Ask a Maritime Attorney: Charter Program Breach

Question:

My husband and I joined a yacht charter boat ownership program last year and purchased a relatively expensive sailboat to be placed in charter in Mexico. We were chartering her through a guaranteed income program, being promised a minimum cash flow each month throughout the five-year term of the agreement. Unfortunately, delivery of the boat coincided with the shutdown caused by the COVID pandemic, and the charter company sent a letter to all boat owners in the program that they would not be able to pay the guaranteed income until the shutdown was lifted. Notwithstanding the pandemic, we have learned the boat is now being placed almost continually in charter, but we have not received any income and they are taking the best years of our boat. The contract we signed stated the agreement was null and void if either party failed to perform according to the charter agreement. Since they have failed to pay us any of the guaranteed income, they appear to have broken the contract. What would be the legal ramifications of us taking the boat out of charter?

 

Answer:

Our reader has a couple issues playing out here but based on her description of the actions of the charter management company it is clear it (the management company) has breached their contract. Based on that breach, she can probably take the boat out of charter, but she may also have other remedies.

Charter management companies around the world advertise the benefits of owning a charter boat. Those benefits often include the use of other boats in their fleet, offsetting the costs of ownership, and in the case of our reader, a guaranteed income in addition to the cost offset. But, as with most contracts, it pays to read the fine print of the agreement.

The terms of a charter management agreement will vary significantly depending on the particular company that is managing the charter fleet, and the boat owner’s rights and remedies will depend on the language of that agreement. Our reader describes a provision in the agreement which renders the contract “null and void” if either party breaches the agreement, but in this case the actions of the management company would amount to a rather egregious breach of contract. This breach would probably have relieved her of her obligations under the contract, even without the “null and void” clause.

Many contracts include an “act of God” clause which will release the parties from their respective obligations in the event of a natural disaster such as a hurricane, and the COVID pandemic may have had that effect even without a breach by the management company. Similarly, a party may be excused from performance under a feature of general contract law known as “impossibility of performance,” which may arise under these circumstances.

Based on general contract law and the common language of these agreements, the charter management company may have been within their rights to keep their fleet tied to the dock and cease payments under the “guaranteed income” program. But the question of whether our reader could have removed her boat from the fleet, based solely on inactivity, may only be answered by reviewing the language of the contract.

This particular situation has an added twist, because it seems the management company chartered our reader’s boat anyway, without her knowledge and after telling her that the boat would not be chartered. To make matters worse, they failed to inform her of the charter activity and failed to pay her the charter income. Under these circumstances they are clearly in breach of the contract and they have probably committed a fraud.

Based on our reader’s story, if her boat was in the United States, we might be advising her to sue the management company for fraud and breach of contract. But the boat is in Mexico and the charter management company might be based in Mexico. This complicates the legal landscape greatly, and it requires us to look deeper into the agreement to see whether it requires a dispute to be resolved in a Mexican court and whether it includes a Mexican “choice of law” clause, requiring the application of Mexican law regardless of where a lawsuit is filed.

In this case, based on our reader’s story, the charter management company has obviously breached the contract and our reader may be entitled to damages for fraud, even in a Mexican court. But regardless, her boat amounted to a significant investment, and this highlights the need to have a contract reviewed by an experienced attorney before signing anything.

 

David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.

David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is an adjunct professor of Admiralty Law, a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508 or at dweil@weilmaritime.com.