In a previous posting, we reviewed a typical Sale & Purchase (S&P) transaction assuming that once the Memorandum of Agreement (MOA) has been signed by both parties, all is smooth sailing afterwards, figuratively-speaking and, hopefully, realistically-speaking for the vessel herself.
From the moment there is an ‘agreement on main terms’ and a ‘recap’, lots of things could go wrong until the time of the actual delivery of the vessel to her new owners and the legal change of ownership. In everyday life, when one buys a can of Coke at a convenience store, timing, payment and change of ownership of the property (can of Coke) are evident and self-explanatory; for a vessel, where there is a present agreement on terms for the asset to be exchanged in the future, many things can go wrong until that point in the future; and that point is almost always in the future (and rarely immediately like with the sale of a can of Coke) since irrespective of how fast and efficient the sale, several weeks of lead time is required for an S&P transaction; or, that still there is some contractual timecharter employment remaining (several days to possibly year) for the vessel to be delivered charter-free or that the vessel has another port call in order to discharge her cargo and finish her voyage charter. Things that could change between signing an delivery can vary from the least expected such as the ship to sink or to be declared Total Constructive Loss (TCL) due to an accident, collision, allission, act of God, etc, or that the market has skyrocketed or plummeted and now buyer and seller either get to leave money on the table or get stuck with an asset (investment) that’s already several million dollars in the hole from day one, respectively. Although not every eventuality can be expected or planned for, shrewd and experienced buyers and sellers and their brokers ensure for a language that expects the unexpected and minimizes the risk from changing conditions and a possible fall-out.
The terms of the sale of the vessel are determined by the MOA which most likely is based on the Norwegian Sale Form of 1993 (Saleform 1993 or plainly NSF 93). The NSF 93 has sixteen main clauses and special or additional terms are incorporated in the addenda. In the preamble, there is introduction and definition of sellers, buyers and the vessel, of banking days and classification society. Since sellers and buyers can be special purpose companies (SPC), usually there is a need for a guarantee for the performance by the parent companies.
Clause 1 deals with the Purchase Price, which is the gross price for the selling the vessel; usually ship brokerage commissions are not mentioned here and are dealt privately between the sellers and the brokers (and possibly buyers.)
Clause 2 deals with the Deposit, which typically is 10% of the Purchase Price to be lodged to an escrow account within three banking days from the day of the MOA having signed by both parties. As volatility and prices change, deposit can vary and get more substantial; after the market collapse in 2008 and several defaults, it turned out that 10% was just too low hurdle to jump in such a volatile market. Also, for demolition sales, the standard deposit is 20% to reflect more ‘skin’ for a low Purchase Price (in absolute terms) and also the higher risk for the transaction.
Clause 3 deals with the Payment at the time of the closing, which has to be effected no later than three banking days once the Captain (and sellers) have provided Notice of Readiness (NOR) to buyers hat the vessel is ready in every respect for delivery under the terms of the MOA. At such time, the Deposit from Clause 1 is released in favor of the seller, as well as additional monies due to the sellers from the sale (there is additional payments for bunker onboard, lubes, oils, etc which have already been mutually accounted for and priced in advance of the sale.)
Clause 4 refers to (vessel) Inspections, that the buyers have the right to inspect or inspected or waived such right, or in any event, the vessel was made available for inspection, and buyers have approved the vessel. Most of the time Clause 4 is a formality, as already significant time and effort and resources have been dedicated to inspections and approval of the vessel well before any agreement was made, so, by the time of the closing, Clause 4 is one of the least concerning clauses.
Clause 5 is titled ‘Notices, Time and Place of Delivery’ and states the time and place of the delivery; as the vessel had been trading since the main terms were agreed upon, as the day of the delivery is approaching, the sellers are obligated to keep the buyers apprised of the vessel’s itinerary and her expected delivery time. Usually delivery time is a time window, when buyers cannot deliver before a certain date and buyers are not obligated to take delivery after a certain deadline (Date of Cancelling.) Likewise, place of delivery is usually expressed as a geographic region, between certain ports, where both parties agree to effect the transaction. Obviously, delivery time has to be within certain banking days (defined in the preamble) since purchase money has to change hands, but also delivery place has to be convenient, minimizing bureaucracy and tax matters, which could affect the price (a delivery port closer to a loading port is favorable to buyers, ceteris paribus, as it minimizes the ‘ballast leg’ for the vessel to reach her next cargo (freight)).
Clause 6 deals with Drydocking and Divers Inspection and reflects the possibility of the vessel getting inspected or delivered in drydock. In reality, vessels are getting delivered while afloat, having undergone ‘superficial inspection’ and not an inspection while in drydock. However, at time of delivery, the buyers have the right to undertake underwater inspection of the vessel and her hull by a qualified diver with a closed-caption camera and with a representative of the classification society present. The cost for such inspection is for buyers’ account, unless there is fault found that has to be addressed before the delivery of the vessel; the definition of fault is interpreted strictly by the classification representative’s judgment (it ‘affects class’ or warrants ‘class condition / recommendation’); if the fault affects the seaworthiness of the vessel, the cost of the underwater survey is payable by the sellers, who, in addition, will have to either compensate monetarily the buyers for expected rectification of the fault or rectify the fault and deliver the vessel without ‘class condition / recommendation’.) Buyers also have the right to have the tailshaft pulled out and inspected at their expense, and again, if repairs are required, then sellers have to pay for the inspection related costs and repairs; typically such provision of this clause is almost never exercised given the time required and the tediousness of such inspection. In general Clause 6 can be problematic as, if there is fault, then a whole new discussion has to commence on the expected costs for repairs, easiness of access for ship repair yards, the significance of the damage (structural impact?), loss of hire, etc. This is a discussion that commences un-predictably once main terms have already been agreed, and if there is no much goodwill left between buyers and sellers till now, then, it may very well turn out to be a deal breaking point.
