by Prof. Dr. Christoph Ph. Schließmann
Building or buying a superyacht is a complex undertaking that involves integrating and coordinating a number of parties and stakeholders. In the process, more complex stages of yacht operation need to be planned and prepared for. A yacht is actually a floating company that is constantly changing, with jurisdictions that are rarely compatible, but also with a high rate of change of crew members, suppliers, and service providers. The operation of a superyacht is an adventure that involves high costs and a risk level that must be well-controlled and transparent.
As an attorney specialising in international corporate business law for 30 years, I have always viewed my legal role in guiding international transactions as that of a corporate navigator looking far beyond the letter of the law and seeing the whole picture. My experience tells me that, without this perspective, I would not be able to fill my role of offering advice about superyachts.
At the outset, it is important to understand this: An attorney always represents interests and is required to by law. He cannot and must not try to please everyone, and he definitely should not put his own interests before the interests of his clients. If I represent an owner, a shipyard, or a broker, I always need to act in their interest. This can involve conflict resolution or even go so far as establishing distinct “red lines” that should not be crossed. Whatever the context, preliminary discussion and definitions must come first. Often, as the only attorney involved in a deal, I represent both buyers and sellers. In this kind of situation, my role is to come up as smoothly as possible with a solution that will satisfy all parties, that will be pragmatic, and of course one that has a solid legal foundation. Compromises are automatically assumed.
My work as a yacht attorney centres around 5 Main Topics:
1.International Law and Management
Every business and every superyacht operation is almost exclusively a business that exists in different legal environments and jurisdictions. Without appropriate skills applied, the business will be difficult to oversee.
It is important not only to observe national regulations and have local representation, but the key hallmark for the competence and training of an “attorney specialising in international economic law” is familiarity with the common ground between conflicting international legal realms and the ability to navigate this terrain.
In his field, contracts are often drawn up following Common Law models, especially using templates supplied by various professional associations. For instance, with English contracts drawn up according English law, with the jurisdiction in London, the data for each of the parties is simply filled in and the contract is submitted. Comments on their relevance and validity often sound something like this:
“The only contract we will accept is the MYBA contract; under this form all yacht brokers are acting. Please find out about the MYBA contract . . . “, followed by many links intended to back up this opinion. “MYBA is a yachting association that is recognised and respected worldwide, and it is common and accepted practice to utilise their templates as contracts for all types of sales”. Furthermore “English Law is common for business contracts and is the basis of International Maritime Law, being chosen because this is a neutral territory with Common Law that is considered to be fair and justified”.
Of course, this does not make the contract any better or more legally valid. Rather, the most it shows is that people who have used contracts like these have simply been lucky in the past.
A broker working in Germany within a European context used the internet to enter into a Common Law contract with a private individual to sell his vessel. But he neglected to include a revocation clause. Since the broker was not able to make the sale, the owner himself sold the vessel to friends. Without further ado, the broker asked for his commission, which he supposedly could claim under English law. When he was refused, he threatened to bring a lawsuit under English law in London. He was not successful.
We revoked the contract. In several particulars, the contract violated German laws that protect private owners, especially Terms and Conditions of the law applicable to contractual obligations, Article 6 Rome I, in conjunction with section 305 et seq of the German Civil Code (BGB). The contract form used was a boilerplate contract containing conditions for a variety of contracts provided by the user. Such a provision is invalid if a broker”s client is supposed to pay the broker a commission or reimburse expenses, even if the broker was not successful and contributed nothing to the concrete sale that was made solely by the client in a private context. Under German law, an obligation to pay remuneration exists only if can be proved that the contract has come about as a result of mediation on the part of the broker (§ 652 of the German Civil Code, BGB). Pertinent EU guidelines also specify: ‘Member States shall provide that unfair terms in contracts that a dealer has concluded with a consumer are not binding on the consumer, and shall lay down the conditions in their national legislation; they shall also provide that the contract remains binding on both parties on the same basis if it can exist without the unfair terms”. The German place of jurisdiction derives from §§17, 18 II of the European Council Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I).
Combination of Common Law und Civil Law Contract Types:
Time and again I see contracts that are written according to the logic of one jurisdiction but end up with a choice of law for a different jurisdiction. This is fatal because systemically it will not fit!
For any contracts dealing with international business relationships, one of the core issues that must be clarified from the outset is the governing law. Indeed, this choice will shape the design and regulatory framework, along with all the consequences that will arise depending on the jurisdiction chosen, as with, for instance, sales law.
The two major legal families of the Western world are Common Law and Civil Law. Common Law originates in England but has also shaped the law of the United States, English-speaking Canada, and many former British colonies, in particular Australia and New Zealand.
