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BIMCO releases new standard ship sale and purchase agreement

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 BIMCO releases new standard ship sale and purchase agreement

At a Glance…

BIMCO has recently launched SHIPSALE 22, its own standard contract for the sale and purchase of vessels. It seeks to improve on SALEFORM 2012, the Norwegian Shipbrokers’ Association’s standard form of contract. Although there are only a few substantive changes in SHIPSALE 22, the new form is more in line with modern market practice, and it is expected that the industry will adopt it as a new standard form going forward. 

Authors: Lianjun Li, Min Li, Peter Glover, Donald Sham, Peter Lee, Tat Pan, Cheryl Yu, Philip Rymer, Patrick Chong, Leah Lei

Capability: Transportation; shipping

Read time approx: 7 minutes (1,336 words)

Format
Unlike SALEFORM 2012 but similar to other BIMCO standard contracts, Part I of SHIPSALE 22 contains the standard box layout setting out information such as the parties’ details, amounts and inspection arrangements, which allows the parties to locate the key information easily and for fewer amendments to be made to the Part II text. The substantive provisions are set out in Part II, followed by two annexes with the delivery documents and the excluded items.

In addition, the clauses have been arranged in such a way as to ensure that SHIPSALE 22 follows the typical chronology of a sale and purchase transaction, which makes the standard form more reader-friendly.

Apart from the layout changes, SHIPSALE 22 contains some revisions to the existing wording and new clauses in response to the latest developments in market practice. Some of the noteworthy changes are set out below.

Subjects
SALEFORM 2012 does not provide for a mechanism governing subjects to effectiveness of the agreement. In practice, the parties often deal with conditions precedent prior to signing the memorandum of agreement (in exchanges on terms and the recap) and such that the deal is unconditional by the time of signing. One of the notable additions in SHIPSALE 22 is the subjects clause, which allows the parties to set out in the agreement itself any conditions that are still to be fulfilled before it becomes effective. In the event that any conditions are not fulfilled by the specified date, the agreement will be null and void automatically. Where parties decide to include subjects in the memorandum of agreement, it is important to stipulate clearly which party is responsible for fulfilment of the subjects and how to confirm that they have been fulfilled.

Performance guarantees
In a ship sale and purchase transaction, it is not uncommon for the performance of one or both the parties (in particular buyer-side) to be guaranteed by another entity, in particular where the party in question is a single-purpose entity. To facilitate documentation of the performance guarantee in one single document, SHIPSALE 22 includes a signature field and a statement from each relevant guarantor that it shall guarantee the performance of the obligations of the seller or the buyer (as the case may be) in accordance with the agreement.

Deposit and payments
Revisions have been made to the deposit clause in SHIPSALE 22, in particular to refer to a deposit holding agreement, which shall set out the basis on which the deposit will be received, held and released by the deposit holder.

Further, the concept of disruptive banking events has been added to SHIPSALE 22. The deposit clause provides that a grace period of two banking days will be given to the buyer if the deposit holder’s receipt of the deposit is delayed by certain disruptive banking events, which might, for example, include delays due to bank sanctions checks.

SHIPSALE 22 also contains a gross-up clause, which provides that the paying party shall gross up the relevant payment so as to ensure that the other party receives and retains the full amount where the paying party is required by applicable law to make any deduction or withholding in respect of such payment.

Inspection
SALEFORM 2012 allows the parties to opt for (i) an outright sale, with inspection of the vessel and its classification records having been completed before the agreement is entered into, or (ii) a sale subject to the buyer’s right to conduct a pre-delivery inspection. SHIPSALE 22 provides an option (iii), namely an outright sale, the buyer having waived its right to inspect the vessel and its classification records, which may be agreed in a seller’s market or for certain types of sale and leaseback transactions and distressed sales. Of course, the buyer may still want to inspect the classification records.

Where option (ii) above is chosen, the buyer’s right of inspection is (at least now on paper, reflecting market practice as the usual scope of inspection) narrower under SHIPSALE 22. The inspection under SHIPSALE 22 is to be done “without testing of the Vessel’s engines, machinery, equipment or systems”, rather than “without opening up” under SALEFORM 2012.