Clause 7 refers to ‘Spares and Bunkers’ onboard and are passed on to buyers. All spare parts onboard the vessel or parts in the possession of the seller ashore at the time of the vessel delivery that were stored / ordered on behalf of the vessel now become property of the buyers along with the vessel; although there is no additional, itemized pricing for the spares, collectively they have been incorporated in the price of the vessel (vessels coming from ‘good stables’ – owners with ample spare inventory onboard and high maintenance standards) routinely command premium pricing in the secondary market, to the tune of millions of dollars on occasion (which is a point not regularly addressed in vessel valuation discussions.) Bunkers onboard, especially at present with high oil prices, can be worth several hundred thousand dollars and therefore fuel tanks having been sounded by mutual survey of buyers and sellers for their quantity and compensation is calculated and effected with Payment under Clause 3; likewise, oils and lubes onboard are passed free of charge to the buyers, but there is additional compensation for ‘sealed’ drums and other such containers. In general, all items onboard the vessel at delivery time become the property of the buyer at no extra cost. There is a list of items explicitly to be excluded from the sale, which is usually stipulated under one of the addenda, and typically includes items proprietary to the sellers / owners / managers, items that bear their logos, stationary, etc items that are onboard at the discretion of the sellers (additional radio / navigational equipment not required by the classification society), and leased / rented items onboard like nitrogen or acetylene bottles.
Under Clause 8, there are provisions on Documentation, the documents that will be produced at the time of the closing by the buyer and the seller. Here, the burden in general is on the seller who have to produce much more paperwork proving proper ownership, certifications, documentation, etc that also has to be proper for the buyers needs in order to properly register the vessel under their chosen jurisdiction. Usually, preparation of documentation is a formality, but it can get very tedious when the vessel is to enter / leave cabotage markets, the ownership structure is more complicated and spread-out, etc
In Clause 9, under Encumbrances, the sellers warrant that the vessel is to be delivered to the buyers free of any and all encumbrances, mortgages, liens, debts, etc. Usually such close is not a brainer, but when the vessel is in bankruptcy proceedings or the owner is passive owner in no position to be aware of any trade debt, this clause can be more critical, and sometimes a judicial sale provides a clean slate.
Clause 10 under the heading of ‘Taxes’ is provided for entertainments purposes (probably shipping is one of the few industries that taxes and entertainment can be used in the same sentence) ensuring that each side will be responsible for their own tax liabilities. However, given shipping is an international industry, the place of delivery (Clause 5) and also the vessel’s registry have already been chosen to be of favorable tax regime and minimal government interference.
Clause 11, headed ‘Condition on Delivery’, partially reflecting Clause 6, stipulates about the condition of the vessel at the time of her delivery, her seaworthiness, which defects have to be addressed before the delivery and how. This could be a tricky clause that has led many a buyer and seller into arbitration and litigation. Again, for clarity, the classification society is the ultimate interpreter of any technical defaults and the repair-related remedies thereof. However, the devil is in the detail, as they say, and not only the cost of repairs can be open to interpretation, but also more subjective factors like loss of hire, cost of repositioning the vessel, third-party contractual liabilities, etc
In Clause 12 under ‘Name / Markings’, the buyers undertake to change the name of the vessel and replace the seller’s house flag / house colors on the chimney stack with their own shortly after the vessel delivery.
Clauses 13 and 14 under ‘Buyers’ Default’ and ‘Sellers’ Default’, respectively, it is stipulated that should either party fail to live up to their obligations under the MOA, buyers may lose their deposit or may have the option the walk away from the sale, etc Further, additional compensation may be warranted depending on the extent of the default.
Under Clause 15, ‘Buyers’ Representatives’, the buyers of the vessels, from the time they lodge their deposit under the MOA, they are entitled to place (usually) two of their representatives (usually chief officer and engineer) onboard the vessel for purposes of getting familiar with the vessel; they are not regular crew and cannot interfere with vessel operations; they are learning the ‘ropes’ of the vessel and her equipment, etc with the rest of the buyer’s incoming crew to join the vessel at the time of the delivery (and at the place of the delivery.)
Finally, under the last standard clause of an MOA based on NSF 93 template, Clause 16 stipulates for ‘Arbitration’ in the event of disputes, and typically English Law or United States Law and the Law of the State of New York are the standard language, with London Arbitration (Arbitration Acts 1950 and 1979) the preferred venues.
For additional terms for the sale of a vessel, there may be a list of clauses that are attached to the MOA in the form a addenda and could cover from small formalities / requests from each side to major points such as that sometimes the sale maybe conditional on the buyer’s winning a tender business where the vessel is intended to be employed, and thus, the terms of such addendum have to be clearly stated that the sale is still conditional but only on one very specific condition, which by itself can be dependent on many other events beyond anyone’s control (if the tender is to be awarded by a government and it’s delayed, postponed, canceled or the government has changed or …
Despite all its criticisms and calls for improvements, NSF 93 in its six-page simplicity has managed to condense a complicated transaction on many levels to a transaction that even a ship broker can do! But again, as they say, the devil is in the details, and good, experienced shipbrokers worth their salt who have been through many closings fully know that although an MOA is six-pages long, proper attention to detail can make or cost millions in dollars in arbitration awards, litigation or plain old good will and reputational damage.
© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved.
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