Selling or buying a ship involves a substantial investment and is a very involved process. Stuart Plotnek provides a useful overview of the basic procedures and some important considerations when entering into a ship sale and purchase transaction.Whether you’re a seller or a buyer, find yourself a reputable ship broker. The broker will use his or her contacts worldwide to market the ship or find what’s available and propose one or more potential counterparties.

The seller will usually make the vessel available for a basic physical inspection by any interested parties and allow them to review the vessel’s classification records, though in good markets physical inspection is sometimes waived or replaced by a survey report. If one or more parties are interest in purchasing the vessel, negotiations will commence.

The brokers, in consultation with their respective clients, will produce a list of the agreed terms of the sale and these will commonly be set out in a “Broker’s Recap”. The Recap may not be legally binding because it contains “subject to contract” wording (or other wording making it clear that other contract terms are still to be agreed) so that a valid and binding agreement does not exist unless and until the seller and buyer agree all the terms of their bargain.

Following agreement of the Broker’s Recap, the broker for the seller will prepare the sale contract, better known as a Memorandum of Agreement (“MOA”). There are various standard forms of MOA currently in use but the most common are the Norwegian Saleform 2012 and the Nipponsale 1999. Other forms of MOA include the Singapore Ship Sale Form 2011 and the BIMCO SHIPSALE 22 published in 2022. It is usually the seller who will decide which MOA to use and so as a buyer it pays to be aware of the subtle and not so subtle differences between the different MOAs or take legal advice from those that are.

The MOA in all its forms contains provisions dealing with, amongst other issues, payment of a deposit and the balance of the purchase price, notices and the time for delivery, pre-delivery underwater inspection or drydocking, delivery documentation, encumbrances, condition of the vessel and default by either party. The parties are free to either amend or add to the standard clauses of the MOA (e.g., to add provisions dealing with confidentiality, breach of sanctions) to reflect their agreed terms.

Conditions of deposit

A deposit will be payable by the buyer following execution of the MOA. The deposit is usually ten percent of the purchase price of the ship but can, depending on the price and prevailing market conditions, be as much as twenty percent. The deposit must be paid within a certain time after the execution of the MOA although currently time for payment is more often linked to the opening of an escrow account commonly by the seller’s lawyer. The deposit is held in escrow for the seller and buyer jointly and will be released on delivery of the vessel. In the event that the buyer defaults on payment of the balance of the purchase price at the time of delivery the deposit will (under Saleform 2012) be forfeited to the seller as compensation for its loss.

The MOA will give a date range for delivery and a location for the physical handover of the vessel, either by way of a specific port or one port within a range. The seller is obliged to give notices at certain times so that the buyer is kept fully informed about the vessel’s itinerary. These notices help the buyer to understand how long he has to finalise any financing he is arranging and get ready for delivery (for example, arranging insurance for the vessel) but also allows him to position his crew in time for the handover.

The MOA will also provide for an underwater inspection of the vessel (there is also an option for drydocking but this is rarely used) just prior to delivery. Whilst damage to the vessel found during the underwater inspection does not give the buyer an express right to terminate the MOA, seller and buyer would be best advised to ensure that in the event of underwater damage being discovered their respective rights and obligations are clearly expressed.

Condition on delivery

Of note is the condition of the vessel on delivery. Vessels are usually sold either in the same condition as when inspected pre-contract (excluding fair wear and tear) or in “as is, where is” at the time of delivery. In the case of the latter the presence of the words “as is, where is”, may not of themselves exclude terms implied into the MOA by statute or law (implied terms). For example, the English Sale of Goods Act 1979 implies terms relating to title, satisfactory quality and fitness for purpose into a contract for sale of goods. Clause 18 of the Saleform 2012 contains an exclusion of implied terms to the extent permitted by law but a seller will usually seek to expressly exclude the application of such terms to the contract if using a form other than Saleform 2012.

