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SOME LEGAL CONSIDERATIONS

Running a boat building business involves legal issues such as contracts, insurance, manufacturers certificate of origin.

Disclaimer:  I am not an attorney. I am an engineer.  This is not legal advice. Only a lawyer can give you legal advice.   All of the following is based on my own experience and education.   It is very general in nature.  Many laws concerning running a business vary from state to state.  It is your responsibility to find out what the laws are in your state or city.  Any errors or omissions on my part do not relieve you from your obligation to operate your business legally. Where possible I have put links to web sites that contain information about the subject.  However, you should consult an attorney for specific details of the laws applicable where your business is located. What is said here applies only to the USA.  If you are in another country you need to talk to someone who knows the laws in your country.

Contracts:  Most beginning boat builders don't even want to think about contracts. But they need to in order to protect themselves. If you take an order to build a boat you need to get the customer to sign a contract for the order before you ever begin to buy materials or begin construction.  The reason is simple.  With a gentleman's agreement, that is, a hand shake, the customer can back out of ithe agreement at any time, leaving you with all of the costs.  You need to get it in writing. Many builders have been left with a boat that the customer decided they didn't want or couldn't pay for. If this happens you would have to find someone to buy the boat to recover your costs. With a contract, your case will be very strong if you decide to take the customer to court to recover your costs. This does not have to be a formal contract. It can all be on the order form. But both parties need to discuss and know what they are agreeing to.

Things to put in the contract.

What boat is to be built and who will build it. Where it will be built.

Are there to be any changes from the published description of the boat? What are those changes? Did the customer pay a deposit??

The agreed price. How it will be paid?  Up front? In installments? Half now, half at delivery?  Establish the details so the customer can't put off paying you.

The agreed delivery date.

The agreed place of delivery.

Who will pay for transportation if the customer requests the boat to be delivered to a location other than the factory.

Note requirements if the customer wants to make changes.  How the price will be negotiated for the changes.

Cost overages:  How will any cost overages be paid and by whom.

Any other negotiable items.

The days of a gentleman's agreement are unfortunately behind us. That ship has sailed. You have to protect yourself and your business.

Liability:  If you built it, and something is wrong with it, that injures or kills someone, you may be liable. What does that mean? It means you may have to pay damages to the injured party. You will more than likely get sued.  This is based on the principle of strict liability which, simply put, says that the builder is liable for any defects in his product.  The best way to protect yourself is through liability insurance and to make sure you build to known accepted industry standards.  You must build to the standards found in Federal regulations. That's the law. But, you have an option whether or not to build to ABYC standards or some other accepted standard such as ISO or ABS, or Lloyds to name a few.  In the USA most courts use ABYC as the de facto standard. That means that most manufacturers use ABYC standards and accept them as the benchmark of boat construction. However, if you don't build to standard and something bad happens, you will probably be found liable.  Building to a known standard is good protection against liability. It is not 100% protection but helps your argument that the problem was completely unforeseen.  If you normally build to the standards and for some reason don't follow the standard on a particular boat or item on a boat, you should document your reasons why.  Keep a file on each boat sold.   If you change something, note it in the file. Put in why did you built it that way, how you built it, and why it is a better way to build.  This is for your own protection.

Insurance:  Insurance is expensive and everybody knows it.   Still if you build a product and sell it to the public it is cheaper to have insurance than to have to pay a large settlement. So you should have liability insurance. If you decide to have employees, you will also need to have liability insurance to cover on the job accidents.

Environmental considerations:  The EPA has regulations that apply to boat manufacturing. Such things as dust collection, reduction of styrene emissions, and use of products containing chemicals that pollute the environment are enumerated in the regulation. Some of these apply to everybody. Some do not apply to businesses under a certain size.  There is information about this on the EPA web site, and on NMMA's web site.

To incorporate or not. A company owned by a single person is known as a sole proprietorship. You as the owner are responsible and liable for everything. You can be held personally responsible for debts, liabilities and anything that happens to your customers because of your product. But for many small businesses this is the way to go. You have complete control over the business and all of the assets and profits are yours to do with as you please. 

If you take a partner (two or more owners) the same rules apply except everything is divided up equally, or according to how much each partner has invested in the company.   If you have a partner you need an agreement in writing, defining each partner's share of the business and their responsabilities.  You also need to state who has the authority to do what. You most likely don't want your partners selling their part of the business without your permission. But if it's not in writing they can.  So spell it out.  Especially spell out who has fiscal responsibility. Who handles the cash. Who has access to bank accounts, pays the bills,  can purchase materials, etc. You probably want to require that all partners must agree to any expense, beyond routine things such as ordering materials and supplies.  Most disagreements in partnerships are over money and how the company is managed, so get it down in writing.  Get an attorney to sit down with you and your partner or partners and put it all down on paper.. When it's done, everyone has  to sign the partnership agreement and have it witnessed.  It would be good to have it notarized.   This will protect you from someone who could sell out and disappear with the cash.   You need to do this even if the company is family owned!  It is actually much easier on everyone if they know what their responsibilities are.

