The Ship Sale

THE SHIP SALE (PART 1)
4.1 THE OFFER
This Chapter examines the terms of a firm offer to purchase a ship together with some of the potential implications and problems.

There is no set pattern in putting forward an offer to purchase because this is dependent upon the requirements of the individual Buyer and also on the particular ship which is to be purchased. There are, however, certain features which any offer must contain and as the eventual deal will be based upon one of the standard forms such as the Norwegian Saleform, it is usual to follow the same logical sequence as in such a form. Standard Saleforms will be dealt with in the next Chapter.

The vast majority of work carried out by S & P Brokers involves the sale of second hand ships intended for further trading. As with any contract, there has to be an offer, a consideration (the price to be paid for the ship) and an acceptance. In real life this will involve negotiation - that is to say by offer and counter offer. These will continue until the two parties to the deal, the Buyer and the Seller, are satisfied they have obtained the best transaction for their particular interests on the prevailing market. The negotiations will then usually conclude by reaching an agreement on principle terms "subject to contract details" when it will normally be the task of the Seller's Broker to draft a written contract for approval and eventual signature.

An S & P Broker (the Seller's Broker) appointed to sell a ship will circulate its details. At one time these would have been the subject of particulars widely circulated by mail to a comprehensive list of S & P Brokers and each Broker tended to have an easily identified "particulars sheet". Mail has, however, been almost completely overtaken by electronic communication. Telex was the first to replace the postal system but fax became more convenient and now more widely than anything else is the use of e-mail which is proving to be the ideal medium for "putting a ship on the market".

It is usual for the opening offer to be made by the Broker acting for the intending Buyer and the offer will be based upon details which have been provided by the Seller's Broker.

When an offer is put forward, provided it is sufficiently interesting to the Seller, it will merit a counter offer; it would be rare indeed for the first offer to be accepted outright. It is important to bear in mind that, although one uses the expression "counter offer", legally each counter offer is actually saying "I decline your offer and now make you the following firm offer". Even if negotiations have reached the stage where, for convenience, the loose expression used when making the counter offer is "accept except" it is still a fact that - legally - either party can break off negotiations at any time.

Occasionally ships are sold by auction. This particularly occurs where possession of the ship has been taken by an official body due to the financial failure of the Owner. At an auction, the successful Buyer is usually the highest bidder and in such a transaction, Brokers are not usually involved except, often, as advisers before the day of the auction.

Of course an S & P Broker's duty is always that of an adviser to his Principal and it should at all times be his aim to obtain for his principal the best terms and price on any transaction he must always take care not to place his own interests (i.e. his desire to conclude a deal) before those of the Buyer or Seller for whom he acts. In this, flexibility, determination, integrity and hard work are prime requisites for success.

SHIP SALE AND PURCHASE


Whatever the variations by which an offer is put forward, the basics of any firm offer remain the same namely:
Name of the ship concerned
Reply time
Price
Place and time of delivery
Conditions of sale (e.g Saleform to be used)

There will be a substantial number of additional requirements depending on individual circumstances and these must be studied and understood. Some of the main ones are set out in the rest of this Chapter.

It is usual to have one Broker acting for the Buyer and one for the Seller. Occasionally, there may be a `chain' involving two or more Brokers on one side or the other, each requiring a share of the total commission which must be divided.

Very rarely a Broker is the sole intermediary between a Buyer and a Seller when his expertise and impartiality will be fully tested.
4.2 THE STRUCTURE OF AN OFFER
Buyer's Name. When an offer to purchase is received a Seller needs to have some idea with whom he is dealing. If the Buyer's name is well known and of good repute it is usually an assurance that when the time comes there will be no problem of payment. If, however, the Buyer is not widely known or is new to the industry, the Buyer's Broker would be advised to submit as much information as possible even including bank references, in order to ensure that the offer he is putting forward is taken seriously. Reputations also, of course, extend to Brokers and an offer put forward by a first class Broker is expected to be on behalf of a reliable Principal thus a Broker should always acquire as much knowledge as possible of the Principals for whom he or she is working. A reputation can be damaged very easily but repairing it can take a very long time.

Reply Time. All offers must have a time limit. The Broker must therefore make quite sure how long the authority he has been given extends. The limit of this authority must be expressed without ambiguity or possible misinterpretation. Date and time must be clearly expressed. Times differ from continent to continent and there are differing time zones within continents. A Broker must therefore be clear as to when the authority he has been given by his Principal expires and must then put forward the offer he has been given stating the day of the month and the time indicating clearly at what place in the world the actual time of the day is applicable.

For example, a typical offer will be put forward — "Offer firm for reply here 14.00 hours BST London time Tuesday 25th June 2005". Always use the 24 hour clock in order to avoid confusion between am and pm. Adding BST to London time may seem excessive but it reminds the other party that British Summer Time is in operation. The same would apply anywhere else in the world (e.g. North America) where a daylight saving system operates.

Do not use such loose expressions as "for prompt reply" or "for immediate reply"; they mean different things to different people. One might be quite surprised at just how the law interprets "immediate reply" and it should be avoided at all costs; so establish an exact time.

Price. Obviously the currency to be used for the vessel's purchase must be clearly stated with the actual amount in figures and words. Today the currency adopted is almost always expressed in United States Dollars when ships change hands in the international market. The use of a common currency is useful in making comparisons between similar ships on the same market by obviating the necessity for currency conversion with its attendant fluctuations.

THE SHIP SALE (PART 1)


Deposit. It is almost invariable for ten percent (10%) of the agreed purchase price to be lodged by the Buyers in a joint interest bearing account in the names of the Sellers and the Buyers (or their agents) to be released to the Sellers at time of delivery of the ship. Should the Buyers wilfully default on the contract their deposit is forfeit to the Sellers.

Payment. It is usual for payment to be demanded either on delivery or within so many "banking days" (usually three) of delivery. Strict deadlines for payment are essential when such large sums are involved. The ten million dollars used in the example in this and the next Chapter may be considered a relatively modest price. Even so, a day's delay in payment even at moderate rates of interest could mean the loss of over $1200 per day (or almost a dollar a minute!)

Commission. Unless stated otherwise, it is the Seller (i.e. the one who receives the payment) who pays all the Brokers' commissions from the actual sale price. It is customary in second hand ship sales for there to be one percent commission for the Buyer's Broker and one percent for the Seller's. When taking authority to make a firm offer on behalf of the Buyer, his Broker should clearly establish that the price being offered does include 1% commission. Thus an offer of US$10,000,000 is put forward as "Price USD $10,000,000 less one percent total commission".

The Seller's Broker, however, will also require a commission and therefore a further one percent of the sale price is added and the offer put forward to his Principal will be: "Price US $10,000,000 less two percent total commission". So that the Seller would receive a net price for his ship of US $10,000,000 less US $200,000 = US $9,800,000.

Should there be more than two Brokers each Broker will, in turn, add his commission to that put forward to him before passing on the offer to the next Broker or the Seller.

If, for example, there happened to be four Brokers in a deal (an unusual circumstance) the firm offer would reach the Seller with 4% total commission. Occasionally a Seller may try to resist such a "high" amount and try to force the Brokers to share commissions even to the extent of agreeing a total percentage, letting the Brokers "fight it out among themselves"; only the circumstances at the time will dictate what is eventually agreed.

The amount of commission in S & P deals is, in any case, not standard. Much will depend on the circumstances and the price. Very often there is just as much if not more work in concluding a five million dollar deal than one of twenty million plus.

On each deal, therefore, a Broker should consider what is reasonably compatible with the time likely to be involved in reaching a successful conclusion as well as the price involved when adding commission to the price put forward.

For most deals, one percent of the total purchase price for each Broker is considered the norm but Brokers must always be prepared to make a sacrifice, if by so doing, the deal stands a greater chance of success.

On occasions it is the Seller who states his price for a ship "net of commission". Either the Broker must decide to try and arrange with the Seller an agreed fee or a figure must be worked out, mathematically, to ensure what the price of the vessel must be in order to provide the commission(s) required.

For example, if a ship is sold for say, USD $975,000 net of commission, the Broker, in order to earn 1% of the final purchase price, must divide US $975,000 by 99 and add to the net price as follows — US $975,000 + 99 = USD $9,848.48 + USD $975,000 = US $984,848.48. At this price the Seller will receive his US $975,000 net of commission and the Broker will obtain 1% provided Buyers and Sellers agree a contract price of US $984,848.48.

SHIP SALE AND PURCHASE
If more than 1% is required, the equation is different. For example, if 2% is required by Brokers where the Seller has specified a final price of US $975,000 net of commission the calculation is as follows:

US $975,000 + 98 = US $9,948.97 x 2 = US $19,897.94 + US $975,000 = US $994,897.94.

Needless to say, if 3% commission is required 97 is divided into the net price and the quotient is multiplied by 3, the product of which is added to US $975,000. If 4% the divisor is 96 and the multiplier 4 and so on.

Fortunately such equations are rarely necessary but it is important to know how to calculate should the occasion arise, as it sometimes does.

Occasionally the Buyer's Broker will find that the principal has already stipulated an address commission which is retained by the Buyer. The most common reason for the inclusion of an address commission is to satisfy the Buyer's internal accounting procedures where the address commission becomes the income of the department in the Buyer's company negotiating the sale.
4.3 INSPECTION AND INSPECTION OF RECORDS
Except for demolition, ships are rarely purchased without being inspected by the Buyer's Superintendent Engineer or other qualified Surveyor. It would be like buying a house without even a cursory inspection.

This inspection should not be confused with the inspection carried out by the ship's Classification Society at the time of delivery. That inspection at one time always involved the ship going into drydock but now it may be carried out by specially qualified divers. The full implication of the clause covering this inspection will be covered in the next Chapter.

To clarify the difference between the two types of inspection the one carried out before confirming the purchase is often referred to as "superficial inspection".

Because a ship purchase is a large capital transaction a Buyer will always seek to eliminate margins of error and therefore when inspecting a ship he will wish to see as much as he can, in the time available, in order to be sure that the vessel is in sound working order.

Ideally, for example, it is better to see the holds clean swept but this may not always be possible. All depends upon the movements of the ship and a Seller would be reluctant to hold up his vessel unless he had reasonable assurance that a positive deal was in prospect. Similarly, the same situation applies to the inspection of the tanks in a tanker for which purpose gas freeing would be required.

Occasionally a Buyer may request the opening up of closed areas such as ballast tanks, wing tanks etc. to ensure against deterioration, but this is time consuming and the Seller may resist such delay to his ship. Any desire for opening up must be clearly stated before inspection commences so that there is no misunderstanding when the inspection begins.

Buyers often require for the inspection of log-books while aboard. This is a check on the performance of the vessel so that the Inspector may check if the ship is performing as regards speed and consumption according to how she is described. It is also a check on casualties that may have occurred during recent voyages (e.g. hitting underwater objects or superficial damage) which have not yet been notified to the Classification Society and thus not appear in their records.

The place where it is proposed inspection should take place must be specified and since it is in the interest of Buyers and Sellers to ascertain whether or not the ship is likely to be sold, it is important to state a time within which inspection shall take place and a decision given.

4.3.1 Records Inspection
The inspection of Classification Society records is a part of routine S & P activity. Brokers are not expected to be technical men or marine surveyors therefore they do not inspect records and do not express opinions in the matter. It is part of their job, however, to arrange for inspection of records at the Classification Society and this they will do on behalf of their Principals. The Society will not, of course, permit such an inspection without written authority from the Sellers.

An experienced Marine Superintendent or Surveyor will glean, from an inspection of a ship's records at a Classification Society, a fairly accurate idea of her condition. He will note recurring problems and areas of inherent vice.

Inspection of records usually takes place before ship inspection for the simple reason that when the actual ship inspection takes place, the records will have revealed the parts of the vessel where any trouble has been detected and where examination should be most concentrated.

When arranging records inspection a Broker will first obtain permission from the Sellers of the vessel, either direct or through their Broker. When permission has been granted, he will then arrange with the relevant Classification Society the time and date when it is desired for the records to be inspected and will give the name of the Inspector.

Should an S & P Broker be asked to nominate or recommend a surveyor to inspect a ship or records on behalf of a Buyer great care is essential in case it should be found later that the Inspector was negligent. A Broker should therefore nominate or recommend "without guarantee".

4.3.2 Reply Time for Inspection of Vessel and Records
At one time it was not unusual for S & P negotiations to proceed "subject superficial inspection and inspection of records". This could, therefore, mean that the Buyers and Sellers - and of course their respective Brokers - would devote their time and expertise right up to completing all the details of an intended sale, only to have the whole thing collapse when one or other of the inspections took place. There was no redress; the Buyer would not even be obliged to give reasons for refusing. It was the cause of severe frustration to Brokers at that time.

Fortunately, during recent years, Sellers have been able to refuse to negotiate on a "subject inspection" basis. Thus the intending Buyer must carry out inspection of records and superficial inspection of the ship itself and then make the offer on an outright basis.

