Introduction

Sale of ships is customarily carried out by means of standard forms the main of which is the Norwegian Saleform edited by Bimco.[1] The yachting sector has adopted the same contractual practice ― eg see the Myba sale and purchase standard form. The aforesaid contractual templates are usually referred to as “memorandum of agreement” and follow a well-established scheme.

At the outset, the buyer carries out an inspection of the vessel and thereafter elects whether it intends to purchase or not. The buyer’s election is generally unfettered, ie the buyer is free to accept or reject the vessel independently from the outcome of the inspection.

In the event of rejection, the contract is null and void and the deposit, if any, is immediately released to the buyer. In the event of acceptance, the contract becomes binding on the buyer which must take delivery of the vessel at the closing date (subject to the other terms of the agreement).

This short article will focus on two key points of sale and purchase transactions:

(a)  the initial inspection; and

(b) delivery at closing.

Each of which is dealt with in turn below. 

The initial inspection

The inspection of the vessel by the buyer is crucial. By means of the initial inspection the buyer has the opportunity to thoroughly examine the vessel and to detect defects affecting the same. It is mandatory to have the inspection carried out by a skilled surveyor which should ideally inspect the vessel both in dry dock and by sea trial. It is advisable to have the vessel’s log books also examined so as to be aware of casualties etc suffered by the vessel.

As mentioned in the introduction, following the inspection the buyer is generally free to accept or reject the vessel at his discretion. However, once the buyer has accepted the vessel, the sale becomes outright and definite and the buyer is bound to take delivery of the vessel at the closing date in the condition she was at the time of inspection – see in this regard clause 4 and 11 of the Norwegian Saleform 2012.

This is why sale and purchase transactions are referred to by commercial man as “as is” transactions.[2] Should the parties wish to provide for the vessel to be delivered otherwise than as she was at the time of inspection, clear words should be used and the contract drafted accordingly.[3]

Summing up, buyers should be aware of the importance of carrying out a thorough inspection and should not hesitate to invest resources in such a fundamental process in order to avoid unpleasant surprises. 

Delivery at closing

The closing date is the moment in which the vessel will be actually delivered to the buyer. It is quite common for sale and purchase contracts to provide expressly that at delivery both risk and property will pass from the seller to the buyer.

The main obligations of the seller can be set out as follows.

First, to physically deliver the vessel to the buyer in the condition she was at the time of inspection and to comply with the exceptions to the “as is” regime if any. In this respect, from the buyer’s perspective it is good practice to insert in the contract a clause establishing the buyer’s right to have the vessel inspected at delivery so as to ascertain that the seller has duly complied with his obligations as far as the physical condition of the vessel is concerned.

Second, to tender to the buyer the documents listed in the sale and purchase contract.[4] The clause dealing with the seller’s documentary obligations is of the utmost importance for the buyer. The delivery documents will be evidence of the buyer’s title to the vessel and of the absence of mortgages and other encumbrances on the vessel at the time of delivery. The delivery documents will also enable the buyer to register the vessel under his chosen flag state. It is therefore good practice to liase in advance with the flag authorities so as to ascertain precisely which documents will be necessary for registration purposes and to draft the related clause in the sale and purchase contract accordingly.

With reference to the buyer’s obligations, delivery at closing will trigger the buyer’s duty to pay the balance of the purchase of price. The buyer should be prepared to transfer the funds with no delay or he may risk termination of the contract from the seller’s side. In falling market conditions, this may lead to heavy claims for loss of profits. 

Conclusion

Sale and purchase of ships involves complex issues. The above are just two of the many aspects which such transactions require to deal with. Manning, insurance and tax issues will also often arise. And it may be prudent to transfer funds by means of a stakeholder.

It is therefore strongly recommended for sellers and buyers to be properly advised by experienced consultants in order to manage and reduce related risks.

Avv. Federico Serra

[1]     See also the Nipponsale and the Singapore Ship Sale forms

[2]     Cfr The Union Power [2012] EWHC 3537 (comm). See also the article of Mr S Rainey QC “As is .. as you were? The Union Power and as is provisions in ship sale and purchase contracts” in Ship Building and Finance 2016, Informa Law from Routledge

[3]     See clause 11 of the Nowegian Saleform 2012

[4]     See clause 8 of the Norwegian Saleform 2012

Federico Serra