Payment Methods and Security in Ship Sale and Purchase Transactions

Payment Methods and Security in Ship Sale and Purchase Transactions

Payment at the closing of a second-hand ship sale must be coordinated with the transfer of title, delivery of the ship, release of the deposit, discharge of any mortgage, exchange of closing documents, and completion of registry formalities. The seller will ordinarily refuse to deliver until the full amount due has been received in an acceptable form. The buyer, however, will usually resist releasing the purchase funds until the ship and the agreed documents are ready for simultaneous transfer.

This tension makes payment mechanics a central part of the transaction rather than a routine banking detail. The chosen method must give the seller sufficient certainty that the funds are available while protecting the buyer from paying before the seller has satisfied the contractual conditions for delivery.

The difficulty increases when the parties, banks, registries, mortgagee, ship, and closing representatives are located in different jurisdictions or time zones. A payment clause that appears simple on paper can fail in practice if it does not reflect bank cut-off times, correspondent banking routes, anti-money laundering procedures, registry working hours, and the sequence in which documents and funds must be released.

Coordinating Payment with Delivery

The Need for a Simultaneous Exchange

The basic commercial objective is a simultaneous closing. The seller should receive the purchase price at the same time that the buyer receives the ship, title documents, and control of the ship. Neither party should be required to perform substantially in advance of the other unless adequate safeguards have been agreed.

True simultaneity is difficult where the seller’s nominated receiving bank is in a different jurisdiction from the buyer’s remitting bank. Time-zone differences may leave only a narrow window during which both banks are open and able to process or confirm a large-value transfer.

The payment may also need to pass through one or more correspondent banks or through a clearing system in the principal financial centre for the payment currency. A transfer denominated in USD, for example, may require settlement through correspondent accounts in New York even though neither the buyer nor the seller is based in the United States.

Further complications arise where the deposit is held by a bank other than the seller’s nominated bank. The parties must then coordinate the release of the deposit with the separate remittance of the balance and ensure that the seller receives the entire amount required at closing.

A registered mortgage can make the sequence more demanding. The seller may need to use part of the purchase price to discharge the secured debt before the mortgagee releases the mortgage. The mortgagee bank may be located in another jurisdiction and may insist on receiving cleared funds before authorising delivery of the discharge documents.

Registry arrangements must also fit the banking timetable. The existing registry may need to issue deletion documents, while the buyer’s new registry may require evidence of title transfer, mortgage release, and delivery before provisional or permanent registration can be completed. If registry offices and the closing bank operate in different time zones, the parties should identify the precise order of each step well before delivery.

Standard-Form Treatment of Payment

Nipponsale contains more detailed payment provisions than the traditional wording in clause 3 of the SALEFORM editions. SALEFORM generally states the buyer’s payment obligation without prescribing a complete operational procedure. Parties using SALEFORM therefore sometimes add a detailed closing clause or payment protocol explaining how the balance, deposit, bunker adjustment, and other sums will be transferred.

The absence of detailed printed mechanics should not be interpreted as evidence that the issue is unimportant. A transaction-specific clause may need to identify the receiving account, payment currency, bank charges, value date, evidence of payment, release conditions, treatment of late-arriving funds, and responsibility for delays within the banking chain.

Using the Deposit as Part of the Purchase Price

The buyer should ensure that the contract expressly permits the deposit to be released to the seller as part payment of the purchase price if that is the intended closing structure. SALEFORM 2012, Nipponsale 1999, and SSF2011 contain wording that facilitates this result.

The position under SALEFORM 1993 is less straightforward because the printed clause requires payment “in full” to the seller’s nominated bank and does not necessarily require that bank to be the same institution holding the deposit. Without an amendment, a buyer relying on the deposit as part payment may face an argument that the entire price must still be remitted separately to the nominated bank.

The contract should therefore state whether the deposit holder is authorised to release the deposit directly to the seller, to the mortgagee, or to another agreed account at closing. It should also explain whether accrued interest belongs to the buyer, forms part of the purchase price, or is applied toward another closing amount.

Bankers’ Payment Letters

A bankers’ payment letter can provide an efficient method of paying the balance at closing. The buyer’s bank issues an irrevocable and unconditional undertaking in favour of the seller or the seller’s bank to pay the stated amount with value on the completion date.

In Ateni Maritime Corp v. Great Marine Ltd (The Great Marine (No. 1)) (1990), the court recognised this type of letter as an established commercial method for transferring funds. Once the undertaking is delivered without qualification at closing, the seller receives a direct right against the issuing bank for the amount stated in the letter.

