Ship Sale and Purchase

Matt Hannaford, Paul Turner, Iain Goldrein

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781317984382
• Edition: 6
• Topic: Derecho
• Subtopic: Derecho marítimo

Ship Sale and Purchase is an essential working guide for anyone involved in the business of making ship sale contracts and also in the resolution of related disputes. It continues to be of great practical use, highlighting typical problems and tensions between the parties to ship sale contracts, as well as best practice.

This sixth edition contains a clause-by-clause commentary on SALEFORM 2012, the latest edition of the highly successful Memorandum of Agreement for the Sale and Purchase of Ships, issued by BIMCO and the Norwegian Shipbrokers Association. Key differences with the previous SALEFORM are described in order to help all involved get up to speed.

Recent case law is evaluated to highlight contractual issues that have arisen in recent years and a comprehensive description of the many ways in which the standard form provisions may be modified to suit the particular requirements of each transaction.

It provides complete coverage on the subject by including a practical overview of two other ship sale contracts, the current (1999) edition of Nipponsale and the first edition (2011) of the Singapore Ship Sale Form.

CHAPTER 1

THE SALE AND PURCHASE OF SECOND-HAND SHIPS

1.1 INTRODUCTION

An owner wishing to sell a ship will often appoint one or more sale and purchase brokers (“S&P” brokers, as they are widely known) and provide them with full particulars covering such matters as the ship's name, former name(s), flag, port of registry, Classification Society and rating, builder, year of build, type, registered tonnages, deadweight, draught, speed, fuel consumption, machinery, deck layout, cargo capacity, and the ship's classification survey status. Armed with such particulars, the owner's brokers will draw up and circulate an invitation for offers. The content of the invitation will depend on whether the selling owner is willing to disclose its identity and intentions in the market; sometimes the brokers' brief will be to circulate limited particulars on a “no names” basis.

A party interested in acquiring tonnage may already have retained brokers to find a ship of a certain description. Thus the way is open for a prospective buyer, if interested in the circularised particulars, to enter into preliminary discussions with the selling owner through the broking channels.¹

1.2 ASSESSING MARKET VALUE

1.2.1 Market value

The next step will be for the prospective buyer to assess the market value of the ship. Market value is widely taken to mean the value of a ship on the basis of a sale:

• for prompt delivery;
• for cash payment on normal commercial terms;
• free of charter, liens, charges, mortgages and other encumbrances; and
• otherwise at arm's length on normal commercial terms between a willing seller and a willing buyer.

It should be noted that for particular ship sale and purchase transactions, one or more of these criteria for assessing market value may not be applicable. Examples include:

(a) Sale not contemplating “prompt delivery”

Situations arise where a buyer enters into a contract for the purchase of a ship in circumstances where physical delivery (and the passing of ownership) to the buyer will not take place until a significant period of time after the date of the contract. This might be the case where the ship is subject to a long-term charter and the terms of the charter prohibit a change of ownership of the ship during the life of the charter.

Where there is a significant time-lag between the date of the sale contract and the agreed date for delivery of the ship to the buyer, the market value of the ship as at the date of the contract will not (on its own) be a sufficient basis on which to determine the price which the buyer should pay. Other factors will include the age of the ship at the date of delivery, the likely deterioration of its condition (assuming normal trading activities) between the time of contract and the time of delivery and the projected state of the market for ships of similar age and type at the time of the ship's delivery to the buyer. Obviously, assessing value at a future date is always a speculative exercise, the degree of speculation being dependent upon the length of time between the date on which the price is fixed and the date on which the buyer shall take delivery of the ship.

(b) Sale “subject to charter”

Some ship sale and purchase transactions expressly contemplate the ship being sold “subject to charter” and in such cases the price being paid for the ship will be determined not just by the value of the ship itself but also by reference to factors relating to the charter such as the amount of the charter hire, the remaining duration of the charter period and the quality of the charterer.

1.2.2 Valuation criteria

The market value of a ship will be assessed by reference to a variety of factors. These include:

(a) Existing market conditions

The S&P brokers who carry out valuations will take into account the price which similar ships have fetched in the market, for example, by reference to their own experience, the experience of their colleagues and by reference to reported transactions.

But in practice it may be difficult for brokers to obtain hard information about ship sales with which they were not involved. Although information as to a change in a ship's registered ownership, name or flag typically will be accessible to brokers, it is less usual for the sale price to be disclosed. Sensitivity amongst the buyer and the seller as to price means that it is quite common for ship-sale contracts to contain confidentiality provisions.². The widespread use of these provisions is reflected in published market surveys of ship sales which frequently contain expressions such as “market sources report that [a named ship] was sold on undisclosed terms for a price believed to be in the region of [stated price or price range]”.

(b) Reputation

The reputation of the ship's owner and managers may be relevant insofar as it can give a prospective buyer comfort (or concern) about whether or not the ship is likely to have been well maintained. This factor is likely to be of particular importance in the case of older ships.

