In this series of short basic articles, we'll be highlighting some areas that should be on the forefront of a purchaser's mind when purchasing a boat/ship/yacht/vessel to avoid turning something that should be an exciting exercise, into a frustrating nightmare.
Get it in writing
Typically sellers and purchasers of larger, more expensive, technical vessels will view a well-drafted agreement minimising risk as an absolute necessity but this doesn't always run true for purchasers of smaller vessels, who may see it as an unnecessary complication (and expense), and 'just want to get on with it'. From a legal perspective, it is undoubtedly a far easier task handling a contractual dispute where the terms have been reduced to writing.
Just like boats, vessel sale and purchase agreements come in all shapes and sizes ranging from an in-house contract to the Norwegian Saleform and MYBA standard form agreements.
An agreement doesn't have to be a cure for insomnia or attempt to cater to every possible circumstance (real or imagined) but at the very least should clearly record in reasonably plain language what the parties have agreed to and how the deal will proceed (or not) and what happens when things go south.
Although the circumstances and technicality of every sale will be different, there are some common contractual provisions that should be in every agreement as a departure point.
Common contractual provisions
Parties: it is not uncommon for the purchaser to initially be described as an individual or company and then prior to settlement choose to nominate an alternate party/entity as the Purchaser so do include a nomination clause or even simple drafting such as '…and/or nominee' in the agreement to avoid a variation/novation agreement downstream to rectify matters. The inclusion of the Seller's full details will assist in due diligence investigations to determine whether the title to the vessel can legally be passed at settlement.
Vessel Details: This should at the very least include the vessel's name and registration number (if registered) to assist in legal due diligence (see my upcoming article Boat Purchase 101: Legal Due Diligence);
Deposit: Typically 10% of the Purchase Price, held in trust by the Seller's solicitors (or the broker as stakeholder) and released to the Seller at settlement, or the Purchaser if the deal doesn't proceed. It's a good idea to outline who pays any bank charges, particularly in international transactions;
Conditions: Typical conditions include;
Finance Condition (Bank/Second Tier/Vendor): It's imperative to ensure there is sufficient time to satisfy any finance condition as the lender will have a raft of requirements that must be satisfied prior to finance being approved (if necessary).
Insurance: Oftentimes this will dovetail into the finance condition (if applicable) as a financier will want to ensure that there is some assurance (in addition to a ship's mortgage) that they'll be repaid should the vessel be deemed a total or constructive loss. Typically, if the underwriter won't insure the vessel, finance is likely to fall over, unless alternate security can be offered. In assessing whether to provide cover, the insurer will usually require a condition survey which may take some time to organise particularly if they require dry-docking. Note: whilst similar, it is not necessarily a good idea to rely on the insurer's survey as opposed to a pre-purchase condition survey as the two tend to have different focuses.
Sea-Trial: Typically this is for a fixed duration at the seller's cost, and an opportunity for the Purchaser (and his team) to see her in operation.
Condition Survey: Usually a desktop (see my article Boat Purchase 101: Technical Due Diligence) along with a physical survey. The extent of the physical survey will depend on the type, size and age of the vessel and may include a diver's inspection, in-water survey, or dry-docking. The contract should include a realistic deadline for completion as facilities/personnel/surveyors may have limited availability.
Legal Due Diligence: this isn't commonly included (but can be) as a clause in a sale and purchase agreement but usually occurs in the background from the moment the agreement is signed. (for more details on Legal Due Diligence, see my upcoming article 'Boat Purchase 101: Legal Due Diligence')
'As is, where is': It is almost commonly accepted that the purchase of second-hand tonnage is on an 'as is, where is' basis, subject to any warranties provided for in the agreement.
Warranties: This is often the most contested area of the agreement. Common warranties provided by the Seller (who is in the best possible position to provide these given its history with the vessel) may include:
Vessel sold free of mortgages, liens, encumbrances, charters, debts etc and that title will pass free of same;
Seller legally entitled to sell and if owned by a corporation has complied with any internal corporate requirements (i.e. Directors/Shareholders/Trustees resolutions/minutes); and
The vessel will be delivered in the same condition as she was at time of inspection (fair wear and tear excepted).
Delivery: Date/place of delivery should be included. Consideration should be given to who will pay for the vessel to be delivered ie vessel berthed in Auckland, but to be delivered to Florida. Although circumstances may dictate that delivery and settlement take place on different dates, typically delivery and settlement happen contemporaneously. To avoid technical breach of contract by either party it's prudent for both Seller and Purchaser to work together to set realistic timeframes in respect of delivery times/dates to account for unforeseen circumstances.
Inclusions/Exclusions: Oftentimes drafting around inclusions/exclusions goes along the lines that everything is included unless specifically excluded! Customarily, personal effects of the Seller (and Master/Crew) and items on hire are excluded, however, it makes sense to comprehensively listing both inclusions and exclusions to avoid disputes.
Fuel: Included/Excluded? If excluded inclusion of a provision dealing with fuel i.e price (market or actual net price) along with a mechanism for determining quantity on board at time of settlement is a wise idea.
Documents: The volume of documents to be inspected/handed over at time of settlement will be driven by the size, type of vessel and any flag state requirements Settlement documents usually include:
Bill/s of sale: this acts as title to the vessel and is extremely important;
Certified Transcript of Register Entry (if registered): typically issued on or a day prior to settlement as evidence that (i) the vessel is still owned by the seller, and (ii) no mortgages have been lodged between the time of signing the agreement and settlement;
Evidence that any necessary corporate processes have been followed ie Director/Shareholder/Trustee Resolutions (if owned by a company/trust);
Certificate of Deletion from Register (if changing flag, and if applicable); and
Tax invoice for the vessel and bunkers (if commercial sale).
Payment: Where parties are in different countries, and particularly if the purchase price is being paid in a different currency parties should consider payment of the Purchase Price upfront to a solicitors trust account with appropriate undertakings to hold/release same strictly in accordance with the agreement or use of an escrow agent.
Tax: This is particularly important and specialist advice should be taken on the tax implications that may arise specifically if the vessel is foreign flagged (ie not domestic to domestic purchase) and subject to a temporary import regime where the sale is due to settle. Many temporary import arrangements require the vessel to be imported with tax/duties paid on the value of the vessel.
Settlement Mechanism: In today's shrinking global village it is not unusual to have Seller, Purchaser, Broker/s and Vessel in completely different locations (and time zones) at time of settlement. Accordingly, it becomes increasingly important that all parties work together in a pragmatic, flexible manner to reduce the inevitable tension that arises around settlement time. Use of technology such as Zoom/Team//Skype should be embraced where appropriate with a clearly understood and simple settlement mechanism in place to reduce stress.
Dispute Resolution: Unfortunately things can and do go wrong, and a well-drafted dispute resolution clause is an absolute necessity to resolve disputes as quickly and effectively as possible.
Whilst the above is far from an exhaustive list of provisions that should be in a vessel sale and purchase agreement, it should at least provide a basic guideline/springboard. This article is not intended to be relied upon as legal advice, but rather to highlight some important basic areas (sometimes overlooked) that should be considered when purchasing a vessel. If you're considering a vessel purchase feel free to contact us and we'll be more than happy to assist.
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
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