Sale and purchase of ship

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'The Sale and purchase of ship' is one of the important aspects of the shipping industry. It involves
vast amounts of money (in excess of 100 million US Dollars) and requires different kinds of
professional knowledge, such as knowledge of particular type of ship and its function, legal
knowledge as well as dealing and bargaining knowledge. In order to reduce the number of disputes
and smoothen the sale and purchase procedure, normally the shipowner (seller) and the buyer will
appoint brokers as middlemen to handle the transaction. There are three main stages for the sale
and purchase of a ship which include (1) the negotiation and contract stage, (2) the inspections
stage and (3) the completion. From different stages, it includes different important issues and
regulations. In following, the article will discuss all these stages of Sale and Purchase of a ship and
all the important elements.

Negotiation and contract stage[edit]

The negotiation and contract stage are the first two steps of the sale of a ship. They are normally
carried out by the brokers appointed by both buyer and seller. Initially, the broker of the buyer will
make the telex exchange with the seller's brokers to make an invitation to offer. The main concerns
of both parties at this stage are the pricing, the particulars of the ship and the lay-days of the
transaction.
After this approach, both parties will have the price bargaining and negotiations of the main terms of
contract. If the basic terms are agreed upon by both parties, a recap telex which recaps the terms
discussed will be exchanged, subject to details to be agreed later. With the recap telex, both parties
can further discuss and bargain the main terms of contracts.
After all the details are agreed through numerous communications, a formal contract for the sale of
ship - Memorandum of Agreement (MOA) - will be drawn up. There are some standard form
contracts for the MOA like the Norwegian Sale Form (NSF). However, there are times the contract
may be subject to some conditions such as obtaining approvals from directors or shareholders, or
licences. After drawing the sales form, 10 percent of the deposit will be paid by the buyer and the
buyer can appoint his own surveyor to inspect the ship.

Inspections stage[edit]
After the forming of contract, it will enter to the inspection stage. There are two major parts in the
inspections stage which include the documents inspection and the physical inspection of the ship
afloat. For the documents inspection, the buyer will check the ship's class records and certificate
records. The inspection of records will reveal the history of the ship's maintenance and compliance
with the requirement of class. Furthermore, the buyer also should check the mortgages records and
the maritime lien records to prevent any damages or loss subject to the legal issue of the ship which
occurred before the delivery of the ship. For the physical inspection, checks are usually made to the
surface of the ship and its logbook, unless otherwise agreed.
It is preferable to hire a surveyor from any reputed company to inspect the vessel for all safety,
certificates, equipments, engine issues etc. A sea trial is advisable.

Completion[edit]
The final stage of sale and purchase is known as completion stage. It involves pre-delivery matters
including inspection of underwater parts by the classification society, delivery of documents and the
physical delivery of the ship upon payment of the balance of the contract price. Such underwater

inspections can be done at the buyer's request in which case if it is not required by the Classification
Society's surveyor the due charges will be on the buyer's account.
For the Documents and Physical delivery, it usually occurs in different places depending on the
location of the ship. The final inspection of underwater parts is located in the drydock of the port of
delivery. To obtain the certificate of class with regards to the safety, a survey of the ship's bottom and
underwater parts is conducted by the surveyor of the classification society. The surveyor may make
recommendations for the repairing of ship which affect the expense of the seller before delivery.
Sometimes, the buyer may appoint his own surveyor, who must be approved by the classification
society, to carry out the underwater inspection while the ship is afloat.
For the final closing of transaction, the MOA specifies some necessary procedures. Some
documents are required which include the closing memo, minutes of meeting of the seller's directors
and shareholders, a certificate of good standing, a power of attorney, the bill of sale, certificate of
class, any consents or licenses required by the government authority, a certificate by the registrar of
the ship's registry permitting the sale.
Furthermore, the seller should arrange the deletion of his name from the registry and deletion of the
existing flag if the buyer wants to change the flag. Also, cancellation of the insurance cover,
settlement of mortgage and repatriation of crew should also be made ready by the seller. When the
seller is ready, an advance notice of delivery - Notice of Readiness- will be serviced to the buyer and
the buyer will arrange the payment of fuel or "bunkers" and stores on board and instruct his bank to
make the payment on the actual delivery date.

