Marine

For all but a very small number of people, yacht and ship transactions will be relatively infrequent transactions in their lives.  Their importance, however, cannot be understated.

Whether the transaction is the acquisition of a ship for commercial purposes, or the acquisition, charter or commission of a yacht for leisure purposes, the sums of money involved are often extremely high.  In addition to this, one or more parties, or the flag state or location of the shipyard may be situated in a jurisdiction with less regulatory oversight or one of the less transparent corporate ownership registers.

All of these, taken in the round, can lead to a shortage of trust, or a requirement for an increase in due diligence and assurance when it comes to the transaction.

Issues of Trust

These issues of trust can arise in every stage of a vessel's life cycle, from its initial build and commissioning to sale and purchase or charter operations, through its refits and class and flag surveys, varying parties will be conducting high-stakes, high-value transactions that can benefit from the support of an independent escrow agent.

Owner ↔ Shipyard: Guarantees

In many jurisdictions and with many yards, commissioning Owners will require a refund guarantee in return for stage payments during the build process.  Often, buyers will be asked to put up at least 40% of the cost before the ship or yacht is delivered, with the balance due on completion and delivery.

By contrast, sometimes the shipbuilder will require a guarantee from the purchaser - this might be if the buyer is a special purpose vehicle (SPV) incorporated specifically to finance the ship or yacht (possibly with few other assets, if any) or if the buyer is from a jurisdiction where the enforcement of an arbitration award or court order might be difficult.

Buyer ↔ Seller: Deposits & Closings

During an exchange in ownership, a seller will usually expect the purchaser to pay a deposit to demonstrate their intention to complete on the acquisition and to cover any of the seller's fees in the event that the buyer pulls out.

Similarly, a buyer may require a seller to provide certain post-completion documents, certificates, results from surveys or inspections, releases of security or analogous documents that cannot, for whatever reason, be provided at or before completion, and may wish to withhold a portion of the purchase price against their delivery.

Charterer ↔ Owner: Deposits

Before an owner agrees to take a vessel off the charter market for a particular period, they may insist on the charterer paying a deposit to secure that period, with the balance of the charter payment to be made at or during the time of the charter.  During the course of a charter, the Owner may require a further deposit to protect them in the case of damage caused by the chartering party.

Conversely, a charterer may feel uncomfortable about paying over a deposit to an Owner with an opaque ownership structure, or a poor reputation, or who is incorporated in a jurisdiction where the enforcement of an arbitral award or court order might prove troublesome.

Charterer ↔ Manager/Broker: Deposits & APA's

Where a yacht charter is being facilitated by a broker or manager, the charterer may be requested to provide an Advanced Provisioning Allowance ('APA') to allow the yacht to open an account and purchase food, drink and fuel on the guests' behalf - often calculated as a percentage of the charter fee, this amount is generally held by the yacht manager or broker and accounted for by them during and after the charter.

The charterer, for their part, might be reluctant to pay sums over to a broker who is less-established or who does not have segregation/safeguarding arrangements in place or who is not otherwise authorised to carry out payment services on their behalf.

The role of the escrow agent

Escrow agents help to bridge these trust gaps by offering a reliable, independent, objective third-party to handle the exchange of money and documents in accordance with the parties' wishes and the terms of the escrow agreement, without having to rely on trust alone to ensure the security and success of the transaction.

We offer escrow solutions to all of the above issues of trust and will be delighted to give you a quote for your specific requirements.  You can also check out our detailed service pages listed above.

Benefits of escrow over insurance/bonds

Some of the issues of trust outlined above can be addressed through the purchase of a contract of insurance or a bond.  These typically involve the payment of a fee (a 'premium') and then in the event of default the beneficiary under the policy must make a claim from the insurer/bondsman for their loss.

This comes with four primary drawbacks:

1. The premium is spent - regardless of whether or not a claim is made, the insurer or bondsman charges the premium as consideration for adopting the risk in the transaction;
2. There is a credit risk on the insurer/bondsman/guarantor - even the largest underwriters carry a credit risk; a policy of insurance is only as useful as the money that the underwriter has to satisfy all of the claims they are underwriting at any one time.  In circumstances where an insurer is the subject of many simultaneous (or a few ultra-high value) claims, they may not be able to satisfy their obligations; and
3. It takes time to process a claim - even a successful claim can entail months of paperwork and claim administration before it is paid out; and
4. Every policy or bond is written on very specific wording - it might be that for unexpected reasons, an expected claim is not actually covered by a policy or bond (either because it is specifically excluded or because the wording allows it to be excluded for some other reason).

Cash-backed escrow, by contrast, addresses all of these issues.  It is generally cheaper to administer than the cost of a premium; in most cases there is no credit risk because the funds are segregated and safeguarded by the escrow agent; payouts generally happen within a few days; and there will not be any circumstances in which a payout is excluded - the terms of the escrow agreement will make it very clear what circumstances need to exist to trigger a payment, rather than necssarily the reasons behind those circumstances.

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