Circumstances could change and if ever a pattern of negotiations "subject inspection" were to return it will be vital to ensure that dates and times for the inspections to take place are clearly specified together with a deadline for eventual decision to be declared by the Buyer. It must be appreciated that, if a deal is concluded "subject to inspection of records and ship", the Seller cannot deal with other Buyers in the meantime so that unambiguous time limits are essential.
4.4 DELIVERY - WHERE AND WHEN?
The place and time of delivery must be clearly indicated before agreement can be reached on a ship sale. Obviously Buyers and Sellers will each wish delivery to take place at a port and time most convenient to themselves compatible with the movements of the ship.

Once a deal is agreed, however, both parties will seek to expedite matters to their mutual satisfaction and in any argument which may follow on this particular issue, commonsense will hopefully be the prevailing factor.

It is clearly better for both parties if delivery takes place at a safe place which is accessible for taking off and taking on a ship's crew. A safe berth alongside a quay or jetty is ideal for this purpose and it is usually found more convenient if this can be arranged at the vessel's

SHIP SALE AND PURCHASE


last port of discharge. If drydocking at delivery port has been agreed, then it must be ascertained in advance that at such a port - or close by - there are drydocking facilities for this purpose. Similarly facilities for diver's inspection must be ascertained if appropriate.

The date of delivery is important for the purpose of signing on a crew by the Buyer and making the necessary arrangements for transfer by the Seller such as arranging (often referred to as "stemming") dry-dock if such is agreed. There are also the numerous other arrangements which must be made in advance which include banking, insurance, documentation, registration and classification amongst others.

Almost invariably the Buyer will have placed a deposit on the vessel he intended to purchase and in the event that the vessel cannot be ready for some reason beyond Seller's control, it is only right that the Buyer should have the option to cancel the deal. Such a contingency might be occasioned by an actual or constructive total loss of the ship, in which case the Buyer will require the return of his deposit, plus accrued interest, and it is for this purpose that a cancelling date for completion of the sale should be incorporated. Having inspected and accepted the vessel and placed a deposit with the clear intention of a purchase, the Buyer may not wish to lose the ship, if for example, she was delayed in reaching her port of destination for some reason. The Broker acting on behalf of the Buyer should therefore make it clear that the cancelling date of the contract is "in Buyer's option". This means that should the vessel miss her cancelling date, the sale may still be maintained by the Buyer, if it is in his interests, and if he feels there is a reasonable assurance that delivery can take place without undue further delay. This situation is clearly covered in the Norwegian Saleform 1993 which is dealt with in the next Chapter. The cancelling date is essentially an option, the contract is not automatically cancelled if the ship is later than her cancelling date.
4.5 DRY-DOCKING OR DIVER'S INSPECTION
The full implications of the clause covering the inspection at time of delivery will be referred to in the next Chapter. Suffice it to say for the moment that it is an important clause of most S & P contracts, ensuring as it does that the vessel is in full compliance with Classification rules.

The only occasion where such a clause would be omitted would be when a ship is sold "as is, where is" which means in effect "there lies the ship - take her exactly as she is". Also excluded from dry-docking are ships sold for demolition.

The purpose of the dry-docking clause is to enable the parts of the vessel below the water line to be inspected. If such parts are damaged so as to affect the vessel's class, they must be put right by the Seller to the Classification Society's satisfaction. It is quite usual now for the underwater parts to be inspected by the Classification Societies using specially qualified divers and this is a method frequently used especially where no dry-docks are available.

The next Chapter will consider, line-by-line, the Norwegian Sale Forms which are the forms most commonly used today. They have been revised many times, the most recent is dated 1993 hence the abbreviation NSF93. Such is the conservatism of Shipowners, its immediate predecessor - NSF87 - is still quite widely used. S & P Brokers therefore need to know about both forms because it may be many years yet before the NSF87 becomes obsolete.

There is no such document as a perfect sale contract. Buyers may well argue that the contract placed before them by the Seller is too much the vendor's favour and vice versa but experience has shown that the Norwegian Sale Form is as equitable as can be devised and furthermore, it is known throughout the world which facilitates the drawing up of the final contract for signature once agreement on terms has been reached.

THE SHIP SALE (PART 1)


6 WHAT IS INCLUDED IN THE PRICE?
Just what is included in the sale price causes possibly more argument than any other item when a ship is delivered. It is therefore of prime importance to define as clearly as possible what are the intentions of Buyers and Sellers in this respect. When a Buyer negotiates a deal he expects everything belonging to the ship to be included in the sale price and will expect all items on board the vessel and also any items ashore or on order if they are the ship's property except, that is, for bunkers and lubricating oils which are dealt with separately. Items involved may include a spare propeller or tail-shaft. During negotiations, the Broker should do the utmost to establish clearly what is the ship's property. It is common for Sellers to exclude from a sale certain items which may be regarded as fleet spares (if there are one or more ships of the same class). Such items as gas bottles, tank cleaning machines as well as things of a personal nature such as a gift from the ship's sponsor when she was launched, pictures which decorate saloons, the ship's bell, crockery and cutlery bearing the Seller's flag or name.

A Broker should anticipate such contingencies and endeavour to clarify what is intended by Sellers, when handing over a vessel, in order to eliminate difficulties. On delivery, a Buyer will expect to have aboard items of equipment which were aboard the vessel when inspected.

If there was, for example, a spare propeller and a spare tail-shaft at the time of inspection, he will naturally expect to see them aboard on delivery. Occasionally however, ships have been known to incur damage to an item of equipment such as a working propeller between the time of inspection and delivery in which event the spare propeller is used while the damaged propeller is taken ashore. A Seller could argue that the spare propeller is aboard the vessel, being used to propel the ship, while the working propeller is ashore and damaged or possibly condemned. It is important therefore to specify that the ship will be delivered with "a spare propeller" rather than "the spare propeller" and such subtleties in negotiation should be noted by aspiring S & P Brokers.

Normally all the vessel's manuals, plans, instruction books etc if not on board should be handed over by the Sellers as soon as possible after delivery and the contract should stipulate a period within which such delivery to be completed.

A list of radio and navigational aids whether on hire or not is also an essential part of the negotiations to be itemised by the Sellers so that the Buyers, on delivery, will be fully aware of what is ship's property and what of the items on hire may be retained under new contracts between the Buyers and the lessors of the equipment. In these days of total dependence on electronics for navigation it is vital for the Buyers to know whether or not the ship can sail as soon as delivered.
.7 BUNKERS AND LUBRICATING OILS
Ships at the time of delivery will have bunkers and unused lubricating oils and these must be paid for in addition unless otherwise agreed. The exceptions to this may occur when a vessel is sold on an outright basis "as is where is" or when purchased for demolition when bunkers may be more of a liability than an asset.

When taking over bunkers at a port of delivery, there are three possible areas of dispute. The first is the price, the second is the quantity remaining on board and the third is the quality (i.e. whether useable or not).

Bunkers prices vary from port to port and a Buyer will naturally wish to limit as much as possible the amount to be paid for bunkers remaining on board when a ship is delivered. If a ship has taken on board bunkers at a port where they are expensive, it is understandable that the Buyer will object to paying the same price if the delivery port is a place where bunkers are cheap. Agreement must therefore be reached on the basis for determining the cost of bunkers at the time of delivery. Prices of bunkers at any port in the world are readily obtainable through a bunker broker, oil trader, oil company or the Internet and a Broker should always be ready to assist in providing this information if called upon to do so. The current price for bunkers at the

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port of delivery can therefore be established easily through the same sources as referred above. The cost of lubricating oil can be obtained from any oil company although a ship customarily contracts with only one supplier for lubricating oil and that company's price may differ slightly from another's.

If, at the port of delivery, bunkers are expensive, Buyers may stipulate the maximum quantity to be paid for with a view to having sufficient remaining on board for taking the ship to a port where they are cheaper.

At the time of delivery, the skill of the Brokers in bringing their Principals to an amicable agreement over bunkers can be invaluable. In case of difficulty, an impartial referee in the form of an oil company representative may be sought in order to propose a way to settle the matter. Occasionally, the Buyer may claim that bunkers contain quantities of sludge, in which case the quality will be challenged and again, the decision of an impartial referee should settle the matter to the satisfaction of both parties.

The Broker should, therefore, endeavour to establish which prices should prevail when settlement for bunkers and lubricants is required at the time of delivery. It may seem that this reference to bunker prices is unnecessarily detailed when one considers the cost of bunkers in the context of the price of the ship itself. The fact remains that disputes over bunkers are only too common.
4.8 BUYER'S CREW ON BOARD BEFORE DELIVERY
The time when a ship is to be delivered can be a nerve testing time for all parties involved in the sale, including the Brokers! Buyers are anxious to place their crew aboard as soon as they arrive at the delivery port but experience has shown that it is unwise to allow the Buyer's crew to go aboard before the ship has been paid for and documents exchanged. The essence of any contract, however, should always be goodwill and where possible a compromise should be sought in respect of this difficulty.

The difficulty arises because the Buyers have a natural anxiety to ensure that items of ship's property are not being taken ashore prior to handover while Sellers discourage any interference in the running of the ship while it remains their property. Furthermore, in the event of an accident occurring involving the Buyer's crew, litigation will ensue and the delivery time for the official handing over could be delayed.

During the sale negotiations it is usual for agreement to be reached to allow a limited number of members of the Buyer's crew aboard for the purposes of familiarisation but always at Buyer's risk and expense.
4.9 SAME CONDITION AS WHEN INSPECTED
There are occasions when this stipulation can cause disputes, the difficulty being providing the proof of what was the condition of the vessel when inspected. It could be, for example, that the Buyer's surveyor may not have conducted an exhaustive inspection of the entire ship and as a result may have missed certain items. Such an eventuality must lead to doubt as to whether a particular defect was present on the day when the vessel was inspected.

Obviously a Seller will be anxious to sell his ship and therefore not go out of his way to point out items which are not in perfect repair in which case, the burden of proving that the vessel was in better condition upon inspection will fall upon the Buyer.

The wording "substantially the same condition as when inspected" is a common term and gives the Buyer a degree of assurance that the ship that was inspected will be, except for fair wear and tear, the same ship as when delivered. Furthermore, the Seller is under an obligation to maintain the vessel in the manner of a reasonably prudent Owner between the date of

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inspection and the date of delivery. It is now not unusual for the Buyer's inspector to take photographs or make a video record so that later arguments are avoided.

Subject Further Details Basis NSF1987 or NSF1993
No two ship sales are the same. Each has its own and often unforeseen complications which test the skill and ingenuity of the Broker whose task it is to bring the two sides together in harmony.

Reference has been made to the Norwegian Sale Forms as being used throughout the world for ship sales and the words "basis NSF1987" (or "NSF1993") mean that the basic form will be used, clause by clause and line by line but with amendments, additions and alterations according to the negotiated ship sale terms agreed at the time of concluding the agreement.
4.10 ENGLISH LAW/ARBITRATION LONDON
Because of its long tradition as a centre of shipping activity, arbitration in London is a most frequently accepted term and since London arbitrators are versed in English law, it follows that these two conditions are complimentary to each other.

When the time comes to study the two forms in the next Chapter it will be seen that the later (1993) form is far more specific about how the arbitration should be carried out.

Brokers must always strive to use their skill in such a way as to ensure disputes which lead to arbitration do not occur. However, where large sums of money are involved and big issues are at stake the final resort of going to law is, at times, inevitable.
4.11 WITH CLASS MAINTAINED FREE OF RECOMMENDATIONS AND FREE OF AVERAGE DAMAGE AFFECTING CLASS
The above condition is commonly used in S & P and it is important to understand its full meaning and implications.

These may be summarised as follows:
1. Nothing relating to surveys should be overdue. All surveys have a date and therefore all must be up to date at the time of delivery.
2. Class surveys may have recommendations, outstandings or subject items of class. This means that the classification surveyor has seen something which must be dealt with by a certain date. If this recommendation is noted, even though it may not be due until after delivery of the vessel, it must be settled at the time of delivery.
3. There are also appendix items which are not given a definite date. Buyers cannot claim an appendix item from Sellers as these do not affect clean class whereas outstandings do affect them.
4. Claims on insurance must be cleared. Average means anything which is to be claimed against insurance underwriters. When the ship is sold, the new Owner cannot claim on the underwriters of the previous owner therefore average items must be cleared before the ship is delivered.

There are differing views on the interpretation and implementation of the conditions imposed above and these will be considered more fully when examining the sale contract in the next Chapter.

SHIP SALE AND PURCHASE
4.12 THE OFFER AND COUNTER OFFER
As previously mentioned, there is no standard form for putting forward offers but many Brokers have a check-sheet or pro forma on their desk as an aide-memoire in order to ensure that no items are neglected or overlooked.
Let us assume the m.v. "Georgina" is for sale and the Seller's Brokers have circularised the vessel with an indicated price of US $10,250,000 with delivery UK/Continent during the following July/August.