It is worth noting that, unlike SALEFORM 2012, which contains a default position, SHIPSALE 22 does not stipulate which of the three alternatives applies in the event that the parties fail to make a selection. Therefore, it is important for the parties to make sure that the relevant box is filled in.

Underwater inspection and drydocking
Where an underwater inspection is chosen by the parties, under SALEFORM 2012, the buyer is in a position to prevent the seller from tendering notice of readiness by delaying the underwater inspection. SHIPSALE 22 seeks to address such situation by providing that if the buyer fails to commence the underwater inspection within two days after the vessel is made available for such inspection, it shall be deemed to have waived its right to an underwater inspection.

Where the vessel is drydocked, the buyer is entitled under SALEFORM 2012 to require the tailshaft to be drawn and surveyed even if such survey is not required by the vessel’s classification society. SHIPSALE 22 has removed the buyer’s right in this regard, which is in line with current market practice.

Virtual closing
SHIPSALE 22 expressly refers to the option of virtual closing in addition to a physical closing meeting. It is provided that after the seller gives the notice of readiness, a documentary closing shall take place either remotely by electronic means or physically. The addition reflects current market practice and has been adopted in many ship sale and purchase deals in recent years, in particular due to the outbreak of the COVID-19 pandemic.

Sanctions, anti-corruption and confidentiality
In line with market practice, BIMCO has included in SHIPSALE 22 sanctions and anti-corruption clauses, a breach of which entitles the non-breaching party to terminate the agreement and claim damages resulting from the breach. In contrast, the newly inserted confidentiality clause does not give rise to a right to terminate the agreement in the event of a breach by either party (in line with market approach to such clauses).

These are a welcome addition to reduce time and costs in negotiations as it is already common for the parties to insert similar wordings to satisfy their internal requirements and, where external financing is involved, their lenders’ requirements. Alternative wordings may remain relevant where required by the parties so as to meet applicable compliance requirements.

Conclusion
SHIPSALE 22 is by no means a fully comprehensive standard form designed to cover all issues relating to the sale and purchase of a vessel. As with SALEFORM 2012 parties should not lose sight of the need to make amendments and additions to address deal-specific arrangements and issues such as possible nomination of buyers, sale on a “subject to charter” basis and COVID-related matters. Reed Smith is also preparing a detailed clause-by-clause guide to deepen our clients’ understanding of the terms of and use of SHIPSALE 22.

Although not all the issues raised during the consultation have been addressed in SHIPSALE 22, it does contain new clauses and useful wording clarifications, which are often included in SALEFORM 2012 by way of amendment or addition. The publication of SHIPSALE 22 has been well received by industry players and is expected to facilitate the negotiation process and save time and money in S&P deals going forward.

If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors – listed below – or the Reed Smith lawyer with whom you regularly work. 
 
 Lianjun Li  Lianjun Li
Partner, Hong Kong
+852 2507 9857
lianjun.li@reedsmith.com
 Min Li  Min Li
Partner, Hong Kong
+852 2507 9892
min.li@reedsmith.com
 
 
 Peter Glover  Peter Glover
Partner, Singapore
+65 6320 5332
peter.glover@reedsmith.com
 Donald Sham  Donald Sham
Partner, Hong Kong
+852 2507 9752
donald.sham@reedsmith.com
 
 
 Peter Tin Ho Lee  Peter Tin Ho Lee
Partner, Hong Kong
+852 2507 9839
peter.lee@reedsmith.com
 Wing Tat Pan  Wing Tat Pan
Partner, Hong Kong, Shanghai
+852 2507 9705, +86 21 6032 3190
tat.pan@reedsmith.com
 
 
 Cheryl Yu  Cheryl Yu
Counsel, Hong Kong
+852 2507 9819
cheryl.yu@reedsmith.com
 Philip R. Rymer  Philip R. Rymer
Partner, London
+ 44 (0)20 3116 3559
prymer@reedsmith.com
 
 
 Patrick Chong  Patrick Chong
Trainee Solicitor, Hong Kong
+852 2810 9494
patrick.chong@reedsmith.com
 Leah Lei  Leah Lei
Paralegal, Hong Kong
+852 2507 9856
leah.lei@reedsmith.com
Transportation Industry Group 
 
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