http://incelaw.com/en/knowledge-bank/publications/building-a-yacht-in-germany-your-choice-of-law-may-not-be-as-simple-as-you-think

Speed read

Newbuild contracts for yachts are often subject to English law, which is commonly chosen to govern cross-border commercial contracts. While English law provides considerable certainty of outcome for the parties, a potential buyer from a German yard may find that certain elements of his English law contract will nonetheless be subject to German law. Consider, by way of example, the scenarios below.

A British company, Pleasure Yachts, commissions a yacht from a shipyard in Germany. Can Pleasure Yachts and the yard agree the contract will be governed by English law, or must German law apply?

The parties have freedom to agree on the law that suits them best to govern their contracts. In the EU (excepting Denmark), the Rome I Regulation provides that the parties’ express choice of law is to be upheld by Member State courts. A choice of law may also be implied under this Regulation if the circumstances of the case point to a particular country’s law as being applicable.

So if Pleasure Yachts and the German shipyard agree it in their contract, English law will apply.

Will German law apply at all?

It will, where the parties have expressly agreed in their contract that it should, or where the contract does not contain a governing law clause, if the surrounding circumstances demonstrate that the parties intended German law to apply. The Rome I Regulation also allows for different elements of a contract to be governed by different laws. So the Pleasure Yacht contract could be governed in part by English law and in part by German law.

In addition, the German Civil Code has the effect of making property rights in the yacht governed by the law of the country in which she is situated. So, in this case, even if the contract provides for English law, German law will still apply to issues relating to, for example, the transfer of title in the yacht being built. Pleasure Yachts should therefore obtain German law advice on relevant issues, such as transfer of title to, and retention of title in, the yacht before entering into the contract. 

What if the buyer is a German individual, Klaus Müller, who enters the contract in his own name and wants the yacht for his own personal use? Can he still provide for the contract to be governed by English law? Can he also insert a clause into the contract that provides for disputes to be referred to London arbitration?

Klaus is acting as a consumer and the Rome I Regulation allows a consumer who enters into a contract with a business that is based in the same country to agree the law that is to apply to their contract. If no law is expressly chosen, then the default position is that the law of the country where the consumer has his “habitual residence” will apply. In that case, German law would apply to Klaus’ contract with the shipyard. 

Where the contract is governed by English law, Klaus can also expressly agree an arbitration agreement in the contract. The English courts will uphold a valid arbitration clause agreed between the parties and refer any dispute to arbitration. 

What protection does German law give the buyer if the shipyard tries to limit or exclude its liability under the contract?

Article 6 para. 2 of the Rome I Regulation provides that the applicable consumer protection regulations are those of the state of habitual residence of the consumer. So German consumer protection regulations will apply to protect Klaus even if the parties have agreed that English law is to apply. By way of example, a general term in a contract that excludes or limits the liability of the yard for grossly negligent breaches of contract will be invalid under German law. Likewise, any other terms and conditions of the shipyard that are unfairly advantageous to it will be invalid. Where they are found to be invalid, the German Civil Code will apply instead. Under the relevant rules in the German Civil Code, the shipyard will be liable for any losses (including consequential losses) caused by negligence. This will also be the case where the yard’s sub-contractor tries to rely on a limitation clause against Klaus.

It should be noted that German consumer protection regulations apply to Klaus as a German consumer but they would not apply if the buyer was Pleasure Yachts, a company.

What about any time bar clause for bringing claims contained in the contract?

Under English law, a clearly drafted time bar clause will be valid and any claims brought after time has expired may be time barred, with the result that the claim cannot be pursued. It is therefore important to check any time bar clause in the contract and/or any statutory time bar (consult your lawyer if you are unclear about the effect of these) and start proceedings in the correct forum before time expires. So you need to check whether you must start court proceedings and, if so, in the courts of which country. Alternatively, if the contract contains an arbitration clause, you will need to interrupt time by starting arbitration under the rules of the appropriate arbitral forum provided (e.g. the London Maritime Arbitrators Association, London Court of International Arbitration, International Commercial Court).

Under German law, the parties can agree on a time bar that differs from the statutory time bar (the applicable statutory time bar is a potentially complex issue on which legal advice should be taken). However, with regard to Klaus, any time bar clause in the shipyard’s standard terms and conditions that is shorter than the statutory time bar will be invalid even if the parties have agreed that English law is to apply. 

So what are the key points to keep in mind?

Yacht buyers using German shipyards should be aware that they can agree a choice of law for a newbuild contract and that English law is a popular and a practical option. Even if German law is not agreed, however, some of its provisions may still apply in areas such as transfer of title and consumer protection against unbalanced standard terms. For this reason it is advisable to take advice from a German qualified lawyer even if the main law of the contract is English. Ince & Co’s Hamburg office has both German and English qualified lawyers on its team.

Tim Schommer, Partner, Ince & Co: http://incelaw.com/en/ourpeople/tim-schommer