Worldwide second hand market exists in the selling and purchasing of existing ships of various classes and sizes. Every year around 1,000 ocean going ships changed ownership for further commercial trading. Changing shipping market conditions, for each size and class of a ship, pushes ship owners either to ship owner buy a ship on the market. Starting from the early 1970s, maximum size of tankers increased up to 500,000 DWT and dry bulk carriers increased up to 400,000 DWT. Expected economic life of a ship was considered to be 25 years. However, over the last decade, volatile bunker prices, technical improvements of ship engines, stringent regulations on pollution, and trading patterns and global commodity consumption have altered the economic lives of ships. Sale and purchase of a ship usually arranged by shipbrokers. Shipbrokers handle all types of commercial shipping contracts in the world. Many shipping companies may have a department that specializes in ship sales and purchases. Shipbrokers act as intermediaries between the ship owner and a potential ship buyers. Requirements of a potential ship buyer may be transferred to the second hand market by shipbroker. No matter how well skip owners know each other, prudent ship owners usually involve a shipbroker to act as an impartial intermediary and facilitator. Basic elements of ship sale and purchase agreement include ship purchase price, where and when the ship will be delivered to the ship buyer. Other important sale and purchase agreement elements, such as whether a deposit shall be paid and within what time period. There are several standard forms used in ship sale and purchase market. Most widely utilized contract form for the sale and purchase of a ship:
1. Norwegian Shipbrokers’ Association Memorandum of Agreement Saleform 1993, upgraded to “Saleform 2012” in March 2012.
2. Singapore Ship Sale Form 2011 or SSF 2011.
Regardless of which form is used, every sale and purchase contract concluded will have negotiated changes, stricken clauses and additional language agreed upon between ship buyer and ship owner. Ship sale and purchase contracts are often referred to as Memorandum of Agreements (MOAs) following the Norwegian Shipbrokers’ Association’s terminology. Like all contracts, a ship sale and purchase agreement might be formed on the basis of an offer and acceptance where there has been a meeting of the minds. Whether that has occurred is usually decided on the basis of national contract law. However, shipbrokers are usually careful to indicate in negotiations that no contract will form until the execution of a memorandum of agreement (MOA) or other document. Steps in a ship sale and purchase:
1. Shipbroker or ship buyer identifies a ship to buy
2. Ship buyers requests permission from ship owner to inspect the ship’s records and ship
3. Ship buyer inspects the ship’s records and the ship with an experienced ship surveyor
4. Ship buyer submits an offer, potential ship buyer and ship owner negotiate the terms of a sale and purchase contract, including the terms of an escrow arrangement
5. Ship buyer and ship owner execute the sale and purchase contract
6. Ship buyer remits the agreed deposit amount in accordance with the escrow arrangement
7. Ship owner confirms authorization from the flag state to transfer the ship
8. Ship buyer initiates preparations for the registration of the ship following delivery
9. Ship buyer arranges for a crew to take custody of the ship on delivery
10. Ship owner positions the ship at the agreed port or place of delivery
11. Ship owner tenders a “Notice of Readiness of Delivery” when the ship is ready
12. Sale and purchase closing is held at ship owner’s offices, lawyer’s office or some other agreed-upon location where all closing documents are executed, including a “Protocol of Delivery and Acceptance,” which specifies the exact moment when ship title transfers from ship owner to ship buyer upon the payment of the purchase price
13. Upon confirmation that the purchase price has been paid either directly or pursuant to an escrow arrangement, the Protocol of Delivery and Acceptance is executed and exchanged;
14. Protocol of Delivery and Acceptance is communicated to the captain of the ship instructing him or her to deliver the ship physically to ship buyer or ship buyer’s representative
15. Ship owner’s crew departs and ship buyer’s crew boards the ship.
Usually, ships are sold “as is” without warranty regarding condition, must be delivered by ship owner in the “same condition as it was when inspected, fair wear and tear accepted” and “free of any recommendations affecting class”. Ship owners are also often obligated in sale and purchase contracts to report to the relevant Classification Society any discovered deficiency in the ship’s condition or equipment. Classification Society would issue a “recommendation” if a defect was identified and not corrected in accordance with Classification Society rules. Notice of Readiness of Delivery that the ship owner sends to the ship buyer usually states that the ship is ready in all respects for delivery to the ship buyer in accordance with the terms of the ship sale and purchase contract. The parties may agree to close the sale of a ship that has one or more outstanding recommendations, but the ship owner has an obligation to disclose any such recommendations known to it. Sale and purchase closing of a ship is typically conditioned in the sale agreement upon the completion by the ship buyer of a documents inspection and a physical inspection of the ship. Documents inspection usually consists of inspecting the ship’s log books, the ship owner’s other ship records and the ship’s classification and government certification records. Ship owners and buyers commonly agree that the ship buyer may have a diver conduct an underwater inspection of the hull, or may carry out an inspection of the hull while the ship is out of the water in drydock. Primary duty of the ship owner is to deliver the ship as provided in the ship sale and purchase agreement, along with certain documents identified in the Memorandum of Agreement (MOA). Time of delivery may or may not be an essential condition of the contract permitting the ship buyer to reject the ship if the ship owner fails to deliver the ship by the specified closing date. Primary duty of the ship buyer is to pay the agreed upon purchase price for the ship at the time, and in the manner, specified in the Memorandum of Agreement (MOA). Ship owner and buyer have the duty to avoid making misrepresentations to the other party. Generally, ship buyer has 3 business days to pay the balance of the purchase price of ship, execute all delivery documents and be ready to physically take delivery of the ship, by having a crew available to go on board of ship. If the ship buyer is not ready, it risks being considered