To transfer title in the vessel to his buyer a seller will need to execute various documents that will be delivered to the buyer at the time of delivery of the vessel at a closing meeting. Closing meetings take place onshore, usually in a major business location. The vessel will almost certainly be located in a port that might be several time zones away so the parties will need to consider the timing of the delivery so as to ensure that all the services involved in a ship closing are open and available.

MOAs usually contain a list of delivery documentation although common practice is for the parties to delete that clause and agree an addendum to the MOA setting out a more detailed and extensive list of documentary requirements for each party. Each document plays an important role in the sale. The bill of sale transfers title in the vessel to the buyer. The seller’s corporate authority documents evidence the seller’s ability to sell the vessel. A transcript of the vessel’s entry on the relevant ship register will be required to evidence that the vessel is free of registered encumbrances and mortgages.

A confirmation from the vessel’s classification society will confirm the condition of the vessel based on its classification records. Other documents also play a part. The seller will issue invoices for both the vessel and any fuel and lubricants to be purchased by the buyer. The seller will also be required to provide various undertakings and confirmations, for example a confirmation that the vessel is not blacklisted or has not called at selected ports. Technical documentation for the vessel will usually be handed over on board.

At the time of delivery, the balance of the purchase price will be paid by either the buyer or its financiers, the deposit released and the delivery documentation exchanged. Title in the vessel is transferred to the buyer at the point when the bill of sale is physically delivered by the seller to the buyer at the closing meeting. Consequently, in order to confirm the exact time at which title and risk in the vessel passes to the buyer, the parties will sign a protocol of delivery and acceptance which accurately records the date, time and location of the delivery so that were there to be an incident around the time of delivery or a third party claim were to come to light following delivery there can be no argument as to which party is responsible.

The buyer will require the vessel to be delivered free from encumbrances, mortgages and maritime liens or any other debts. On delivery any existing mortgage over the vessel must be discharged by the seller’s mortgagee usually by repayment of the outstanding loan (if any) out of the proceeds of sale. This will allow the seller to provide a transcript of register described above which will confirm that the vessel is free of any encumbrances that might be registered against it.

Multiple jurisdictions

However, because a vessel will usually be trading across various jurisdictions it is impossible for a buyer to completely satisfy itself that a vessel is free of all claims. As a result, a buyer would be best advised to seek legal advice as to what, if any, additional investigations in various jurisdictions might be available to it.

After delivery, the buyer will register itself as owner of the vessel either on the same registry or in a new registry of its choice. If the buyer has taken a loan to finance the purchase of its new vessel the buyer’s financing bank will at the same time register a mortgage over the vessel as part of its security for the loan.

Following delivery the seller will, if required, delete the vessel from its ship registry and provide a deletion certificate to the buyer which the buyer will then present to his new register as evidence that the vessel is not registered anywhere else.

This article is intended as an overview of what one might expect in a basic sale and purchase transaction. There are also many practical aspects of a vessel sale and purchase transaction to consider which are the responsibility of the seller and buyer rather than their legal advisors, for example, arranging insurance and technical and commercial ship management, renaming and painting the vessel in its new colours and agreeing a charter for the vessel. This is not intended as legal advice which we would recommend should be taken from a specialist advisor in all circumstances.

For further information, please contact:

Stuart Plotnek
Director
Stuart@CJCLaw.com

Campbell Johnston Clark offers unrivalled experience in all aspects of ship sale and purchase transactions, including second-hand sales, sale and charterback transactions and the resale of newly constructed vessels. Our services extend from expert guidance through the initial drafting and negotiation of memoranda of agreement, via production of delivery documentation and asset registration, to the closing meeting and the payment procedures inherent in multi-jurisdictional contracts.

Our specialist lawyers can advise you how to structure the corporate ownership of your fleet, assist you with the incorporation of domestic or offshore ship owning companies and, should the need arise, can novate your MOA or shipbuilding contract. In conjunction with our accomplished team of ship finance lawyers we can also assist with the registration and/or discharge of ship mortgages. We are equally well equipped to support you in agreeing any technical or commercial ship management contract.

In the regrettable event that a dispute arises, CJC’s full range of litigation, arbitration and mediation expertise is at your disposal.