to your insurer the art on board the superyacht and its estimated value. Don’t assume that the yacht’s hull and machinery cover will protect your art.

separate tax treatment , which may not be consistent with that of the yacht – as with helicopters, the yacht’s Temporary Importation Regime is unlikely to extend to art on board – and you may well need separate import and export papers for each piece of art. It may have a shorter right to stay in the EU than the superyacht. • Regulatory: Antiquities, artworks of particular cultural importance, and objects incorporating materials derived from rare plants or animals are subject to additional (and stringent) regulation. Ensure that you obtain proper advice from experienced specialists, and are able to prove your compliance with the relevant regulatory regimes. • Conservation: Less of a legal point

and more of a practical one: have you considered the potential risks of displaying your artwork on your superyacht? Humidity levels and

41

FLAG Surprisingly, there is no legal requirement to fly a flag, but if you do not have one, port state control will probably stop you from sailing. Choosing a flag relies on what regulatory regime you want to operate your superyacht under. Within the superyacht sector: • The British Red Ensign is the Owners should be aware that where superyachts are being chartered in European waters the interpretation by the Commission of EU Council

Points to remember • A buyer will be denied access to flag’s records to check whether the yacht is being built to the letter of the law, unless this is agreed with the builder during the contract negotiations. • The documentary requirements when registering a superyacht will vary from flag to flag, and depend also on the length and tonnage of the superyacht. All registries will require proof of ownership prior to first registration (i.e. a bill of sale or builder’s certificate), a certificate of survey, a tonnage certificate and, if registered elsewhere, the previous registry’s deletion certificate. If a superyacht has had a break in its registration history, you will have to fill in the gaps in a way acceptable to the registry.

overwhelming flag of choice in all its variations, including the UK, Isle of Man, Gibraltar and the Cayman Islands - following the conclusion of the Brexit process this may change. • In the USA, the Marshall Islands have a sizeable footprint, but for superyacht registration, they do not yet have a large presence in Europe. • In recent years, the Maltese flag has also become very popular, in part because of its leasing scheme. • In Asia, Hong Kong is viewed as a popular registry for superyachts.

Regulations mean non-EU ags may have issues with port state authorities, although there is no evidence of active enforcement by port state control against non-EU ags. With Brexit, this will mean the UK and Gibraltar ags will no longer be EU ags. The status of the other Red Ensign ags post-Brexit is also uncertain at present.

43

ARMS ON BOARD Whether or not a superyacht can legally carry weapons depends on the type of superyacht, the laws of the port state you are visiting and the flag state that the superyacht is flagged with.

• There are potentially extremely serious civil and criminal sanctions, if there are breaches of weapons licensing laws. • Given that there are significant international concerns about the proliferation of arms, with fears that weapons could end up being used in crime, terrorism, or in civil war, security companies, as well as shipowners, must be extremely careful. Appropriate legal advice needs to be sought to ensure that both the security personnel carrying weapons, and the company owning the weapons acquire all the necessary licences and consents. In particular, it should be noted that some jurisdictions, such as Egypt, have banned the presence of weapons and armed security teams on board when transiting their territorial waters. Be mindful of any unplanned changes to your route, which may bring the superyacht into the territory in which the existing weapons licences are inadequate.

Chain of command and authorisation to use force • Requirements state that the captain has the overriding authority and responsibility to make decisions with respect to the safety and security of the superyacht, as with any ship. However, there are questions as to how the captain’s overall responsibility for security issues interplays with the need for a professionally trained security team to take quick and immediate decisions in the heat of an attack. • It has been widely argued that security personnel have an inherent right to use force in instances where it is necessary in their self-defence, and that the members of the security team should have a discretion under the RUF to use force without the captain’s consent in these circumstances. Weapons licences • Making sure that all relevant licences are in place for carrying weaponry and ammunition on board during a voyage is a potential legal minefield, given that the laws of a number of legal jurisdictions may be involved. Laws and regulations governing weapons licences are frequently extremely complex, and

• On board the superyacht, the security team must be bound by clear Rules for the Use of Force (RUF), which should clearly set out the protocols and measures to be taken in the event of an attack by pirates. These should provide a detailed, graduated response plan to pirate attacks as part of the security team’s operational procedures, with the aim of preventing boarding using the minimal force necessary to do so. In particular, the IMO guidance for the RUF states that rearms should not be used against persons ‘except in self-defence or defence of others against the imminent threat of death or serious injury, or to prevent the perpetration of a particularly serious crime involving grave threat to life’.