The principal advantage is that the parties need not wait for the full banking chain to complete a telegraphic transfer before releasing the ship and documents. The unconditional obligation of the buyer’s bank can stand in place of immediate confirmation that the funds have already reached the seller’s account.

The wording should be agreed well before closing. The seller will want a clear statement that payment is irrevocable, unconditional, for same-day value, and not subject to further approval by the buyer. Any condition allowing the buyer or the bank to stop, reverse, or delay payment would undermine the intended protection.

Authorised representatives of the buyer’s bank will usually need to attend the closing or participate through an agreed electronic procedure. The seller should verify that the signatories have authority to bind the bank. Evidence may be supplied through certified bank records, authorised signature lists, formal confirmations, or another method acceptable to the seller and its advisors.

Bankers’ payment letters have become less common in second-hand ship sales, partly because commercial parties have become more cautious about the credit standing and reliability of financial institutions. Where this method is proposed, the seller should assess the issuing bank as carefully as it would assess any other source of payment security.

Advance Funding and Same-Bank Transfers

Where the seller will not accept a bankers’ payment letter, the buyer may pre-position the closing funds. One method is for the buyer to open an account in its own name with the bank that will receive the seller’s payment and transfer the required funds into that account before closing.

When all delivery conditions are satisfied, the buyer instructs the bank to debit the buyer’s account and credit the seller’s account within the same institution. Because the transfer is completed through the bank’s internal books, it can occur almost immediately and avoids much of the delay associated with correspondent banking.

As a matter of banking law, payment may be treated as complete once the bank accepts an irrevocable instruction to execute the internal transfer. The closing protocol should nevertheless state what documentary evidence the seller will accept as confirmation that the transfer has become final and unconditional.

Advance funding can also cover bunkers, lubricating oils, stores, spare parts, and other amounts payable in addition to the purchase price. Since these amounts may not be finalised until shortly before delivery, the buyer can pre-fund an estimated figure and arrange for any excess to be returned after the closing calculations are agreed.

The account may be structured as a buyer-controlled account, a suspense account, or an escrow account. Each structure produces different legal and operational consequences, particularly regarding control of the funds, insolvency risk, interest, release instructions, and the circumstances in which money can be returned.

These arrangements must be established sufficiently early for the banks to complete customer identification, source-of-funds verification, sanctions screening, and other anti-money laundering procedures. A payment structure that depends on opening a new account cannot safely be left until the final days before delivery.

Telegraphic Credit Transfers

How the Payment Chain Operates

If neither a bankers’ payment letter nor advance funding is used, the balance will commonly be remitted by telegraphic credit transfer. This is familiar and widely available, but it can be difficult to reconcile with a simultaneous ship closing.

The buyer first instructs its bank to send the funds. The bank transmits a secure payment message, which may be routed through a correspondent in the financial centre where the payment currency is cleared. The correspondent bank then transfers the funds to the correspondent used by the seller’s bank, after which the seller’s bank receives an advice and credits the seller’s account.

Message routing, compliance checks, queuing, decoding, correspondent processing, and local cut-off times can create several hours of delay. A message confirming that payment has been initiated does not necessarily mean that the seller has received an unconditional credit.

A Cross-Border USD Transfer Example

Consider a closing in London where the buyer’s bank is in Singapore, the seller’s bank is in London, and the price is payable in USD. The buyer’s bank may send the instruction to its correspondent bank in New York because USD settlement ordinarily takes place through the United States banking system.

The first New York correspondent transfers the amount to the New York correspondent acting for the seller’s London bank. The second correspondent then advises the seller’s bank in London, which credits the seller’s account and confirms receipt.

The accounts of the two New York banks may be settled through the Clearing House Interbank Payments System (CHIPS), with corresponding entries through accounts maintained at the Federal Reserve. Finality may depend on completion of these settlement entries rather than merely on transmission of the original payment message.

If both the buyer’s bank and the seller’s bank use the same correspondent, the New York leg may be completed through internal netting or debit and credit entries within that correspondent. This can simplify the process, but the parties should not assume that a shared correspondent will eliminate all delay.

Payment Finality and Reversal Risk

Local clearing rules may permit certain transfers to be reversed or unwound after initiation. A seller may therefore refuse to accept a copy of the buyer’s transfer instruction, a secure message, or a provisional bank advice as proof of payment.

