The current reduction of activity in the new building market for traditional ship types has led to a renewed focus by owners on the second hand market, particularly in the smaller bulk sector where market sentiment is that there is a much better return on value to be had than from ordering newbuildings at today’s prices.
Second hand ship sale and purchase involves consideration of a number of legal and commercial issues. BLP have prepared a series of three briefings, of which this is the first, setting out some of the key issues and considerations for sellers and purchasers to consider.
For the purposes of these briefings we have assumed that the sale and purchase contract is governed by English law.
The sale and purchase contract
As in any sale and purchase contract, the main terms to be negotiated will be concerned with what is actually being sold (i.e. the condition of the ship), the timing and method by which title is to be transferred, payment and who is liable for what in the context of a breach of contract scenario.
The most common forms of sale and purchase contract currently in the market are the Norwegian Sales Form 1993 (NSF 93), the Norwegian Sales Form 2012 (NSF 2012) and the Japan Shipping Exchange Form (Nippon). The most commonly used form today is the NSF 93.
Although these forms of sale and purchase contract are considered “standard forms”, they should be viewed as a “menu” of clauses which then need to be carefully tailored to the particulars of each sale.
What is actually being sold?
In the context of the sale and purchase of a ship, the extent to which a buyer can define exactly what it is he is purchasing, other than identifying the ship itself, is usually quite limited. This is obviously a good position for the seller but not for the buyer, as it means it is very difficult for the buyer to be able to know what the condition of the ship is.
The buyer is therefore left to rely on any physical inspection of the ship that it undertakes (which is usually undertaken on a superficial basis), an inspection of the ships classification society records and a judgment as to the quality of the owners in order to determine the ships condition for the purpose of the purchase.
Under English law, the Sale of Goods Act 1979 (as amended by the Sale and Supply of Goods Act 1994) (the “SGA”) applies to the sale and purchase of second hand ships, unless excluded. The SGA seeks to imply into the sale and purchase contract certain terms of satisfactory quality and fitness for purpose (subject to certain conditions being met) in respect of the condition of the subject ship.
Traditionally the terms “as is, where is” (NSF 2012) or “as she was” (NSF 93) are used to describe the condition of the ship the subject of a sale and purchase contract, with the view being commonly held that such terms are sufficient to exclude the implied conditions under the SGA, the purchaser therefore agreeing to purchase the ship in the condition and state in which she is found at the point in time defined in the sale and purchase contract, all faults included, without any warranty as to quality or condition. This view was blurred recently by a number of cases.
In Dalmare SPA v Union Maritime Ltd (Union Power) , the Court made clear that the words “as she was” were likely not sufficient to exclude from a sale and purchase contract the implied terms of satisfactory quality and fitness for purpose under the SGA. The Court also expressed the view that the words “as is where is” were also likely not sufficient to exclude such implied terms.
The case of Michael Hirtenstein & Others v Hill Dickinson LLP  endorsed the traditional meaning of the words “as is, where is” – i.e. that a ship purchased on this basis was deemed to have been purchased in her existing condition, be that good or bad, with no recourse against the seller for subsequently discovered faults.
Despite the Hirtenstein case, the case of Union Power is still good authority for the position on the term “as she was”, which will not be sufficient to exclude the implied terms of satisfactory quality and fitness for purpose under the SGA. This should be borne in mind for any seller/buyer contracting on NSF 93 – see below for our recommendations on this point.
Takeaway point – NSF 93
The NSF 93 continues to be one of the most popular forms of ship sale and purchase contract. Section 11 of NSF 93 uses the term “as she was” to describe the condition of the ship on delivery, a term which on current case law is not sufficient to exclude the implied conditions that the ship should be of satisfactory quality and fit for purpose upon sale pursuant to the SGA.
- Seller Point: a specific term should be drafted and included within the sale and purchase agreement excluding statutory or other implied terms if the intention is to conclude the sale on the basis that the ship is to be sold in the condition in which the purchaser has found her. The insertion of such a term should ensure that the liability of the seller in respect of the condition of the ship is limited for the purposes of the sale to the condition of the ship as the purchaser has found her.
- Purchaser Point: if the ship is to be purchased in a certain condition, or subject to certain conditions, these need to be made very clear in the sale and purchase agreement. This applies not only to NSF 93 but in respect of any sale and purchase agreement.