SHIP SALE AND PURCHASE

ELDA BELJA 2008

His RT. Hon. Lord Justice Bernard Rix in his forward to the book of Ian Goldrein and Paul Turner Ship Sale and Purchase makes reference to a story he heard once about the famous shipowner Sir William Burrell, the museum in whose name now graces Glasgow. It seems that, having inherited a merchant fleet from his father, he made three great decisions in his life: he sold the fleet at the top of the market, bought back another fleet at the bottom of the market, and sold it again at the top of the market.

Purchase of second hand tonnage Purchase of new build ships Chartering Prize Judicial sale Abandonment Transmission

 The Sale of Goods Act of 1979 as amended by the UK Sale and Supply of Goods and Services Act of 1994. These acts are a set of sale of goods legislation in the UK which largely governs the area of ship sale and purchase. Common law and equity continue to apply in addition to these. There is the UK Unfair Contract Terms Act of 1977. That Act is a statutory source of contract law which applies also to the contracts of sale. This is a statutory control of the contractual provisions for which the parties may opt because if you go back to the sale of goods legislation, then that statutory legislation is largely of a nonmandatory nature, meaning that it will be excluded if expressly done so by the agreement of the parties so the freedom of contract remains.

In Section 26 of the Unfair Contract Terms Act we have a definition of international supply contracts. These are defined as being the contracts whose characteristics are the following: 26 (3) (a) either it is a contract of sale of goods or it is one under or in pursuance of which the possession or ownership of goods passes; and (b) it is made by parties whose places of business (or, if they have none, habitual residences) are in the territories of different States (the Channel Islands and the Isle of Man being treated for this purpose as different States from the United Kingdom). Combined with these requirements: 26 (4) (a) the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or (b) the acts constituting the offer and acceptance have been

What is expressly stated in this Act is that the Act will never apply in cases where in a contract the parties who are not based in the UK have chosen as a choice of law applicable in the part of the UK* e.g. English, Scottish or Welsh. This Act remains limited to those ship sale and purchase contracts of second hand tonnage within the UK where both the seller and buyer are within the UK and the case of a UK shipyard. The UK Misrepresentation Act of 1967 this deals with precontractual statements intended to induce the other party into the contract. The provisions of this Act will be relevant in this context of the ground rules for three contractual negotiations. If you have English law applying to a particular ship sale and purchase contract, then you have to look in the first sale legislation, secondly the unfair contract terms legislation, and thirdly the misrepresentations legislation. *Article 27, Unfair Contract Terms Act

In Civil law countries such as France, which applies largely the provisions of the civil code, you would have to look separately for those provisions that are strictly property law e.g. the ownership, title, registration, etc. Then you would look at the law of obligations and the law of contracts and you rely on those provisions to regulate your contract of sale, for example, in the case of second hand tonnage. These are in Book 3 Title 6. As regards the shipbuilding contracts, you have two different approaches: They are regarded as contracts of sale; or They are regarded as a special type of contract of construction or building. In the case of shipbuilding contracts you will look at the provisions under contract law such as hiring of services, hiring industry and services. You are hiring the services (locatio operis) of the shipbuilder. You have to look at contracts of building and construction etc. This is found in Title 8 of the Civil Code.

 Under Greek law which has the Maritime Code the Public Maritime Code would regulate the issues of ship registration and ownership from the public side (administrative law). The Private Maritime Code of Greece would deal with the private issues regarding proprietary interests of ships. However, for contracts you also have to resort to the provisions of the Commercial Code and the Civil Code.

The International Convention on Maritime Liens and Mortgages of 1993

E.g. Article 3 change of ownership 3(1). With the exception of the cases provided for in articles 11 and 12, in all other cases that entail the deregistration of the vessel from the register of a State Party, such State Party shall not permit the owner to deregister the vessel unless all registered mortgages, "hypothques" or charges are previously deleted or the written consent of all holders of such mortgages, "hypothques" or charges is obtained. However, where the deregistration of the vessel is obligatory in accordance with the law of a State Party, otherwise than as a result of a voluntary sale, the holders of registered mortgages, "hypotheques" or charges shall be notified of the pending deregistration in order to enable such holders to take appropriate action to protect their interests; unless the holders consent, the deregistration shall not be implemented earlier than after a lapse of a reasonable period of time which shall be not less than three months after the relevant notification to such holders.

