October, 2022 - The effect of Covid-19 on ship sale and purchase contracts
- Date: 13/10/2022
Although there has been a welter of material generated in relation to the effects of Covid on a variety of shipping contracts, very little if anything has been said about its effects on the sale and purchase of second hand ships. That is surprising given the obvious difficulties which the pandemic created and continues to create in respect of the delivery of ships at the contractual place of delivery or within the contractual delivery range. It is also notable that no maritime body has attempted to draft a standard clause for incorporation into sale contracts. It may be that this is because the terms upon which ships are sold are particularly sensitive to market sentiment and thus not conducive to a standard wording. However, the absence of any template clause has inevitably led to the drafting of bespoke clauses which, with due deference to the persons drafting them, sometimes lack clarity. The inability of the seller to deliver the ship can of course have very serious consequences. Like in all clauses dealing with a specific event, bespoke clauses need to be clear. While that is an obvious statement, anticipating what the consequences might be of, for example, a crew quarantine requirement are potentially far reaching and the parties' positions need to be spelt out as clearly as possible. That does not however mean that bespoke clauses need to be long.
Most sales of second hand ships, at least in the Western Hemisphere, are undertaken on the basis of the Norwegian Saleform (usually the 2012 version) (the "NSF") which in clause 5 contains provisions as to where the ship can lawfully be delivered and by when. The delivery window almost always provides that the last day of the window is the cancelling date in the buyer’s option. The NSF does not contain a force majeure clause so the right to cancel arises if the seller cannot tender a notice of readiness or be in a position to give delivery by the cancelling date even if their inability to do so has been caused by an event outside the seller’s control. Instantly one can see that the effects of Covid, and specifically rules or regulations relating to it, might prevent the seller being able to meet the cancelling date. Hence the need for clear contractual language to cover such a situation, as best possible.
In clause 5 of the NSF the ship is to be delivered at a place which is "accessible". Prior to Covid, no detailed thought had in truth been given to what "accessible" meant in this context and no case law precedent had developed. Suddenly, sellers and buyers had to focus on whether the place at which the seller intended to give delivery was "accessible". If it were not then the seller’s notice of readiness, which is the trigger for the payment of the purchase price, would not be valid because such notice can only be validly given when the ship has arrived at a place where the seller can lawfully deliver the ship under the contract.
Clearly for the place of delivery to be accessible it must be possible for the seller to disembark its crew; otherwise it will be unable to give the buyer "vacant possession". There are arguments to the contrary but it would seem wrong if the buyer was compelled to pay the purchase price in circumstances where the seller’s crew were still on board and could not leave.
But what of the buyer’s crew? Unless the contract otherwise provides it is suggested that if the buyer is able to get a crew (rather than its chosen crew) on board the ship then the place of delivery will be accessible. Otherwise one could conceive of cases where the chosen crew cannot for some reason reach the place of delivery or cannot board but the crew of, for example, another nationality, could do so.
In a number of cases where the place of delivery or all places within the delivery range are inaccessible the seller has sought to overcome this problem by asking the buyer to take over the seller’s existing crew. The buyer often refuses for reasons which are sometimes illogical, but on other occasions for strategic reasons (e.g. where the market is falling). It has been suggested that the buyer might be under an obligation to agree the seller’s proposed solution on the basis that it has a contractual duty to cooperate, but it seems unlikely that the principle goes that far.
All the more reason therefore for the contract to contain wording to cover the situation where delivery cannot be given at the nominated place of delivery or within the contractual delivery range. These clauses vary but very often stipulate that the seller can nominate another place of delivery and make provision for who should bear the cost of moving the ship to her new nominated place of delivery, and for an extension of the cancelling date by the time taken to reach the new place of delivery. Some also provide that where delivery cannot, due to Covid related matters, be given at any place within the delivery range, that the parties shall negotiate in good faith and/or use their best endeavours to find another place where delivery is possible. All these provisions need careful wording to ensure that the parties' intentions are properly reflected.
The negotiation of the sale of second hand ships can be a speedy process, often conducted on the basis of a set of seller’s "standard " terms, and with short time frames for reply to offers and counter offers. The parties to such negotiations would be well advised to give early thought to whether a Covid clause is required and if so attend promptly to its drafting.