The contract should define the point at which payment is treated as made. Possible standards include receipt of cleared funds, an unconditional credit in the seller’s account, confirmation from the seller’s bank that the payment is irrevocable, or delivery of another agreed form of bank assurance.

Timing is particularly difficult because the buyer will not normally send the funds until the seller’s documents have been approved and the ship is confirmed safely afloat and ready for delivery. By the time those conditions are satisfied, the remaining banking window may be too short for a cross-border transfer to complete on the same day.

A detailed closing timetable should therefore work backward from the latest settlement and registry cut-off times. The parties may need to complete document review in advance, pre-clear the payment through compliance departments, use conditional release arrangements, or select a closing location and bank structure that supports same-day completion.

Payment by Letter of Credit

The Autonomous Nature of the Credit

A documentary Letter of Credit (LC) can be used to pay the balance of the price or, in standby form, to secure the buyer’s obligations in place of or in addition to a cash deposit. The issuing bank gives an independent and irrevocable undertaking to honour a presentation that complies with the terms of the credit.

The bank’s obligation is autonomous from the sale contract. The seller’s right to payment depends primarily on presenting the specified documents in strict conformity with the Letter of Credit (LC), not on proving the buyer’s underlying liability in the ordinary way.

This independence gives the seller a bank credit risk rather than relying entirely on the buyer. It also creates a serious documentary risk. A bank may refuse payment where the presentation contains a discrepancy, even if the discrepancy appears commercially minor and the buyer has no legitimate complaint about the ship.

Documentary Conditions Must Be Workable

The Letter of Credit (LC) should list only documents that are necessary, clearly described, and capable of being produced in the required form. The seller should avoid conditions dependent on a certificate, endorsement, or approval controlled by the buyer or by a third party whose cooperation cannot be guaranteed.

Every description should be checked against the sale contract, registry requirements, bill of sale, protocol of delivery and acceptance, invoices, certificates, and technical documents. Dates, ship particulars, names, amounts, and signing requirements must be consistent across the complete closing package.

The expiry date, place of presentation, latest delivery date, applicable banking rules, and time allowed for examination must also accommodate the actual closing process. A credit that expires too soon can lose its value precisely when a dispute delays delivery.

The Lena and the Consequences of Poor Drafting

Kydon Compania Naviera SA v. National Westminster Bank Ltd and others (The Lena) (1981) arose from a ship sale in which most of the purchase price was to be paid under a confirmed irrevocable transferable and assignable Letter of Credit (LC).

The credit required several documents, including signed invoices, a legal bill of sale, confirmation concerning the ship’s arrival at the breaking site, gas-free evidence, and a certificate from the Greek Registrar confirming freedom from encumbrances. The credit also contained delivery and presentation deadlines and incorporated documentary credit rules.

Payment was refused because the documents presented by the assignee did not comply with the credit. The court also criticised the instrument as confusing and poorly adapted from a form intended for a different presentation structure.

The Lena demonstrates two essential points. First, the Letter of Credit (LC) must accurately reflect the transaction rather than relying on unsuitable standard wording. Second, the seller must be certain that every documentary condition can be satisfied exactly within the permitted time.

Because a ship sale closing often involves documents issued by registries, authorities, class, agents, and other third parties, the risk of documentary discrepancy can be substantial. This is one reason Letters of Credit (LCs) are not routinely used as the principal payment method in second-hand ship sales.

Cheques, Bills of Exchange, and Payment in Kind

Cheques

Cheques are rarely suitable for the principal purchase price. They may occasionally be accepted for smaller closing adjustments, such as the value of bunkers and stores remaining on board.

Delivery of a cheque does not provide the seller with immediate cleared funds or an unconditional bank undertaking. The drawee bank is not required to honour the cheque unless sufficient funds are available or it chooses to extend credit to the buyer.

Clearing may take several days, and the cheque may be dishonoured. Acceptance therefore depends heavily on trust and on the seller’s willingness to bear the buyer’s credit risk after delivery.

Bills of Exchange

A bill of exchange is a signed order by the drawer requiring the drawee to pay a stated amount to a named payee, to the payee’s order, or to the bearer. It may be payable on demand as a sight bill or at a future date, and it may be clean or accompanied by documents released upon payment.

The seller’s principal disadvantage is deferred payment. Unless the seller discounts the bill to a third party and receives immediate funds, the seller remains exposed to the possibility that the drawee will fail to pay at maturity.

Discounting transfers the payment risk to the third-party financier, but it may involve fees, recourse obligations, or other conditions. A bill of exchange should therefore be evaluated as a credit instrument rather than as the equivalent of cash at delivery.

