Ship Sale and Purchase

From Max-EuP 2012

by Tjard-Niklas Trümper

1. Subject matter and definition

When two parties agree to completely transfer the property interest in and physical ownership of a ship from one party to the other, one would call this agreement, if in appropriate form, a contract for the sale and purchase of a ship (in practice often ‘ship sale and purchase’, Schiffskauf, vente du navire, vendita di nave, compraventa de buque, skeppsförsäljning, schipkoop). However, in practice, the notion of ship sale and purchase often does not only refer to the agreement, namely to the contractual rights and obligations, but also to its performance, viz the requirements for the transfer of the property interest in a vessel and/or its registration. Thus the notion does not only refer to contractual relationships (sale), but also to the effects of such ship sale and purchase agreements as to third parties, in particular with regard to the property interest in the vessel (transfer of title (movable goods)). As in usual sales, the parties are commonly referred to as seller(s) (Käufer, acheteur, compratore, comprador, köpare, koper) and buyer(s) (Verkäufer, vendeur, venditore, vendedor, säljare, verkoper).

Due to the fact that in ship sale transactions property and risk in respect of the vessel also pass from one party to another, these transactions have to be distinguished from mere charters of ships (charter party) or related contracts whereby the owner(s) of a vessel do not dispose of the vessel.

Moreover, ship sale and purchase transactions must, in principle, be distinguished from contracts for the new construction of a ship (also called shipbuilding contracts) since the former only refer to sales of vessels owned by individuals other than the original vessel builders (also referred to as ‘second hand tonnage’). This can also be seen in the fact that shipbuilding contracts are subject to the principles of construction law and are commonly considered as contracts for work and labour.

The distinction is important because the problems of those two contracts are in practice rarely the same. A major distinction rests upon the fact that the buyer of a ship to be built normally accompanies the whole ship construction process from beginning until delivery whereas a ship buyer quite frequently has only a few days—or even hours—to inspect a chattel for which he will possibly pay a price of €2 to 50 million.

2. Particularities of the subject matter: ship

The act of selling and purchasing a ship is predominantly characterized by the subject matter being a ship. In maritime law a ship is generally defined as every description of vessel used in navigation (see s 313(1) Merchant Shipping Act 1995, Marine Craft Constructors Ltd v Erland Blomquist (Engineers) Ltd [1953] 1 Lloyd’s Rep 514; for Germany see Federal Supreme Court, BGH, 14 December 1951, NJW 1952, 1135; for Italy see Art 136 Codice della navigazione, Corte di Cassazione, sezione I civile, 15 November 1994, no 9589, Il Foro Italiano 1994, 3387).

Ships, at least if they are commercially operated, are significantly different from many other goods as, for instance, defined in the English Sale of Goods Act 1979, s 61(1) (sale, common law). This is true for the following reasons: first, ships are very often located at quite a distance from their owner’s place of business; secondly, commercial ships are subject to the macro- and micro-economic constraint that they must constantly be in service, in particular because of the high maintenance costs and the necessity of earning freight or charter hire (charter party); thirdly, laytimes of commercial vessels have been considerably reduced during the 20th century as a consequence of efficiency improvements so that laytimes of more than a few days are nowadays exceptional; finally, ships are subject to registration requirements and are in this respect similar to real property despite the fact that they are chattels.

Due to the particularities of ships—particularly commercial ships, merchant ships or ships exclusively operated in transport trades—the parties to an agreement to sell and purchase a ship find themselves in quite a different situation than the parties to an ordinary agreement to sell. The buyer typically has quite limited access to information as to the actual condition of the vessel, but at the same time he exposes himself to considerable financial risks due to the fact that he will normally waive all his rights as to conditions or warranties in respect of the vessel’s actual physical condition because in most arm’s length contracts the seller’s contractual obligations as to the vessel’s physical condition are considerably excluded or limited. Very often only the system of vessel classification, according to which classification societies survey the physical and technical condition of most ship’s hull and machinery, provides the buyer with some valuable and reliable information as to the ship’s actual condition.

Opposed to this, the seller is mainly interested in fully dissolving his relation to the vessel sold, a fortiori, if the seller is a single ship company which is to be wound up after the sale of its only asset.