to be in default of the sale and purchase contract. If ship buyer refuse to take delivery within the required period of time, the deposit placed by the ship buyer in escrow is likely to be withheld until the parties’ claims and counterclaims are resolved. In most sale and purchase contracts, such a situation is generally resolved through arbitration. In most cases, ship buyer is entitled to reject a ship if it has developed a material defect after ship buyer’s physical inspection, or if the relevant Classification Society has issued new recommendation that the ship owner fails to resolve to the Classification Society’s satisfaction. In other cases, sale and purchase contract may only grant the ship buyer the right to seek damages from the ship owner to remedy defects that have arisen after inspection, rather than giving the ship buyer a right to reject the ship. Ship owners and buyers sometimes negotiate a provision that permits the ship buyer to reject the ship but only if the difference in condition would have a significant impact on the ability of the ship buyer to utilize the ship as intended. If the ship buyer erroneously rejects the ship, it may lose the deposit. Risk of loss or damage of the ship, and the risk of any liability that may be incurred by the ship, remains with the ship owner until the time that the Protocol of Delivery and Acceptance is signed by the parties and the transaction is actually closed. If the ship is damaged or is otherwise not ready for delivery to the ship buyer by the agreed upon date of closing, then the ship buyer may be entitled to compensation for its losses and expenses incurred in preparing for the sale, but usually only if the damage or loss was due to the ship owner’s negligence. Most standard ship sale and purchase agreements include express provisions waiving the ship owner’s liability for any consequential, incidental, or “expectation” damages. Such provisions are very important to protect the ship owner against uncertain, potentially significant and uninsurable damages. For example, if the ship buyer has arranged a post delivery charter for which it expects to realize $1 million in profit, but the sale transaction falls through due to damage to the ship, ship buyer could seek to bring a $1 million claim against the defaulting ship owner, unless such a claim is prohibited by a waiver of consequential damages. In addition to the risk of actually being held liable for such damages, even a successful defense against such a claim can be very expensive, because the litigation of such claims would necessarily involve disputes over the meaning of the sale and purchase contract, the cause of the damage or loss to the ship, the value of the lost charter, and the qualifications of the various experts who would testify on either side of those issues. Sale and purchase contracts usually provide that if the ship becomes an actual, constructive or compromised total loss before delivery, then the sale contract will become null and void, and both parties “walk away” from the transaction. Memorandum of Agreement (MOA) typically requires the ship owner to deliver a number of documents to the ship buyer:
1- Notarized Bill of Sale
2- Commercial Invoice
3- Certified Certificate of Ownership and Encumbrance (showing that the ship owner has clear title and that there are no liens of record against the ship)
4- Certificate of Confirmation of Class showing no outstanding recommendations
5- Power of Attorney for the ship owner’s representative
6- Certificate of Permission to Sell the ship and/or cancel the current registration
7- Certificate of Cancellation of the former registry
8- Executed Amendment of Continuous Synopsis Record documenting the deletion of the ship from the former registry
9- Certified Copy of Ship’s International Tonnage Certificate
10- Ship owner’s letter of undertaking that it will immediately notify ship’s captain to deliver the ship to the ship buyer or its representative upon payment of the full purchase price.
Ships are almost always sold free of mortgages and liens, with the ship owner representing and warranting that ship shall be free of such encumbrances. Many registries will not permit a ship to be sold and the title transferred with an outstanding mortgage against the ship, and those that do permit such transfers require that the mortgagee provide written consent to the transfer. As a consequence, any outstanding mortgages are generally released in connection with the sale of a ship. Ship is generally considered “sold” when the ship buyer remits the full purchase price plus any money for fuel and lubricants remaining on board of ship at the time of delivery by wire transfer or other agreed upon mechanism and the ship owner confirms receipt of the funds. Executed Protocol of Delivery and Acceptance generally specifies the exact time when the ship is “sold” as between ship owners an buyers. Exact time governs in any dispute between ship owner and buyer with regard to the responsibility for the ship, for any liabilities incurred by the ship, and with regard to the risk of loss or damage to the ship. However, from the perspective of the ship registries, a ship is considered “sold” and ship title is transferred effective as of the date and time that ship owner and buyer file the Bill of Sale with the ship owner’s registry and causes the ship to be deleted from the registry, or to otherwise have the title transferred to the ship buyer. Under American and English law, each party has a duty to act in good faith to mitigate damages if a ship sale contract is not consummated. If the ship buyer defaults, the ship owner has the duty to immediately seek to trade the ship again in commercial service or to sell to another qualified ship buyer. If the ship owner defaults, the ship buyer has the duty to seek to charter or purchase another ship. Prevailing party’s damages awarded by an arbitration panel or court will depend upon market conditions as the parties seek to mitigate their damages. For example, if the ship owner eventually sells its ship at a lower price than that agreed to by the original ship buyer, the difference may be awarded as damages to the ship owner. Ship sale and purchase contracts usually release both parties if the ship is a total loss before delivery, either an “actual total loss” or a “constructive total loss”, or if either party is prevented from complying with the contract because of a force majeure, type event not within either party’s control, such as the outbreak of war. Some governments apply a sales tax to sales in personal property, including ships, if the transaction occurs while the ship is within that government’s territorial jurisdiction. Ship sales often occur in the United States, wherever possible, while ship is in international waters and not within the jurisdiction of any particular state.