I Introduction
Over the past 50 years, few sectors have seen the growth and development that the superyacht sector has witnessed.2 While the existence of luxury yachts is not per se a creation of the past half-century or even the past century,3 the existence of and demand for luxury yachts by wealthy private individuals and families of the size, scale, complexity and comparative value most certainly is.
There are, perhaps, many points in time that could be characterised as the birthplace of the large luxury yacht industry. However, the conversion of the Canadian River class anti-submarine frigate, HMCS Stormont, into motor yacht Christina O 4 by billionaire Greek shipowner Aristotle Onassis in 1954, would incontrovertibly rest comfortably among them.
Since 1954, the global superyacht fleet has grown consistently, with some reports estimating there to be in excess of 5,600 superyachts (yachts exceeding 24 metres in length) in existence.5 The available industry data shows there to be an ever-increasing demand for larger yachts – in 1990, a 44-metre yacht would have put that yacht within the list of the top 100 largest yachts globally. Now, the average length of all yachts in-build has exceeded the 50-metre mark, with more than 40 superyachts in operation that exceed 115 metres in length. In addition, the past few years have seen a surge in orders and deliveries of very bespoke superyachts, such as long-range expedition and explorer yachts for purchasers looking to explore the far reaches of the planet,6 and projects for luxury residential yachts or ‘yacht liners’ offering a different type of participation in the superyacht sector. Throughout all of the above, English law has maintained a consistent foothold on the superyacht industry, with many international contracting parties electing to have their yacht construction contracts, sale and purchase agreements, refit, repair and conversion contracts, charterparties, management and crewing agreements and other core yachting contracts governed by English law and subject to a dispute resolution regime seated in London – often the London Maritime Arbitrators’ Association arbitration.
Wealthy private individuals and families with ownership interests in superyachts are likely to have a considerable sum of money tied up in this increasingly complex and developing asset class. While we cannot possibly offer a complete guide to the law surrounding superyacht ownership within the confines of a single chapter, we hope to highlight some of the forces (legal and non-legal) that we believe are likely to shape the superyacht sector in 2023/24 and what industry participants can do to deal with and, in certain circumstances, capitalise on those forces.
II Macroeconomic conditions that have shaped the superyacht sector in the past 10 years
As the past three or four years have shown, when global economic conditions are highly favourable, the superyacht and other luxury assets markets enjoy bumper years. VesselsValue, a data firm specialising in shipping, aviation and superyachts, reported that in 2021 approximately 887 superyachts were sold,7 compared to 500 in 2020 and 429 in 2019 (albeit 2020 is probably an anomalous year to act as an ideal data point given the impact of covid-19 on the ability of buyers and sellers to travel and ultimately transact). The 2021 quoted figure (887) is, of course, based on known yacht sales. The true number of sales – that is, those done discretely, directly between parties without the involvement of third parties or via the transfer of shares in owning entities rather than via asset sales, is probably in excess of 1,000. It is also noteworthy that 2021 also saw the sale of one of the largest yachts in the pre-owned sales market – the 126 metre yacht Octopus with a last-known asking price north of €230 million. 2022 did not reach the same peak in terms of reported sales volume as 2021, but in excess of 500 sales were reportedly concluded.8
Similarly, on the newbuild side, 2021 saw the launch of some of the biggest superyachts9 to grace the waters – 10 of these were 74 metres and above. The Monaco Yacht Show Report 202110 estimated that as of August 2021, approximately 486 new superyachts over 30 metres were in build in 2021, divided between 450 motor yachts and 36 sailing yachts, with more than 44 per cent of these falling into the 30 to 40 metre category, meaning that the larger 40 metre yachts dominated the construction books in 2021. It is important to note that the 2021 deliveries data and the 2021 order book do not necessarily tell one what level of market appetite existed for buyers of newbuild yachts in 2021 as a significant percentage of the yacht construction agreements for these 486 in-build yachts will have been signed within the three to four years prior to 2021 (i.e., at some point between 2017 and 2021). Or, put another way, the 2021 newbuild data tells one what the appetite for newbuilds was in the years leading up to 2021. One of the best ways to get a sense of the forward-looking appetite of buyers of newbuild yachts is to look at the availability of build slots for yachts to be delivered in 2025/26 and beyond. Naturally, this differs between countries, shipyards, yacht types and sizes. However, the general market consensus11 is that there are limited build slots available until 2025/26.