An attractive offer might read like this:
m. v. "Georgina" On behalf of Moya Shipping of New City Court, London (the first offer may omit the intending Buyers name and simply say something like "first class Buyers to be nominated') we are authorised to offer firm for reply Tuesday 10th July 17.00 hours BST London time basis details as set out in your e-mail of 8th July timed 1615 hrs (or state time and date and type of whatever communication was used to give details of the ship):
1. Price US $9,750,000 less 2% total commission this end.
2. Subject prompt inspection of the vessel with clean swept holds at Southampton within July 2002
3. Subject approval of class records after inspection of same.
4. Buyers' reply on inspection of vessel and records within 3 working days after completion of vessel inspection.
5. Delivery of the vessel, charter free, at a port in Antwerp/Hamburg range at a safe anchorage or berth safely afloat within 30 days after signing of Memorandum of Agreement and deposit lodged with cancelling date in Buyers' option.
6. Vessel to be delivered with class maintained, free of recommendations and free of average damage. All safety certificates to be up to date. Vessel to be delivered in substantially the same condition as when inspected.
7. Dry-docking as per NSF 1987. (Or could be "divers' inspection as per NSF1993)
8. Vessel to be delivered with everything belonging to her on board, ashore and on order including all spare parts and spare equipment including spare propeller and tail-shaft, radio/navaids not on hire (please itemise).
9. Purchase price to include bunkers and luboils as on board at time of delivery.
10. Vessel to be delivered free of all encumbrances/mortgages/maritime liens/taxes/claims and all debts whatsoever.
11. Subject contract details basis NSF (1987 or 1993 as appropriate) - English Law to apply and deposits, payments and arbitration in London.
12. Buyer's right to place two men on board at Buyer's risk and expense after contract signed, deposit lodged and Buyer's signed indemnities provided.
13. Sellers guarantee the vessel is not black-listed by any Arab country.
4.12.1 The First Counter Offer
On the assumption that this initial offer is of interest to the Sellers, a counter offer might take the following form:
Behalf Freya Shipping of St. Mary Axe, London, we are authorised to counter offer on the following terms and conditions to your offer of yesterday's date for reply here 15.00 hours BST London time Thursday 12th July.

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1. Price US $10,250,000 less 1X% total commission your end. (Note - the Sellers have maintained their indicated price and only allowed 1X% commission from the purchase price to Buyer's Broker. The fact that there is more than 1% commission at the Buyers' end tends to indicate that either there is another Broker involved in the deal or that the Buyers have included an address commission in their offer).
2. Subject superficial inspection only at first port of discharge Antwerp/Hamburg range within July 2005. Buyers will of course have access to holds but as the vessel will be discharging cargo, Owners cannot, in advance, confirm that holds will be clean swept. Vessel's deck and engine logs will be made available to Buyers at time of inspection.
3. Agreed. (Note - Sellers have agreed inspection of records).
4. Agreed except decision of acceptance/rejection of ship and records within 48 hours after ship inspection. (Note - Sellers wish to speed up the decision on whether or not the ship is accepted and have shortened the period for reply. Obviously a Seller must know with minimum delay whether or not he has a deal for the purposes of finding another Buyer or fixing the ship).
5. Agreed except delivery during August 2005 with 20th September 2005 cancelling.
6. Diver's inspection as per NSF93 (Note dry-docking has been declined and alternative of diver's inspection offered which is now quite common practice).
7. Agreed except Sellers will not replace spare propeller or spare tail-shaft if used prior to delivery. Radio/Navaids on hire will be advised soonest. (Note - The Seller is taking the precaution of not being required to replace the spare propeller or spare tail-shaft in the event of the vessel hitting a submerged object prior to delivery, in which case the working propeller and/or tail-shaft might be condemned necessitating the spares to be fitted. Radio and Navaids are listed in the Owner's office and the Broker will obtain details of which are on hire and which are owner's property as soon as the information is forthcoming).
8. Remaining bunkers and unused lubricating oils to be paid for extra at current price at port of delivery. (Note - it is normal for Sellers to require Buyers to pay extra for bunkers in ship sales for further trading. As mentioned previously in this Chapter, the Broker can expect some argument regarding prices of bunkers and luboils at the port of delivery, also quantity and quality).
9. Agreed. (Note - The Sellers have agreed to clear all debts on the ship prior to delivery. Proof of this must be given at the time of delivery in order to obtain transfer of flag from one registry to another).
10. Agreed except after "average damage" add "affecting class". (Note - Sellers have agreed the wording as proposed by Buyers but require the condition that only claims against underwriters which affect the vessel's class will be cleared at the time of delivery).
11. Agreed but add words "fair wear and tear excepted" after "the same condition as when inspected". (Note - The addition inserted by Sellers can cause complications because of the difficulty in proving what was the condition of the vessel at the time of inspection. The Seller will be anxious to sell the ship and is under no obligation to point out items which are not in a perfect state of repair and therefore the burden of proving that the vessel was in a better condition upon inspection will fall upon the Buyer).
12. Agreed. (Note - Brokers have a key role to play in the avoidance of disputes needing to go to law. Arbitration can of course be convened at any centre of shipping throughout the world which is acceptable to Buyers and Sellers).
13. Buyers have the right to place two men on board at Buyer's risk and expense on arrival of vessel at delivery port. (Note - Refer to previous comments regarding Seller's reluctance to have personnel other than ship's crew aboard prior to handing over. The risks are obvious but Buyers also have fears of items which are ship's property being taken ashore. Buyers also have an interest in familiarisation of the vessel by their crew and therefore may wish to have an engineer aboard for the delivery voyage with this in mind).

SHIP SALE AND PURCHASE
14. Agreed.
15. For transfer of flag in Buyer's option, Buyers to state their registration documentation requirements with which Sellers to do their utmost to comply.
It is emphasised that the above offer and counter offer is an example only of what might happen during a negotiation for a ship purchase. The Brokers will continue their exchanges, clause by clause and line by line until, hopefully, agreement is reached on terms following which it will be their duty to draw up a sale contract for signature.
In the next Chapter, it will be assumed that following offers and counter offers on the above outline basis, agreement has been reached on terms. It will then be the task of the Seller's Broker to draw up a Memorandum of Agreement for signature, carefully observing every item which has been agreed by both parties and recording it in the sale contract.

Whilst all offers and counter offer have to be authorised by the Principal concerned, the process of submitting them in a manner most likely to result in a favourable reply can only be perfected by practice and experience. By this means, the Broker builds up a reserve of confidence essential for his or her ultimate success.
4.13 SELF-ASSESSMENT AND TEST QUESTIONS
Attempt the following and check your answers from the text:
1. When a ship is sold for further trading who normally pays the Brokers' commissions?
2. What is meant by "Free of average damage affecting class"?
3 What is the purpose of the dry-dock or diver's inspection clause in a sale contract? Having completed Chapter Four attempt the following and submit your essay to your Tutor. A ship is placed in the open market for further trading.

Discuss and explain the usual procedures for reaching agreement on terms and the various stages to be followed from inspection of records to final delivery of the ship to new Owners.
Chapter 5
THE SHIP SALE (PART 2)
5.1 INTRODUCTION
In the previous Chapter the procedure adopted by Sale and Purchase Brokers, whereby offers and counter offers are exchanged, was examined. During the course of that Chapter, it was pointed out that, when final agreement on terms is reached, it would normally be the duty of the Seller's Broker to draw up a contract - or Memorandum of Agreement to use its formal name - for signature by the two principals.
Now the perfect form of sale contract can rarely exist by reason of differing interests between Sellers and Buyers. However, the ultimate desire of both parties, after having reached agreement on terms, is for an efficient and smooth transfer of ownership. To this end the careful preparation of a contract is vital
Experience has shown that the Norwegian Shipbrokers' Association's Memorandum of Agreement for sale and purchase of ships is as equitable as can be devised. This document was originally adopted by the Baltic and International Maritime Council (BIMCO) in 1956 and during the past 10 years, it has been revised four times, in 1966, 1983, 1987 and 1993. The Norwegian forms have the advantage of being the most widely known and extensively used of all sale contracts and it is on these forms that this Chapter is based.

Shipping people, no matter how forward looking they may be, when it comes to standard forms tend to be conservative in the extreme. For example, some dry cargo charter parties in current use contain wording that is unchanged from forms devised in the nineteenth century. Thus, although most practitioners in ship sale and purchase will agree that the 1993 form is a marked improvement upon the 1987 version, the 1993 form has not yet entirely replaced the 1987.
In the examinations, as in real life, you will be expected to show a knowledge of where the two forms differ although questions seeking detailed knowledge will usually allow the candidate to choose and declare which form their answer is based upon.
Appendix 10 is a copy of Norwegian Saleform 1987 and Appendix 11 is a copy of Saleform 1993 by kind permission of the Norwegian Shipbrokers Association both of which should be studied and compared one with the other. During the course of this Chapter students should be prepared to make references to both these appendices as well as to the previous Chapter so that adequate time should be allocated.
5.2 CONCLUDING THE SALE
It is now assumed that the Brokers involved in the offers and counter offers discussed in Chapter Four finally reached agreement on terms.
A telex or e-mail of confirmation of the completion of the sale would be put forward by the Seller's Broker as follows:
On behalf of Freya Shipping of St Mary Axe, London we are pleased to confirm the sale of m. v "Georgina" to Moya Shipping of New City Court, London on the following terms and conditions:
1. Price US $10,000,000 less 2% total commission your end. Deposit 10% within three banking days of signing contract otherwise terms Saleform clause 2. Payment within three

SHIP SALE AND PURCHASE
With this in mind Appendices 10 & 11 will be examined in detail. Saleform 1987 will be used as the basis and italics will be used to indicate where the Saleform 1993 is different.

Date. This should be the date on which agreement was reached on terms. That is to say when finally offers and counter offers having been exchanged, all outstanding items were finally confirmed by both parties. The deposit must be lodged within 3 banking days from the date of the agreement being signed by both parties and therefore the Brokers drawing up the contract must be flexible in pursuit of attending to the interests of their Principals and the requirements of the sale in question.

Lines 1,2 & 3, Names of the parties and the ship. These are straightforward containing the full style and addresses of Buyers and Sellers and also the ship's name. The '93 form more correctly says "agreed to sell" instead of "sold" and "agreed to buy" instead of "bought".

Lines 4 to 8, Details of the ship. Date of build, classification and name of builders can be obtained from the classification register or from owners. Classification Society and Class in the '93 form rather than simply "Classification". Events have even overtaken the '93 form because register tonnage is now denoted as GT and NT

The '93 form then devotes fines 10 to 15 clarifying some words and phrases used in the contract.

NB The ship's call sign can be obtained from the classification register or from Owners. Gross and net tonnage are best obtained from the tonnage certificate in Owners' office.

Clause 1, Price. The price must be expressed stating currency and amount in figures and words.

Clause 2, The deposit. The sale having been confirmed, it is important for the Seller to have some kind of surety of the Buyer's intent. If, for example the ship is deviated from her course and is unfixed in the belief that the ship is sold and there is no serious intention on the part of the Buyer except to have an option on the vessel then the Seller could incur heavy costs. A deposit is therefore a necessity since, with its establishment, the Seller is further assured of the Buyer's seriousness and can make the necessary arrangements for the final handing over of the vessel with despatch. The deposit can be lodged in any Bank but it is usually placed in the Seller's bank so as to facilitate banking arrangements when the ship is delivered although the Seller's Broker's bank is often used.

The deposit is to be lodged within three banking days from the signing of the contract by both parties and any interest on the deposit shall be for Buyer's account. Should there be any fee imposed by the bank for holding the deposit, it shall be borne equally by Buyers and Sellers. The '93 form goes into a little more detail about the release of the deposit.

Clause 3, Payment. Obviously the Sellers require to receive the precise amount of purchase money as agreed. Banks charge for their services and therefore Buyers must instruct their Bankers to have the required amount of money available for payment to Seller's account as and when required with any bank charges for the account of the Buyers. This accounts for the wording "free of bank charges". When the vessel is ready for delivery official notice of readiness is given to the Buyers by Sellers. The '93 form devotes a whole new clause (5) to the question of notices and, incidentally, has already clarified that the word "written" includes any method of transmitting the written word. Note also the '93 form includes the words "in every respect physically ready for delivery" this is included because the looser wording under the '87 form became the subject of a law case ("Aktion" 1987). Full payment within three banking days after such notice is generally acceptable but such notice could, of course, be expressed in other forms — for example "within three working days" or "three days, Sundays and Bank Holidays excepted" but the S & P world has almost universally elected to use the expression "banking days" which seldom if ever causes any ambiguity and "banking days are defined in the '93 form.