Part Cash and Part Barter

Some transactions combine cash with property or another form of value. Part-exchange structures are more familiar in the luxury yacht sector, where a builder may accept an existing yacht from a shipowner acquiring a more expensive yacht.

A barter element requires its own detailed terms. The parties should address valuation, inspection, title, encumbrances, delivery condition, tax treatment, risk of loss, warranties, and the consequences if the asset offered in exchange cannot be delivered as agreed.

Security for the Buyer’s Obligations

The Cash Deposit as the Conventional Protection

The traditional security for the buyer’s performance is a cash deposit paid into a joint or stakeholder account. SALEFORM, Nipponsale, and SSF2011 are structured around this approach.

The deposit demonstrates commitment, gives the seller a fund against which contractual remedies may operate, and reduces the seller’s exposure if the buyer fails to complete. The deposit agreement should state who holds the money, the account structure, interest entitlement, release conditions, governing law, fees, and the documents required for payment out.

In some transactions, the seller may require additional security because the deposit is considered insufficient in relation to the buyer’s obligations or because the buyer is a newly formed or thinly capitalised entity. Less frequently, another form of security may replace the cash deposit entirely.

Parent Company and Personal Guarantees

The Nature of a Guarantee

A buyer may arrange for a creditworthy parent company, affiliated entity, or ultimate beneficial shipowner to guarantee its obligations. A guarantee is a written promise by the guarantor to answer for the debts or liabilities of the buyer as principal debtor in favour of the seller as beneficiary.

A conventional guarantee creates a secondary obligation. The guarantor’s liability depends on the existence and enforceability of the buyer’s underlying liability. If the buyer is not legally liable, the guarantor under a simple surety guarantee may have no obligation to pay.

Guarantees, Indemnities, and Performance Bonds

A guarantee must be distinguished from an indemnity. An indemnity is a primary and independent obligation to compensate the beneficiary for specified loss. It does not necessarily depend on proving an enforceable debt owed by the buyer.

A performance bond may also create an independent obligation. Classification depends on the wording rather than the title. Where the issuer promises to pay against a compliant demand without investigating the underlying dispute, the instrument is likely to operate as an on-demand bond, subject to limited exceptions such as fraud.

The distinction produces significant consequences. Under a straightforward guarantee, the seller may need to prove the buyer’s default and liability. If the sale contract is void or the buyer is released, the guarantee may also fall away. A material variation to the sale contract made without the guarantor’s consent may discharge the guarantor.

An indemnity or on-demand bond can provide stronger protection because it creates a primary obligation. The guarantor or issuer will nevertheless insist on precise conditions, financial limits, expiry provisions, and documentary requirements.

Countersigning the Sale Contract

In some second-hand ship transactions, the buyer’s parent company or another group company countersigns the memorandum of agreement as guarantor. If the buyer fails to pay the deposit or purchase price, the seller may then pursue both the buyer and the guarantor.

This approach is convenient but can leave uncertainty about the nature and scope of the guarantee. The contract must be interpreted to determine whether the guarantor covers payment only, all buyer obligations, damages, interest, costs, extensions, and variations.

A separate guarantee is usually preferable where the parties require a detailed and durable security instrument. It can define the trigger, procedure, cap, duration, governing law, and interaction with the sale contract more clearly.

On-Demand and Surety Guarantees

Guarantees generally fall into two broad commercial categories. A surety guarantee requires proof that the buyer has defaulted and is liable. An on-demand guarantee requires payment against a demand and any documents specified in the instrument, without a full determination of the underlying dispute.

Banks commonly issue on-demand guarantees. Outside the banking context, courts may be reluctant to construe an ambiguous corporate instrument as creating an independent payment obligation.

Some guarantees require a final arbitration award or court judgment before payment can be demanded. This reduces abuse risk for the guarantor but weakens the seller’s immediate protection. The parties should decide whether the security is intended to provide rapid liquidity or merely an additional source of recovery after liability has been established.

In second-hand ship sales, surety guarantees are more common than simple-demand corporate guarantees. A buyer will often resist an unrestricted on-demand instrument because of the risk that the seller could call it during a genuine contractual dispute.

Drafting an Effective Guarantee

Form, Consideration, and Execution

A guarantee must be in writing. Unless executed as a deed, it must also be supported by consideration. The timing of the guarantee and the underlying sale contract should be coordinated so that consideration is clear and enforceability is not placed in doubt.