The picture that emerges from both the second-hand market data and the new build data is, for active industry participants who have transacted throughout this period, unsurprising: the yacht industry has just enjoyed one of the largest boom periods on record.
While a number of theories have been posited as to what has catalysed this superyacht boom era (post-covid restlessness, accruals of large sums of unspent covid cash, fear of missing out, crypto-mania, low interest rates, etc.), the true position is likely an aggregation of these factors and a decade of significant wealth creation born out of economic growth and booming stock markets worldwide, which helped fuel huge growth in personal fortunes. Put more simply, a lot of people have made a lot of money in the past decade.
According to Forbes,12 the number of billionaires around the globe nearly tripled in the years from 2010 to 2020. Likewise, according to a 2021 Guardian article, the world gained 5.5 million millionaires in 2020. Dollar millionaires now account for more than 1 per cent of the global population for the first time in history, such that 56.1 million individuals had assets worth more than US$1 million, and the US accounted for nearly one-third of the world’s 5.2 million new millionaires.13
Ultimately, and somewhat unsurprisingly, what the data tends to suggest is that against very favourable global macroeconomic conditions, the yacht market enjoyed one of its most successful periods on record. It is hardly that big of a surprise that, as of May 2023, the world’s richest person was the founder of the world’s largest luxury goods company.
III Economic forces likely to shape 2023/24
While it is always tricky to say with precision what will definitively happen in any given period of time (look only to 2020 for validation of that point), there are certain factors that are likely to shape and continue shaping the superyacht and luxury asset markets in 2023 and beyond.
The most significant of these is what happens in the two most superyacht-significant global economic areas – namely, the United States and Europe. The United States and Europe face a set of tricky economic circumstances to navigate.
First, at the time of writing, inflation in the US, the UK and the EU is stubbornly refusing to reduce, forcing central banks to keep raising interest rates.14 The issue with this is that the rapid rise in interest rates has, and continues to have, an increasingly negative effect on a huge number of banking institutions worldwide. Taking the US as an example, by rapidly raising interest rates, the US Federal Reserve has caused a significant credit crunch within US banks,15 and principally those banks that invested heavily into low interest-paying US government bonds that, in a swiftly born era of higher interest rates, has caused those held-to-maturity bonds to become difficult to sell in the short term (at least, difficult to sell without the banks being required to book a large loss – which they have to do when large numbers of depositors want their money back).
Secondly, the commercial real estate (CRE) markets in many major cities throughout the world face some once-in-a-lifetime challenges post covid-19 with low occupancy rates and high interest rates. There is a growing consensus that property valuations are going to fall by as much as 40 per cent as more than US$1.5 trillion in US commercial real estate debt comes due for repayment before the end of 2025. As Bloomberg puts it: ‘A $1.5 trillion wall of debt is looming for US commercial properties’.16 Again, these types of events are likely to result in large-scale losses for banks and other financial institutions invested into the CRE sector.
IV New technology and the risk of delays to projects
In addition to the economic forces mentioned above, yacht owners are under pressure to consider the use of new technologies and alternative fuels to ensure compliance with requirements to decarbonise operations and reduce greenhouse gas (GHG) emissions. Change is being driven by regulation and, in consequence, also by commercial factors, as markets and consumers increasingly demand compliant tonnage. No owner wants to have access to lending and capital restricted.
i Decarbonising shipping
The International Maritime Organization’s (IMO’s) GHG strategy drives policy within the maritime industry, with a new raft of regulations having taken effect from 1 January 2023. These are the carbon intensity indicator (CII), the energy efficiency existing ship index (EEXI) and the ship energy efficiency management plan (SEEMP) Part III, all which will have a major effect on future ship design and vessel operation. The IMO’s GHG was revised in July 2023 at its Marine Environment Protection Committee (MEPC80) session, with a new set of more stringent targets agreed. A reduction of ‘well-to-wake’ GHG emissions by 20 per cent, striving for 30 per cent, by 2030, and a 70 per cent reduction, striving for 80 per cent, by 2040 (each compared to 2008 levels), with an ultimate goal to reach net-zero ‘by or around 2050’, represents a considerable challenge for all stakeholders. It is not yet clear what these figures will mean in terms of necessary ship improvements between now and 2030 to 2040. Given some uncertainty surrounding existing measures, such as the CII, it may be that quite dramatic initiatives will already need to be implemented towards the end of this decade to enable these ambitious goals to be met.
