PURCHSE AND SALE OF SHIPS IN INTERNATIONAL MARKET

Sale and purchase of ship is one of the important activities in the shipping industry. It involves
a huge amount of money in term of more than hundred millions US dollar and it requires
different kinds of profession knowledge like knowledge of particular type of ships and
functions, legal knowledge as well as dealing and bargaining knowledge.

In order to reduce the disputes and smoothen the sale and purchase procedure, normally the
ship-owner (seller) and the buyer will appoint brokers to be a middlemen to handle the
transaction.

There are three main stages for the sale and purchase of a ship which include the negotiation
and contract stage, the inspections stage and the completion. From different stages, it
includes different important issues and regulations.

 1 Negotiation and contract stage

 2 Inspections stage
 3 Completion
 4 Protection of buyer
 5 Procedure to terminate the contract
 6 Remedies of seller
 7 Remedies of Buyer
 8 Duties of the seller
 9 Duties of the buyer
 10 Conclusion

Negotiation and contract stage

The negotiation and contract stage are the first two steps of the sale of a ship. It is 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 in this stage of both parties 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 forms, contracts for the MOA like 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 licenses. After drawing the sales form normally 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
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 document inspection, the buyer will check the ship's class records, certificate records.
The inspection of records will reveal the history of 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, it usually checks the surface of the ship and its logbook, unless
others agreed to check ship’s holds and tanks.

Completion
The final stage of sale and purchase is known as completion stage.

It involves pre-delivery matter 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. Also the under -water inspections can be done at
the buyers request in which case if it is not required by the Classification Society's surveyor the
due charges will be on buyers account.

For the Documents and Physical delivery, it usually occurs at different places which depending
on the location of the ship. The final inspection of underwater parts is located in dry-dock of the
port of delivery. To obtain the certificate of class in regards of the safety, a survey of the ship's
bottom and underwater part is conducted by the surveyor of the classification society. It may be
some recommendations for the repairing of ship which affect the expense of the seller before
delivery. Sometime, the buyer may appoint his own surveyor who approved by the classification
society to carry out the underwater inspection while the ship is a float.

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, 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 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 bunkers and stores on board and
instruct his bank to make the payment on the actual delivery date.

Protection of buyer( important Issue)

There are some clauses under the sales Form protecting the interest of the buyer of ship. For
example, the Clause 9 of Sale Form 1993 has provided some limited protection for the buyer.
Under the clause 9, the seller has made the warrant 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 the vessel still have 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 entitle to claim for the damages but not terminate the contact if there is breach of
warranty. Thus, it is difficult for the buyer to terminate the contact.

Procedure to terminate the contract(Important)

To terminate the sales and purchase contract, there are two main procedures the buyer
must take the steps:

Firstly, the buyer should put a notice to inform the seller that there was an encumbrance
aware and,

Secondly, the buyer should seek clarification on seller's intention with regard to the
encumbrance by specifically referring to Sellers’ obligations under clause 9 of Sale Form 1993.

After taking the above two steps and the seller fails to remove all the encumbrance in time,
the buyer will be entitled to terminate the contract.
Remedies of seller
Under the Sale of Goods Act 1979 s.41, the seller entitles to exercise a possessory lien for the
vessel until payment by the buyer. Also, the seller also entitles to resell the vessel to the other
buyer if the buyer fails to settle the payment in the time. An unpaid seller may bring an action to
recover the price where the purchaser has acquired the property in the ship but refuse or failed to
pay the price.

Remedies of Buyer
Under the Sale of Goods Act 1979 s.51, the buyer entitles to take action for non-delivery of ship
and claim for damages. For the delay of delivery, the buyer can claim for the different value of
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 non-delivery after certain period.

Duties of the seller

Fundamentally, the main duty of the seller is delivery the ship in accordance with the terms,
conditions and warranty 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 the time of delivery is an essential part
of the contact, the buyer can have the option to cancel the contract under the situation that the
delivery is not made by the stipulation.

Furthermore, the seller is also has the obligation to avoid the misrepresentations. Although there
is no general duty of disclosure and the buyer is free to investigations on the ship intended to be
purchased, the seller should not induce the other party to enter the contract by making material
representations which are not true. 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
the statement is untrue "Misrepresentation", it is difficult for the buyer to claim for remedies if
this misrepresentation not become a contractual terms.

Duties of the buyer

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 a related term in the contract. The buyer
must also accept delivery under the Sale of Good Act 1979, s27. It is provided under section 227,
the payment and delivery should be concurrent unless otherwise stipulated. Of course, the buyer
also has the obligations to prevent the misrepresentation during the negotiation stage.

Conclusion
It is concluded that sale and purchase of sale is one of the most complicated procedure in the shipping
industry and it is much more complicated comparing with new building contract of ship.
The S&P contract involves different kind of professional knowledge of ship and the bargaining skills.
Furthermore, due to the legal effect raised by the Maritime liens attach to the second hand ship, the
buyer should further check the history and court writs to reduce the future loss from the purchasing
ship. Thus, with regards to the complicated issues of this market, professional shipbroker takes an
important role during the transaction.