The International Conventions for the Unification of Certain Rules Relating to Maritime Liens and Mortgages of 1967

*The 1980 United Nations Convention on Contracts for the

CS are independent commercial organizations staffed by marine surveyors who work with shipyards, ship-owners, insurance co. and flag state authorities in matters relating to construction, maintenance and repair of ships. One of the principal objectives of the classification system is to enhance the safety of life and property at sea by securing high technical standards of design, manufacture, construction and maintenance of mercantile and non-mercantile shipping. In relation to a second hand tonnage this objective is pursued by means of a regime of regular surveys by surveyors of the CS with which the ship is entered. The class records serve to show to the surveyors from the CS with which the ship is entered, defects discovered, major breakdowns and repairs undertaken. The records will also show conditions of class (also known as class recommendations or class qualifications) recorded in a special reasons list and requiring rectification to the

Class records will not show breakages, damage or defects which: Are known to the seller but are not known to the CS Are notified to class or spotted by class, but repaired before class make any entry in their records; Are latent, in the sense that they are not yet apparent to sellers or class or anyone making an inspection; Are outside the scope of class.

The next step will be for prospective buyers to assess the market value of the ship. Market value will be assessed by reference to a variety of factors including, amongst others: Existing market conditions the brokers who carry out valuations will take into account the price which similar ships have fetched in the market, for example by reference to their own experience, the experience of their colleagues and by reference to trade press publication and published advertisements. The reputation of the ships owners and managers Any special characteristics of the ship or her trading which could be relevant to her earning power, including existing charter or contract of affreightment or employment. The availability of the finance the willingness of banks to provide funds towards the acquisition of the ship. The physical conditions of the ship and her machinery. Since the brokers will not usually be given the opportunity to inspect the ship, their valuations will be made on the basis of various

First stage
The surveyor will make a detailed review of the ships class records and gather as much background information about the ship as he can. In particular, the surveyor will be looking for info about such matters as: The identity of ships builder The identities of her present and previous operators and owners The recent trading activities Her recent sale and purchase record; and Bearing in mind the trades in which the ship operates, her market reputation.

Second stage
The second stage of a typical pre-purchase inspection will involve the surveyor going on board the ship in order to: Make a visual inspection of representative parts of the ships hull, decks, tanks, cargo spaces, accommodations, bridge and radio areas, machinery spaces, machinery and equipment Take ultrasonic measurements of steel thickness, test tanks coatings/outside layers/covers, check hatch covers, closing mechanisms and the like Review the ships deck and engine lock books for recent casualties or other problems; Review the ships class and trading certificates to check compliance with class and convention requirements; Discuss the ships performance, trading history with master

Third stage

The third stage of a typical pre-purchase inspection is the reporting stage. Immediately after the inspection has been completed, most surveyors will also prepare a detailed written report of what they have inspected.

The contents of the recap message will vary from case to case but the main terms agreed might include: sign of the ship;

The name, former name(s), flag, port of registry and call

The identity of the seller(s) and buyer(s) The identity of the ships builders and the year of build; The ships registered tonnages; Info concerning the ships hull, machinery, holds,
The ships class details and the date of her last/next
special survey;

hatches, cargo capacity and cargo handling equipments;

The price and currency of payment, together with the

 The inspection terms; The geographical and temporal delivery range and the cancelling date; Any special requirements relating to the ships condition at delivery and any major items excluded from the sale; The method of dispute resolution and governing law; The form of contract to be used, e.g. Norwegian Sale Form, Nippon Sale Form; Any other terms to be agreed or conditions to be fulfilled before there is a legally binding agreement.

 An initial negotiation phase dealing with main terms and culminating in the approval of a recap of the main terms agreed; and A secondary phase of the negotiations dealing with details and culminating in the signature of a written contract which records all the main terms and details agreed between the parties.

In most cases the three basic requirements for a valid contract under English law would be: An intention to create a legally binding relationship A concluded agreement on the essential terms of the contract Consideration First, the parties must intend to create a legally binding relationship. In the case of commercial transactions there is a strong presumption that the parties intend their relationship to be legally binding, and will consider it so, given that the negotiations have been successfully concluded. Although this presumption may be rebutted by evidence to the contrary, the burden of proving that there was no such intention is a heavy one, and, in this situation, arbitral tribunals and courts will try to determine the parties objective intentions by reference to what they said and did during the negotiations. Second, there must be a concluded agreement on the essential terms of the contract. This will usually involve two essential elements offer and acceptance. Third, in most cases the contract must be supported by consideration, which means that there must be some element of bargain.