Protection of buyer[edit]
There are some clauses under the sales form protecting the interest of the buyer of ship. For
example, clause 9 of Sale Form 1993 has provided some limited protection for the buyer. Under the
clause 9, the seller warrants that the vessel is free from all charters, encumbrances, mortgages and
maritime liens or any other debts whatsoever at the time of delivery. The buyer can claim against the
seller for all consequences of claims make against the vessel which have been incurred prior to the
time of delivery. If the ship cannot settle down all the mortgages and other claim attached to the ship
before the delivery, the buyer can discharge the purchase price to cover this part of claim. Normally,
the buyer would also retain part of the payment for around six months to secure there is no any
claims and Maritime Liens of the ship.
However, it is difficult for the buyer to terminate the contact even if the vessel still has some
encumbrances, mortgages or maritime liens at the time of delivery. Under the English law, the
"warranty" is a contractual promise which is not the condition of the contract, so the innocent party
can only claim damages but not terminate the contact if there is breach of warranty. Thus, it is
difficult for the buyer to terminate the contract.

Procedure to terminate the contract[edit]

To terminate the sales and purchase contract, there are two main procedures and the buyer must
follow these steps:
Firstly, the buyer should put a notice to inform the seller that there is an encumbrance he/she is
aware of and, secondly, the buyer should seek clarification on seller's intention with regard to the
encumbrance by specifically referring to Seller's obligations under clause 9 of Sale Form 1993.
If, after the buyer taking the above two steps, the seller fails to remove all the encumbrance in time,
the buyer will be entitled to terminate the contract.

Remedies of seller[edit]
Under the Sale of Goods Act 1979 s.41, the seller is entitled to exercise a possessory lien over the
vessel until payment by the buyer. Also, the seller is entitled to resell the vessel to another buyer if
the buyer fails to settle the payment in time. An unpaid seller may bring an action to recover the sale
cost where the buyer has acquired the property in the ship but refuses or fails to pay the price.

Remedies of Buyer[edit]
Under the Sale of Goods Act 1979 s.51, the buyer is entitled to take action for non-delivery of the
ship and claim for damages. For the delay of delivery, the buyer can claim for the difference in value
of the vessel if the price to buy the other vessel instant is different. Also, the buyer can terminate the
contract and claim for damages if the vessel is not delivered after a certain period.

Duties of the seller[edit]

Fundamentally, the main duty of the seller is to deliver the ship in accordance with the terms,
conditions and warranties of the contract. The time of delivery may or may not be an essential part of
the contract depending on the clause of the contract. If time is of the essence, the buyer can have
the option to cancel the contract when delivery is not made by the stipulated date.
Furthermore, the seller also has the obligation to avoid misrepresentation. Although there is no
general duty of disclosure and the buyer is free to onboard inspections on the vessel to be
purchased, the seller should not induce the other party to enter into the contract by making
material representations which are untrue. Statements or assurances made during negotiations
leading to a contract may be either "terms" which form the express terms of the contract or just the
statements which do not intend to be part of the contract, but help to induce the contract. Even if the
statement is not "Misrepresentation", it is difficult for the buyer to claim for remedies if this
misrepresentation does not become a contractual term.

Duties of the buyer[edit]

The main duty of the buyer is paying the agreed purchase price of the vessel. Normally, the time of
payment is not the essential factor unless there is an express clause in the contract. The buyer must
also accept delivery under the Sale of Goods Act 1979, s27. It is provided under s27, that payment
and delivery should be concurrent unless otherwise stipulated. Of course, the buyer also has the
obligations to prevent misrepresentation during the negotiation stage.

Conclusion[edit]
The sale and purchase of ship is one of the most complicated procedures in the shipping industry far more complicated compared to a new building contract of a ship for example. The S&P contract
involves different kinds of professional knowledge as well as strong negotiation skills. Furthermore,
due to the legal effect raised by the Maritime liens attach to the second-hand ship, the buyer should
check the history and any court writs to reduce any future loss from the purchased ship. Thus, with
regard to the complicated issues of this market, a professional shipbroker takes an important role
during the transaction.