The guarantor’s constitutional capacity, corporate approvals, signatory authority, and execution formalities must be verified. Where the guarantor is incorporated in another jurisdiction, local legal advice and an enforceability opinion may be appropriate.

Protecting Against Discharge

A variation to the sale contract that may prejudice the guarantor can release the guarantor unless consent is obtained. Guarantees often contain wording allowing the buyer and seller to amend, extend, waive, or supplement the underlying contract without further approval.

General advance-consent language may not protect every change. The safest practice is to obtain the guarantor’s written confirmation for each material amendment, extension of the cancelling date, price change, release, or settlement.

Material side letters and collateral agreements should be disclosed before the guarantee is issued. A guarantor may seek to avoid liability by arguing that it would not have agreed to provide security had the undisclosed arrangement been known.

Where several guarantors are jointly and severally liable, releasing one guarantor may affect the obligations of the others. Any release, compromise, or restructuring should therefore preserve expressly the seller’s rights against the remaining guarantors.

The treatment of other security is equally important. If a cash deposit, mortgage, pledge, or other security forms an essential part of the guaranteed arrangement, releasing it may discharge the guarantor. Even where discharge is not complete, the guarantor may be released to the extent of the prejudice suffered.

Defining the Guaranteed Obligations

The instrument should state whether the guarantor covers payment obligations only or also performance of non-payment duties. It should address the deposit, purchase price, damages, interest, legal costs, indemnities, extensions, and any liabilities arising after termination.

The guarantee may be unlimited or subject to a monetary cap. If a cap applies, the drafting should clarify whether interest, enforcement costs, taxes, and expenses fall within or outside the limit.

The payment trigger, demand form, supporting documents, payment deadline, expiry date, transferability, and notice method should be stated with precision. A guarantee intended to continue through amendments, insolvency, time extensions, or changes in the buyer’s structure must say so clearly.

Governing Law and Enforcement

The guarantee should contain its own governing law and dispute resolution provisions. These do not necessarily need to match the sale contract, but inconsistency can create additional cost and procedural complexity.

The seller should confirm that the instrument is enforceable both in the chosen forum and in the jurisdiction where the guarantor or its assets are located. A judgment or award has limited value if it cannot be converted into a practical recovery.

Where a company gives an upstream or affiliate guarantee, local law may require corporate benefit, commercial interest, shareholder approval, or other protections. A legal opinion can provide comfort concerning capacity, execution, validity, and enforceability.

Bank Guarantees

A seller seeking payment certainty may require the buyer to procure an on-demand guarantee from a bank acceptable to the seller. The bank undertakes to pay upon receipt of a conforming written demand and any other required documents, usually without examining the merits of the underlying sale dispute.

The seller’s risk then depends primarily on the bank’s creditworthiness and the legal effectiveness of the guarantee. A strong bank may provide more reliable security than a trading company or individual whose financial position can deteriorate before closing.

From the buyer’s perspective, a bank guarantee can be expensive and restrictive. The issuing bank may require full cash collateral, a charge over assets, or another form of counter-security. Guarantee fees will accrue while the instrument remains outstanding.

The buyer also bears the risk of a wrongful or fraudulent demand. Although fraud may justify restraint in exceptional circumstances, the independent nature of an on-demand guarantee means that the bank will ordinarily pay a facially compliant demand without resolving the underlying dispute.

The ICC Uniform Rules for Demand Guarantees, URDG 758, were developed to promote consistent interpretation and operation. These rules apply only where the guarantee incorporates them expressly. The parties should decide whether URDG 758 is suitable and ensure that the guarantee’s specific terms do not conflict with the intended closing mechanics.

Standby Letters of Credit as Security

UCP 600 and ISP98

A standby Letter of Credit (LC) can secure the buyer’s obligations as an alternative to a guarantee or cash deposit. Under UCP 600, a credit is an irrevocable undertaking by the issuing bank to honour a complying presentation.

The International Standby Practices, ISP98, provide rules designed specifically for standby credits and describe the standby as an irrevocable, independent, documentary, and binding undertaking upon issue. ISP98 is widely used internationally, particularly in transactions involving banks in the United States.

UCP 600 and ISP98 apply only when incorporated. The parties and issuing bank should select the rule set that best fits the instrument and make any necessary modifications directly in the credit.

Confirmation by a Local Bank

If the issuing bank is located in another jurisdiction, the seller may require confirmation by a reputable bank in its own country. The confirming bank adds its independent undertaking and gives the seller a local payment source.

