Description of the ship
In general, the ship is described by reference to the following aspects: her name, her International Maritime Organisation (IMO) number, Classification Society, class notation, year of build, the identity of the shipbuilder, flag, place of registration and gross and/or net tonnages.
1. Name of ship
A Malaysian ship shall only be described by the name by which she is for the time being registered.
[1] The buyer should pay attention to the ship’s name and its spelling but it is good practice that the buyer cross-checks the name against other descriptive details, particularly the IMO number.
2. IMO number
Buyers should check the veracity of the IMO number of the ship before a sale transaction as a ship’s IMO number may be tampered with for purposes of evading public administrative sanctions, although such cases are rare.
3. Classification Society and Class Notation
The buyer must obtain a classification certificate from the Seller during the negotiation stages to ascertain the safety and reliability of the ship. Classification descriptions of a ship when she is initially delivered and entered with her Classification Society may change throughout the ship’s life. For instance, they may change due to modifications to the ship or changes in her business. Therefore, the seller should ensure the accuracy of the class description. If doubted by the Seller, it may be prudent for the seller to restrict the description to the name of the ship’s Classification Society.
4. Year of Build
Buyer should refer to the transcript and certificate of the Malaysian Registry or the shipbuilder’s certificate to ascertain the year of build. However, a certificate of Registry and the shipbuilder’s certificate may not be conclusive proof of the year of build.
[2] Where necessary, the buyer should look behind the register and a shipbuilder’s certificate to confirm the year of build.
[3]
To clarify the ship’s age, the parties may, instead of the “year of build” provision, opt for a provision specifying both the date of completion of building work and the date of delivery to her original owner by the shipyard.
5. Identity of Shipbuilder
Buyers should refer to the transcript and certificate of the Malaysian Registry. Where a ship has undergone a substantial structural change or refit, the buyer should enquire about and include in the agreement the identity of the builder which conducted these works.
6. Flag and Place of Registration
Buyer should refer to the Certificate of Malaysian Registry and conduct a Ship Search at the Marine Registry. The seller must state the information as at the time when the ship is delivered to the buyer. Before agreeing, the buyer should enquire whether the ship is bareboat registered. This is because, if so, the flag of the flag state with whom the ship is bareboat registered will prevail over the flag of the flag state with whom the ship is originally registered. In such situations, it is good practice to state both the original and subsequent flag.
7. Gross and/or Net Tonnage
Buyer should refer to the Certificate of Malaysian Registry or Ship Transcript. Depending on the type of agreement, the parties must state the gross tonnage and/or the net tonnage.
[4]
The parties
1. Seller
The buyer is advised to ensure that the seller is the sole registered owner of the ship because in the event a claim is brought against a non-owning seller, the latter may not have sufficient assets to satisfy the claim. The buyer should also ensure that the seller can pass full and good title in the ship as ownership may be shared between two or more parties.
At the initial stage, the buyer’s advisors should conduct due diligence on the corporate structure of the seller trading as a company since the seller, if proven to be liable for breach of contract, is protected under the doctrine of separate legal personality.
[5] Therefore, it would be prudent for the buyer to negotiate for some form of collateral for the performance of the seller’s obligations
[6] if the seller is a company, more so if the company is a one-ship-one company.
2. Buyer
The buyer will generally be a special-purpose company for the mere purpose of owning the ship. In this regard, a seller may doubt the financial health of the buyer. To protect its interest, the seller should ensure the agreement duly includes a provision providing for the payment of a deposit within a specified number of days after the contract signature and the establishment of the deposit account.
Payment
1. Deposit
The buyer must pay a deposit (equivalent to 10% of the purchase price) to the seller upon the signing of the agreement. Where parties use a standard form and intend to negotiate a deposit amount other than 10%, an amendment to the deposit term would be required. In the rare event that parties waive the requirement of deposit, and a standard form is used, not only do parties need to delete the deposit term but also make consequential deletions and alterations to references of deposit in other terms in the standard form.
Parties may stipulate in the agreement a deposit holder (stakeholder) holds the deposit, failure of which the seller’s bank shall undertake the role as the default position. Sale agreements typically provide that the deposit will be held in the joint names of the buyer and the seller to prevent the release of the deposit to a party without the other’s consent. Therefore, a buyer should be wary of a term which provides that the deposit is to be paid to an account in the seller’s sole name or the deposit is under the latter’s exclusive control.
Depending on the term, the deposit is paid immediately after the execution of the agreement or paid within 3 banking days from the date of the agreement or lodged within 3 banking days after fulfilment of certain conditions.
[7] Buyers should note the difference between “lodge” (which means that the deposit must be received in the deposit account by that time) and “pay” (which means that the deposit is merely remitted by the buyer’s bank).
There might be situations where a deposit account cannot be opened timely enough to the extent a party wishes to “exit” the agreement. In this regard, parties could add a provision conferring either party the right to cancel the contract without penalty on its part if, through no breach on its part, the stakeholder has not confirmed that the deposit account is open by a specified date.
2. Balance Purchase Price
Standard forms generally provide that the balance purchase price is to be paid on delivery of the ship but not later than 3 banking days after the date that NOR is given.
