Sale and purchase procedure
Practical payment mechanisms

Before a closing meeting for the sale and purchase of a second-hand vessel takes place, the sequence of steps to be taken for payment of the purchase price and delivery of the seller's documents must be agreed, as well as whether the buyer or the seller should take the first step.

Sale and purchase procedure

In a typical scenario the seller and the buyer enter into a memorandum of agreement for the sale and purchase of a vessel. The vessel is mortgaged in favour of the seller's bank. The seller's bank will discharge the mortgage only upon receipt of an amount sufficient to settle the outstanding amount secured by the mortgage. Normally, the seller intends to use the purchase price under the memorandum of agreement to settle the outstanding amount. However, the buyer (and the buyer's bank) normally expects the vessel to be free of mortgages when taking delivery of the vessel and paying the purchase price.

Unless otherwise agreed between the parties, Clause 8 of the Norwegian Saleform 93 provides that:

"In exchange for payment of the Purchase Price the Sellers shall furnish the Buyers with delivery documents, namely... (d) current Certificate of Ownership issued by the competent authorities stating that the vessel is free from registered encumbrances."

Under Norwegian law, this clause provides that payment of the purchase price and delivery of the seller's documents (including a clean certificate of ownership) should take place simultaneously.

One way to avoid last-minute discussions is to agree in the memorandum of agreement or in a pre-closing memorandum, prior to delivery, the sequence of steps that are to be taken during the closing meeting - for example, that the mortgage will not be discharged until the seller has received the purchase price.

When negotiating the closing procedure, a generally accepted principle is that the party taking the first step (A) is obliged to do so only if the other party (B) can provide sufficient comfort that B's obligation will be fulfilled as soon as possible after A's fulfilment. For example, if the buyer (or its bank) is to pay the purchase price before receiving the clean certificate, the seller (or its bank) must provide sufficient comfort that the existing mortgage will be discharged immediately after the seller's receipt of the purchase price. Correspondingly, if the seller's bank is required to discharge the mortgage prior to receiving the outstanding funds secured by the mortgage, the buyer's bank must provide acceptable comfort that the funds will be paid immediately after the discharge of the mortgage.

Practical payment mechanisms

Confirmation and payment letters
One option is that the seller's bank provide a letter confirming that it will discharge (or arrange for discharge, since it is the registry which ultimately effects the discharge) the mortgage immediately against receipt of payment of amount due in the nominated account. In addition, the ship registry should confirm on the closing day that it is ready to discharge the mortgage upon receiving instructions from the mortgagee.

Alternatively, the buyer's bank can confirm that it will pay the purchase price to the nominated account immediately upon receipt of a copy of the deletion certificate. This is often also done by using a 'payment letter' issued by the buyer's bank and brought to the closing meeting by a representative of the buyer's bank. As part of the closing procedure, the payment letter is then tabled and released to the seller's bank at an agreed time during the closing.

Payment letters neutralise the timing challenges. For example, if it is agreed that the seller's bank shall discharge the mortgage against receipt of payment of the purchase price and the funds do not arrive in the account before the bank closes, the closing cannot proceed until the next day. By using a payment letter, there is no need to wait for the funds to arrive and the closing can proceed uninterrupted.

Suspense account
Another recognised procedure is that the buyer's bank transfers the funds to a suspense account with the seller's bank in advance. Consequently, there will be no delays following late arrival of funds. When using this procedure, the transfer of funds (usually via a Society for Worldwide Interbank Financial Telecommunication (SWIFT) MT 103 message) should be accompanied by a separate SWIFT message (often MT 199) that clearly states the instructions for the release of funds from the suspense account during the closing meeting - for example, by stating that a certain person is granted power to sign a release letter or that funds be released subject to an assigned protocol of delivery and acceptance.

Escrow agent
A third method is to use an escrow agent to collect all the documents and receive the funds in an escrow account. The agent then makes arrangements for simultaneous transfer of funds and delivery of documents. This is not common in sale and purchase of second-hand vessels, but may be recommended in more complex transactions.


Since the simultaneous exchange of funds and documents poses a challenge in the sale of any vessel that is mortgaged, in order to avoid disputes and delays, it is essential that the procedure be agreed by the parties well in advance of delivery taking place. There are various practical solutions open to the parties to resolve this potential difficulty and identification of the most suitable solution at an early stage will assist in achieving smooth delivery of the vessel.

For further information on this topic please contact Gaute Gjelsten at Wikborg Rein's Oslo office by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email ([email protected]). Alternatively, contact Linn Hertwig Eidsheim or Christopher Andreas Brun at Wikborg Rein's Bergen office by telephone (+47 55 21 52 00), fax (+47 55 21 52 01) or email ([email protected] or [email protected]).