3. The Norwegian Saleform

In Europe and the rest of the western hemisphere most ship sale and purchase transactions are based on the standard contract form published under the title ‘Norwegian Saleform’ (NSF or Saleform) which has a history of more than sixty years. For the purpose of facilitating and economizing contract negotiations, in the 1940s the Norwegian Shipbrokers’ Association (Norsk Skipsmegler Forbund) promoted the Norwegian Saleform (then known as Salgsform, 1948) as a standard form to be used in ship sales. Within a few years the Baltic and International Maritime Council (BIMCO)—an NGO dedicated to promoting, inter alia, greater harmony in regulatory matters (private rule-making and codes of conduct)—took up the idea of the Norwegian Saleform, had the document translated and promoted it under its auspices. From that point forward the Norwegian Saleform became the standard document for selling and purchasing commercial ships, notwithstanding its being repeatedly revised in 1956, 1966, 1983, 1987 and 1993. The latter two editions (Norwegian Saleform 1987/1993) are nowadays typically in use. It does, furthermore, not come as a surprise that it was not shipowners but shipbrokers who made an effort to harmonize ship sale and purchase since the shipbrokers conduct the negotiations. These negotiations are considerably facilitated and economized if the parties can conduct them on the basis of a mutually approved standard form.

Besides the essentialia negotii, viz the contractual parties, the determination of the ship to be sold and its price, the Norwegian Saleform 1987/1993 contains notable provisions as to the following: terms of payment and deposit (clauses 2 and 3); inspections of the vessel (clauses 4 and 6); delivery and documentation (clauses 5, 7 and 8); taxes, fees and other contractual costs (clause 10); physical condition of the vessel on delivery and freedom from encumbrances (clauses 9 and 11); and parties’ default (clauses 14 and 15). Moreover, in clause 15 the Norwegian Saleform contains an arbitration (see arbitration law (national) and arbitration (international)) and choice of law (choice of law by the parties) clause which provides for different alternatives; the default setting, however, being the application of English law and arbitration in accordance with the rules of the London Maritime Arbitration Association (LMAA).

Probably the most distinguishing feature of the Norwegian Saleform is contained in clause 11, according to which the seller must deliver the vessel in the same condition as it was at the time of inspection by the buyer (the so-called ‘as is principle’). Thus the principle of caveat emptor applies and, in principle, no terms as to the vessel’s condition or quality can be implied into the contract. However, the caveat emptor principle was considerably diluted when the phrase ‘… the vessel shall be delivered with present class free of recommendations …’ was introduced in clause 11 with the 1983 revision of the Norwegian Saleform. According to clause 11, the seller undertakes to deliver the vessel fully ‘in class’ and thus reference has to be made to the vessel’s classification status. Making reference to the vessel’s class is very sensible since the surveys as to the physical condition of a vessel’s hull and machinery by classification societies—at least by those classification societies organized in the International Association of Classification Societies (IACS; see also Dir 2009/15/EC)—are considered to be thorough, impartial and reliable. However, there is no absolute safety in this respect because the classification societies’ rules and regulations contain some element of discretion, in particular since shipowners are customers who could substitute the vessel’s classification society with one of its competitors. The disadvantage of the reference to the classification society’s inspections and its respective records, recommendations and conditions is the fact that, in so doing, conflicts regularly arise between the ship’s buyers and the classification society because the classification society allegedly was in breach of its own rules and regulations when surveying the vessel’s hull and/or machinery while the buyer relied upon the class records. It is important to note that in practice there is no contractual relationship between the buyer and the respective (third party) classification society at the time of the alleged breach by the latter (professional liability).

The act of transferring the ownership of a vessel in practice invariably necessitates a variety of documents to be transferred between seller and buyer or their respective banks. The situation is in this respect similar to the practice of international commercial sale of goods (sale of goods, international (uniform law), UNCITRAL, UNIDROIT Principles of International Commercial Contracts (PICC)). These documents serve the purpose of improving the buyer’s position in respect of third parties and authorities such as banks, flag state authorities, classification societies, public ship registers, insurance companies, P&I clubs, etc. Clause 8 of the Norwegian Saleform 1987/1993 in particular enlists, inter alia, the following documents: bill of sale, certificate of ownership, certificate of freedom of encumbrances, confirmation of class, protocol of delivery and acceptance. Moreover, clause 8 provides that any additional document must be furnished by the seller provided that such document may reasonably be required for registering the vessel.

