Home / Insights / Short & Sweet: Ship Sale and Purchase #8 – default provisions in Saleform 2012

Short & Sweet: Ship Sale and Purchase #8 – default provisions in Saleform 2012

What we are attempting this time is the simplification of the most complex clauses in any agreement, including the Saleform 2012: the default provisions. So, to keep it short and sweet, we are forced to leave out some of the exotic flavours of this topic.

Buyers’ Default

Clause 13 of Saleform 2012 regulates Buyers’ default. The potential Buyers’ defaults are quite restricted to payment defaults. There are no Buyers’ default linked to failure to take over the Vessel (like you often find in shipbuilding contracts) or failure to provide the agreed documents. Nor is it likely that a Buyer will pay for the Vessel but not accept physical delivery. We could of course experience situations where Buyers are not able to get the crew on board (or even on location), or fail to timely complete the registration, but nonetheless, pay the purchase price to avoid a default under the contract, and delay the physical take-over of the Vessel without this being an explicit default under the terms of the Saleform 2012 Memorandum of Agreement (MoA).

Clause 13 creates a two-limb default. The first Buyers’ default described in Clause 13 is failure to pay the Deposit in time (see separate article on payments for deadlines). The Sellers may then cancel the MoA and claim compensation for their losses and expenses, with interest. England’s Court of Appeal decision in Firodi Shipping Ltd v. Griffon Shipping LLC (December 2013) confirmed that under the Saleform 93 (with same default provisions as its sequel Saleform 2012), where the deposit has fallen due and is unpaid, Sellers can claim the Deposit notwithstanding that the deposit amount may be (and likely will be) in excess of Sellers’ loss arising out of Buyers’ failure to pay the Deposit. (Interestingly, the Singapore Sale Form aims to address this by stating that failure to pay the Deposit gives the Sellers  no  automatic  right  to  compensation  in  the  amount  of  the  deposit.)

The second Buyers’ default is failure to pay the purchase price on time. Again, the Sellers can cancel the MoA. If so, the Deposit with interest shall be released to the Sellers. If the Deposit does not cover their loss, the Sellers shall be entitled to claim further compensation for their losses and expenses incurred together with interest. If the market has dropped, and Sellers are only able to secure a new sale at a lower price, they will have a loss equal to the difference in purchase price. That being said, under both Norwegian and English law a Seller can only claim actual losses, whilst there is a duty to mitigate its losses

Sellers’ Default

Clause 14 of Saleform 2012 regulates Sellers’ defaults. The Sellers’ defaults are linked to the Sellers’ failure to deliver the Vessel on time. As described in our previous articles, the Sellers must tender a Notice of Readiness prior the cancellation date. Failure to do so will constitute a Sellers’ default. Also, a failure to be ready to validly complete a legal transfer of the Vessel by the cancellation date will constitute a Sellers’ default. A Notice of Readiness can be validly tendered when the Vessel is at the place of delivery and physically ready for delivery. In order to perform a valid legal transfer of the Vessel, the Sellers must also have made necessary arrangements with the Vessel’s registry, have a Bill of Sale in agreed form available and also be ready to provide certain other agreed documents required to complete the legal transfer (all as agreed under Clause 8). If there is a Sellers’ default as described above, Buyers may (or may not) cancel the MoA. If they cancel, the Deposit with interest earned shall be released to them immediately.

Clause 14 also states that if the Vessel, after Notice of Readiness has been tendered but before Buyers have taken delivery, ceases to be physically ready for delivery and is not made physically ready again before the cancellation date, the Buyers retain their option to cancel the Vessel. This means that even if the Vessel is ready prior to the cancellation date, and the Sellers validly tender a Notice of Readiness, the Sellers bear the risk of an accident occurring in respect of the Vessel during the 3 banking days the Buyers have available to take delivery. We sometimes see that a Seller is willing to allow the Buyers extra days to make the payment if there are delays, just to secure the sale. If so, the Sellers should be aware that they bear the risks pertaining to the Vessel for this additional period.

As per the standard wording of Clause 14, in the event of a Sellers’ default as described above, the Sellers shall make due compensation to the Buyers for their loss and for all expenses together with interest (i) if the failure is due to the proven negligence of the Sellers, and (ii) whether or not the Buyers cancel the MoA.

“Proven negligence” is a very strict term. Delays due to bad weather, Charterers’ delays etc. are hardly “proven negligence”. If the Sellers is refusing to deliver as they have received better offers it is clearly a proven negligence (likely even willful default). If Sellers have negligently disregarded damages to the Vessel, had negligently bad maintenance etc. which causes the Vessel not to be physically ready as per the MoA, or the Sellers have negligently gambled on a last voyage which turns out to exceed the cancellation date, there could be  negligence. However, the negligence must be proven and it is often hard for a Buyer to prove the Sellers’ negligence in these matters.

Sellers will often want to amend the provision, so that losses can only be claimed against them if the Buyers actually cancel the MoA. If so, Clause 5 (d) is also deleted. The Buyers will then be forced to raise their claims and negotiate them before they decide whether or not to cancel. If they agree to affirm rather than cancel the MoA, they will not get further compensation for any losses incurred (except if compensation is agreed in exchange of affirming the MoA). From a Sellers’ perspective it is a clear advantage to know the actual claims of the Buyers if the Buyers do not cancel the MoA, and not leave this to be subject to last-minute negotiations on closing. In our view, it is even an advantage for a Buyer to have this clarified before they decide whether or not to cancel the MoA.

Some general points

Both Clauses 13 and 14 states that the losses and expenses shall be paid together with interest. Interest is not specified and no rate is agreed. It could be an advantage to agree a specific default interest rate for clarification. This does not apply to the terms in respect of interest on the Deposit, where it refers to actual interest accrued (if any) on the Deposit account.

Both Clauses 13 and 14 state that Deposit shall be released to the non-defaulting party. Normally, release of Deposit will require both parties’ signatures, or a final arbitration award or court order. Hence, the non-defaulting party should expect to be forced to arbitrate or litigate to get an order for release of the Deposit, but we have seen MoA and escrow arrangements where the non-defaulting party may declare release unilaterally due to the other party’s default (not surprisingly, these are not very common), and also situations where the defaulting party willingly release the Deposit and seeking in exchange release from any further Sellers’ claims.

Finally, the provisions regarding losses have little value where the counterparty is a single purpose company. In case of Buyers’ claims for a Sellers’ default, the Sellers will still have the Vessel against which recovery actions can be taken, but the Vessel will in most cases be subject to mortgages (perhaps also maritime liens) which may limit any recovery for an innocent Buyer. In case of a Buyers’ default, Buyers can easily walk away by leaving the Deposit (especially if they have no other assets), and might try to obstruct or delay the release of Deposit. The Sellers will then have to spend time and money to obtain an arbitration award or court order for the release of the Deposit, with limited prospects for recovery of their costs. It is important that both parties carefully evaluate their counterparty and consider if guarantees from a more substantial company is required.