(c) Special characteristics

Special characteristics of the ship or her trading could be relevant to her market value if the ship's potential earning power is enhanced. Examples include physical characteristics of the ship's design, as well as benefits such as existing charter or contract of affreightment employment.

(d) Availability of finance

The willingness of banks (or other financiers) to provide funds towards financing the acquisition of the ship may also be a factor which influences a ship's market value. Banks may, for example, refuse to consider financing ships beyond a certain age however good their physical condition may be.

(e) The physical condition of the ship and her machinery

Since brokers will usually not be given the opportunity to inspect the ship, their valuations (known as “desktop valuations”) will be made on the basis of various assumptions. These include assumptions that the basis of sale will be that set out in section 1.2.1 above, and that the ship is seaworthy and in good condition for a ship of its type and age.

Usually the valuation will also include certain qualifications, including that the valuation is approximately based on the values of comparable ships sold in the open market; that the valuation is made by reference to the state of the market as at the date on which the valuation is given and that, while the valuation is believed to be correct and given in good faith, its accuracy cannot be guaranteed.

Given these assumptions and qualifications, it is not surprising that a prospective buyer will usually wish to supplement its brokers' valuation by commissioning marine surveyors to make a physical inspection of the ship either before the contract is signed or before the buyer's obligation to purchase the ship under contract becomes unconditional.

(f) “Last done”

If the ship has previously been sold on the second-hand market, S&P brokers will use its previous sale price as a reference for the market value of the ship in subsequent sale negotiations. This reference is known in S&P broking language as “last done”.

1.2.3 Finance valuations

S&P brokers may be invited to value ships in a variety of circumstances, not just in connection with ship sales and purchases. For example, ship financing loan agreements usually provide for the financed ships to be valued regularly at the borrower's expense by independent S&P brokers acceptable to the lenders.

The purpose of such valuations will be to determine whether outstandings under the loan exceed a specified percentage of the market value of the ship and, where lenders insist on the right to carry out full physical inspections (rather than mere desktop valuations), to check whether borrowers are maintaining the ships in an acceptable condition.

1.3 MARINE SURVEYOR INSPECTIONS

Unless there are exceptional circumstances (e.g. where the buyer has operated the ship on bareboat charter prior to deciding to acquire her), buyers typically will appoint an experienced marine surveyor to carry out a pre-purchase inspection prior to entering into a legally binding contract for the sale and purchase of the ship.

Precisely how the pre-purchase inspection (or inspections) will be conducted will vary from case to case depending on factors such as the physical location of the ship, whether the ship is trading or in dry-dock and the working practices of the particular marine surveyor who has been appointed to carry out the inspection. Generally, however, the pre-purchase inspection process can be separated into three distinct components:

• review of class records;
• on-board inspection; and
• report of findings.

1.3.1 First stage – review of class records

The first stage of a typical pre-purchase inspection will involve an experienced marine surveyor making a detailed review of the ship's class records in order to gather as much background information about the ship as he can. In particular, the surveyor will be looking for information about such matters as:

• the identity of the ship's builders;
• the identity(ies) of her present and previous operators and owners;
• her recent trading activities;
• her recent sale and purchase record, bearing in mind the trades in which the ship operates,
• her market reputation.

Experienced surveyors generally prefer to make this review and research before boarding the ship because the class records and other background information may alert them to the possibility of serious problems (including recurring weaknesses) of which they might otherwise be unaware.

1.3.2 Second stage – inspection on board ship

The second stage of a typical pre-purchase inspection will involve the surveyor going on board the ship in order to:

• make a visual inspection of representative parts of the ship's hull, decks, tanks, cargo spaces, accommodation, bridge and radio areas, machinery spaces, machinery and equipment – although, as it will usually be impossible for the surveyor to inspect every part of the ship, he will concentrate on accessible areas where his experience suggests that problems may be visible;
• take ultrasonic measurements of steel thickness, test tank coatings, check hatch covers, closing mechanisms and the like;
• review the ship's deck and engine log books for recent casualties or other problems;
• review the ship's class and trading certificates to check compliance with class and convention requirements;
• discuss the ship's performance, recent trading history (including types of cargo carried) and other matters relating to the ship's condition with the master and chief engineer; and
• make a detailed photographic (sometimes incorporating video) record of the condition of the ship.

1.3.3 Third stage – report

The third stage of a typical pre-purchase inspection is the reporting stage. In many cases surveyors report back to the buyer and discuss the survey strategy while the surveyors are on board the ship.

However, immediately after the inspection has been completed, most surveyors will also prepare a detailed written report which:

• records where and when the inspection was made and which parts of the ship were (or were not) inspected;
• describes the ship's main technical particulars and dimensions;
• outlines the ship's classification details and her class survey status (items which are overdue or due in the next three to six months would usually be noted);
• reviews the ship's trading certificates;
• describes the ship's main machinery and equipment;
• includes any relevant entries from the ship's logs;
• includes a detailed report of the conditions found on board the ship and the surveyor's observations upon, and...