With respect to the buyer’s interest in acquainting himself with the vessel and inspecting its condition, the Norwegian Saleform provides the buyer with the right to more or less thoroughly inspect the vessel and its records.

In this respect three stages of inspections can be distinguished. In the first stage the buyer, who usually has already received the details of the vessel from a broker, has the right to inspect the vessel’s (confidential) classification records (see Norwegian Saleform 1987 clause 4 para 1; Norwegian Saleform 1993 clause 4 (b) para 1, line 35). In case the parties have already signed the Norwegian Saleform at this stage, the sale has to be considered as a sale upon a contingent condition to performance (Kauf auf Probe, vente à l’essai, vendita a prova, compra a prueba, ta på öppet köp, koop op proef), which is a binding contract unless the buyer does not withdraw from the transaction.

Having inspected and accepted the class records, the buyer may physically inspect the vessel and its logbooks in the second stage (see Norwegian Saleform 1987 clause 4 para 2 and Norwegian Saleform 1993 clause 4(b) para 2). However, the inspection at this stage is—unless it is a buyers’ market (eg vessels laying-up)—commonly quite superficial and in particular, does not provide for any internal inspection of engine or tanks, commonly referred to as ‘opening up’. Furthermore, this inspection must not interfere with the operation of the vessel and is without cost to the seller. At best, the inspection takes place at a time when the vessel is dry-docked for class repairs. After this physical inspection of the vessel by the buyer’s inspection team (consisting of master mariners and marine engineers) the buyer has 48 hours (Norwegian Saleform 1987 clause 4 para 4, line 31) or 72 hours (Norwegian Saleform 1993 clause 4 (b) para 4, line 44) to declare whether he commits to purchasing the vessel (notice of acceptance). Thereafter, the buyer has no right to unilaterally withdraw from the agreement to sell. If no notice of acceptance is received by the seller in time, the contract becomes null and void and the deposit is to be released to the buyers (Norwegian Saleform 1987 clause 4 para 4 and Norwegian Saleform 1993 clause 4 (b) para 4).

If a notice of acceptance is furnished in time, the transaction enters the third and final stage of inspection. In this stage the final inspection directly prior to delivery of the vessel is undertaken (see Norwegian Saleform 1987/93 clause 6). Unlike the first two stages, in the third stage the classification society rather than the buyer surveys the vessel according to its own rules and regulations (an objective standard). In addition, the third inspection stage has a different and more limited scope, namely only the vessel’s underwater parts below the summer load line, eg the tail-end shaft, rudder, propeller and bottom are inspected. The Norwegian Saleform 1993 requires the parties to choose between two alternatives: either dry-docking of the vessel for the underwater inspections (clause 6 (a)) or underwater inspection by a qualified diver (clause 6 (b)); in case of doubt the dry-docking alternative shall prevail (see lines 152 and 153).

If any underwater part is found to be affecting the vessel’s class, the defect has to be remedied at cost to the seller to the classification society’s satisfaction. However, it is important to note that the Norwegian Saleform does not at this stage provide the buyer with a right to reject the vessel on grounds of its physical condition. Such a right of rejection, rescission, termination or cancellation is, at least not explicitly, mentioned. If such a right is barred, there remains an issue of construction which will be dependent upon the applicable law. This is problematic in cases in which a defect is found which does not immediately affect the vessel’s class but, nevertheless, does affect its commercial value or will in the future become a class issue (eg low steel thickness levels; see also Ateni Maritime Corporation v Great Marine Ltd (The “Great Marine (No 2)”) [1990] 2 Lloyd’s Rep 250, CA).

At the end of this third and final stage of inspection and provided that all defects found have been remedied, the seller has to deliver the vessel to the buyer (clauses 5 and 11). At the time of delivery and transfer of risk (risk, transfer of) the vessel must in principle be in the same condition as at the time of the physical inspection in the first two stages, with ‘… fair wear and tear excepted’.

Additionally, clause 11 para 2 of the Norwegian Saleform 1987 provides that the vessel’s present class must be free of recommendations and also requires the seller to notify the classification society of all matters arising prior to delivery which would affect the vessel’s class (see Compania de Navegación Pohing SA v Sea Tanker Shipping Ltd (The ‘Buena Trader’) [1978] 2 Lloyd’s Rep 325, CA).