THE SHIP SALE (PART 2)
Clause 4, Inspections . As has been mentioned, a ship purchased for further trading is rarely negotiated without inspection of the ship and of her records. A ship purchase is a substantial financial transaction and the future fortune of the Buyer may well depend on its outcome. It is important therefore to eliminate risks and margins of error as far as possible. Classification records can usually give a clear indication of the standard of maintenance, trading history and the general condition of the ship since her maiden voyage up to the last survey. A Buyer will note carefully recurring problems and will pay special attention to these when the physical inspection of the vessel takes place. In the case we are studying - the "Georgina", the Buyers have inspected records and have accepted them. The words in lines 22 and 23 of the '87 form which read "The Buyers shall have the right to inspect the vessel's classification records and declare whether same are accepted or not within" will, therefore, have to be deleted.

Similarly, if the vessel had been accepted after inspection before contract signing we could expect Clause 4 to read - "The Buyers have accepted the vessel's records and also the vessel after inspection and the sale is therefore outright".

Sellers are usually reluctant to allow opening up of the main engine and it is natural that Sellers should require compensation should Buyers hold up the vessel on account of delay in inspection. Log-books for engine and deck are part of the items inspectors will wish to see. In effect, they are the ship's diary and provide information of importance to a Buyer such as speed and consumption and details of any incidents in which the ship has been involved.

It is incumbent on Buyers to inform Sellers whether or not the vessel is accepted within 48 hours after completion of inspection. Thereafter the sale becomes definite, if Buyers have accepted the vessel, subject of course to other conditions of the contract.

Incidentally, there is no debate about the inspection, the Buyer does not have to give his reasons for turning the ship down, he can just walk away from the deal at this stage, and reclaim his deposit; thus there is a risk of a sale collapsing after all the negotiations have been completed. The '93 form takes note of the growing tendency for negotiations only proceeding once the inspections have taken place and thus provides for this situation in option (a). It even allows for careless preparation of the form by stating that option (a) applies if the Broker forgets to delete option (b).

Clause 5, Place and Time of delivery. Sellers and Buyers in the "Georgina" case having agreed that delivery shall take place at Antwerp within August 2005, it is incumbent on Sellers to keep Buyers posted about the vessel's itinerary and estimated time of dry-docking. The ship will remain Seller's property until paid for and delivery usually takes place immediately after the vessel has been taken out of dry-dock. Obviously, it is more convenient for all concerned in the sale and handover of the ship for delivery to be effected alongside a berth or quay but in a busy port, this may not be possible.

As previously mentioned, it is in the interests of both parties to have a cancelling date in the contract as a precaution lest the vessel, for circumstances beyond the control of Buyers and Sellers, cannot be delivered within the time agreed. Such a circumstance could occur should the vessel be declared a constructive total loss.

If delay in delivery might be occasioned by repairs not anticipated when the vessel entered dry-dock or any other reason for which Sellers were not responsible then the cancelling and delivery date could be re-negotiated, in which case an addendum to the Memorandum of Agreement would be drawn up by the Brokers setting out the terms which had subsequently been agreed.

The Broker's task is to attend always to the interests of his Principals and it is essential that Buyers are kept fully apprised of the vessel's movements, estimated time of dry-docking and delivery.

SHIP SALE AND PURCHASE
The '93 form uses clause 5 to go into greater detail about notices and keeping Buyers informed of the vessels itinerary and includes reference to the safety of the place of delivery.

Then there is a long (some Brokers say too long) clause 5(c) which seeks to reduce the fear of the buyer simply "walking away" if the ship misses her cancelling date. There is, however, no obligation upon the buyer to agree a new cancelling date if the ship is delayed so "walking away" is still an option.

Clause 6, the Dry-docking (and diver's inspection) clause. This clause should be studied carefully in order to understand its implications. (In the past it has been a favourite subject for examiners!) The purpose of the clause is to allow inspection of all external parts of the vessel below the water- load-line. Note that the '93 form refers to "the deepest load-line" in preference to the '87 form's reference to "summer load-line". The inspector will be the representative of the appropriate Classification Society and he will be accompanied by the representatives of Buyers and Sellers.

Should there be any part of the vessel below the load-line found broken, damaged or defective, so as to affect the vessel's clean certificate of class, it shall be made good by Sellers to the Classification Society's satisfaction. While in dry-dock, Buyers, or the Classification Society's representative, may have the tail-end shaft drawn. Again, should it be found defective or condemned, it shall be made good at the Seller's expense to the Classification Society's satisfaction without qualification.

All expenses incurred during dry-docking shall be for Buyer's account provided no parts of the vessel below the Summer load-line are condemned or found defective as to affect the vessel's clean certificate of class. If such parts are found defective so as to affect the vessel's clean certificate of class then all expenses, including dry-dock dues and the Classification Society's fees shall be for Seller's account.

The expenses for taking the vessel to the dry-dock and from the dry-dock to the place of delivery shall be for Seller's account.

Clause 6 in the '93 form is far more detailed and students should carefully compare the way the two forms deal with this subject. Clause 6(b) covers the option of a diver's inspection in lieu of dry-docking. This is now more frequently adopted and it meant, under the '87 form, that a written clause had to be added.

Clause 7, Spares, bunkers etc. It might seem incredible, when one considers the sale itself involves millions of dollars, that this clause in the Memorandum of Agreement probably causes more controversy than any other. Basically it concerns what is included in the purchase price of the vessel and Brokers should take care when closing a deal to be as precise as possible so as to avoid misunderstandings at a later stage in the transaction.

Obviously a Buyer expects all equipment aboard the vessel at the time of inspection to be available on board at the time of delivery. If the vessel has a spare propeller and spare tail-shaft he will expect these items to be available when he takes possession of the ship and difficulties can be experienced if they are taken out of spare and used prior to delivery. Both Saleforms exonerate Sellers from replacing spare parts including spare tail-end shaft(s) and/or spare propeller(s) which are taken out of spare and used as replacement prior to delivery. It is important for Brokers to establish what navigational equipment is ship's property and what is on hire.

Spares on order are excluded from the sale in the printed wording of the Saleforms but often their inclusion is negotiated by the Buyers. Any equipment belonging to the vessel at the time of inspection that is not on board at the time of delivery, to be forwarded with forwarding charges, if any, for Buyer's account.

Sellers are always reluctant to part with items of particular interest or value, such as sponsor's gifts at the time of launching, works of art, pictures/paintings and any other articles bearing the Seller's name such as crockery, plate, cutlery, linen etc. Should any of the latter be taken

THE SHIP SALE (PART 2)


ashore because of the reasons stated, Sellers are required to replace them with unmarked items. Personal belongings are obviously excluded and also personal items such as clothing which are part of the slop chest.

Remaining bunkers and unused lubricating oils must be paid for at the current market price at the port of delivery. If there happens to be a large quantity of bunkers aboard at the time of delivery and the price for bunkers at the port of delivery is expensive, Buyers may wish to limit the quantity to be paid for with the intention of taking the vessel to a port where they are cheaper. They may therefore require the wording to limit the quantity to an amount not exceeding a specified number of tonnes but any such limitation should be unambiguously agreed during negotiations.

If the quality is in doubt, a surveyor may be called in from an oil company to act as referee so that Buyers cannot refuse to pay what has been agreed under the terms of the contract by alleging that bunkers are unusable and little more than sludge.

Brokers should try to obtain in advance the approximate amount of bunkers and unused lubricating oils to be paid for and agree the cost with their respective Principals.

Payment under this clause is to be effected at the same time as the purchase money is paid and shall be in the same currency unless otherwise agreed.

Clause 8, Documentation and Clause 9, Encumbrances. A later Chapter of this course will be devoted to documentation on delivery and students will be referred back to the documentation clauses in both Saleforms.

For the time being it should be noted that as the "Georgina" is registered under the Panamanian registry and it is the responsibility of Sellers to provide for the deletion of the vessel from the Panamanian Registry and deliver the certificate to the Buyers.

The Sellers must provide, on delivery, a Bill of Sale stating that the vessel is free from all encumbrances and maritime liens and any other debts whatsoever. The Bill of Sale must be notarially attested and legalised by the Consul of the country in which the vessel will be registered by the Buyers. Such a document presented in this manner is a surety of authenticity and enables the Buyer to proceed on the oceans of the world in the knowledge that every possible action has been taken to ensure that no debt appertaining to the vessel remain uncleared.

The deposit is released in Seller's favour and the balance of the purchase money paid together with items mentioned in Clause 7 of the contract. Classification certificates, plans which are on board the vessel and other technical documentation are forwarded to Buyers while log books may remain in Seller's possession although Buyers, should they so wish, may take copies of log books.

Clause 10, Taxes etc. Taxes, fees and expenses incurred in registering the vessel under Buyer's flag must, of course, be for Buyer's account while any such expenses incurred by Sellers in closing the vessel from her Panamanian registry must be for Seller's account.

Clause 11, Condition on Delivery. Condition of the vessel at the time of delivery can sometimes cause problems for the reasons already mentioned in this Chapter. It is difficult to prove beyond reasonable doubt that the Buyer's surveyor conducted an exhaustive survey when he surveyed the ship. He may well have missed certain items and a dispute may then arise as to whether a particular matter was present at the time of inspection. The words "fair wear and tear excepted" do, therefore, lend themselves to dispute. ("Fair wear" may be relatively simple to envisage but what about "fair tear"?)

It is important to remember that the Seller is under no obligation to point out items which are not in a perfect state of repair except, of course, damage or defects which affect class. Ship sales are essentially governed by the principle of caveat emptor which is the legal phrase which means "let the buyer beware"

SHIP SALE AND PURCHASE
Thus the efficiency of the original inspection and the burden of proving any serious differences between condition at time of inspection and condition on delivery fall upon the Buyer

Under the '87 Saleform, when a sale is definite and the ship has been accepted after inspection, the Sellers must notify the Classification Society of any matter coming to their knowledge, prior to delivery, which might lead to the withdrawal of her class or to a class recommendation. In other words, the Sellers have an obligation to maintain the vessel in the manner of a reasonably prudent Owner between the time of inspection and delivery. The '93 form goes further in that it stipulates that the vessel must be "free of average damage affecting class" whether or not the Seller knew about it and reported it to the Classification Society. The term "inspection" is defined in this clause in the '93 form. The different wording of clause 11 in the '93 Saleform is considered by many to be the most significant difference between it and the earlier version.
Clause 12, Name/markings. On delivery Buyers must change the name of the vessel and also any funnel markings, a fairly obvious obligation.
Clauses 13 and 14, Default by Buyers and/or Sellers. Compensation must be paid to Sellers in the event of a default by Buyers and vice versa. Losses for such defaults can be heavy and compensation must be paid together with interest which, in the '87 form, is stipulated at a rate of 12% per annum but this is often deleted during negotiations, especially at times of worldwide low interest rates (the '93 form simply states "with interest" without specifying a rate). Brokers play an important part in avoiding disputes but however much care may be taken, defaults occur which prove expensive and time consuming for all involved in the transaction. Obviously, the rate of interest will vary according to current rates at the time of the transaction.
The wording under Seller's Default in the '93 form is far more comprehensive including the procedure if the ship should become 'unready' between time of giving notice and Buyers taking delivery.
Clause 15 Buyers representatives. This clause which is so often the subject of a written clause in the '87 version is self explanatory,
Clause 15 (Saleform'87) 16 (Saleform'93) Arbitration Brokers must always be on the alert in trying to avoid arbitration or litigation, both of which are unproductive in time and expense. Nevertheless it is necessary in every contract to make provision for any such possibility and Clause 15 of Saleform'87 covers Arbitration in a general way. Because of an ancient maritime tradition, the City of London is widely accepted as a place of arbitration and in accordance with English law. If the parties to the contract cannot agree on a single Arbitrator, three shall be appointed, one by each party to the dispute and the third by the London Maritime Arbitrators' Association. In the Clause, there is provision lest one party to the dispute fails to appoint an Arbitrator or if an Arbitrator, having been appointed, is unable by refusal or other reason to act in the matter. The contract is subject to the law of the country agreed to as a place of arbitration and the award rendered by the Arbitration Court is binding on the parties to the dispute.
The '93 form goes into more detail giving three options, 16(a) sets out the procedure for London arbitration, 16(b) covers the New York arbitration system while 16(c) is available if the parties want arbitration other than in London or New York.
As mentioned previously, it is rare for a printed form to cover all eventualities and the addition of written clauses tends to be the rule rather than the exception.
In the case of the "Georgina" sale, item 9 in the telex of confirmation (recap) is extra to the provisions of Saleform'87 and therefore an extra clause is required to the contract. The meaning of this clause (which would be numbered Clause 16 basis '87 form) can be summarised as follows:

i) Nothing relating to surveys should be overdue. All surveys have a date and therefore all must be up to date at the time of delivery.
ii) Class surveys may have recommendations, outstandings or subject items of class. This means that the classification surveyor has seen something which must be dealt with by a certain date. If this recommendation is noted even though it may not be due until after delivery of the vessel is must be settled at the time of delivery. It may, of course, suit both Buyer and Seller to agree a sum of money in lieu and for the work to be deferred for the Buyer to carry out nearer the specified date.
iii) There are also appendix items which are not given a definite date. Buyers cannot claim an appendix item from Sellers as these do not affect clean class whereas outstandings do affect them.
iv) Claims on insurance must be cleared. Average means anything which is to be claimed against Underwriters. When the ship is sold the new Owner cannot claim on the Underwriter of the old Owner therefore average items must be cleared before the ship is delivered.
Clause 17. In the recap telex it was agreed that Buyers could place two men aboard the vessel with the usual indemnities after the contract signed and deposit has been lodged in accordance with Clause 2 of the Memorandum of Agreement. A written clause covering this point would not be needed if the '93 had been used as this is covered in Clause 15
There are conflicting interests in this matter. Sellers are usually reluctant to allow Buyer's crew aboard the vessel before payment in full has been effected. The reasons for reluctance by the Sellers might include the possibility of pilferage, accidental or wanton damage even interference in the running of the ship. More particularly if the '87 form is used, the representatives may spend their time nosing around and bring to the Seller's attention any defects they find which may have been missed at the time of inspection which places the Sellers in the "now you know" position.
From the Buyers point of view, having agreed to purchase the vessel with everything included in accordance with Clause 7 of the Memorandum of Agreement, have a natural desire to ensure as far as is reasonably possible that minor items are not taken ashore by Seller's crew which may be ship's property. A compromise is a reasonable solution to this problem and two men placed aboard as representatives usually suffices. Their presence must be at Buyer's risk and expense and it is understood that they will not interfere with the running or performance of the ship while she remains Sellers' property. Sometimes, Buyers may wish an Engineer to sail with the vessel during her final voyage to the delivery port but this can only be effected with the full permission and approval of the Sellers.
Clause 18. Buyers will wish to ensure that the vessel they are buying is free to trade worldwide — hence the insertion of a "no Arab boycott" clause.
The above notes, combined with those in the previous Chapter, although by no means definitive, provide a useful guide with regard to the business of buying and selling ships.