There is no formal requirement for a sale contract to be in writing; a sale contract could also be made orally. However, in commercial transactions it is both sensible and usual for the parties their contractual relationship to be put into writing. The parties should however bear in mind that, in addition to the express terms set out in the contract, other terms may be read into the contract. These terms (known as implied terms) may be read into the contract as a result of applicable legislation. Terms may also be implied where a court determines that the implication is obvious and necessary to give the transaction contemplated by the contract such business efficacy as the parties may have intended.

 S 13 (1) of SOGA the ship will correspond with the description given to her in the contract S 14 (2) of SOGA the ship must be of satisfactory quality. * This carries with it the requirement that the ship must meet the standard that a reasonable person would consider satisfactory having regard to the description and price and all other relevant circumstances. S 14(3) of SOGA fitness for purpose S 15A (1) of Soga where the breach is so slight that it would be unreasonable for buyers to reject, the breach is not to be treated as a condition but may be treated as a warranty. * This rule is subject to any contrary intention of the parties: S 15A(2) of SOGA

If we go into the basic provisions of the Sale of Goods Act, Section 2 (1) A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. (2) There may a contract of sale between one part owner and another. (3) A contract of sale may be absolute or conditional. (4) Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contact is called a sale. (5) Where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition later to be fulfilled the contract is called an agreement to sell. (6) An agreement to sell becomes a sale when the time

In Rugg and Co. Ltd. v. Street [1962] 1 Lloyds Rep. 364 sale negotiations were going through the intermediary brokers at both sides. At one point, one of the parties thought they had reached a final contract and the Court was asked whether the negotiations themselves created a binding contract or where they contingent upon the signing of a formal memorandum of agreement? McNair J, in the commercial court, said: in each case the Court has got to make up its mind on the construction of the documents and on the general surrounding circumstances whether the negotiations were not to have a contractual force until a formal document was signed...as in this case the standard form to be used is well recognised I have not the slightest doubt is stating that the negotiations (which are not of

In the Balkenstein [1985] 1 Lloyds Rep. 93 case there was a sale agreement for 3 ships under a Norwegian Sale form. All terms of the sale were agreed upon including the term regarding the 10% deposit. It was worded that this 10% deposit was going to be paid on signing of the contract. The contract eventually was not signed and the purchase price was not paid. The owners/sellers claimed damages for the breach of contract and compensation (which was equal to the deposit). The buyers/defendants were claiming that there was no binding contract because the written contract was never signed and the deposit was going to be paid only upon the signing of the contract. Fox J held that: I can see nothing in the present case to lead me to the conclusion that the parties contemplated the execution of the MoA as a pre-requisite to the conclusion of the contract...In the present case all the terms of the sale were agreed and it seems that all indications are that they were not intended to

Here then we the other side of the coin from the expression subject to contract. The court held that the execution of a MoA was part of the agreement but not a precedent to it being fulfilled and duly and properly performed. In a later passage Fox L J says: I do not feel able to agree that in general where the agreement provides for the payment of a deposit such payment is necessarily a pre-requisite to the formation of the contract....the provision for the payment of the deposit is simply a term of the contract. In the absence of a special provision it does not seem to me to carry with it any implication that it is a condition precedent to the existence of contractual relations.

The issue of whether a binding agreement had been reached after an exchange of telex messages also arose in The Great Marine (No. 2) [1990] 2 Lloyds Rep. 250. The judge hearing the case found that at the time of the recap telex an oral agreement had been reached between the brokers. The recap telex was not made subject to be signed and the contract had no subjects and was not expressed to be subject to details. The fact that the terms of the Sale form 1987 were incorporated into the contract did not prevent a binding agreement being reached, notwithstanding the fact that it was anticipated that the concluded contract would be drawn up and the standard terms of Sale form 1987 amended so as to reflect the specific terms that had been agreed between the parties.

