Short & Sweet: Ship Sale and Purchase #2 – Payment methods
Aktuelt | 12.02.20Shipping og offshore
Payment for the Vessel
One of the issues which often causes extensive negotiations is the payment of the purchase price. The reason is, in our opinion, that it is poorly regulated in the relevant standard forms and leaves ambiguity on a point that is one of the main elements in any transaction. What is worse, sometimes these negotiations arise after the entering into of the sale and purchase agreement, simply due to having adopted the print form without supplemental provisions.
The issue is particularly important if there are lenders/mortgagees involved on the Sellers and/or the Buyers' side. The outgoing mortgagee (Sellers' financier) does not want to discharge its mortgage in the vessel before it has received the funds to repay the Sellers' outstanding debt. On the other hand, the new mortgagee (Buyers' financiers) does not want to advance the loan and pay the funds until it has secured a mortgage against its loan. These conflicting interests must be solved, preferably well in advance of signing the agreement, or least the delivery date.
Standard practice is that a part of the purchase price is paid upon/shortly after signing of the sale and purchase memorandum of agreement (the "MoA"). The deposit clause of Saleform 2012 (NSF) opens up for the parties to agree the amount of the deposit, but if no specific number is agreed, 10 % will be used. We consider 10 % to be the most common, but we also see increased deposits if, for example, it is a long time to delivery, there is a vessel under construction, the Buyers are in a difficult financial situation etc. We also see decreased deposits where the purchase price is very high (typically rigs or drilling vessels).
While earlier forms stated that deposit should be placed on joint bank accounts, Saleform 2012 refers to interest bearing accounts with a "Deposit Holder". The reason is that ordinary banks have become more and more reluctant to accept deposits on joint accounts. Hence, we have seen an increased use of client accounts with law-firms or shipbrokers, notaries etc. as Escrow Agents. We consider the use of Escrow Agents to be more common than use of joint bank accounts. A note: Check that the account is in fact interest bearing, or amend the MoA.
Saleform 2012 requires payment of deposit within 3 banking days after signed MoA AND the deposit holder has confirmed in writing that the deposit account has been opened. Also, an obligation is imposed on both parties to provide all necessary documentation to open and maintain the account without delay. This is an important part due to the strict requirements for KYC compliance and documentation. The parties must expect to provide a rather extensive documentation to the deposit holder in order for the deposit holder to comply with KYC requirement. However, no exact time limit for providing the documents is inserted in Saleform 2012. This may then allow a Buyer to delay the timing of providing the deposit, unless this is clarified. We sometimes see that a deadline is inserted, and the parties must then check that they actually are able to deliver the required documentation within such date.
The Singapore Ship Sale Form (SSF) 2011, on the other hand, has maintained a standard of 10% deposit. It has also taken the approach to fix a value date for latest remittance of deposit. The Sellers are responsible for establishing the deposit account in time. It also includes certain detailed KYC requirements on the Buyers’ side together with a general reference to comply with anti-money laundering laws and regulations of the country of the deposit bank. It may be considered that SSF2011 removes uncertainty, as it is more detailed and specific on the issue of deposit. It is our opinion, however, that the SSF2011 may be too detailed and specific, and may raise issues if the deposit holder has different KYC requirements than set out in the form or applicable local law. Further, technically the Sellers will be in breach of contract if the deposit account is not opened within 2 banking days prior to the fixed “Value date” for transfer. We all know that there may very well be delays in opening such account, and such delays may depend on the Buyers. In our view, Saleform 2012 seems to have a more flexible approach with regards to the issue of deposit.
The Deposit will be released to the Sellers on delivery as part of the payment of the purchase price (assuming delivery of the vessel as per the MoA).
Payment of balance
On delivery of the Vessel, the balance of the purchase price together with any other payment under the MoA (payment for bunkers, luboils etc.) shall be paid to the Sellers. In the NSF 2012, the Buyers have to make payment within 3 Banking days from the NOR having been tendered. SSF2011 includes an option for the Buyers to delay delivery of up to 7 consecutive days against paying a pre-agreed daily amount. Nipponsale 1999 has similar provisions.
During the amendment discussions of the Saleform 2012, we proposed that the form was amended to include a standard payment procedure, or alternative payment procedures which the parties could decide when signing the MoA. We have seen that discussions regarding payment procedure often have caused problems, in particular where the buyers and sellers are bank-financed. The payment procedure has been a near show stopper to a number of transactions, and in a few cases it has succeeding so, with the Sellers’ bank not wanting to discharge the mortgage until the loan is repaid (usually from the sale proceeds) and the Buyers/Buyers’ bank will not make any payment until the vessel is confirmed free of mortgages.
Thus, we recommend to our clients to address this issue when negotiating the MoA and agree a procedure before its execution, when both the Buyers and Sellers are equally determined to close the transaction and conclude a sale. If this issue is left to be addressed after execution of the MoA, and the involved parties (including banks) at a later stage are not able to agree on a payment procedure, both Sellers and Buyers will be challenged.