In international waters, the laws of the flag state apply. Superyachts requiring protection of armed security guards generally engage private security firms to provide such services. Armed guards are usually only on board the superyacht while it is in a high risk area. Use of force and rules for the use of force • Currently, no international conventions or regulations state what force and measures can be used lawfully to defend against a pirate attack. As a result, in international waters, the laws governing the use of force will be those of the flag state of the superyacht, which must be complied with by the captain, crew and security personnel at all times. It is advisable that the flag state is consulted at an early stage in the owner’s consideration of the decision to place armed guards on the superyacht to ensure that any statutory requirements are met.

potentially licences may be required from multiple government agencies.

45

MIGRANTS Superyacht owners and operators need to be aware and prepare for migrants at sea. Obligations to rescue refugees and immigrants at sea

– Details of the assisting superyacht, position of the superyacht, maximum speed, and next intended port of call; current safety and security status, and endurance with additional people on board. – Details of the rescued people, including: total number; name, gender, and age; apparent health and medical condition (including any special medical needs). – Actions completed or intended to be taken by the captain. – The captain’s preferred arrangement and location for disembarking or transferring the rescued persons, mindful that rescued persons should not be disembarked or transferred to a place where their life or safety would be at risk. – Any help needed by the assisting superyacht due to limitations and characteristics of the superyacht’s equipment, available manpower, stocks of supplies (for example). – Any special factors such as safety of navigation, prevailing weather conditions, time-sensitive cargo.

Where is it appropriate to disembark those rescued? While the obligation of seafarers to rescue those in peril is legally clear, what happens next is murkier. The Convention on Search and Rescue specifies that a rescue is not complete until the rescued person is delivered to a place of safety. That could be the nearest suitable port, the next regular port of call, the superyacht’s home port, a port in the rescued person’s own country or one of many other possibilities. A refugee or asylum seeker, however must not, under international law, be forcibly returned to a country where his or her life or freedom would be endangered, or, by extension, to a country where he or she would not be protected against such return. Care should be taken when disembarking refugees, asylum-seekers and those indicating they fear persecution or ill-treatment in a particular territory to ensure that the requirements of the 1951 Refugee Convention are met.

A captain cannot allow a superyacht to be used as floating accommodation and must disembark migrants at a place of safety. How this would work in practice When assistance is requested to the rescue of people in distress at sea, the captain of the superyacht should: • Identify the superyacht’s equipment and life-saving appliances that may be appropriate for the rescue operation. • Determine if any special arrangements, additional equipment or assistance may be required for the rescue operation. • Implement any plans and procedures to safeguard the safety and security of the crew and the superyacht. • Inform the superyacht’s owner/operator and agent at the next intended port of call of the rescue operation. • Provide the Rescue Coordination Centre responsible for the search-and-rescue region with the following specific information, if possible:

The captain of a ship has a legal obligation to give assistance to those in distress at sea irrespective of the nationality or status of those in need, or the circumstances they are found in. The obligation goes further to say that you must, with speed, attempt to rescue the distressed person(s) providing this can be achieved without serious damage to the vessel, the crew or any passengers, or absent of ‘special circumstances’. The level of assistance will initially depend on the situation. If there is nobody in the water, then it may be reasonable to wait alongside until the coastguard arrives and provide food and water. However, if someone is in the water or the vessel is at risk of sinking, life rafts or launching tenders must be deployed and access to your superyacht needs to be allowed. Contracting states are obliged to provide assistance to captains and release them from their obligations with minimum further deviation from their journey.

47

Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42-43 Page 44-45 Page 46-47 Page 48-49 Page 50-51 Page 52-53 Page 54-55 Page 56-57 Page 58-59 Page 60-61 Page 62-63 Page 64-65 Page 66-67 Page 68-69 Page 70-71 Page 72-73 Page 74-75 Page 76-77 Page 78-79 Page 80-81 Page 82-83 Page 84-85 Page 86-87 Page 88-89 Page 90

Made with FlippingBook - professional solution for displaying marketing and sales documents online