Without confirmation, a seller facing dishonour may need to pursue the foreign issuing bank in its home jurisdiction. Country risk, transfer restrictions, bank insolvency, and unfamiliar enforcement procedures should therefore be considered when approving the issuing and confirming banks.

Strict Compliance with Documentary Terms

The bank is entitled to examine the documents and refuse payment where the presentation does not comply. It may ask the issuing bank or buyer to waive discrepancies, but the seller should not rely on a waiver being granted.

The safest approach is strict documentary compliance. The seller should prepare a presentation checklist, allocate responsibility for each document, agree the form in advance, and arrange a pre-examination by the nominated or confirming bank where possible.

A clean protocol of delivery and acceptance signed by both parties is often a suitable payment trigger because it is normally executed only after the other delivery conditions have been satisfied. The credit may also require a demand, invoice, bill of sale, or another carefully defined document.

Mortgaged Ships and Documentary Control

A simple Letter of Credit (LC) structure can become difficult where the ship is mortgaged. The mortgagee may require payment before releasing the mortgage, while the credit may not pay until documents evidencing mortgage discharge have been presented.

The problem can sometimes be addressed by appointing the mortgagee bank as confirming or nominated bank, arranging advance examination of the documents, or using an escrow structure that permits simultaneous release of funds and mortgage documents.

Unless the sequence is legally and operationally complete, the parties may become trapped in a circular condition where the bank will not pay without the release and the mortgagee will not release without payment.

Replacing the Cash Deposit with a Standby Credit

Where a standby Letter of Credit (LC) replaces the usual deposit, the drawing conditions should mirror the events that would allow release of cash from the deposit account. Payment may be permitted against a signed protocol of delivery and acceptance or, where delivery does not occur, against agreed release instructions, a final award, a judgment, or another defined order.

The expiry date should extend beyond the period during which deposit rights may remain disputed. Automatic extensions or a replacement mechanism may be required if the delivery range or cancelling date is postponed.

The Messiniaki Tolmi and Documentary Risk

The Transaction Structure

The Messiniaki Tolmi concerned a Letter of Credit (LC) used to replace the buyer’s initial 10% cash deposit. The ship was to be delivered safely afloat and substantially intact inside Kaohsiung harbour during September 1980, with a cancelling date of 30 September 1980.

The seller was required to provide a valid gas-free certificate approved by the Taiwanese authorities. If the ship could not enter the harbour, the buyer was to pay demurrage at USD 6,000 per day after an agreed waiting period.

The Letter of Credit (LC) was to be established with the Royal Bank of Canada, directly or through a confirming bank in London, and remain valid until 30 October 1980. The seller was required to deposit several documents with the confirming bank, including an undertaking to instruct the master or local representatives to deliver once the price had been received.

The sale contract also required a notice of readiness countersigned by the Kaohsiung harbourmaster or Lloyd’s agents in Taiwan. After receiving the gas-free certificate and notice, the buyer was to instruct the confirming bank to release the amount. If the buyer failed to give instructions within the permitted period, the seller could seek payment against the specified documentary package.

The Added Condition and the Dispute

The buyer’s bank issued the credit and later amended it in a manner inconsistent with the sale contract. The amendment required the seller’s notice of readiness to be accepted and signed by the buyer’s agent at Kaohsiung. The seller accepted this change under protest.

The ship arrived in the outer harbour on 22 September 1980. The seller presented a notice of readiness endorsed by Lloyd’s agents and a gas-free certificate accepted by the local harbour authorities for entry into the inner harbour for breaking.

Against the background of a sharply falling scrap market, the buyer rejected the notice, arguing that the gas-free certificate lacked the required approval. The ship remained outside the inner harbour, and the buyer later purported to cancel. The ship was eventually sold to a third party.

Interim Protection and Final Outcome

The Letter of Credit (LC) provided meaningful security only until expiry. Concerned that a later award or judgment might be worthless, the seller obtained interim relief requiring the buyer to instruct the banks to release the credit proceeds into a joint account controlled by the court.

The confirming bank challenged the order but was unsuccessful during the interlocutory appeals. In the substantive proceedings, however, the seller’s claim against the confirming bank failed because the documents did not appear on their face to comply with the credit.

The gas-free certificates appeared to lack the required official approval, the bill of sale was treated as stale, and an initially missing sight draft would also have justified rejection. Other discrepancies advanced by the bank were regarded as insubstantial, including an extremely minor error in recorded tonnage, but one valid discrepancy was enough to defeat the presentation.