This part of the Norwegian Saleform 1987 was altered after a revision process, and clause 11 of Norwegian Saleform 1993 now provides quite differently that ‘… the vessel shall be delivered with her class maintained without condition/recommendation, free of average damage affecting the vessel’s class, and with her classification and national certificates, as well as all other certificates the vessel had at the time of inspection, valid and unextended without condition/recommendation by class or the relevant authorities at the time of delivery’. The new wording considerably dilutes the caveat emptor principle in favour of the buyer. This is achieved by introducing another standard of condition (free of average damage affecting the vessel’s class) into the contract. The meaning of average damage was interpreted by the Commercial Court of the Queen’s Bench Division in Piccinini v Partrederiet II (The ‘Alfred Trigon’) [1981] 2 Lloyd’s Rep 333. The Commercial Court held that it means damage which is ordinarily covered by the vessels hull and machinery insurance.

In summary, one could say that within the contractual arrangements of the Norwegian Saleform the principle of caveat emptor is, notwithstanding clauses 11 and 6, widely applied. It is nevertheless of note that the buyer’s right to inspect the vessel is often considerably restricted. Consequently, the importance of the contractual description of the vessel (year of construction, builder, class, deadweight (loading capacity), draught and dimensions, equipment, speed and consumption, etc) and of the seller’s respective representations is considerably increased (see German Federal Supreme Court, BGH 29 November 2006, BGHZ 170, 86; Kellogg Brown & Root Inc v Concordia Maritime AG [2006] EWHC 3358; culpa in contrahendo, good faith, fraud).

4. Transfer of ownership

The transfer of ownership (transfer of title (movable goods)) of the vessel as execution of the seller’s contractual undertaking is governed by a specific set of rules, particularly due to the fact that ships are registered and third parties (ship mortgagees) may be directly affected by the transfer in ownership of the vessel.

Contrary to the law applying to the rest of the agreement (see clause 15 of the Norwegian Saleform), the transfer of ownership is, according to the principles of international property law (property law (international)), governed by the lex libri siti, viz the law of the country where the ship is or is to be registered. The essential requirement for transfer of ownership is invariably mutual consent. In addition to this, some national laws require registration of the vessel, although in other countries the latter has only a declaratory function. The Norwegian Saleform is in this respect open to adjustment in particular with regard to the required documentation (see clause 8) to enable the buyer to register the ship.

5. Legal harmonization of ship sale and purchase

Due to the widely accepted use of the Norwegian Saleform for more than 60 years and due to the fact that ship sale and purchase is a field of pure commercial law with the respective parties being experienced merchants contracting on equal footing, there has not been any real need to harmonize the national laws of ship sale and purchase.

Nevertheless, the European Community tried to harmonize or even centralize the registration of ships by establishing a European ship register. However, the attempt was unsuccessful, and the idea was aborted, although it was raised again recently (COM(2006) 275 final).

Finally, it should be mentioned that the United Nations Convention on Contracts for the International Sale of Goods (CISG) does not apply to the sale of ships (see Art 2(e) CISG). Contrary to this, the Study Group on a European Civil Code did not exempt the sale of ships from the ambit of the Principles of European Law—Sales (see Art 1:104(a) PESL).

Literature

Christian Breitzke, Die Norwegian Saleform (1970); Folke Grauers, Fel i sålt skepp (1980); René Rodière and Emmanuel du Pontavice Droit maritime (12th edn, 1997) 83; Christopher Hill, Maritime Law (6th edn, 2003) 48; Jürgen Basedow and Wolfgang Wurmnest, Third-Party Liability of Classification Societies (2005); José Luis Gabaldón García and José María Ruiz Soroa, Manual de Derecho de la Navegación Marítima (3rd edn, 2006) 298; Nicolai Lagoni, The Liability of Classification Societies (2007); Aleka Mandaraka-Sheppard, Modern Maritime Law and Risk Management (2nd edn, 2007) 467; Iain Goldrein and Paul Turner, Ship Sale and Purchase (5th edn, 2008); Malcolm Strong and Paul Herring, Sale of Ships—The Norwegian Saleform (2nd edn, 2009); Thor Falkanger, Hans Jacob Bull and Lasse Brautaset, Scandinavian Maritime Law (3rd edn, 2011) 112; Sergio M Carbone, Pierangelo Celle and Marco Lopez de Gonzalo, Il Diritto Marittimo (4th edn, 2011).

Retrieved from Ship Sale and Purchase – Max-EuP 2012 on 02 October 2022.

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