Should you incorporate? Incorporation has advantages.  There is what is known as a limited liability corporation that gives you some of the benefits of a full corporation but without the complexity.  Incorporation creates an entity which is your company. The company then takes on all the liabilities and assets. Everything belongs to the company. If a liability situation occurs the company can be sued, but they have to prove you did it willfully and negligently to go after you personally. This means that your personal belongings such as your house can no long be taken away because you are no longer personally liable for the company's debts and liabilities.  Incorporation has some tax advantages too.

The best thing to do is take a class at your local community college on this subject. Basic business course usually cover the advantages and disadvantages of each type of business.  Also, you should discuss this with an attorney before proceeding. You don't necessarily need an attorney to incorporate.  You can find all the forms and procedures on the internet or in books at your local book store or library,  but an attorney can explain any questions you may have and ease the process.

Resources:  Look on the Business page for resources to help you learn about all of these things.

Manufacturer Certificate of Origin.  Most state require a Manufacturer's Certificate of Origin to register and title a boat.. A majority of the states have passed laws requiring boats to have a Title, just as cars have a Title.  To get a Title a consumer has to show a legitimate bill of sale and Manufacturer's Certification of Origin.  In some states this is called a Manufacturer's Statement of Origin.  This is not a Federal or Coast Guard requirement.  However, the Coast Guard has proposed a regulation for this, but currently it is still just a proposal. The best thing you can do is contact your State Boating Law Administrator and ask for a copy of the form used in your state. This form should be acceptable in any state because they are all patterned on a model put together by the National Association of State Boating Law Administrators. This form  may be available from the Department of Motor Vehicles or other state agencagencies that registers boats. The manufacturer should give the consumer this form as well as a bill of sale with each boat.   Without this form your customers will not be able to register their boat.

If you are building a  boat over five net tons, and it is going to be documented by the Coast Guard, rather than registered with a state,  then there is a Coast Guard Form.  CG Form 1261 Builder Certification and First Transfer of Title. This is also called a Manufacturers Certificate of Origin or a Master Builders Certificate.  It is not available on the web. Documentation services (do a web search) will get this form for you, or you can contact the Coast Guard National Vessel Documentation Center or call 1-800-799-8362 or download the form at http://www.uscg.mil/hq/cg5/nvdc/forms/cg1261.pdf.

Model Year: This has been much discussed by boat manufacturers, dealers, and engine manufacturers as well as by the Coast Guard and the States.

As far as I am aware the only law requiring a model year designation is the Hull Identification Number regulations. Most boat manufacturers give their boats a model year and make changes to their model lines every year.  However, small businesses generally don't make many changes from year to year and some never change their boats except to make improvements that are necessary. Most often these changes are not obvious and are in the actual structure rather than the appearance of the boat. So these builders often don't want to declare a model year. There are even some large boat builders who do this. Grand Banks rarely makes changes to their boats and a 1990 looks exactly like a 2000. They have in the past objected to putting a model year on their boats. So why use model year?

First is your customer.  Customers like to know when a boat is new, or not. They like to know  what model year it is.  Model Year is not terribly important if you never change the boat, but if you make changes then it is.  

Second, most states require a model year on the registration. But, this model year is taken right from the Hull Identification Number.

Recently engine manufacturers have been discussing not using a model year. Mainly this is so boat dealers can put a engine on a boat without worrying about whether the engine is the same model year as the boat, as long as it is new. However, the serial number of the engine would still be able to reveal the year of manufacture so  there would be no confusion over parts numbers.  A new model would be manufactured when a major change was made to the engine. This may work for engines but it is not as practical for boats.

The biggest problem with model year is a sales and inventory problem. If you have a boat in inventory from last year, and it has never been sold, is it a "New" boat or is it last years model?  The HIN law says that you can't change the HIN once the boat enters interstate commerce.  This means when it has been sold, or shipped to a dealer.  But as long as it is still at the factory the builder is free to put whatever model year in the HIN that they wish. However, this can run into a problem with state registration if the model year is more than one year removed from the date of manufacture. So be cautious if you do this.  After the boat leaves the factory, it becomes illegal to change the model year.  A dealer, manufacturer or anyone else CAN NOT change a Hull Identification Number to update the model year no matter how long the boat sits on his lot. The Federal regulation requires that permission be obtained from the Coast Guard to make any alteration to the HIN.  Also, a dealer or seller cannot misrepresent an older model as a current model year boat because most states would consider this consumer fraud.  They can however state that it is a "New" boat as long as this is true.

When does  a model year begin or end? As of 2009 the US Coast Guard began enforcing the model year regulation as it is written:

Model year means the period beginning August 1 of any year and ending on July 31 of the following year. Each model year is designated by the year in which it ends. Title 33 Code Of Federal Regulations Chapter I Part 181.3.

So Model year begins on August 1st and ends on July 31.  Example: Model Year 2012 would begin August 1, 2011, and end July 31, 2012.

Prior to this the US Coast Guard had been allowing manufacturers to determine the model year. So older boats may have a different model year span than new boats.  But new boats must use the definition as stated above.  For the rules, go to the page on HINs.