There is no easy definition as to what it takes to be a successful Sale and Purchase Broker but common sense and an ability to like people and to be liked by people, is an essential attribute for the simple reason that the end result is that there will be more Principals who will rely on his advice and expertise, the more strength to his elbow.
As has been mentioned previously in these notes, few if any ship sales are identical, each one having its own unique requirements which necessitate separate clauses and each one having its own problems and difficulties which need to be surmounted.

SHIP SALE AND PURCHASE


5.3 SIGNATURE ON CONTRACTS
Brokers may be called upon to sign contracts on behalf of their Principals in the same way as chartering Brokers sign charter parties. In both cases, the Principles are the same. The Broker must ensure that neither he nor his shipbroking company bear personal responsibility and therefore certain usages must be adhered to. The first is that the parties to the sale are named and described in the contract and are therefore clearly identifiable as Principals. Secondly, Brokers signing sale contracts must always qualify their signature in a way which makes it clear that they are in no way responsible for the execution of the contract. The normal style is therefore as follows:

For and on behalf of (Here spell out the name of Sellers or Buyers, as the case may be)

(Name of shipbroker or firm)
signed by As Brokers only

Occasionally the old fashioned wording "as brokers and non-responsible mandataries" may be used. Either way, there is no risk of the Broker being considered a party to the contract.

A further addition to the signature could be the manner in which the authority was given to the Broker by either the Seller or Buyer. This could be expressed after the signature in the following manner:
(signature) As brokers only

By (here state letter, fax or other communication medium) authority dated from

The name of whoever granted the authority would be inserted in full in the appropriate place beneath the Broker's signature.
5.4 OTHER SALE CONTRACT FORMS
As was mentioned at the beginning of this Chapter, the perfect sale contract can rarely exist for the reason of the differing interests between Sellers and Buyers. It would be impossible to present numerous sale contracts for study in this course, however Appendix 12 is a copy of the "Nipponsale 1999" published by the Japan Shipping Exchange.

Students should study the Nipponsale and note where its terms differ from the Norwegian forms.
5.5 TO SUM UP
In this Chapter, Three specimen sale forms have been presented for study. The essentials of all such contracts are much the same and must be incorporated in any form of Memorandum of Agreement, viz. time and place of delivery, price, inspection of class records and ship, dry-docking, what is included in the sale and any other conditions mutually agreed.

THE SHIP SALE (PART 2)
5.6 BROKERS' COMMISSIONS
The Broker's commission is rarely inserted in a contract. A Broker is responsible for attending to his own commission and must therefore ensure that this is recorded in writing and agreed prior to the conclusion of a sale.

Ideally there should be a separate 'commission letter' signed by the Seller (who technically pays all the commissions) but this is not often done today. However there is no point in being trusting to the point of foolishness because the legitimate earning of commission is why the Broker is there, he or she - like any other labourer - is 'worthy of his hire'. The Brokers should ensure that there is ample written evidence (usually the exchange of telexes) that commission is due. Alternatively FONASBA have devised a formal commission contract which would cover the matter fully.

One may ask why does one not, therefore, include a commission clause on the M.o.A. as is often done in charter parties and the only answer is that it has never been customary to do so. So far as contracts drawn up under English law are concerned. The Contracts (Rights of Third Parties) Act 1999 allows a Broker to sue in his own name if a brokerage clause is included in a contract between two other parties (e.g. the Owner and the Charterer). Does this mean that the custom will change and brokerage will appear in Sale contracts? Only time will tell!
5.7 SELF-ASSESSMENT AND TEST QUESTIONS
Attempt the following and check your answers from the text:
1. Who, unless otherwise agreed, pays the commission on a ship sale?
2. What is the purpose of the dry-docking clause in Saleform 87 and who pays the dry-docking expenses?
3. A working propeller and existing tail-shaft are condemned after the delivery voyage. Does the Seller of the vessel need to replace them on delivery of the vessel to a Buyer?

Having completed Chapter Five, attempt the following and submit your essay to your Tutor.

Using details of an imaginary ship, draft an opening firm offer on behalf of your Principal, the Buyer, with an explanation of each term forming the offer.

INTRODUCTION
A merchant ship may stay with one Owner or change ownership several times during its life but that life is finite and at the end, there is only one sale left which is to the ship-breaker.

At one time it was reckoned that a ship's life was 20 years but this varies considerably for a variety of reasons. The state of the chartering market is, of course, a major general influence. Particular factors include the type of trade in which the ship has engaged, the care lavished on the ship by her Owners; even the policy of the owner. To these reasons must now be added the recent IMO convention (MARPOL 13G) on the phasing out of single hulled tankers

One must realise that, when a ship is sold for further trading, she could well commence to trade in direct competition with the Seller. Thus some Owners may insist on selling a ship for scrap even if she has several years of useful trading life left; in this way potential competition is eliminated. The price for scrap will be much less than a price for further trading but the Shipowner's tax accountant can often turn this to their advantage.

The scrap market is quite different from the market for further trading. Different contract conditions, a completely different type of Buyer and quite different pitfalls for the unwary Seller.

When sold for further trading, the ship will probably continue its way of life as before; only the ownership changes. A ship sold for scrap will have been run down to the barest stipulations of seaworthiness and with no concern at all for cargo-worthiness. Seaworthiness in this context means that the ship must still be in good enough condition to retain her Class otherwise, if she became a casualty on the way to the demolition yard, the insurers would not pay out.
There will be cases where a ship has been in a serious accident or has been laid up for so long that her engines no longer work and she is certainly well out of Class. In such a case she would have to be towed to the breaker's yard for which tugs will be hired. Before towage can take place, a 'Towage Certificate' will have to be obtained from the Classification Society who will demand that the ship be made 'sea safe' which involves all openings - doors, hatches, portholes etc - to be welded shut to make them water-tight. This done, the ship will be able to obtain specific insurance cover for her last voyage.
The actual arrangements for the towage may be made by the Sellers but it is quite common for 'dead' ships to be sold 'as is, where is' leaving the Buyers to make the arrangements which are usually carried out by specialist ship-delivery companies.

This purpose of Chapter is, therefore, to emphasise the specialist skills and knowledge that an S & P Broker trading in the demolition market needs to acquire. The first necessity is to obtain a mental picture of how ship-breaking is carried out.
THE SHIP-BREAKER'S WORK PLACE
Although most countries with a seaboard carry out ship-breaking to a greater or lesser degree it is in the less developed countries where the major proportion of this industry is based.

In those countries the work is carried out very effectively but in a manner which can, at best, be described as unsophisticated although, in some cases, crude in the extreme may be a better

SHIP SALE AND PURCHASE
description. Currently the most active ship-breaking areas are the Indian sub-continent, South-East Asia and the Far East.

In many instances the breaker's premises are no more than a stretch of sea-shore with a gently sloping beach. The ship arriving for breaking first anchors off this beach while the transfer of ownership takes place. On completion of these formalities, most of the Seller's crew leave the ship but a few remain because their duties are an essential part of the ultimate delivery of the ship. This ultimate delivery consists of the ship being aimed at a given marker on the shore and then driven - at considerable speed - straight at the beach. The speed is necessary to ensure the ship's hull being firmly stranded because that is where all the work on the ship takes place.

The Buyer then first removes anything which has a second-hand resale value. In addition to items from the engine room such as electric generators, a ship has several objects for which there is a ready second-hand market; visualise the yield from such places as the galley (cookhouse) and crew accommodation.

Before the serious task of demolition can begin some precautions have to be taken. Tankers, of course, have to be gas-freed and sludge removed so that work with cutting torches can be safely carried out. It is a matter for negotiation whether the Seller or the Buyer does this cleaning work. The same applies to fuel tanks on any ship and the question of remaining bunkers is another area for decision during negotiations.

Then the ship is simply taken to pieces with flame-cutters. The ship's own cranes or derricks may be retained as long as possible to handle the sections as they are cut out.

Some of the steel will go to steel-works where it is re-melted; even steel production from raw materials needs a certain amount of scrap to help the molten steel to flow. However, much of the ship's plating only has to be heated sufficiently to re-roll it for its re-use in other ways. The advantage of using scrap steel is that the massive capital investment necessary for making steel from raw materials is avoided. The particular value of steel from ships' plates is that the quality is uniform which cannot be achieved from the use of miscellaneous scrap.

It will be seen that this method of ship-breaking requires very little capital investment in sophisticated equipment and the fact that it is labour-intensive is an attraction in the countries concerned. This in itself is beginning to give cause for concern because the minimum technical skill required of the workers means that casualties are not uncommon. Furthermore the health hazards for the workers themselves and the environment in general is exciting reaction from such organisations as Greenpeace who are especially concerned about the dangers from such things as oil residues and more especially the presence of asbestos in many ships where it has been used for insulation of such items as steam pipes.

With the world becoming increasingly environment-conscious, the long-term future of current methods of ship-breaking is not easy to predict but for the immediately foreseeable future that is the main buying end of the demolition market.
6.3 THE BASIC PRINCIPLES OF A DEMOLITION CONTRACT
Before studying any contract in detail some fundamentals from the Buyer's viewpoint need to be considered.

It is estimated that the average ship, in scrap terms, is comprised of the following:
86% scrap steel
7% cast iron
1% non-ferrous metals (e.g. brass, copper, bronze) 6% non-metallic materials (e.g. timber, plastics)

DEMOLITION
Ships are traded in the demolition market according to their actual weight of metal and it will be recalled from Chapter One that this is referred to as the Light Displacement which is the weight of the hull completely equipped plus the weight of her machinery, boilers, water in the boilers and spare parts but excludes cargo, bunkers, provisions stores and other water.

Prices are quoted in US$ per light displacement ton (often shortened to "lightweight" or LDT). Care must always be taken to check whether it is the ton of 2240 pounds, or the metric tonne of 1000 kilograms. (The American "short ton" of 2000 pounds is seldom if ever used in this context). Although the LDT is the way prices are quoted, the eventual contract of sale usually quotes an agreed total (lumpsum) price as well as a price per light displacement ton.

Prudent Buyers will insist on some independent confirmation of the ship's light displacement which can be checked from the original builder's plans or a letter from the builders. The same information may also be gained from the ship's deadweight scale or trim stability booklet. Enquiries should also be made to check from the ship's records whether any modifications have been made which might affect her lightweight. Some ships have permanent ballast, the weight of which should be deducted from the lightweight when calculating price.

As with any ship sale, confirming what is included in the sale is important. For example the steel in a spare tail-shaft is of particularly good quality also one should check what material any spare propeller is made of. The spare propeller is usually of cast iron but if, like the working propeller, it is made of bronze this is a bonus because scrap bronze commands a very high price. The nature and weight of any other spares, such as an anchor, need to be checked.
6.4 SELECTING THE RIGHT BUYER.
A primary concern from the Seller's point of view is the identity of the Buyer. In a recent listing of ship-breakers there were over 100 names in India alone and it stands to reason that there will be a wide variety of financial stability when such a large number is involved.