On the other hand, in continental Europe, the Civil Law that has shaped the legal systems of many EU countries has quite different legal regulations for individual types of contract. For the most part, it is codified and has contract types with subtle differences, especially when it comes to sales law.
One of the most fundamental differences between Common Law and Civil Law is that Common Law relies to a much greater extent on objective explanatory value, which takes a second place to the otherwise identifiable and consistent will of the contracting parties. This is particularly evident in the American “Parol Evidence Rule”, whereby evidence of negotiations and external circumstances before or at the conclusion of the contract, which are likely to create a different objective from the declaration of content interpretation, are generally excluded.
An important difference also lies in dealing with the law. The interpretation of laws as part of Common Law follows closely the intent of the law and the letter of the law. This intent is derived only from the text of the law itself. There is no legal technique that operates with abstract concepts, as there is with Civil Law. Common Law did not develop the abstract concept of the contract until the second half of the 19th century . A contract is governed by the principle of “privity of contract”, which states that only a person who is a party to a contract can derive rights from it or be subject to obligations. The notion of a subjective right found in Civil Law is missing.
If parties of two different national legal systems come together, within certain limits (consumer protection), they have a choice of law under international law. If there is no explicit contractual choice of law, the applicable law will be determined for the most part by the Rome Convention on the law applicable to contractual obligations. In the absence of an express or implied choice of law by the parties, the contract will be governed by the law of the country with which it is most closely connected. This is basically the country where, at the time the contract is signed, the party providing the characteristic performance has its habitual residence or headquarters, which is the head office of the seller, or perhaps the place of delivery and handover of the yacht purchased. This presumption may be dispensed with only if the totality of the circumstances would allow for a closer connection with another country.
Efficient preparation of a contract would therefore mean always checking initially to find out which legal system the parties can act effectively within and then drafting the contract to conform with that system while avoiding false crossovers.
If a contract is subject to German law but is legally valid under English law, which is also the language of the contract, the parties have something to look forward to in January of 2018: German law under the German Code of Civil Procedure but negotiated in English will then be possible, on request and subject to agreement of the parties, at the District Court of Frankfurt am Main in a special English-language division (Chamber for Commercial Matters).
A Current Look in The Direction of BREXIT:
With BREXIT, the Brussels I-a regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters will be abolished, which will have serious consequences for the recognition and enforcement of judgments.
-After BREXIT, the former Brussels Convention of 1968 will automatically come back into force and will be binding in the courts of the United Kingdom after it leaves the EU. This will apply when deciding on international jurisdiction and enforcement in relation to the 14 “former” remaining EU Member States that are parties to the Brussels Convention (including Germany).
-As early as 1960, Germany and the UK concluded the German-British Convention on the Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters. The content of this Convention has, however, little in common with the rules of the Brussels I Council Regulation and therefore cannot replace it.
With the elimination of the Council Regulation, previous UK regulations would come back into force, for instance lis pendens, and especially “torpedo” actions in the form of abusive negative declaratory actions which the Brussels I Council Regulation protected against.
Currently, Member States recognise judgments of other Member States without the need for a so-called exequatur procedure. This recognition is based on mutual trust between the EU Member States as well as the fact that the same rules that govern them. It is sufficient to submit certain documents from the country where the judgment is made to the competent executing authority in the country where it is recognised, which means that the enforcement of a judgment from another EU country can be enforced almost as quickly as a national one. Without going into detail here, it should be emphasised that the method for enforcing a title in the UK is extremely complex and expensive.
With the elimination of the Brussels I Council Regulation, there is the danger of a possible resurgence of “anti-suit-injunctions”, whereby, under English law, the opposing party would be prohibited from initiating a parallel proceeding with respect to a particular subject of the dispute. The purpose of such an “anti-suit injunction” is, essentially, to prevent one of the parties from taking legal action in a foreign court in breach of a jurisdiction agreement.
If BREXIT does not come up with other regulations (soft deal), the German-British agreement would alternatively apply between Germany and the UK, which would at least include provisions on the enforcement of judgments for payment of certain sums of money, which in turn would require prior extensive registration with competent UK courts. In addition, the agreement has more reasons for non-recognition than those provided in the Brussels I Council Regulation.
As a result, the risk is very high that a judgment by a court in a country remaining in the EU will be denied recognition and enforcement following the withdrawal of the United Kingdom from the EU.
Therefore, it is important to consider under which laws and in what manner recent agreements between nationals of UK and EU states are entered into.
2.Legal Matters and Taxes are Inextricably Linked
The international yacht business is inconceivable without the synthesis of law and taxes.
I could fill books with cases of legal contracts that ignore tax issues resulting in fatal financial consequences. Fiscal sovereignty of nations usually means that one country definitely allows an approach that would work for residents taxable in another country. I am thinking here of the foreign tax regulations in Germany that are unknown to many countries in the EU. What is permissible in Malta is not remotely possible in Germany or the rest of the EU.