Ships and superyachts entering the waters of EU Member States will shortly have to contend with a new EU regulation imposing well-to-wake GHG limits on energy used on board from as soon as 2025. The EU Parliament, Council and Commission have recently reached agreement on a new regulation that aims to accelerate decarbonisation in shipping by setting targets to reduce the GHG intensity of fuels over time against a 2020 reference value, starting from 2 per cent in 2025 and rising to as much as 80 per cent by 2050. On entering into force from 1 January 2025, the FuelEU Maritime Regulation aims to help reduce GHG emissions by promoting cleaner fuels and energy sources. These e-fuels or renewable fuels of non-biological origin (RFNBOs) reduce the carbon content in ship fuel. Use of RFNBOs is to be encouraged by setting far less favourable default values for fossil fuels in the calculation of the GHG intensity of energy used by a vessel. Owners must pay a penalty if a vessel is assessed with a higher GHG intensity than the relevant reduction requirement, and this penalty increases if such deficit continues. Other measures include a requirement, from 2030, for container ships and passenger vessels to connect to shore power when at berth for longer than two hours in a relevant port.
Owners with vessels coming within the scope of the FuelEU Maritime Regulation will, therefore, need to start preparing for the reporting and monitoring requirements of the new regime and for supply of the relevant fuels.
ii New fuels, new equipment
Market data indicates that the world orderbook for vessels with alternative fuel propulsion is increasing. LNG is still the dominant alternative fuel source being selected for commercial tonnage, although this is widely now referred to as a transition fuel in the pathway to decarbonisation. Around 30 per cent of gross tonnage on order will be able to operate on alternative fuels on delivery, with methanol and hydrogen-fuelled newbuildings starting to emerge and strong interest being shown in ammonia. There is considerable interest in batteries and hybrid solutions (where a battery typically combines with a diesel engine). In short, it is a time of great change in maritime propulsion technology, which will affect almost all vessel types (including superyachts), albeit one that will last many years. It is clear that there is no one solution and that many challenges lie ahead.
The future bunkering market seems likely to contain a range of different fuels, significantly affected by regional production and local energy markets. Supply is currently a major barrier that regulators and their governments need to address if global shipping demand for carbon-neutral fuel is to be met. It is not just the fuel: appropriate shore-side power and infrastructure need to be provided or upgraded to enable bunkering operations, which will require considerable investment.
In technology terms, methanol fuel systems are currently felt to be more mature, ahead of ammonia and hydrogen. New fuels will also require new safety regimes – methanol and ammonia are highly toxic and hydrogen is extremely flammable – which will also require time and investment in training. In light of the relatively slow uptake of carbon-neutral fuels at present, and while the technology develops and the supply chain elements are integrated, there is also a focus on onboard carbon capture and storage (CCS) systems to permit continued use of conventional fossil fuels.
Exhaust gas cleaning equipment (scrubbers) have been retrofitted to many vessels or installed on newbuildings as part of the drive to ensure compliance with existing emissions requirements, which will continue. Other systems to augment traditional propulsion and to assist to reduce fuel consumption and associated emissions are also being fitted, such as rotor sails fitted on passenger vessels or air lubrication systems to reduce frictional resistance between hull and water.
Any maritime construction project brings with it the risk of delay, but this is particularly the case for those projects for vessels with equipment incorporating new technologies.
iii Delay in a typical shipbuilding contract
Most shipbuilding and yacht construction contracts fix a calendar date as the contractual ‘delivery date’, which is adjustable on account of specified ‘permissible delay’ – for instance, delay arising as a result of events of force majeure, agreed modifications and/or late payment of instalments by the owner. The force majeure clause usually provides that, in the event of delay by reason of events beyond the builder’s control, the contractual delivery date will be extended, subject in some cases to a ‘cap’ that, if exceeded, will permit the owner to terminate the contract. The builder usually has to comply with strict notice provisions and is under a duty to mitigate the effects of any such delay.
