Ship Sale and Purchase

Ship sale and purchase

1. Negotiations stage and binding contract

During the negotiations the parties owe no duty to make full disclosure of their position to the other party under English law, but they must not misrepresent facts to induce the contract. The parties must express their intention clearly to prevent an ambiguous contract which may not be binding. They are masters of their contractual fate. They may have agreed all basic terms but they may not wish to be bound until certain other terms are agreed. To this extent, they must make their intention clear. Contracts have been held not to be binding because the parties did not make clear what they wanted. There are some examples given of such circumstances, which you must try to understand by doing the activities below.

2. Important terms of the contract

The standard statutory implied terms of the Sale of Goods Act 1979 as amended in 1995 will apply if the law of the contract is English. The property will pass to the buyer when the parties intend it to pass. The sale of a second-hand ship is normally an agreement to sell, not a sale contract yet. Before the final stage, during which the seller will give notice of readiness, the ship is not yet in a deliverable state and the parties’ intention is that the property shall not pass when the contract is made but upon payment on the day of delivery.

The term of when the deposit is payable is important, breach of which entitles the seller to cancel the contract (regardless of whether or not the MOA was signed) provided there was, in all other respects, a binding contract (The Blankenstein). In such a case the deposit is payable to the seller as a right accrued prior to the acceptance of the repudiatory breach (The Griffon). This can be reversed but requires very clear wording.

Payment of the deposit is linked to the buyer’s right to inspect the vessel which leads to the inspection stage of the sale process. Such inspection has two parts: inspection of documents, and physical inspection of the ship. This inspection of the ship afloat will be decisive as to whether or not the sale will become definite. If the buyer is satisfied with the ship they will give notice of acceptance, otherwise the deposit will be returned.

There follows the completion stage during which the classification society will inspect the ship in the dry-dock to confirm whether or not there are any defects. If there are not, the classification society will issue a clean certificate that the vessel is in class. Invariably, however, there is something to be done to a second-hand ship before it can be classed; therefore, the classification society will make recommendations which the seller has to follow. If they do not, the buyer will have the right to reject the ship, or make a claim for defects. (An example of this is The Great Marine (No.2)).

If all goes well, the seller will give notice of readiness for the delivery of the documents and physical delivery. The buyer must pay the price within a certain time after the notice of readiness. The seller has already undertaken that the ship will be free of maritime liens and any other debts. Usually disputes arise when the ship is not in the condition as it was at the time of inspection, or when it is encumbered with maritime liens or other debts. You will find out how the relevant clauses in this area have been interpreted by the courts.

The Sale of Goods Act 1979 applies to the sale of used ships and therefore an implied term as to satisfactory quality is to be implied under s.14(2). This could be negated by the conduct of the parties or by custom in the business or expressly excluded in the contract. The general requirement to accept a ship ‘as is’ or ‘as was’ is not such clear wording (The Union Power).

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