For example, the tax conflict between the old Malta Lease and current EU law led to its being abolished in August of 2018.
The final trigger for Infringement proceedings was the European Court of Justice ruling on Mercedes-Benz finance leases in 2017 (ECJ, 4 OCT 2017 – C-164/16), on the basis of which the former Malta Lease Scheme was not in line with EU law, and the European Commission brought an action for contract infringement in March 2018. Malta was forced to end its popular Lease Scheme in August of 2018.
In a nutshell, the Maltese Lease Scheme was legal under Maltese law mainly because Malta defined an operational “service lease” differently from the EU or the laws of other EU countries. According to this, an effective finance lease with the objective of acquiring ownership of the leasing item at the latest with payment of the last due instalment was not interpreted as a standard lease with a call option (so-called lease purchase) but as an operational service lease with corresponding tax advantages.
3.Drafting Contracts Means More Than Filling in Templates
Apart from the yacht industry, I know of almost no other field where complex contracts are drafted by legal amateurs using templates and copy and paste without having examined the specific relevant background and the necessary tax issues.
As a result, the error rate is usually high.
Let me cite just one case where one wrong word made a big difference:
A yacht dealer sold a used yacht with a model contract that contained the following clause: “If the object of purchase is subject to defects, the seller is obliged to rectify the defects within a period of two years for new objects of purchase. For used objects of purchase, the seller is ONLY obliged to repair hidden defects that were present at the handover, within one year”. After one year passes, defects appear that might be covered by the warranty, but he is sure that he is not responsible due to the statute of limitations. Unfortunately, this is not the case, because his contract does not legally regulate the possible reduction of the liability period to one year for used vessels. I have emphasised the crucial word ONLY in the wording. A one-year limitation period cannot be assumed since this shortening is not effective according to clear case law of the Federal Court on terms and conditions (a sample contract is one such) merely because of this word “ONLY”, because that would invalidate the claim for damages in addition to the subsequent performance claim, which would make the entire clause invalid. In this case, therefore, a warranty of two years is correct, much to the dealer”s disadvantage.
One of the most important contractual areas in the construction, purchase, and refitting of a yacht is the area of statutory liability (legal guarantee) and warranty (commercial warranty). Above all, both of these as well as their system and design also depend on the applicable law or choice of law as well as the character of the business, whether B2B, B2C, C2B, or C2C.
4.Economy and Efficiency Versus Legal Certainty
All design must allow for legal certainty and cost-efficiency. However, priority is given to legal certainty, because the consequential costs of faulty design and its risks would otherwise bury any apparent efficiency.
For the yacht attorney, this is a great field of conflict with clients and stakeholders, because it is assumed that there is a conscious awareness of forward-looking, preventive designs of short-term efficiency. The attorney will often be relegated to being a “problem”, and this will often complicate a good deal. I am definitely opposed to this view and will explain my reasons for having a design. This can also lead to the attorney having to be released for liability reasons, if an urgently advised design is explicitly not wanted, or if the attorney has to consider whether he wants to continue to serve the client seriously and with a good conscience.
For me, good and reputable international support means: Finding the most economical solution combined with maximum legal certainty and a low risk level.
5.Central Compliance, Legal Matters, Taxes, and Fiscal Project Management
As a final, all-encompassing aspect, I would like to address what is still very rare in our industry: “Legal project management”. For many years, we have been taking on, in addition to individual tasks, when requested, the overall control of yacht projects and integrating various aspects with the client, while including service providers in a yacht project along with the related monitoring aspects.
Currently we have a client who has individually designed and built a 32-meter superyacht for himself. We will assist him from the first idea through prototypes with a naval architect and designer, through the tendering process at a number of selected shipyards, the establishment of a suitable owner and operating structure for the yacht with all legal and tax aspects, the negotiation and drafting of contracts with all involved service providers, above all the building yard up to the flagging and handover and then the ongoing operation. As a central representative, the various strands come together for me and my team as we manage and control all the processes having to do with legal, tax, and economic aspects, all in coordination with the owner.
Prof. Dr. Christoph Ph. Schließmann arbeitet seit vielen Jahren als Fachanwalt für int. Wirtschaftsrecht (Bar Approved Specialist Lawyer in Int. Business Law). Das besondere Engagement des ambitionierten Wassersportlers und Skippers gilt dem deutschen und internationalen Yacht- und Marineindustrie-Recht rund um Bau, Kauf/Verkauf, Refit, Eignerstrukturen, Vermietung, Steuern und Vertragsrecht, Beflaggung sowie Crewrecht. Schließmann ist Autor unzähliger Artikel rund um das Yachtrecht und Steuern.