These permissible delays are to be contrasted with unauthorised delays, in respect of which the contractual delivery date is not adjusted and that usually result in a liability for the builder in liquidated damages, accounted for by a reduction in the contract price payable by the owner. The builder’s exposure to liquidated damages is almost always capped, but with an option for the owner to terminate the contract if the delay exceeds a given number of days, with provision also made for an agreed long-stop date on which the owner can terminate for excessive delay, covering both unauthorised delay and delays for force majeure.
iv Design and build
Most international shipbuilding and yacht construction projects proceed on a design and build basis, with the builder expressly responsible for the design of the vessel. Important and novel items are usually expressly referenced in the contract itself, as well as the specifications. Key items and their subcontractor supplier or original equipment manufacturer (OEM) are usually set out in a Maker’s List, and where more than one such OEM is provided, selection is governed by a contractual mechanism.
As new or emerging propulsion technology presents a likely inherent project risk, consideration should be given to greater-than-usual scrutiny of the relevant OEM subcontractors and their products. Where possible, the owner should establish issues such as the OEM’s own guaranteed performance criteria, post-delivery support and warranty in respect of the item from the builder, and seek to ensure that appropriate provision is made in the shipbuilding or yacht construction contract to confirm the builder’s responsibilities.
Certain key challenges may emerge from the supply chain for such new items. Two of these, delay and increase in cost, are discussed below.
Delay – is it force majeure?
Force majeure regimes are a standard feature of international shipbuilding contracting practice. Relevant provisions from the well-known Shipbuilders’ Association of Japan form (SAJ) are referred to below (other forms in widespread use contain similar provisions).
Every project is likely to generate its own challenges, but some obvious considerations arise around responsibility and recourse if the item itself is deficient or its delivery is delayed. Many standard forms provide general ‘sweeping up’ wording in the force majeure clause, extending protection against any circumstances beyond the builder’s control that prevent or hinder performance, but that are not included in the list of specific force majeure events set out in the relevant clause. By way of example, the SAJ form provides this in respect of ‘other causes or accidents beyond the control of the Builder, its subcontractors or suppliers . . . whether or not indicated by the foregoing words’ (Article VIII.1). However, there are two specific events in the usual list, either of which may more readily expressly cover delay arising from, or associated with the supply of, a novel item of equipment.
Force majeure – shortage or delay in supply
With demand increasing for systems capable of delivering a compliant GHG solution, pressure naturally builds on the supply chain. Even without other global events, such as the war in Ukraine, flu and covid-19 pandemics, shortages of certain key items might be expected. An illustration of this is battery supply. The most common battery technology deployed afloat uses lithium ion, but at the time of writing there is a global shortage of lithium, which may well impact any newbuilding project incorporating an energy storage solution.
In such circumstances, delay in the supply may very well present the builder with the opportunity to claim permissible delay under the shipbuilding contract by use of a typical provision in the contract’s force majeure regime. The relevant term in the SAJ provides for ‘shortage of materials, machinery or equipment . . . inability to obtain delivery or delay in delivery of materials, machinery or equipment, provided that at the time of ordering the same could reasonably be expected by the Builder to be delivered in time’ (SAJ, Article VIII.1)
Such drafting provides some scope for the builder to claim force majeure delay, but on a very limited basis because it is one of the builder’s principal obligations to organise and arrange for the timely sourcing and delivery of all items required to construct the vessel. Accordingly, a builder will only ordinarily have a right to claim force majeure delay as a result of shortages in respect of delays that occur unexpectedly and without fault. In this regard, it is important to note that there must be a general shortage of supply, not just a higher market price (which on its own is not enough to establish a shortage in supply for the relevant item within the typical drafting found in these clauses).
Force majeure – latent defects
The force majeure clause may also provide scope for an extension of time for delivery in circumstances where latent defects emerge in the particular item of equipment. Article VIII.1 of the SAJ provides for permissible delay in respect of ‘defects in materials, machinery or equipment which could not have been detected by the Builder using reasonable care’. Critical path analysis will likely be crucial to show that the latent defect was in fact the cause of the claimed delay, and the builder will need to have evidence to hand that it complied with the requirement of reasonableness in respect of acceptance of the relevant item from the OEM. Food for thought with emerging technology: context will be key.