Practical Lessons from The Messiniaki Tolmi and The Lena

The Letter of Credit (LC) must reproduce the commercial agreement accurately. An issuing bank should not introduce additional documentary conditions that transfer control of payment to the buyer or its agent unless the seller expressly accepts that risk.

The demand mechanism must be clear. Every required document should be described precisely enough for the seller, buyer, issuing bank, and confirming bank to identify the same requirement.

The seller should seek payment triggers within its own control. A condition requiring buyer approval, a third-party signature, or an uncertain governmental endorsement can transform strong bank security into an unreliable instrument.

The sale contract should make timely issue and, where required, confirmation of the Letter of Credit (LC) a condition precedent to the seller’s continuing obligations. The issuing and confirming banks and the final wording should be subject to the seller’s approval.

The presentation period must allow time to correct discrepancies. Draft documents should be reviewed in advance, and the nominated bank should be asked to identify defects before the final presentation deadline wherever possible.

Comfort Letters

Commercial Purpose and Limitations

A parent company, affiliate, or connected individual may provide a comfort letter supporting a party’s obligations. The letter may state an intention to ensure performance or describe a present policy of providing financial support.

Such wording is weaker than a guarantee. An intention or policy may be changed, and the recipient may have no enforceable claim if the letter was deliberately framed as a non-binding assurance.

Comfort letters are sometimes used where the issuer cannot or will not provide a formal guarantee. Constitutional restrictions, negative pledge covenants, financing agreements, internal policy, or accounting concerns may prevent the grant of binding security.

Whether the Letter Is Legally Binding

The title “comfort letter” does not determine legal effect. A court or arbitral tribunal will apply the ordinary tests of contract formation and consider whether there is an offer, matching acceptance, intention to create legal relations, and consideration.

The document will be interpreted in its commercial context. Relevant matters include the wording of the sale contract, the formality of negotiations, the parties’ communications, the recipient’s understanding, and the complete language of the letter.

The party asserting that the comfort letter is legally binding bears the burden of proof. In Re Atlantic Computers plc, National Australia Bank Ltd v. Soden & another (1995), wording stating that the letters were not guarantees and represented present intentions by way of comfort only was sufficient to show that no binding commitment had been created.

The parties should avoid deliberate ambiguity. If the letter is intended to be non-binding, it should say so clearly. If a binding obligation is required, the document should state that intention and should usually be drafted as a guarantee, indemnity, or another recognised security instrument.

Even a non-binding letter should contain a governing law clause so that its meaning and non-binding character are interpreted under a chosen legal system. Courts in different jurisdictions may not approach comfort letters in the same way.

Security for the Seller’s Performance

Market Practice

Second-hand ship sale practice usually requires the buyer to provide security while allowing the seller to perform without giving equivalent security. This reflects established market custom, but it can expose the buyer to substantial post-delivery risk.

A buyer with sufficient negotiating leverage may seek a parent company guarantee, bank guarantee, retention account, escrow arrangement, or another form of protection against the seller’s pre-delivery and post-delivery obligations.

The Buyer’s Exposure Without Security

A detailed condition inspection is not always carried out at the moment of delivery. The buyer may discover a contractual non-conformity only after taking possession and paying the price.

Unregistered or undisclosed claims can create similar problems. Maritime liens and certain other claims may remain enforceable against the ship after the transfer of shipownership, even though they arose while the seller controlled the ship.

Before delivery, a buyer facing a serious seller breach may refuse acceptance, withhold the balance, terminate the contract, recover the deposit with interest, and seek damages where legally available. The possibility of withholding completion also gives the buyer meaningful negotiating leverage.

After delivery, that leverage largely disappears. The buyer may be confined to a damages claim or to enforcement of a contractual indemnity, including the indemnity contained in clause 9 of SALEFORM 2012.

Recovery can be difficult where the seller is a single-ship entity incorporated in an offshore jurisdiction. Once the ship is sold, the seller may have disposed of its only readily identifiable asset. The proceeds may be assigned to lenders, distributed within the group, or moved beyond practical enforcement reach immediately after closing.

Even where the buyer anticipates that the seller will deliver a defective ship, effective interim relief may be difficult to obtain. The buyer should therefore assess the seller’s post-closing credit standing before relying solely on a damages remedy.

Security for Pre-Delivery and Delivery Obligations

Under clause 14 of SALEFORM 2012, failure by the seller to give a valid notice of readiness or to be ready to complete the legal transfer by the agreed deadline can entitle the buyer to repayment of the deposit with interest. Where the failure results from proven negligence, the buyer may also claim compensation for loss and expenses.