If read carefully, one will see that Clause 8 of NSF 2012 states that the listed documents to be delivered by the Sellers on closing shall be delivered to the Buyers "in exchange for payment of the Purchase Price". The list of documents includes evidence that the vessel is free of mortgages. The "Explanatory Notes" to Saleform 2012 indicates that the interpretation of this clause is that the Sellers shall first receive the purchase price, then use it to repay its loans and then discharge the mortgage/provide evidence. This is, however, very well hidden and not very clear to the parties. Worst case, it will then be the Buyers who bear the risk, and the Buyers who will have a problem should their bank refuse to send funds prior to old mortgage being deleted.
SSF2011 also lacks a suggested payment procedure. The Japanese form Nipponsale 1999 has a default solution where the Buyers, upon receipt of Notice of Readiness, shall preposition the balance payment with Sellers’ bank to be released upon signing by the Buyers and Sellers of a protocol of delivery and acceptance. However, also this wording lacks necessary details.
Hence, a procedure for each amount payable prior to and on delivery needs to be clearly described in the MoA.
In our experience, the payment procedure now being most common is a procedure akin to the one found in Nipponsale 1999, but not fully described therein. The Buyers/Buyers' Bank will preposition the funds in Sellers' Bank via telegraphic transfer (SWIFT) accompanied with conditions and instructions (also sent by SWIFT) that the Sellers' Bank shall hold the funds only to be released against a release letter and/or protocol of delivery and acceptance. The parties then agree that the release documents will be signed and tabled in the closing meeting (but left undated/untimed), whereafter the Sellers' Bank will discharge the mortgage and provide evidence of such discharge. Once evidence of mortgage-discharge is received, the release documents will be exchanged and funds released. This way, the Sellers' Bank has the benefit of seeing the funds in place and that the Buyers are willing to release the funds once the mortgage is discharged, but the funds will not actually be released until after discharge of mortgage. In our opinion, this is a balanced solution (Note: most but not all shipping banks have between them the requisite SWIFT’s Relationship Management Application (RMA) to establish such SWIFT communication between them – in such case, RMA arrangements may be made, or an alternative payment method be agreed, see below).
A similar solution is to use an Escrow Agent with whom to place the funds in advance. However, a few important points should be kept in mind. The balance of the purchase price is Buyers' funds until released. While release of deposit requires the signature of both Buyers and Sellers, for the balance of purchase price only Buyers' signature is required under the MoA. Also, the Buyers should be entitled to withdraw the funds at any time. The balance of purchase price is not a security for the MoA, and remitted funds should not be held back should the delivery fail. However, an Escrow solution might be an issue with the outgoing mortgagee (Sellers' Bank), as the Escrow Agent's account may not be with the Sellers' Bank. In such case, the Sellers's Bank should discharge the mortgage trusting that the Escrow Agent (often a reputable law firm) will send the funds after closing and that the funds will arrive at the Sellers' Bank. There may be a time gap, also over a day, between discharge of mortgage and actual receipt of funds. Many banks will be reluctant to accept this. Another deterrent for choosing the Escrow solution is the price, which keeps increasing, and in some cases, as with the German notaries their fee is calculated as a percentage of the deposit and/or purchase price.
There is a simpler solution, but one which requires a high amount of trust between the parties and their financiers if any: the Buyers transfer the balance funds on the closing date. That means that at closing, when exchanged documentation is approved the Buyers will send the funds directly to Sellers and upon evidence of the SWIFT transfer, obtain title. A variant of that, especially where there is a Sellers' Bank and mortgagee, is to await for the Sellers' receipt of funds prior to discharging the mortgage and delivering the Vessel. The funds may be received in minutes. Or, there might be delays in the transfer and the Buyers may risk sending funds but having to wait days before the funds are confirmed received the mortgage discharged and the vessel delivered. If this procedure is used, it is often combined with a letter of undertaking from the outgoing mortgagee that they will discharge the mortgage immediately upon receipt of funds. It can still be a risk, or least, a nerve-racking episode for Buyers and Buyers' Bank, as the Buyers will not be able to register the vessel before delivered free of mortgages, and the Buyers' bank will not be able to register any mortgage until the vessel is registered.
Up until some years ago, we would often agree on "Payment Letters" where payment would be effected by a letter of undertaking from the Buyers' Bank to the Sellers, or Sellers' Bank, for payment with same-day value on the agreed currency . This payment by letter would suffice for both the discharge of the mortgage and the delivery of the vessel. The Buyers' Bank still had a relative risk that the vessel would not be delivered the same day, and they still had promised to pay, but as the Payment Letter was handed over when the parties were ready to close, the risk was limited. We have not seen this method used for some years now and we doubt any outgoing banks will accept it anymore.