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11 April 2012
The Norwegian Shipbrokers' Association's Memorandum of Agreement for sale and purchase of ships (the 1993 Norwegian sale form) is the standard contract most commonly used for the sale and purchase of second-hand vessels. An updated version of the form was recently issued. It is made available through the Baltic and International Maritime Counsil and named SALEFORM 2012.
As might be expected when updating such a widely used standard form, the changes that have been made are moderate. The amendments are partly editorial, such as new definitions and a rearranged layout of Clauses 5 and 6, and partly substantive, such as new trigger provisions for payment of a deposit and a new provision in Clause 6 (b)(ii) permitting delivery against a price reduction when the diver's inspection reveals damage. Other amendments reflect industry practice, most notably the expanded list of delivery documents in Clause 8.
In Clause 2 of the 2012 form, the first change is that the deposit amount has been left open. A deposit of 10% has been retained as the default position where the parties have not agreed otherwise. The new form includes several such 'open' solutions intended to offer more flexibility to meet different market conditions.
Another important change in Clause 2 is that the buyer's obligation to arrange a deposit has been made conditional on:
Under the 2012 form, the buyer will have more time to pay the deposit, and this time period could possibly be further extended by a delay in the execution of the memorandum of agreement.
This amendment reflects commercial reality, as the previous three-day deadline was considered by many buyers to be too short a period in which to make timely payments. However, this change may also raise some interesting questions as to when the contract will be treated as having been concluded, at least under English law. Typically, the contract is considered as having been concluded when the recap is agreed. Signature of the memorandum of agreement is not required to enable the contract to be enforced. Arguably, this position may have changed under English law with the 2012 form and may enable both parties to have a cooling-off period between agreeing the recap and deciding whether or not to execute a memorandum of agreement.
The basis of the form sale is that it is concluded on an 'as is' basis, subject to an underwater inspection by either a diver's inspection or by drydocking before delivery.
Clause 5(b) of the 2012 form requires the seller to give 20, 10, five and three days' notice of the date on which the seller intends to tender the notice of readiness. Clause 6(b) links in with this provision by requiring the buyer to give nine days' notice of the intention to request a diver's inspection. Thus any change in the notices given under Clause 5(b) will also need to be picked up under Clause 6(b).
The 1993 version of the form did not identify the consequences if the diver's inspection could not be carried out within three days of tendering the notice of readiness or before the cancellation date. The 2012 form addresses this issue by providing for an extension of the cancellation date if the diver's inspection is delayed. To ensure that the buyer is not obliged to pay the purchase price before the diver's inspection, Clause 6 states that the notice of readiness cannot be tendered before completion of the inspection.
Another change is the second paragraph of Clause 6(a)(ii), lines 130-143. If the underwater inspection reveals defects which the classification society does not require to be rectified before the next drydocking survey, the seller has the right to deliver the vessel with such defects against a price reduction. The price reduction is the average of two quotes from repair yards obtained by each of the parties. While this may go some way towards resolving disputes concerning the condition of a vessel on delivery, it may cause problems for a buyer which, following purchase, is required to deliver the vessel under a charter free of defects.
The list of documents to be provided on delivery has been substantially extended. Clause 8 now requires both parties to provide documents evidencing that "all necessary corporate, shareholder and other action" has been taken to authorise the transaction, including a power of attorney. These clauses have been kept sufficiently general to suit different types of company, but the provision does not include certificates of registration and/or of good standing, which parties may consider adding if these are not publicly available.
The 2012 form renames the certificate of ownership as a 'certificate or transcript of registry'; this document is to be issued on the delivery date. The 1993 version required 'current' certificates, thus creating room for debate as to whether the requirement was met where the seller provided a certificate issued a day or two in advance.
Under the 2012 form, the seller is also obliged to provide additional documents which the parties previously almost invariably listed in an addendum or closing memorandum – namely, documentation evidencing closure of the vessel's continuous synopsis record, a letter of undertaking regarding blacklisting, commercial invoices for the vessel and for bunkers and extras and a copy of the cancellation letter to the satellite communication provider.
To ensure that the delivery documents are acceptable to all third parties, such as banks and ship registries, it is common practice to agree that copies or forms of delivery documents be exchanged in advance. The new Clause 8(c) codifies this practice. The new form also states that documents that are not in English must be translated.
The order in which the parties' obligations are to be performed during the closing meeting is often dealt with at the last minute and can lead to disputes. In practice, it is often not possible to achieve a simultaneous exchange of money against documents. Commonly, the purchase price is used to pay off the seller's loan, which is secured by a mortgage over the vessel. However, the buyer's bank may be unwilling to disburse its loan and advance the purchase price without a transcript of registry free of encumbrances or even the deletion certificate.
A common, practical compromise is the use of a letter of undertaking from the seller's bank confirming that the mortgage will be discharged on receipt of the purchase price. Without providing a definitive solution to this chicken-and-egg problem, Clause 8 of the 2012 form facilitates a practical solution by providing that the transcript of registry can be faxed or emailed from the ship registry to the closing meeting with originals to follow.
Clause 7 (spares, bunkers and other items) has been revised to clarify which items are to be delivered with the vessel. The buyer will normally expect equipment onboard the vessel to be included in the sale. Clause 7 now provides that hired or leased items are excluded only if explicitly listed, failing which the seller must replace such items before delivery.
The former arbitration clause has been replaced by the council's new standard dispute resolution clause, which makes English law arbitrations subject to the London Maritime Arbitrators Association terms (including the small claims procedure), and contains a more detailed procedure for the appointment of arbitrators
The 2012 form also includes two new clauses: Clause 17 (notices) and Clause 18 (entire agreement). The inclusion of a notice provision is of practical importance in a contract where notices must be given in a timely manner. The entire agreement clause prevents parties from relying on previous correspondence and statements not included in the executed memorandum of agreement, and also prevents reliance on any statutory implied terms.
For further information on this topic please contact Oddbjørn Slinning, Ena Aarseth Barder, Kjetil Jansen or Gaute Gjelsten at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (firstname.lastname@example.org, email@example.com,, firstname.lastname@example.org or email@example.com).
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