[8] The buyer should foresee the risk that the payment is due on a non-business day. To address such risk, the buyer should make sure that the definition of “Banking Days” is drafted sufficiently broadly.
Inspections
1. Surface/ Afloat Inspection
For example, under clause 4 of Saleform 2012, there are 2 options for inspections, namely clause 4(a) and clause 4(b)
[9], either of which should be deleted by the parties. In the absence of deletion, clause 4(a) shall apply by default. If parties agree to dispense with the inspection, they should delete clause 4
in toto and substitute that with a provision that the sale is outright and definite subject only to the terms and conditions of the contract. Any other references to “inspection” should also be replaced with appropriate references.
[10]
In the event there is a substantial time lapse between the execution of the agreement/ inspection and delivery of the vessel,
[11] the buyer could negotiate for inclusion in the agreement a right to make a formal inspection immediately before delivery to compare the state of the vessel at that time with the state as at the time of the earlier inspection. This simply allows the identification of any deterioration between the two times that goes beyond the “
fair wear and tear” allowance in the delivery condition clause.
[12] This however gives rise to a risk to the seller in that it opens up the possibility of ungenuine claims from the buyer as to the condition of the vessel. To mitigate this risk, the seller could insist with a counter-proposal that both inspections are to be performed and documented by a jointly appointed independent surveyor.
2. Underwater Inspection
Same as clause 4 of Saleform 2012, clause 6 provides for 2 options for inspection, i.e. diver’s inspection or drydocking, whereby one of which should be deleted. Where parties fail to do so, clause 6(a) shall apply by default. If parties agree to do away with the diver’s inspection or drydocking, the entirety of clause 6 together with the explanatory note thereunder should be deleted.
Clause 6 merely requires an inspection which takes into consideration the time lapse since the last underwater survey was conducted. If the buyer wishes to have a more rigorous inspection, such as an underwater survey in accordance with class, it should add such a term in the agreement through negotiation.
Time and place of delivery and notices
1. Time of Delivery
More recent standard forms require parties to state two dates, i.e. the earliest date on which NOR can be given and the cancelling date.
[13] Where parties use the Saleform 1993 which stipulates “expected time of delivery”, the buyer is advised to substitute the same with a requirement to specify a date (at Clause 5(b)) before which NOR cannot be given. This is to prevent the seller from giving NOR on a date before the earliest expected time of delivery which may be an element of surprise to the buyer.
2. Place of Delivery
The location for the delivery of the ship could be a specific anchorage or port, or a place elected by the seller within a specified geographical area. In the event the seller, wishing to avoid domestic sales taxes, seeks to deliver the ship in international waters close to a port within the agreed area, the buyer could negotiate for a term that all additional costs incurred by the buyer in connection with such delivery shall be borne by the seller.
3. Notice of Readiness (“NOR”)
The Saleform 1993 uses the phrase “
in every respect physically ready for delivery”. The words “
in every respect” could give rise to a risk that a buyer could use certain minor physical defects in the ship as a pretext to reject the vessel (or the validity of the NOR) or to force through a price reduction at the eleventh hour. Therefore, where the Saleform 1993 is in use, sellers should delete the words “
in every respect”. Instead of the deletion in the full interest of the seller, a vigilant buyer would be quick to replace the same with the words “
in all material respects”.
Apart from the physical readiness of the ship, some buyers also want her documents to be ready as a condition precedent for the tender of the NOR. In this regard, the buyer may amend the term to that effect by providing that, before the tender of the NOR, the ship shall be in all material respects physically and
legally ready save for specified aspects of readiness (such as the removal by the seller of articles excluded from the sale or the discharge of mortgagees over the ship) which shall be completed immediately before or, in the event of a mortgage discharge, upon delivery.
[14]
Spares, bunkers and other items
Clause 7 of the Saleform 2012 provides that all spares belonging to the ship at the time of inspection shall be part of the sale. In practice, the buyer would usually make an addition to clause 7 by a term providing that, before execution of the agreement, the seller shall identify (by way of a detailed inventory in writing prepared in the presence of, or otherwise verified by, the buyer’s representative) the main spare parts and stores belonging to the ship and clarify whether they are stored on board the ship or otherwise.
Furthermore, Clause 7 obligates the buyer to take over, among others, and pay for the remaining bunkers and unused lubricating and hydraulic oils and greases. The word “remaining” may open up to few possible interpretations where the ship requires bunkering before delivery, for example (1) maximum balance whereby calculation is based on the total amount of bunker in a full tank capacity minus the bunker needed for the period leading up to delivery; and (2) minimum balance whereby calculation is based on the mere amount of bunker needed to allow the ship to reach and remain until delivery. To eliminate such ambiguity, some buyers may, in practice, amend the term to stipulate either maximum or minimum balance.
Documentation
Clause 8 of the Saleform 2012 provides for the types of documentation to be furnished by one party to the other.