If specific performance is unavailable or commercially unsuitable, the buyer’s remedy will be monetary. A parent company guarantee or bank guarantee can support the seller’s obligation to repay the deposit and compensate the buyer.

The security should identify the covered defaults, amounts, interest, costs, expiry, and payment trigger. It should survive any extension of the delivery range or cancelling date and should remain enforceable if the sale contract is terminated for seller default.

Post-Delivery Retention Arrangements

A buyer may negotiate for part of the purchase price to remain in a trust, escrow, or interest-bearing retention account after delivery. Alternatively, the seller may provide a bank guarantee or parent company guarantee covering defined post-delivery obligations.

The retained amount or substitute security should remain available for an agreed period. The period should reflect the time reasonably required to identify latent non-conformities, undisclosed claims, or breaches of delivery warranties.

The contract may provide an expert determination mechanism where the buyer alleges that the ship was not delivered in the required condition and the seller disagrees. A mutually acceptable senior class surveyor or another technical expert can determine whether a breach occurred and, if appropriate, quantify the required repair or compensation.

The parties must decide whether the expert’s decision is final and binding or whether either party may proceed to arbitration. A non-final determination can assist with interim release of funds while preserving full dispute rights.

The retention can also support the seller’s indemnity for pre-delivery claims asserted against the ship after closing. Release conditions should address pending claims, unresolved notices, expert referrals, interest, partial payments, and the final return of the balance to the seller.

Such arrangements are not standard in the second-hand ship sale market, but comparable security is familiar in shipbuilding and other major asset transactions. There is no structural reason why a carefully negotiated retention cannot be used where the commercial balance permits it.

Maritime Lien Insurance

The Continuing Risk After a Change of Shipownership

SALEFORM, Nipponsale, and SSF2011 require the seller to deliver the ship free from maritime liens and contain indemnity protection for pre-delivery claims later enforced against the ship.

A maritime lien can support arrest of the ship and may survive a private change of shipownership. A judicial sale can produce different consequences, but an ordinary contractual sale does not necessarily eliminate the lienholder’s rights.

Some jurisdictions permit searches for writs or pending in rem proceedings before delivery. These searches cannot identify every lien, and equivalent public records are not available in all jurisdictions.

Purpose and Scope of the Insurance

Where the buyer cannot obtain seller security and doubts the seller’s ability or willingness to honour the contractual indemnity, maritime lien insurance may provide an additional layer of protection.

The policy is designed to indemnify the buyer or its mortgagee for amounts paid when pre-delivery maritime or statutory liens are enforced against the ship after the sale. Cover commonly focuses on liens attributable to former shipowners or managers and may exclude claims capable of registration.

The policy will usually contain a limit for each lien and may impose an overall limit. A sue and labour provision can require the insured party to take reasonable and practicable steps to avoid the loss or reduce its amount.

The buyer may be required to warrant that it had no prior knowledge of the lien when the ship was acquired and that the purchase contract required delivery free from encumbrances. Failure to disclose known circumstances can jeopardise cover.

Maritime lien insurance is not standard for every acquisition. It may nevertheless be valuable where the ship’s trading history, operating region, former management, payment record, or seller reputation indicates an unusually high arrest risk after delivery.

Building a Workable Closing Structure

Payment and security provisions must be drafted as one coordinated system. The purchase price clause, deposit agreement, mortgage release, Letter of Credit (LC), guarantee, closing protocol, bill of sale, registry documents, and protocol of delivery and acceptance should all use consistent triggers and terminology.

A transaction timetable should identify the bank cut-off times, registry hours, documentary review deadlines, payment approval sequence, authorised signatories, compliance clearances, and contingency procedures. Each party should know which step occurs first and what evidence allows the next step to proceed.

The parties should also prepare for delay. The contract should address late bank confirmation, payment initiated but not finally credited, registry closure, technical interruption, missing authority documents, rejected Letter of Credit (LC) presentations, and extensions beyond the planned closing date.

The most secure method is not necessarily the most complicated. A same-bank internal transfer may be more reliable than an elaborate cross-border credit. A simple cash deposit may be more effective than an ambiguous comfort letter. A limited retention may offer better practical protection than a broad indemnity from a seller with no remaining assets.

A successful ship sale closing depends on certainty, control, and timing. The payment method must place usable value in the seller’s hands, while the security structure must ensure that the buyer receives the ship, title, and continuing protections for which it has paid.