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When A superyacht build goes wrong

News / 17-06-2019


The arbitration appellant was German shipyard Nobiskrug GMBH (“Nobiskrug”) and the defendant was Valla Yachts (“Valla”), the purchaser of sailing yacht “A”. Disputes arose between the parties over who should pay for substantial subcontractor overruns. 

The parties entered into a shipbuilding contract in March 2012 and the yacht was delivered in January 2017. Under the shipbuilding contract Nobiskrug undertook to build the yacht in three phases: the first was to build the hull, pre-fit and install major machinery and components, the second, unusually, to employ but only project manage the sub-contractors chosen by Valla by competitive tendering and third was to install the skeg, shaft lines, masts and commission and conduct sea trials.

During the build, issues arose with subcontractors who were making demands for extra payments, threatening to bring legal claims and/or to cease work. There were four such subcontractors with separate claims. The main subcontractor was Ismotec GmbH (“Ismotec”) a contractor responsible for electrical engineering and cabling throughout the yacht. They were contracted on a fixed price of circa €13million. Valla approved variations in the sum of just over €3m.

Ismotec made five claims from December 2014 through to February 2017 totaling approximately €5.5m; these were the main claims at issue in the arbitration. Ismotec’s first claim was for €3m and they threatened to stop work unless the claim was met. This became a pattern whereby Ismotec would raise a claim, threaten to stop work and the claim would be settled by either Valla or Nobiskrug under various conditions and reservations.

The Muehlhan Group was another provider of subcontracted works, in this case of corrosion protection, interior coatings and surface preparation. In September 2015 they presented Nobiskrug with a large claim totaling €950,000. This was paid equally by Valla and Nobiskrug.

With the threat of subcontractors downing tools and stopping work on the build Valla were in a difficult position and so, following negotiations involving both parties, Valla made particular payments to the subcontractors under various conditions and reservations. Nobiskrug took the view that it had no liability to the subcontractors under the sub-contracts in German law and that it was therefore not obliged to repay Valla. The tribunal found Nobiskrug were in breach of its project management responsibilities. The arbitration tribunal appeared to decide that Nobiskrug were obliged to repay Valla simply because they had paid under a reservation (on the basis of the law of unjust enrichment), and Nobiskrug appealed.

Held, the tribunal had found that Valla would be entitled to damages provided that it could show that the project management failures by Nobiskrug were an effective cause of any particular item of cost claimed. However, the absence of certain findings by the tribunal relevant to Nobiskrug's liability to Valla, notably regarding Nobiskrug breaching its project management obligations under the contract and its failure to investigate claims so Valla could form a proper assessment, meant that Nobiskrug’s liability in unjust enrichment was not spelt out completely on the face of the award. It was therefore ordered that these issues would be remitted to the tribunal for further consideration.

While the facts are not entirely clear and the result appears inconclusive, the decision does highlight the perils of an owner seeking to control sub-contractor costs – in the contract and during construction - but leaving responsibility for managing the sub-contractors with the yard.

Duncan Bateson

Duncan Bateson Partner

Siobhan Silk

Siobhan Silk Senior Associate

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