Of particular importance is the bill of sale as it is the document that is used to prove and effect the transfer of title in the vessel from the seller to the buyer. There may be a risk that the ship registry does not return any original bill of sale to the buyer after the completion of the registration process. Therefore, it would be prudent for the buyer to negotiate for a term requiring the seller to furnish an original bill of sale to the buyer, in addition to furnishing the number of originals required by the relevant ship registry in the buyer’s nominated flag state.
Another noteworthy document is the protocol of delivery and acceptance that evidences the date and time of the transfer of title and risk in the ship from the seller to the buyer. This document is commonly prepared as a draft at the commencement of the sale transaction and exchanged between the buyer and seller to agree on the format to avoid any dispute on the contents during the closing of the sale.
On some occasions, the seller may stipulate in the protocol that the ship has been delivered in the condition as per the contract and that the seller has performed all its contractual obligations. The buyer should not countenance such words as they may preclude the buyer from suing the seller for contractual defects which come to the buyer’s attention upon delivery. Parties are advised to make the protocol neutral on issues of liability.
Encumbrances
It is a common term in an agreement that the sellers warrant that the ship, at the time of delivery, is free from any encumbrances.
[15] The word “warrant” may be interpreted as a “warranty” of the contract which in turn does not favour the buyer as, in the event of a breach of the term, the buyer can only affirm the contract (and claim damages), instead of terminating it. Thus, to entitle the buyer to terminate the contract, it should consider negotiating for the term to be amended to a “condition” of the contract.
Condition on delivery
An agreement sets out the ship’s condition at delivery.
[16] Of particular note is the standard term that the ship shall be delivered and taken over as she was at the time of inspection. Unless negotiated otherwise, this term unquestionably favours the seller as the buyer is not conferred a right to inspect the ship immediately before delivery for purposes of ascertaining whether the ship is in the same condition as she was at the time of the surface inspection. To address the risk of disparity between the condition of the ship upon delivery and at the time of the afloat inspection, the buyer could try to negotiate for a right to inspect the ship immediately before delivery by paying a mutually agreed fee to the seller as a consideration.
Events of default and their effects on the agreement
1. Buyer’s Default
Generally, the failure of the buyer to lodge the deposit in accordance with the relevant term and to pay the balance purchase price in accordance with the relevant term are the events provided for the buyer’s default.
[17]
The former gives rise to the seller’s right to cancel the Agreement and, depending on the terms of the agreement, claim compensation for its losses and for all expenses incurred together with interest.
[18] In this regard, the seller would be compensated for its actual losses and costs whether these are more or less than the amount of the deposit.
The latter also gives rise to the seller’s right to cancel the Agreement and provides for the forfeiture of the deposit in favour of the seller. On top of that, if the deposit is not sufficient to cover the seller’s loss, the seller has the right to claim additional compensation for their losses and all expenses incurred together with interest. Despite the forfeiture of the deposit term, the seller should be well advised that it might still be necessary for the seller to prove the actual loss or damage suffered.
[19]
2. Seller’s Default
It is commonplace that failure to tender NOR per the relevant term and to validly complete a legal transfer by the cancelling date are events of the seller’s default entitling, inter alia, the buyer to cancel the agreement.
[20]
Taking clause 5(b) of Saleform 2012 which reads “…
When the Vessel is at the place of delivery and physically ready for delivery in accordance with this Agreement, the Sellers shall give the Buyers a written Notice of Readiness for delivery” as an example of the relevant term, the position is unclear, where the NOR tendered by the seller is invalid (before the cancelling date), as to whether the buyer is entitled to cancel the agreement. The seller could contend that there was no “failure” on its part as it still had the opportunity to tender a fresh NOR until the cancelling date. To prevent the seller from taking advantage of the ambiguity, buyers could stipulate that, in the event of such failure, they shall have the right to terminate “on or before the cancelling date”.
[21]
Dispute resolution
Parties are at liberty to choose which forum to hear any of their disputes arising out of or in connection with their agreement and the governing law of the agreement. Parties are advised to refer their disputes to an arbitral tribunal instead of a court so that they can take advantage of an arbiter possessing the requisite specialised and technical knowledge relating to the dispute in question.
Certain standard forms of the agreement provide for arbitration in London and for English law to apply as the governing law of the agreement.
[22] If London arbitration is not palatable to parties using these standard forms who are based in Malaysia due to logistical considerations, they could replace it with the arbitration in Malaysia (administered by the Asian International Arbitration Centre) or in Singapore (administered by the Singapore Chamber of Maritime Arbitration).
[23]
Entire Agreement
Parties are advised to include in the agreement an “Entire Agreement” clause. This is to prevent either party from disputing that the written agreement does not contain all of the terms of the agreement and also to prevent one party from using pre-contractual oral or written statements to add to, subtract from, vary or contradict the written terms.
Conclusion
Drafting terms in a ship sale agreement requires careful thought. In practice, the buyer may rely on the results of class record inspections only on a minimal basis, so he only has limited opportunities to inspect the ship before concluding the contract. To remedy the imbalance between the parties' relationship, the buyer’s advisors should be alert to point out the buyer’s transactional risks and in turn consider how to effectively eliminate, mitigate or otherwise curb those risks by negotiating for amendments in the interest of the buyer.