At the beginning of this Chapter the point was made that a ship is allowed to run down once it has been decided to place her on the scrap market. Conversely a ship being sold for further trading is usually in a reasonably seaworthy and cargo-worthy condition. In the unlikely event of a sale for further trading collapsing at the last minute, due to default by the Buyer, the Seller can continue to trade his ship until a new sale can be arranged. True, the Seller will have incurred losses which may or may not be recompensed from the deposit or from legal action against the defaulting Buyer.

Consider, however, the plight of a Seller of a ship for scrap, perhaps anchored off a remote beach somewhere in Asia and the Buyer decides he has changed his mind. Such a Seller would be very vulnerable to having to renegotiate the sale at a much lower price. That situation was not unknown in the days before the demolition market became properly organised.

To defeat such a predicament it will be seen, when a demolition sale contract is examined, that much of the clausing is concerned with making payment of the agreed price at the agreed time as foolproof as possible.

The principle device in this context is the way that payment has to be arranged via a Letter of Credit. The Buyer is obliged to open a Letter of Credit in a bank convenient to the Seller. The two parties agree as to the documents which the Seller has to present to the bank at the time of delivery of the ship in order to release the money. The Letter of Credit has to be irrevocable. The only item over which the Seller has no control is that the cash is not released until the Seller's bank receives confirmation from the Buyer's bank that delivery has taken place although some contracts seek to overcome this problem. Unless the Letter of Credit is established and the agreed deposit made within three banking days of the signing of the contract, the Seller has the option to cancel the deal.

SHIP SALE AND PURCHASE
One hundred percent certainty is seldom achievable so that the reputation of the Buyer and the Buyer's Broker is important. Even more vital is the task of the Broker representing the Buyer to be sure of his Principal; it has already been stated that a reputation is easily damaged but difficult to repair. In a busy market, top class Buyers will tend to have little difficulty in filling their demolition berths and so have to retreat from the market for a time. Sellers will then have to look to the less well-known Buyers and so the Seller and the Seller's Broker have to ensure that the eventual contract contains no loopholes.
6.5 THE SALE CONTRACT
The Baltic and International Maritime Council (BIMCO) have produced a standard sale contract for demolition with the codename "SALESCRAP 87" a copy of this will be found in Appendix 13 which will be studied clause by clause.

Most of the major areas where there are a large number of ship-breakers have devised their own standard form and as BIMCO is an international shipowners' association, one can expect some clauses to be more favourable to the Shipowner (the Seller). Nevertheless the SALESCRAP 87 form provides an excellent example for studying the structure of a sale form for demolition as it covers all the main features clearly and in detail.

It will be seen that, in common with many BIMCO forms, the first part is in a "box" layout containing all the facts relevant to the ship and the terms agreed, while Part II embodies the clauses which govern the contract.

Study first, page one of the contract (Appendix 13) where it will be seen that boxes 1 to 15 identify the parties to the contract, the name of the ship being sold and some detail about its main engine, the generators, spare propellers and spare tail shaft.

Box 18 is the all-important item, the price and the currency in which it is to be paid. The rest of the boxes on that page deal with the deposit and the basic details about the Letter of Credit with references to the clauses involved.

Page 2 of the contract (Appendix 13) Clauses 21-25 deal with the position of the ship and her delivery including the all-important place of delivery with expected readiness and the cancelling date. The remaining clauses cover documentation required, rates of interest in the case of default by either party, arbitration and, of course, the signatures of the parties.

Refer now to page 3 (Appendix 13) where the first clause allows for more details of the ship, if they are required, to be set out on the last page which also has space for listing any items not included in the sale in addition to those mentioned in Clause 2.5.

Note especially (Clause 2.1) that unlike sales for further trading, it is not usual for the ship to be inspected either at the time of negotiation or at time of delivery.

Again unlike sales for further trading where bunkers remaining on board tend to take on a disproportionate amount of concern, bunkers become the Buyer's property. For the Buyer they may be a useful source of fuel for the dismantling operation but they may also be something of a nuisance.

Clause 2 also covers the removal of Seller's property bearing the Seller's flag or name as in a sale for further trading. Unlike a sale for further trading, if, for example, the spare tail shaft had to be installed between signing and delivery, the condemned shaft must remain on board. It may be no further use for driving the ship but it is still a useful piece of high grade steel to the breaker.

Clause 3 simply states how the light displacement has to be verified. Note that if the proof of the lightweight differs from the originally agreed figure, the lumpsum price (Clause 3) shall be adjusted accordingly. This explains why on page 1 of the contract both the agreed lumpsum and the price per lightweight are stated in box 8.

DEMOLITION


The deposit clause (No.5) is substantially the same as such a clause in a sale for further trading.

Study Clause 6 carefully. It deals with the mechanics of the Letter of Credit, the all-important system of endeavouring to achieve a foolproof method of payment which seeks to be as fair to the Seller as to the Buyer.
Full details of the way a Letter of Credit (often referred to as a Documentary Credit) are dealt with in TutorShip's course for Shipping Business but the basics are that the Buyer gives detailed instructions to his bank as to how payment shall be made. In Letter of Credit (L/C) parlance this bank is called the Opening Bank and it will be seen from line 57 that this has to be a "first class bank".
The opening bank then makes contact with a bank in the Seller's country which becomes known as the Advising Bank. Line 59 states that this bank is to be "nominated by the Sellers" but there is usually some mutual agreement between the parties because the opening bank will prefer wherever possible to deal with its own branch office or its corresponding bank in the Seller's country.
The instructions given by the Buyers to the opening bank which will, in turn be passed to the advising bank will detail the documents which the Sellers have to present to the advising bank in order to receive payment; these are set out in Clause 13.

It will be seen that safeguards for both parties are built into this system.
a) The opening bank will not accept instructions from the Buyers unless there are adequate funds to make the payment.
b) The advising bank will not accept instructions unless satisfied that the opening bank is indeed first class.
c) The Sellers cannot collect the money until all the required documents are presented and the ship has in fact reached the Buyers.
d) The Buyers cannot withhold payment if all the requirements of the L/C have been satisfied.
Note particularly that the clause calls for a Confirmed Irrevocable Letter of Credit. "Confirmed" means that the advising bank undertakes (confirms) to pay the full amount when all the requirements of the L/C are satisfied even if the advising bank has not received the funds from the opening bank.
"Irrevocable" means just what it says, the Buyers cannot change (revoke) the L/C in any way once it has been opened except with the agreement of the Sellers.
Line 71 provides for an expiry date for the L/C which will be the subject of negotiation between the parties as the Seller will wish to ensure that if the ship is delayed and a new cancelling date is agreed, the money will still be paid. The Buyer will try to keep this date a tight as possible to reinforce the cancelling date and to ensure that the Buyer's funds are not "tied up" any longer than necessary.
Clauses 7 & 8 deal with where the ship physically is at time of signing the contract and how she intends to reach the place of delivery, and Clause 9 covers the actual delivery. Note that if the actual breaking berth (the stretch of beach in many cases) is not immediately available, delivery as near as possible shall be considered as fulfilment of the contract. Study 9.2 carefully as it goes into detail on this point even to the extent of what happens if the Buyer fails to nominate a waiting place.
The cancelling date procedure set out in Clause 10, whilst still allowing the Buyer to cancel if the ship is delayed, imposes the obligation upon the Buyer to declare that option as soon as notification of delay is given or, in the alternative, to agree a new cancelling date. This treatment of the cancelling date can be seen as being sympathetic towards the fact that a ship

SHIP SALE AND PURCHASE
run down preparatory to scrapping would be in dire straits if the Buyer was able to defer cancelling until the last minute.

Clauses 11 & 12 deal with keeping the Buyers informed of the vessel's progress and with actual notice of readiness to deliver which is tendered to the Sellers and to the Buyer's bank (the Opening Bank). Take note that, in this sale form, a tanker would not be accepted as ready until she is able to present a certificate from an independent competent authority stating that her tanks are gas and sludge free so that men can safely work inside the tanks with flame-cutting gear.

The documents required to release, to the Seller, the funds held by the Advising Bank in the Letter of Credit are detailed in Clause 13. This particular saleform (Clause 13.2) ensures that the Seller can demand payment even if the Buyer's bank (Opening Bank) fails to confirm receipt of the notice of readiness.

Clause 14 endeavours to ensure that once the ship has been accepted by the Buyer, there should be no argument about the ship's condition. A clause like Number 15 would be important in a sale for further trading but it seems almost superfluous when one assumes that the first thing to be cut down will be the funnel!

The procedure regarding encumbrances, taxes, dues and charges (Clauses 16 & 17) are similar to those found in any saleform. What is worthy of note is that whilst a ship-breaker is not concerned with the ship having valid safety certificates (e.g. safety radio, safety equipment etc.) a valid Deratisation Certificate (Clause 18) is demanded. The risk of disease which rats can carry is of particular concern to people in the tropics where so much ship-breaking is carried out.

As with a sale for further trading, the Buyers wish to have the option to place their representatives on board. They will be concerned with monitoring what is removed under Clause 2.5, they will also start planning the work schedule so that no time is ever lost between delivery and commencing work.

In some cases such representatives carry out another, quite unusual, function. Sailing a ship at speed straight for the beach is a manoeuvre totally alien to the normal ship's officer's way of life and some firm encouragement at the crucial time can be very helpful.

Clause 20 is most important because there have been cases in the past when a Buyer has bought a ship ostensibly for scrap only to resell it for further trading. Mention was made earlier in this Chapter that some Owners sell for scrap as a policy to avoid creating competition. Thus a clause committing the Buyer to scrapping the ship provides some protection.

It would be very difficult and time-consuming to argue what damages the Seller has suffered through the Buyer trading rather than scrapping the ship which is why this saleform spells out the amount (liquidated damages) that the Buyer would have to pay.

Clauses 21, 22 & 23 are routine but should nonetheless be studied carefully. Clause 24 Deals with arbitration and the law to be applied with various alternatives for the parties to select the one mutually acceptable.
6.6 OTHER SALE FORMS FOR DEMOLITION
Earlier it was mentioned that the BIMCO standard form is by no means universally used and that different buying areas have their own favoured forms. The basic principles are the same, the differences tend to be only in detail.

For example, in the form used by ship breakers in Pakistan there is a clause reading:
VENDOR'S CREW to leave the vessel after physical delivery with the exception of seven crew members who are to remain on board for a maximum of seven days after delivery

DEMOLITION


to assist the Purchaser's beaching operation at Gadani Beach. However, if the Buyers require their services for any further time then all expenses, wages, victualling from then onwards will be for Buyer's account. The beaching at Gadani Beach will be at the Purchaser's sole risk and responsibility.
Most demolition contracts make provision for an alternative place for delivery should the breaker's berth be inaccessible. This is covered in Clause 9.2/9.3 in the BIMCO form. The Taiwan contract treats this situation in a slightly different - and slightly less easily understood - way:
If the vessel on its arrival at the entrance to Kaoshiung Harbor should not be immediately furnished a safe berth by Buyer, the Buyer shall pay to the Seller demurrage at the rate of $ per day or pro rata commencing 3 business days after Notice of Readiness is given to Buyer as provided in paragraph 5 herein. Should the Buyer fail to provide a safe berth for the vessel inside Kaoshiung Harbor within 3 business days after the aforesaid Notice of Readiness is given, the Seller shall have the right to deliver the vessel to Buyer at the entrance to Kaoshiung Harbor or inside Kaoshiung Harbor at Master's discretion. Buyer must make full payment of the presented demurrage invoice through Seller's agent in Kaoshiung to a bank account in Taiwan designated by the Seller's agent prior to physical delivery of the vessel.
The Korean demolition contract requires that the ship's maximum height shall not exceed 45 metres from sea level and one assumes that anything protruding higher than that has to be lopped off by the Sellers before arrival. The main ship breaking ports in South Korea both have draft restrictions, at Inchon it is 4.5 metres and at Ulsan 6.0 metres.
6.7 THE DEMOLITION MARKET
The extracts from other sale forms for demolition are simply given as examples. Not only will different ship breaking areas tend to favour certain forms but individual breakers may wish to include special clauses to suit their own circumstances.
The demolition market is a specialised one and in many respects quite different from the second-hand market for further trading. A major difference is that ship-breakers are demolishing ships all the time. They do not want their berths to be idle, so they will wish to arrange their purchases in such a way that as soon as one ship is completely demolished there is another ready to occupy the berth. Once a breaker has arranged purchases for a reasonable period into the future, he will temporarily drop out of the market (unless an irresistible bargain is on offer) but after a few weeks he will be back again. One could almost say that ship breakers are in the market all the time - which is seldom if ever the case for Buyers for further trading.

The prices breakers will offer will not only be affected by the freight market which influences the number of ships available for scrapping but will also react to the price the breaker can obtain locally for the scrap steel he is producing. This internal market for scrap steel can vary from area to area so that an S & P Broker specialising in the demolition market will be expected to know which breakers are paying the best prices at any one time.