Splashing, or copying someone else's boat. Most people believe they have the sole rights to the use of their own creations or ideas. This is true to some extent. However, it is also known that many people get started in the boat building business by simply copying someone else's design.  This is a very common practice. Sometimes this is perfectly legal but most times it is not.  It depends on the laws in your state, copyright and trademark laws, and a Federal Law called the Vessel Hull Design Protection Act. It also depends on the nature of the design that is copied.  I will try to keep this as simple as possible because the issue can become very complex. Sometimes only the courts can sort it out. As I said in my disclaimer, I am not an attorney, I am an engineer. So I will try to keep it in engineering terms.  But if you have questions about this I suggest you contact an attorney that specializes in copyright, trademark and patent laws.

Basically, you cannot splash or copy someone else's design  of an existing boat without their permission, or unless it is in the public domain.  Splashing means making a mold from someone else's boat. Some people think that if the boat design is changed a little bit, then copying or splashing  is legal.  This is not true. You can still be sued by the designer and lose. This also includes copying someone else's design from plans or drawings.

Legitimate use of someone else's design.  What is public domain? When is someone else's design in the public domain?   Public domain means anyone can legally use it for private or commercial use. One way a design becomes public domain is if the creator of the design says it is. They do this by publishing  and encouraging others to use their design. There are literally thousands of wooden boat designs that fall into this category and many sail and powerboat designs  are in the public domain. However, the act of publishing  alone does not make it public domain.  It has to include the intent by the creator to make it available for anyone to use. 

Some designs have been around so long that no one can legitimately claim ownership, such as the dory, or jon boat.  No one could legitimately say the idea of a dory or jonboat is theirs because these types of boats have been constructed for several hundred years by many boat builders . The design of a simple vee bottom outboard boat is so basic that no one can claim ownership. Vee bottom planing hull boats have been around since the early 1900's.  Canoes are essentially in the public domain because canoes have been made since prehistoric times. Catamarans have been built since prehistoric times in the South Pacific. Basic simple hull designs are almost always public domain.

On the other hand, the unique Boston Whaler design of a cathedral type hull is owned by Boston Whaler.  The hull shape is not necessarily new but they way they put it all together is unique.  A few companies  have tried to copy it but  Boston Whaler has defended their ownership of this design in court and won.  So if you see a nice boat and think it would be a good idea just to take a mold off the hull you may be breaking the law.  This is not a criminal offense, that is, you won't be jailed or fined. But it is civil offence, and you can be sued and have to pay damages.

None of the above prohibits you from improving on a design if it is a genuine improvement. If you see a boat and think it would be better if it had less dead rise aft or a bigger transom, or steps on the planing surface, you can make those types of changes.  Many basic hull shapes have been around for a hundred years and are being constantly "improved". There is nothing illegal about this. But, beware, some designers have taken others to court for building a boat so similar to theirs that it could be reasonably mistaken for their design.  This is the look and feel issue.  If it looks like and feels like their design, it probably is.

There have been cases where people have defended themselves against such law suits by showing the history of a hull design. They show how small changes have been made to it over many, many years and how their variation fits in and is different from that of the person suing them.. They also show that the design of the person suing them is just another variation on a design that has existed for many years.  Sometimes this works, sometimes it doesn't.

Coming up with a design independently, that is, through your own  creative work, without having access to or having seen the other boat that it resembles, does not necessarily violate someone else's right to the design.  But you may have to prove that you developed design on your own.  This  can only be determined by the lawyers and the courts.

Illegal use of someone else's design: This means simply copying someone else's design and selling it as your own. It doesn't matter how it was copied, whether by using plans or splashing a mold. You must have permission from the "owner" of the design to copy it. This is seldom given without some consideration in return, that is, paying them for the right to use it.

Vessel Hull Design Protection Act.  A US Federal law was passed in 1998 as an attempt to stop all  the splashing and copying that occurs in the boat building business.  It states that a designer or builder can register their hull design with the Trademark and Patent Office. Once it has been registered, no one can copy the design.  This is not the same as a patent or a copyright but in effect makes the designer or builder the "owner" of the design. To get this protection, a designer or builder must register their design. Approval is not automatic. The Trademark and Patent Office will do a search of the other registered hull designs and patents to make sure this design hasn't already been registered or patented. If it already exists as a registered or patented design then it will not be given registration. This does provide the creator of a design with some protection.  In 2005 amendments were added to strengthen the law.   The Act . The Act Overview and analysis. This law is also enforceable in the courts in other countries through treaties the USA has with those countries under general patent and copyright infringement agreements.  However this could be very expensive to prosecute. That still doesn't mean you can copy someone else's design just because they are in another country. It is still stealing.

Here are some papers on this subject.  It is full of legal jargon and references to laws and court cases but it is clear enough for anyone to understand the point of it all. Outrigger Hull Design Protection

Here are some other papers on this subject.
Two Perspectives On The Vessel Hull Design Protection Act
Florida IP Trends: Vessel Hull Design Protection Act - What The Hull?

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