Background
In the lead up to the entry into force of the EU Ship Recycling Regulation, sustainable dismantling of vessels was put higher on the agenda for shipowners and stakeholders, and authorities in EEA tested cases on ship recycling under the waste regulations prohibiting export of waste from the EEA. With the recent ratification of the Hong Kong Convention by Bangladesh and Liberia, and the consequential entry into force of the Hong Kong Convention on 26 June 2025, the topic has gained renewed attention.
BIMCO has followed up with a clause to the contrary, for the further trading of a vessel in an agreement for sale and purchase.
In order to provide a clause protecting sellers from allegations that they de-facto have sold the vessel for recycling, BIMCO has now launched a new standard clause for vessel sale and purchase agreements with requirement for “Further Trading”. In our experience, clauses to this effect are already often incorporated as additional clauses when negotiating a vessel sale and purchase agreement / Memorandum of Agreement (“MoA“), the question is if they serve the purpose and/or provide any actual protection.
BIMCO is now introducing a clause for sale and purchase contracts, assuming it targets it as an add-on to its own standard format, ShipSale 2022, as well as to the world’s most used standard the Saleform 2012 by the Norwegian Shipbrokers’ Association (thought it should be noted that, to our knowledge, the Norwegian Shipbrokers’ Association has not been engaged in the drafting or approval of this new BIMCO clause). The full clause can be found on BIMCO’s web pages, see Ship Sales Further Trading Clause 2023 (bimco.org)
Specific comments to the clause
Sub-clauses (a) and (b) cover the intention of further trading and provides and undertaking from buyers to trade the vessel for a certain number of months. These sub-clauses are in line with what we often see incorporated as additional clause when negotiating a sale and purchase of a vessel. The number of months we see inserted varies typically between 6 to 24 months. The qualifications regarding repairs, conversion, lay-up etc., and the exclusion of total loss, have not been commonly seen, but are welcome additions.
Sub-clause (c), including a corresponding clause for future sales and due diligence, is more problematic for buyers. It is something we have seen attempted, as seller-friendly, but something buyers try to avoid. The rationale for the clause is that sellers shall not be able to hide behind the clause if the vessel is sold to a third party, then re-sold to another party without such clause, who then sell the vessel for recycling. However, the shipping market changes frequently, and we regularly have transactions where the value of the vessel has increased between MoA signing and delivery, and where a buyer sell the vessel shortly after delivery. Having an obligation to incorporate such clause in an on-sale contract with a subsequent buyer will likely narrow down the list of buyers willing to accept such never-ending restrictions.
Further, any authority considering the legality of a sale, and any liabilities arising therefrom, will look at the circumstances of the sale, and not simply whether or not such clause had been incorporated in the original or subsequent MoAs.
Sub-clause (d) introduces two alternatives for remedies in case of a breach of the clause. Alternative (i) is called liquidated damages, and not a penalty. The caution around the term penalty stems from the English courts’ stance in not enforcing penalty clauses, though, the courts look into the substance, not the term agreed to be used. And here, what we have in reality is a fixed penalty without any means or pre-estimating any genuine losses, simply as the actual losses are difficult to substantiate unless the original seller is fined or suffers any consequences due to the subsequent sale or recycling of the vessel. Alternative (ii) is an indemnity to keep the sellers indemnified for actual losses, fines etc. they may incur.
Although the clause in itself gives the impression that the sellers may be compensated in case of a buyers’ breach, there might be no funds to collect from buyers if the vessel has been re-sold and recycled, and the buyers potentially (or prudently) are liquidated at that time. But solutions to this (good old) challenge are in use.
Sub-clause (e) adds that sellers also can seek additional remedies through the courts or arbitration tribunal.
Sub-clause (f) is an important exception from any confidentiality clause in the MoA and should be included.
Our perspectives
Regardless of the Clause, any authority investigating if a vessel has been sold for recycling will look at the facts of the transaction. Thus, protection for the sellers and buyers is limited if the facts point to a sale for recycling. Inserting a “Further Trading clause” will not remove (or shift) the sellers’ obligations under applicable regulations or the risk of reputational damage in its entirety.
We have been involved in investigations by the authorities in respect of disguised sales for recycling. It won’t surprise anyone that the investigations will focus around: the age of the vessel; the price; and the market. If the vessel is sold at a price substantially above scrap value, it is a strong indication that the vessel is sold for further trading and not scrapping. Contrary, if an old vessel is sold at a low price comparable to scrap value, there is an indication of a sale with an intention of recycling, regardless of whether or not a Further Trading Clause is included.
Sale of older vessels for future trading in a shorter period might nevertheless shortly after be sold for recycling by the buyers. This was perhaps never the intention at the time of purchase, but a sudden market change or vessel technical issue causes the buyers to decide to recycle the vessel. To cover such events, sellers should include requirements that any subsequent recycling of the vessel shall be made in accordance with applicable laws and regulations, as well as the 2009 Hong Kong Convention and the EU Ship Recycling Regulation. That is a step (just one) in the right direction, whether selling for ethical recycling as a goal or an eventuality.
From the buyers’ perspective, there should be little or no reason to accept the clause in the form proposed by BIMCO, in particular the alternative of liquidated damages. There are no exceptions made in that for ethical ship recycling, should the buyers change their plans for the vessel – in fact, it adds a set cost element on the buyer, who might seek to recoup that from cheaper recycling options.
Where alternative (d) (ii) is agreed, in the event a seller suffer such losses, fines, etc. due to their own breach of regulations applicable to them, it might be equally unacceptable (or even impossible) for a buyer to bear this burden alone.
From an ethical perspective, the clause does not address the real challenges of ship recycling – in fact that does not seem to be its intention at all. It’s intention seems to be to kick the can of liabilities down the contractual path. The clauses we see negotiated in the Scandinavian market have certainly set the bar higher than this new clause from BIMCO.
Even with the Hong Kong Convention coming into force in 2025, the topic of sustainable ship recycling remains a commitment for those owners that strive for a higher standard than what is put forward by regulators. Actual change remains to be seen on the ground, with perhaps the most interesting development will be the changes required in the years to come by the latest ratifying member states, Bangladesh and Liberia.