As with most activities in shipbroking, sales of ships are reported in the shipping press and Appendix 14 is a page from an old copy of the weekly magazine "Fairplay". As was mentioned early in this Chapter, the activity in the demolition market is strongly influenced by the strength of the chartering market. If rates are high, an Owner will trade his ships as long as possible but in a weak chartering market, not only is the income low but Charterers will tend to prefer more modern ships than those nearing the end of their working life. Thus the number of sales for scrap will vary as the market fluctuates.
Appendix 15 is a sale report from Lloyds List which, although not recent, raises an interesting point. Take special note of the sale of the "FAST ALEXANDRIA" which is referred to as a sale "as is". The main thrust of this Chapter, so far, has assumed that the Seller will deliver the ship to the Buyer's place of work. Very occasionally the task of delivering the ship to where it will be broken is undertaken by the Buyer; who may employ a delivery crew for the final voyage.

SHIP SALE AND PURCHASE


It will be seen that the price paid for "as is" is much lower than the rest of the sales. This is understandable because apart from bearing the cost of the last voyage the transfer of ownership is complicated by the fact that the Buyer has to "trade" the ship for that last voyage and so has to register it, insure it and become in every way the same as a trading Owner for just that last trip.

Alternatively the Buyer can arrange, as in the case of the "EGE K", for the ship to be towed to her final destination but this is a costly business and, as mentioned in the introduction to this Chapter, has its own complications. In the report in question the actual price paid was not reported but again it would have been much lower than for ships delivered to the breaker's berth.
6.8 SELF-ASSESSMENT AND TEST QUESTIONS
Attempt the following and check your answers from the text.
1. What is the light displacement of a vessel and how is it expressed?
2. What comprises the scrap content of a vessel?
3. The purchase price of a vessel sold for demolition is expressed in the Memorandum of Agreement by a lump sum. On what basis is this calculated?
4. What does the expression "confirmed irrevocable" mean in connection with a Letter of Credit?
5. Why does a sale contract for demolition usually include both a lump sum price and. a price per light displacement ton?
6. Which of a ship's normal safety certificates is the only one that ship-breakers normally insist upon?
7 To whom was the "Mentese" sold and for what price?
8. What type of ship was the "Rastina" and where are the Sellers domiciled?
9. BP-Amoco sold one of their tankers, what was its name and who bought it? Having completed Chapter Six, attempt the following and submit your essay to your Tutor:

Assume you are the Broker for a ship breaker for whom you have received an indication of a ship which the Owner wishes to sell for scrap. The ship in question is a motor tanker of 7,500 tonnes light displacement which has a bronze working propeller and a spare cast iron propeller. The ship is able to proceed to your Principal's demolition yard under her own power.
Compose a firm offer, giving a brief explanation for each of the terms of the offer.

FINANCE, NEWBUILDINGS AND INSURANCE
7.1 INTRODUCTION
The purchase of a ship is a major capital transaction and although it is quite rare for S & P Brokers to become directly involved in arranging the finance, it is important to understand how their principals arrange the necessary finance.

In essence the Buyer either uses his own money or uses someone else's - or a mixture of the two. To express that in more formal terms, a ship is purchased either from the Buyer's own resources or the Buyer seeks a source of external finance.
7.2 FUNDING THE PURCHASE FROM OWN RESOURCES
It is rare for a ship of any reasonable size to be bought entirely from the Buyer's own resources. Some ship breakers may be the exception because once they have become established, their sale of the scrap metal can generate the cash flow necessary to purchase the next ship for breaking and so on.

Another exception would be where the Buyer has sold a sufficient number of older ships in his fleet or other assets to provide enough cash for the new acquisition.

One may argue that a big corporation would have no difficulty in buying ships from its own resources but this would seldom be strictly true. Students will recall from Introduction to Shipping that a commercial company needs capital in order to operate. In the case of a limited liability company this capital would come from the sale of shares in the company. Thus, when a limited company uses its own funds to purchase a ship, it is actually using its shareholder's money.

There may be cases where a company will arrange for additional shares to be created and placed on the stock market in order to increase the company's capital base to enable the fleet to be expanded.

However, for all practical purposes, a company using its capital raised from shares is better looked upon as using its own financial resources because even for major companies this source of funding is often the exception than the rule.
7.3 BORROWED MONEY
The fact is, the majority of ships, whether newly built or second hand, are purchased with loans specifically arranged for that purpose. The provision of those funds is a specialised sector of the financial market.

The principle providers of loans for ship purchases are, of course the commercial banks - those which do day-to-day business with the general public. Such banks often have specific departments for maritime business.

Other types of bank providing ship finance are merchant banks which do not carry out ordinary banking but concentrate entirely on providing funds for business enterprises. Slightly different but only in detail are the finance houses which tend to specialise in providing money for purchasing goods ranging from a hire-purchase agreement for buying a car to more major items such as ships. There are some such lenders which deal exclusively in ship financing.

SHIP SALE AND PURCHASE
Whichever source is used, the procedure is similar. The first thing the lender will do is to check the borrower's financial status. There are many and varied ways of doing this, all quite legitimate. They include such things as studying the borrower's published accounts, consulting with experts on the stock market, checking with credit reference agencies and generally listening to informed market information. Specifically the lender will want to see the borrower's cash flow forecast sometimes referred to as a business plan. This will go into general detail about the borrower's working, earnings from other sources and financial commitments then, particularly, it will look at the anticipated earnings of the ship in question over the period of the loan.

The lender, as will be explained later, will also demand some form of collateral (security for payment) as protection should the loan not be repaid but the principle comfort the lender seeks is the reassurance of the borrower's ability to repay the loan. The lender will usually also require that a percentage of the purchase price will be paid from the borrower's own resources.

In some cases especially when the future market prospects do not engender optimism, the granting of a loan may be conditional upon a long-term charter being arranged which makes for complex negotiations. The loan is offered subject to the charter, while the charter has to be negotiated subject to concluding the purchase of the ship and the S & P negotiations have to be subject to the charter and subject to the loan. In extreme cases the lender may demand a proportion of the freight being directly assigned so that loan repayments are more certain. Arrangements like these were rife around the middle of the twentieth century often with unhappy results because the market weakened severely and the Owners were left with inadequate cash flow to operate efficiently.

At the other end of the scale when banks have a surplus of funds and are, therefore, anxious to make loans, lenders will be sympathetic to the borrowers' problems in the early stages of operating a newly acquired ship, and may grant a "period of grace" which can mean, for example, no repayments having to be made during the first year.

The security for the loan is almost always a mortgage on the ship being purchased although the lender may require mortgage(s) on other unencumbered units in the borrower's fleet. A mortgage is a legal document the full title of which is the mortgage deed which serves two purposes. The first is the borrower's undertaking to repay the capital sum and agreed interest, the second gives the lender the right to take possession of the ship if the borrower fails to comply with this undertaking. Usually the actual loan agreement is a separate document which details the amount of each repayment instalment, the frequency of repayments and the way in which the interest on the loan is to be calculated. Some loans are agreed with a fixed rate of interest but most lenders endeavour to arrange for the interest to move with the market. This can be done because there are several officially published lending rates such as the LIBOR which is the London Inter-Bank Offered Rate. The agreement could, therefore, stipulate that the rate of interest on the sum outstanding shall be "2% over LIBOR".

In other countries, loan agreements arranged with a variable rate of interest may use different bases for establishing the rate. Almost all industrialised nations have a Central Bank which publishes changes in that country's official base interest rate.

It is important to have the terminology of mortgages clear in one's mind. The borrower gives the mortgage and is called the mortgagor and thus the lender is the mortgagee being the one who receives the mortgage. The act by the lender in taking possession of the ship in the case of the borrower "going under" is referred to a foreclosing.

Interest is not the only cost incurred by the borrower because the lender will require a commitment fee which is a single payment and is intended to cover all the preparatory work the lender has to carry leading up to granting the loan and preparing the documents. Then there is a management fee which is an annual charge intended to cover the lender's work supervising the loan throughout its life. This fee would be particularly important if the amount of the loan is so large that no single lender is happy about covering the whole amount. In such a case one lender will lead a syndicate of a group of lenders. The leader will have additional work keeping the other members informed (and happy!).

FINANCE, NEWBUILDINGS AND INSURANCE


One can easily see that much skill is needed on both sides in order to get the best out of a ship loan agreement. The borrower must obviously make a convincing case as to the ability to repay the loan in order to persuade the lender. Compiling a realistic forecast is just as important for the borrower' own purposes because there is no point in borrowing money to buy a ship if the income will be insufficient to provide enough gross profit to run the ship, fulfil the loan obligations and still leave a net amount to make the venture worthwhile.

The lender must also be shrewd because a fixed interest rate at a foolishly low level could prove costly. Even more dangerous would be an unquestioning acceptance of the borrower's cash flow forecast. Gullibility at that stage could, within a few years, leave the lender with no other recourse but to foreclose on the mortgage. Having this right is vital to prevent total disaster for the lender but banks are in business to "sell money" not to operate ships.

The pitfalls for both borrower and lender are manifold. Shipowners are incurable optimists and historically, when the freight markets were buoyant, the desire to commit themselves to new purchases seemed irresistible. Similarly, in the past, banks have had surpluses of funds and have been rather more willing than was wise in believing cash flow forecasts. No one can be sure that history will not repeat itself

The problems that have overtaken such over-confidence include the obvious one of a severe recession in the freight market. Even a modest down-turn in freights, if accompanied by a world-wide increase in interest rates, could mean the owner's cash flow no longer being viable. A third difficulty can arise when there is a severe distortion in exchange rates where the loan has to be repaid in one currency with income being generated in another which undergoes devaluation.

It has been argued that the considerable increase in the number of independent ship-management companies during the penultimate decade of the twentieth century was due to so many ships being repossessed by banks. Apparently banks had been over-enthusiastic in their lending only to be faced with borrowers unable to repay. The S & P market was then in such a depressed state that the value of the repossessed ships was well below the sums outstanding at the time the mortgages were foreclosed; such a situation was responsible for many people learning the meaning of the expression "negative equity" (the value of the asset being less than the loan outstanding). Some banks, therefore, decided to trade the ships until the market improved, using ship managers to provide the commercial and operational expertise, this being a better option than selling the repossessed ships at an enormous loss.

In all cases, lenders are naturally reluctant to foreclose and will far rather look into rescheduling the loan agreement if that offers a serious hope of the rescuing the situation. Usually this simply means spreading the loan over a longer period so that the repayment instalments are lower.

A mortgage is not the only security that lenders will require because the right to foreclose is worthless if the ship becomes a serious casualty. Thus the lender will demand that every risk, which could diminish the value of the ship, is covered by insurance and that the insurance policies name the lender as the beneficiary. Such policies include, hull and machinery, war risk, loss of freight/hire and cover with a Protection and Indemnity Association (P & I Club) to cover claims from third parties. The lender will take care to check that the Owner renews these insurances at the due dates and that the value declared in the policies keeps pace with any increased value that a market upswing might bring about.
7.4 INCENTIVES TO BORROWERS AND LENDERS 7.4.1 Shipbuilding
Has been a staple heavy industry in many countries. During the first half of the twentieth century, the United Kingdom was among the world leaders in shipbuilding but only a few British shipyards now remain. As industrialisation has developed throughout the world, those countries with a lower cost of living have so successfully competed in ship building that countries such as South Korea now probably produce more newbuilding tonnage than any European country achieved at its best time.

SHIP SALE AND PURCHASE
As the forces of competition began to move against a 'traditional' shipbuilding country there was a tendency for its government to try to find ways of subsidising shipbuilding. The simple economic factor being that subsidising the wages of shipbuilding workers costs the government less (both in terms of money and votes) than having a vast army of unemployed. Furthermore, there is the added advantage of having ships to sell to the benefit of a healthy trade balance.

Different schemes have been tried, the simplest being state ownership of shipbuilding with selling prices being dictated by what the market will bear with no thought to the actual cost of production.
More subtle means to attract foreign buyers when interest rates were high was the provision of "soft" loans. At one time these were offered through the shipbuilders themselves which received recompense directly or indirectly from the country's central bank. Competition in this area became so intense that in the 1960s it was possible to obtain 100% finance with about 80% of this at interest rates which bore no resemblance to the money market at the time; such schemes often included a lengthy grace period before the first repayment fell due.

Some regulation was brought to bear through the efforts of the Organisation for Economic Cooperation and Development (OECD) which succeeded in getting a degree of international agreement as to the maximum proportion of the purchase price to be lent (80% at that time) with a maximum period (8% years) and a minimum rate of interest (8%).

With the competition and anti-dumping laws within the European Union, more stringent safeguards against unfair subsidisation have been introduced.