The Junior K [1988] 2 Lloyds rep. 538 There had arisen a chartering dispute but the principles that emerged from it were applicable as relevant to sale disputes. The defendant wanted to charter the plaintiffs ship and entered negotiations through brokers in October 1985. Telephone conversations were held and telexes exchanged between the brokers culminating in a final telex from the plaintiffs broker, an extract of which read confirm telecons here recap fixture sub details, followed by the agreed terms ending with sub dets Gencon C/P. it was common ground that no further telephone conversations were exchanged and that the recap telex referred to the above was the final communication. The following day the defendant indicated his wish not to proceed. The plaintiff looked

Steyn J said: The expression subject to details which can also vary (e.g. subject to contract) enables the owners and charterers to know where they are in the course of their negotiations and to regulate their business accordingly. It is a device which tends to avoid disputes and the assumption of those in the shipping trade it is effective to make clear that there is no binding agreement at that stage and that ought to be respected. *It is worth mentioning that the thinking on this subject in the US is different. US courts on the whole view a contract as having reached the stage of binding the parties when the main terms have been agreed despite the presence of the expression subject to details in the negotiations.

The Gladys No. 2 [1994] 2 Lloyds Rep. 402 This was a contract of sale of a scrap. This was a contract whereby an arm of the Indian Government was buying this scrap. How did the formation of the contract take place? The government enterprise MSTC engaged brokers to look for a vessel on the international markets. These brokers would then collect the details of potential acquisitions, give them to the committee and the committee would then tell the brokers which ones would be subject to a firm offer and this had to be reconfirmed by the committee, illustrated by the qualification subject recon. This meant subject to reconfirmation. They would give the brokers a blank memorandum of agreement and left it up to the brokers to work on the details. The brokers negotiated some details with the owners and the

The Court said there was no agreement reached because further details, albeit minor, need to be agreed before the contract was binding. The Court said that there is a distinction between a firm offer and an offer subject to recon. On one hand there is a firm offer as to the price and delivery and on the other hand there is an offer in respect of which no further negotiations would take place unless and until reconfirmed and accepted.

SUBJECT TO SATISFACTORY SURVEY

In ASTRA TRUST v ADAMS & WILLIAMS [1969] a ship was sold subject to satisfactory survey. The dispute arose: Whether there was a binding contract. Whether the dissatisfaction of buyers with the survey entitled them to back out of the contract.

Megaw J, holding for the buyers said: ... I do not regard the word satisfactory as adding to or subtracting from what would have been the meaning and effect in law in the absence of that word. In my judgement there was here no binding contract. Thus this case indicates that satisfactory in this context must be put in a subjective test, which must be carried out bona fide.

IF ANY MATERIAL DEFECTS... SHALL HAVE BEEN FOUND...

The contract was the sale of a big yacht which contained a clause which was worded to the extent after the completion of such inspection and/or survey, if any material defect or defects in the yacht or her machinery shall have been found, the purchaser may give notice to the vendor of his rejection by indicating the nature of the defects. The buyer did do all that the clause required and served a notice of rejection and it was upon the validity of this notice that the court was asked to pronounce.

It was then found and held that some of the matters alleged by the buyers to be material defects were in actual fact not material defects even though the buyer could have been honestly of the opinion that they were so.

Harmon L J said hat on true construction of the contract, the word found in the clause must mean in fact and that therefore the matter was one of objective fact and that if, on the truth being ascertained by arbitration or otherwise, there was no such defect, there was no ground for serving a notice of refection.

Free from average This was discussed in Kelman vs. Livanos [1955] 1 LR 120. The facts were that the contract was on so called priam terms. This means that there was a provision for an inspection of the vessels bottom and underwater parts, so a bottom survey was going to be performed. Another provision stated that the ship shall be delivered to the buyers free from average and with clean swept holds and class maintained. Additionally, dry docking and drawing of the tail shaft was stipulated and it was expressly agreed that if any bottom damage was found the buyer could require to be made good to the satisfaction of a Lloyds Register surveyor.

Four years previously a classification certificate had alluded to some bottom damage but indicated that it did not affect the maintenance of the class. On a further inspection at the time of the sale agreement, a surveyor confirmed that class was still maintained, as there has been no deterioration. Seller and buyer disputed on the costs of repair; the buyer insisted that he was entitled to refuse to accept the ship until repairs had been effected; the seller was in breach of his obligation to deliver free from average.

