Retention of title (or “ROT”) clauses are designed to operate so that, if a buyer does not pay for the goods it receives, then it has to return them. So far so good, but what happens if the goods cannot be returned? What if a buyer has taken delivery of a supplier’s goods and then, before payment is made or falls due, sells them on?

This issue is of particular relevance in the context of superyacht refit/repair projects. Suppliers are aware that certain yards are finding market conditions tough at the moment and it is not always easy to tell those that are coping well, from those that are not. Reliable, publicly available information about a yard’s financial status will be limited and will, in any event, be based on past performance. Future prospects can suddenly transform, if an existing order is cancelled or mothballed or credit facilities are withdrawn – and that information can take time to find its way into the public domain.

For this reason, increasingly, yard suppliers are incorporating ROT provisions into their standard contracts so that they can improve the scope of legal remedies available to them, should the yard default.

What does it mean for the owner, if a yard fails to pay for an item acquired on a ROT basis? The answer depends on the nature of the item, how it has been used to refit/repair the yacht and the jurisdictions involved, but, potentially, unpaid suppliers could have direct claims against the yacht itself, for the unpaid purchase price. That is so regardless of whether the owner has paid the yard in full.

Standard refit/repair contracts are unlikely to offer owners much protection against this risk. Most do not concern themselves with the terms upon which the yard can purchase its trade supplies – it is usually accepted that those are matters for the yard and its suppliers to agree between themselves. This means that a yard could accept a supply on ROT terms without the owner’s knowledge and without that being in breach of contract.

What then can owners do, to manage this risk? There are various options to consider, such as:

(a) contractual restrictions against the purchase or use of ROT supplies without the owner’s consent;

(b) written confirmations from suppliers unpaid at the time of delivery, to confirm that they will look to the yard alone for settlement – possibly as a condition to the payment of the final instalment; and/or

(c) endorsements on receipts from suppliers to confirm that they have no claims against the yacht or owner, for the supply in question.

Owners also need to take care about the way in which they handle their dealings with the yard’s suppliers. The refit contract might permit the owner to choose from whom the yard should purchase this or that item. However if the owner directs the yard towards a particular supplier then that could establish a direct relationship between the owner and that supplier, for the item in question. If the yard defaults, then that could help the supplier to bring an ROT claim against the yacht, for the unpaid purchase price.

Written by Jonathan Watson, Partner in MFB’s Superyacht Department, for Abacus Trust Company Limited