To encourage shipowning there have been various schemes at a less frenetic level. These have usually been achieved through tax incentives the simplest of these has been the tonnage tax which was introduced in Greece (1990), The Netherlands (January 1996), Norway (July 1996), Germany (January 1999). The United Kingdom committed itself to such a tax in its 1999 budget and the system is now operative; tonnage tax is under active consideration in other European countries. In essence this system allows Shipowners based in the countries concerned to enjoy a lower and more clearly forecastable amount of tax than other sectors of industry. The UK tonnage tax scheme differs from many others in that an Owner declaring for this form of taxation also has to undertake to train a minimum number of seafarers each year.
Many other schemes have been tried in the past, for example Germany and Norway particularly targeted self-employed professional individuals by agreeing to a very much lower taxation upon funds invested in ships under the national flag. Known as "K/S" schemes it has resulted in many ships in those countries being owned by groups of doctors and dentists. These schemes were withdrawn in 1998 but they had resulted in a dramatic growth in the ownership of small to medium size vessels in Germany during the 1980s and early 1990s.

There are also incentives to lenders whose main worry is the borrower becoming unable (or deciding to be unwilling) to continue repaying the loan. This worry would be more intense should the S & P market be in a depressed state so that repossessing the ship would fail to yield enough to cover the outstanding debt.
In the case of inability to pay it is fairly certain that the shortage of cash would have resulted in the maintenance of the ship being neglected which would further reduce its resale value.

More serious still would be the case where the borrower's country is unstable politically and a sudden possibly violent change in government could make repayment of the loan impossible; the deposed government might even have been the Owner of the ship. In such a case, not only is the loan not going to be repaid but repossessing the ship is impossible.

Fortunately it is possible for lenders to insure against such an eventuality and those offering such cover are often government agencies or are private insurers underwritten by the government. In the United Kingdom, this is a function of the Export Credits Guarantee Department.

FINANCE, NEWBUILDINGS AND INSURANCE
Many such incentive schemes have passed into history as a result of the general lowering of interest rates in most developed countries but the world of finance tends to work in unpredictable cycles and the future could well see a resurgence of incentives or subsidies.

7.4.2 Leasing
Although leasing is not much in demand by entrepreneurial Shipowners who always like to have an asset to sell if the market makes that an attractive option. Some corporate Shipowners, however, including even major container operators, prefer not to raise the capital at all and leave this to a finance house. There are tax advantages to be gained by the financiers, details of which are beyond the scope of this course. The advantage to the operator is that vast amounts of capital do not have to be raised and serviced and the fleet is paid for out of revenue. This system requires a bareboat charter to be drawn up and under such charters the name and even the flag of the ship may be changed so that an operator is not bound to lease from a financier in his own country.

Such transactions are almost invariably in the newbuilding market and the S & P Brokers who become involved in them tend to be specialists. The principal terms of a bareboat charter tend to follow the impression given by its name; the Owner (financier) simply provides the ship; the Charterer (operator) provides everything else including the crew and behaves in every way as if it is the actual Owner. The agreement would contain clauses to protect the Owner, such as making certain that all insurances are kept up to date and at adequate levels.

What happens at the end of the contract period varies and in some cases the ship becomes the property of the Charterer on paying a final amount so that one occasionally hears reference to "lease purchase" which involves a contract with remarkable similarities to a domestic hire-purchase agreement.

7.4.3 Other Methods of Finance
Less traditional ways of raising finance but becoming increasingly popular need a knowledge of high finance which is beyond the scope of this course but students should be aware of their existence, they include:

Bond issues, often favoured by shipyards usually secured against the yard's receivables and paying quite a high percentage above LIBOR

Securitisation which is the use of a stream of income and/or a portfolio of assets to back the issue of securities.

Mezzanine Finance, which is usually provided by specialist ship finance houses and is defined as "unsecured, higher yielding loans that are subordinate to bank and secured loans but rank above equity"
7.5 NEWBUILDINGS
The contract for the purchase of a new ship is quite different from that which has been discussed in earlier Chapters which dealt with second hand ships. One particular difference is that with a second hand purchase there is a significant element of caveat emptor - let the Buyer beware. With a new sale there are far fewer imponderables because integral parts of a newbuilding sale contract are the detailed plans and specifications.

Another clear difference is concerned with the payment. When a second-hand sale is involved the actual payment is quite straightforward, a deposit (usually ten percent) is placed in a joint account at the time of signing the contract. Upon delivery the deposit is released and the remaining 90% plus agreed amounts for bunkers etc. is paid over. With new ships being purchased from the builder the payment schedule is quite different as will be seen later in this Chapter.

SHIP SALE AND PURCHASE


7.5.1 The Sale Contract
The first part of the contract, as with any agreement, identifies the parties being the builder and the Buyer. It then identifies what is being purchased which is in fairly brief terms because later in the contract it stipulates that plans and specifications have to be mutually agreed and signed.

The ship has no name at this stage and so is identified by a builder's hull number. This section then usually goes on to set out the basic dimensions, the main machinery, the speed and the fuel consumption. Then there is a clause stipulating which Classification Society's rules will be followed in the construction and it is also customary to mention at this stage under which flag the ship will be registered on completion.

Then comes the all-important clause covering the price to be paid, the currency in which payment is to be made and here is where the greatest difference arises between second hand sales and new sales, the contract lists the instalments which have to be paid and when they become due.

Whilst this is a matter for negotiation a typical pattern would be a deposit on signing the contract of sale, a second payment when building starts - when the keel is laid is the term usually used. Then a third payment when the ship is launched, remember there is still a lot of work to do fitting the ship out after launching. The final instalment is made upon delivery.

This is by no means the end of clauses dealing with payment. With a ship being specially built to the buyer's specifications, it would hardly make sense to have a simple cancelling clause as there is with a second hand sale. Instead it is usual to agree a delivery date and then to have a penalty clause which details price reductions if delivery is later than this date. This is normally on a per-day basis and it is quite usual to have a table whereby the daily rate increases as the delay goes on.

Lawyers refer to such a scheme as "liquidated damages" in the same way as one has demurrage in a charter party. The scheme takes the similarity to charters further as there can be a clause stipulating price increases if the ship is delivered earlier than the proposed delivery date.

No matter how skilled the naval architects and ship designers might be, unless the ship is a standard design - identical to others - the eventual performance, the ship's speed and fuel consumption, can only be estimates. For this reason it is usual to have clauses covering penalties if the performance is poorer than stated in the contract and additional payments if the performance is better. Such clauses deal with speed differences in tenths of a knot and fuel consumption in percentage points.

Even the deadweight - the crucial earning capacity of the ship - can vary from the agreed specification and so a table of penalties and bonuses is normally agreed to cover any variations.

The tables of penalties have to have a cut-off point and it is usual for the Buyer to have the option to cancel the contract if delivery is delayed by more than six months or if other specifications are widely awry. The clause covering this option can be complex because the builder clearly does not want to be left with a ship designed especially for a particular Buyer which may have characteristics that no other Buyer wants.

It will be recalled that there tends to be reluctance on the part of Sellers to allow Buyer's representatives on board prior to the delivery of a second hand ship but with newbuildings, it is the rule rather than the exception for a Buyer's representative to be present in the builder's yard from the moment building starts until final delivery. The yard has to provide this person with suitable office space for the representative plus an assistant and the representative usually has written authority from the Buyer to agree any adjustments and/or modifications, including any price changes these may cause. The representative ideally is a senior member of the Buyer's technical staff but occasionally an independent marine surveyor will be employed for this particular task.

FINANCE, NEWBUILDINGS AND INSURANCE


There are, of course, clauses dealing with modifications which may be agreed during construction. These can be modifications in the construction specification; the Buyer may have second thoughts Modifications suggested or requested by the builders; certain items of equipment may no longer be obtainable. Modifications may be imposed by changes in the Classification Society's rules. There may also be modifications in the terms of the contract such as a revised delivery date. All such modifications have to be mutually agreed and an addendum to the contract duly signed.

Extensive clauses may be involved in setting out the manner of the sea trials and eventual delivery. There is rather more to such a handover process than the equivalent to a half-hour test drive of an automobile. Such clauses set out the process of the trials as well as listing the documents which must be handed over at time of delivery. One of these documents is, of course the warranty because, unlike the finality of taking over a second hand ship, the Buyer of a new ship has to be protected against faults which do not become apparent until the ship has been in service. This one-year warranty is surprisingly similar to that which one receives when buying a new automobile with one particular difference; it is quite usual for the builders to provide a "Guarantee Engineer" to serve with the ship for an agreed period; his function is to assist the officers and crew in operating their new acquisition and to liaise with the builders about any suspected faults .
7.6 INSURANCE
The large sums involved in sale and purchase deals demand utmost vigilance about insurance. Whilst the S & P Broker is unlikely to be directly involved in the Principal's insurance it is important, from the point of view of understanding the Principal's problems and even the possibility of feeling the need to offer a discreet reminder, that a knowledge of the insurance involved in the purchase of a ship work is essential for the S & P broker

First of all the Buyer of a second hand ship has to make arrangements well in advance of delivery so that, at the precise moment when the ship becomes the Buyer's property, the insurance cover comes into effect. The basic cover is for hull and machinery which, as the name implies, covers risks to the ship itself. In addition, a wise Buyer will have business lined up as soon as possible after taking delivery and so will need also to have cover for freight (the policy would also include hire if the ship is going on time charter).

Students will know from their Introduction to Shipping and Shipping Business studies, that this form of insurance will be placed, through an insurance broker, either with Lloyds or with an Insurance Company specialising in marine insurance.

The Buyer will also need third party insurance, which is usually covered through a Protection and Indemnity Association more colloquially known as a P & I Club. Such associations are unlike Lloyds or Insurance companies in that they are non-profit making mutual associations run by and for their members. They cover all forms of third party risks including inter alia claims by merchants for loss or damage to cargo, claims by parties whose property has been damaged such as port authorities and claims for death or injury to members of the crew.

Specific to ship purchase is the Mortgagee's Interest Insurance which a lender may insist upon as part of the terms and conditions of the loan. This would be in addition to the normal insurance. One would have expected that the normal insurance policies, suitably claused to include the mortgagees as joint beneficiaries, would have been sufficient but there are, of course, cases where the insurers may refuse to pay the Shipowner. Payment could be refused if, for example, the Owner had failed to comply with expressed or implied warranties written in the main policy. Similarly, if the Owner failed to maintain the ship's Class the policy would be void and in such cases there would be no pay-out in the event of a total loss leaving the lender with no payments from the Owner and no ship upon which to foreclose. The Owner takes out the policy and pays the premium because the level of premium will be assessed by the underwriters on the Owner's (not the lender's) reputation. The policy is, however, drawn up with the lender as the beneficiary and is held by them as security.

SHIP SALE AND PURCHASE
Where a newbuilding is involved it is usual for there to be a Building Risk Insurance Policy. In this case the builder takes out the insurance and pays the premium (as it is their record upon which the premium will be based) but the Buyers will be shown as the beneficiary with the finance house lending the money wanting their name included also. Such a policy covers loss or damage to the ship during its period of construction, fitting out and sea trials and covers the Buyer for the loss of progress payments (instalments) already made to the builder as well as consequential losses such as loss of earnings, and extra costs arranging for the building of a replacement ship.

There is also a special policy available to Owners to cover a ship on its final voyage to the breaker's yard called a Breaking-up Conditions Policy. Such a policy recognises that the ship is in a run-down state although still in Class to sail under her own power. It covers any repairs to, say, the main engine in order to ensure that the ship does reach its final destination.
7.7 INSURANCE FOR THE S & P BROKER
No matter how painstaking a Broker may be, accidents can happen it is, therefore, prudent for a Broker to seek insurance cover. As has been mentioned several times in this Chapter, the sums involved in S & P are often enormous and it follows that quite a small error could result in a hefty claim. Even a completely unjustified claim (the mis-directed arrow), once entered into the legal arena, has to be fought and fighting legal battles is a very costly business.

One can find Errors and Omissions Insurance from several sources although taking such cover through a P & I Club specialising in Brokers' problems can bring greater benefits including friendly advice such as a suitable course of action to avoid a claim arising. Such a club, as well as providing legal defence against claims and eventual payment if negligence is proved also offers a service to assist in extracting legally due commissions from reluctant Principals.
7.8 SELF-ASSESSMENT AND TEST QUESTIONS
Attempt the following and check your answers from the text:
1. What is meant by the acronym "LIBOR"?
2. Define the following:
a) Mortgagor
b) Mortgagee
c) Commitment Fee
d) Management Fee
e) Negative Equity
3. What are the main methods of raising the capital to purchase a ship?
4. What are the advantages to leasing rather than buying outright?
5. What type of operator is unlikely to prefer leasing and why?
6. What is the purpose of "tonnage tax" to a government?
7. What is the most significant difference between a sale of a second hand ship and a
newbuilding?
8. What happens if the performance of the ship is not exactly as set out in the contract?
9. At what stages do the instalments of the purchase price have to be paid?
10. How long is the usual warranty period for a new ship?

FINANCE, NEWBUILDINGS AND INSURANCE
Having completed Chapter Seven, attempt the following and submit your essay to your Tutor:
1. Discuss the different ways a Buyer can finance the acquisition of a ship and explain the documentation which may be involved.
2. Analyse the risks Buyers and Sellers face around the time of a sale taking place and the types of insurance necessary.