Force majeure – extent of duty to mitigate
As mentioned above, force majeure regimes typically oblige the contractor to take steps to mitigate the consequences of the delay. Parties often spend time agreeing the scope of this obligation, particularly regarding what steps the builder may have to take to comply. There is plenty of fine law around levels of performance in such circumstances, the practical consequences of which are well worth considering with your legal advisers.
Cost increases
With new technology such as batteries so dependent on raw material production, shortages are clearly likely to impact supply and cost, the consequences of which will ripple through the supply chain. This has been seen in the semiconductor supply chain, which was already under pressure before the covid-19 pandemic, but industry disruption during lockdowns, together with geopolitical issues and natural disasters, led to a global chip shortage from late 2020 that is expected to stretch well into 2023. Whether the builder has a remedy for delay caused to the project in these circumstances has been briefly touched on above, but rising costs eroding the builder’s profit margin are becoming a focus for contractors in contract negotiations. Two approaches are worth mentioning, one passive, the other requiring active management.
Cost increases – price escalation clauses
Price escalation clauses are sometimes agreed between the parties to protect the builder against sharp rises in its cost base in respect of items that are of concern at the time of contracting. The clause may technically be a price adjustment mechanism, catering for a fall in price as well as a rise. While not unknown in international shipbuilding in recent years, price adjustment clauses have tended to focus on a particular material, commodity or other supply – for example, steel, power or labour costs. Once the cost of the particular item exceeds a given threshold, the measure of adjustment may be calculated by reference to a specified labour or material index. This sort of provision is, however, not intended to be a panacea. The adjustment is often limited as to amount and duration. Care also needs to be taken over the reference period for any indexation to avoid a party being unduly disadvantaged by unusual volatility in a chosen index.
Whether this sort of provision will start to feature in maritime construction projects more regularly – and with wider application – remains to be seen, but each will need to be drafted on a bespoke basis, reflective of the parties, the project and the particular item or market.
Cost increases – other approaches
Of course, a formal price escalator is but one tool to deal with an increasing cost base (and as a passive mechanism, is the one most favourable to the contractor). Similar to the obligation to mitigate the consequences of a force majeure event described above, another approach would require substituted performance, by way of the builder having to consider and propose the use of different suppliers for the item or substitution of the item with a suitable replacement (acceptable to the owner). Inventory control may be another approach, requiring proof of the builder locking in its supply by pre-ordering and storing appropriate materials. There may also be a role for the owner in contracting for items direct from the OEM. This is not unknown in shipbuilding for long-lead items (which are then novated to the builder to provide as part of its contractual supply) and can also assist with cost control.
V Outlook and conclusions
So, what does all of this mean for the superyacht and luxury asset sector? In the short term, it means that the extremely favourable global economic conditions enjoyed from 2018 to 2022, which had such a profound impact on the yacht industry, are not likely to repeat themselves in the coming two to three years. That is hardly surprising, but equally does not mean that opportunities will not exist.
The United States and Europe, the two most significant global economic areas for the superyacht market, are facing challenging economic circumstances, and some of these issues have the potential to cause significant economic disruption. On a positive note, notwithstanding the challenging global economic conditions ahead, the general wealth creation trend seen over the past decade is reported as likely to continue well into 2026.17 On the basis that the yacht industry has done well in periods of personal economic growth, this bodes well, but means that industry participants will need to think carefully about where this new wealth is likely to come from and what the best route to market will be.
Similarly, given supply chain pressures, parties to yacht construction contracts should be paying close attention to the relevant contractual provisions covering procurement, testing and commissioning of new technology and the related remedies for any delays and defects.
For the builder/contractor, it is vital to ensure that clear records are kept evidencing selection, supervision and acceptance of relevant items from subcontractors and regarding any delay arising. Where delay does occur that affects the critical path, this must be proven. Where force majeure is applicable, it is essential to ensure compliance with any notice and mitigation provisions.
The owner may wish to give serious thought at the outset to requiring bespoke provisions regarding certain items and their provision from the relevant OEM, as well as to the effect of delays arising from supply side issues and its rights and remedies if the new or emerging technology does not ultimately function as intended.
In summary, although these are more challenging times for the sector, superyacht demand seems set to continue, albeit not at the pace seen in recent years.
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