The court held that, looking at the contract terms as a whole, there were two contingencies: if the surveyor, after the inspection (the bottom survey) approved the condition of underwater parts and found the ship to be generally seaworthy, then she should be deemed ready for deliver; and, if the damage found were to the extent that the condition of the ship was inconsistent with seaworthiness, then in that case, the ship should not be deemed ready for delivery until such time as the repairs were carried out to his satisfaction.

The Court said you cannot talk about these damages found at the bottom as average because average in the ordinary meaning signifies claims against the ship. The buyers were interpreting free from average as no damage was supposed to be found after this bottom survey. The Court said that free from average means that there are no claims against the ships like encumbrances, liens, etc and the seller was not in breach of that.

Free from average damage affecting class This one was discussed in The Alfred Trigon (1981) 2LR 333. Goff J, delivering judgement, said, inter alia that the phrase did not refer to the class documentation but to the vessel herself. The vessel, at the time of delivery, has to be in class and that this class must be free of recommendations and the vessel herself must be free of average damage affecting the class. In a later passage, he says that the phrase must be interpreted as meaning damage of such a character as either to prevent the vessel being in class or to result in the surveyor, on his becoming aware of the damage, imposing some qualification on class in the way of a recommendation.

Free from average damage or defects affecting class This was discussed in Star Kuwait [1986]. The crucial provision was vessel to be delivered free from average damage or defects affecting class. The ship was inspected and was subsequently declined. When the vessel was delivered to the buyers, they had voiced complaints regarding the condition. The dispute was referred to arbitrators who found that the buyers were entitled to recover damages for proven defects affecting the class without the necessity of proving that such defects were such as would ordinarily be covered by insurance.

Birmingham J stated that the arbitrators were correct in their reasoning. The clause should be read as if it was intended to mean free of recommendations affecting the class, free of defects affecting the class. Despite the using of the word or, average was to be read as governing damage only; in using the phrase free of average damage affecting the class it was likely that the parties meant free of any damage affecting the class and that they also meant the vessel was to be free of defects affecting the class.

Birmingham J said that it would not make commercial sense to say that the word average should qualify defects. Unless a defect causes damage the cost of repairing it is not covered by a normal policy of insurance. So, average defects is a meaningless phrase

The Niobe [1995] The dispute arose between the seller and the buyer as to whether the seller was under an obligation to notify his classification society, prior to delivery, of matters affecting class which came to his knowledge either from the contract date or the last survey date or some other date. The MoA in question was on the NSF 1987, clause 11 read: ...the vessel shall be delivered with present class free of recommendations. The seller shall notify the CS of any matters coming to his knowledge prior to delivery which... would lead either to the withdrawal of class or the imposition of a recommendation relating to class.

In the courts opinion the phrase coming to their knowledge, was as apt to cover knowledge acquired before the contract as after and meant matters known to the sellers, neither more nor less, and the sellers were obliged under the contract to inform the CS before delivery of all matters affecting class, whenever such matters might have come to their knowledge. A comparative study of the text of clause 11 in the 1987 and 1993 versions of NSF reveals that in the later of these two versions the requirement upon the seller that he should advise his CS of damage affecting the class has been omitted.

The Nicholas H [1955] The facts of this case were that the cargo laden ship was underway from South America to Europe. Certain cracks in the hull made the master worry. The ship was put in to Puerto Rico and a local class surveyor was invited to inspect the ship. Because the ship was in a hurry to reach the port in Europe, the ship owner pressed the surveyor not to suspend the class. The surveyor put a recommendation that repairs were going to be done as soon as the ship reached a port in Europe. The ship sank on the way and the cargo was lost. Was there negligence on the part of the surveyor and whether the classification society could be found liable to the owners of the cargo as a third party?

Lord Steyn stated: ...If a duty of care is held to exist in this case, the potential exposure of CS to claims by cargo owners will be large. That greater exposure is likely to lead to an increase in the cost to CS of obtaining appropriate liability risks insurance. Given their role in maritime trade CS are likely to seek to pass on the higher cost to owners. Moreover, it is really predictable that CS will require owners to give appropriate indemnities. Ultimately ship owners will pay.

A deposit will be paid; Inspections; Flagging arrangements; Delivery of documents; Bunkers; Closing meetings; Payments mechanics; Release of the deposit; Sellers arrangement for delivery; Buyers arrangements for delivery; Payment and delivery;