09/16/2015

What Does “As Is, Where Is” Really Mean in Yacht Deals?

By Andrew J. High, Esq.

Buyers, sellers, and brokers alike may be familiar with the terms “as is, where is” as they frequently appear in real estate contracts, yacht purchase agreements, and used car or motor coach deals.  The phrase is most commonly seen as caveat emptor or “let the buyer beware.”  In the yachting industry, the language is common in many standard brokerage purchase and sales agreements.  Even where the language “as is” does not appear in yacht brokerage purchase and sales agreements, parties will often find a similar clause with the seller disclaiming any known or latent defects in the boat.  Regardless of where it is found or how it is written, this language can be crucial to the purchaser of a used boat. 

In recent years, a high profile yacht purchaser discovered just how serious this language can be when he thought he was getting a “steal” on a brokerage boat.  The case of Hirtenstein, et. al. v. Hill Dickinson LLP made waves in both the legal community and the tabloids when Mr. Michael Hirtenstein purchased a yacht in “as is, where is” condition at a steep discount to the listing price.  Almost immediately after closing, Mr. Hirtenstein took the boat on a cruise with the intention of proposing marriage to his girlfriend.  Unfortunately, things did not go as planned and the boat suffered catastrophic engine failure, requiring the boat to be towed back to port.  Mr. Hirtenstein sued his lawyers in the deal for, among other things, failing to obtain a personal guarantee as to the yacht’s condition. 

While this case was tried in the courts of London, it is important to consider the implications because similar circumstances could apply to brokerage boat purchases happening here in the United States on a daily basis.  The courts of each state in the U.S. may have slightly different approaches to “as is” clauses or the concept of “let the buyer beware” but in most cases the laws are similar.  As such, buyers, sellers, and brokers should take note and approach a deal with eyes wide open.  What does this mean for you?

First, it is generally established law that regardless of the existence of an “as is” clause, a seller will still be liable where they have actively engaged in fraud to conceal a known defect or condition.  The same may be true of a broker who was an active participant in the fraud.  An “as is” clause will not exonerate you from a cover-up.

The next question is how the law deals with known or latent defects in a boat.  As a general rule of thumb a seller has a duty to disclose any defect that he or she knows about or should reasonably know about.  In most cases, the law will not allow a seller to disclaim known defects with an “as is” clause.  There are certain exceptions to this rule such as those seen in cases where both parties to a contract are considered sophisticated parties, well versed in contracts and negotiation, and thus held to a higher standard.   However, party sophistication is judged on a case by case basis using broad criteria and it is wise never to assume that buyers or sellers will be deemed “sophisticated” in the eyes of the law.  Regardless of the scenario, it is good practice for sellers and brokers to make a point of disclosing known or reasonably discoverable defects, in writing, prior to closing a deal. 

Finally, can an “as is” clause disclaim latent defects?  For the most part the answer is yes, which is what gives some teeth to “as is” clauses or similar manifestations in our industry standard contracts.  Our contracts place the onus on a buyer to hire surveyors to inspect and sea trial the boat prior to purchase in an effort to ferret out any latent defects unknown to the seller.

This case study underscores the importance of buyers conducting thorough surveys and sea trials prior to accepting a vessel and proceeding to closing to ensure a reasonable level of comfortability with the boat and the deal.  It also should make clear that in most cases, an “as is” clause will not exonerate a seller or broker from the requirement to disclose known or reasonably discoverable defects in a brokerage deal.  Yet, circumstances remain where two parties could effectively negotiate a valid “as-is” clause into a brokerage purchase and sale agreement.  If a buyer or seller, or you as a broker, have any question regarding the significance or validity of an “as is” or similar clause, the question should be immediately referred to a practicing maritime attorney.  Ensuring that both buyers and sellers get what they bargained for in a boat deal is crucial to the health of the yachting industry and understanding the legal meaning of “as is” is an essential building block to that end. 

Andrew High is a partner and founder of the Luxury Law Group, a boutique law firm specializing in yachts, jets and other luxury assets. Luxury Law Group has offices in Florida, New York and Washington, D.C.  The author can be reached at ahigh@luxurylawgroup.com or 800-278-7366.  For more information, visit luxurylawgroup.com.