Do you want to acquire a ship in Nigeria? Then, you may require the services of a maritime lawyer. The principal method of acquiring a ship is the purchase of a new or existing ship. The options for the purchase of vessels are to either buy a new vessel or a second hand vessel. One could acquire a ship in one or a combination of the methods described in this section. Another method is through a sale of ship done pursuant to an Order of Court.
Purchase of a new vessel has issues of legal significance that are different from the case of an old vessel
A prospective buyer can place an order with the shipyard for the construction of a specific type and size of vessel. Contracts for shipbuilding is usually expressed on Standard Forms which incorporate internationally accepted terms such as the Shipbuilding Contract of Ship owners Association of Japan.
In the case of existing vessels, parties express their agreement in the Memorandum of Agreement (MOA) which incorporates standard terms like the Norwegian Sale Form.
A buyer may negotiate the terms and his chances of success are subject to the amount of work the shipyard has.
How to acquire a Ship: Shipbuilding Contract
The practice is for the Buyer to place an order with the shipyard for the construction of a specific type and size of vessel. Contracts for shipbuilding is usually expressed on Standard Forms which incorporate internationally accepted terms such as the Shipbuilding Contract of Ship owners Association of Japan (“SAJ”). As expected the terms contained in Standard Forms are usually weighed in favour of the shipyard. A Buyer may negotiate the terms and his chances of success are subject to the amount of work the shipyard has. Shipbuilding Contract Like every contract defines rights and obligations of parties and also allocates risks to be borne by the parties. The Japanese Shipowners Form is annexed to this paper as Annex 1.
Obligation of Builder – The Builder is expected to build the vessel to specification for a fixed price and to deliver the vessel on time.
Obligation of Buyer – The Buyer is expected to pay the price which is usually a fixed price and to accept delivery if the vessel is built to specification and delivered on the agreed time.
A shipbuilding contract defines rights and obligations of parties and also allocates risks to be borne by the parties. Some of the salient issues in a typical shipbuilding contract are considered below.
Obligation of Builder: The Builder is expected to build the vessel to specification for a fixed price and to deliver the vessel on time.
Obligation of Buyer: The Buyer is expected to pay the price which is usually a fixed price and to accept delivery if the vessel is built to specification and delivered on the agreed time.
Allocation of risks:
- market risks: price fluctuation, charter rates costs of labour and materials
- technical risks: may cost more to achieve specification and to meet timely delivery poor performance after delivery risk of physical loss or damage accident in yard or during trials etc, non performance Ancillary contracts specification is set out guarantees, refund, guarantees to refund of installments, performance bond to cover installmental payments, amongst others.
How to acquire a ship: Acquisition of an existing Vessel
The processes involved in the acquisition of an existing vessel are somewhat different from that of a building new ship. As a matter of fact, contract for sale or purchase of an existing ship is usually negotiated by ship brokers acting as agents of both the buyer and the seller. Negotiation is most often carried out by telex and the agreed terms are written down in a Norwegian Shipbroker’s Association Memorandum of Agreement for Sale and Purchase of Ships (“NSF”) being the standard form most widely used for the sale and purchase of old buildings. Norwegian Sale Form 1993 is annexed to this paper as Annex 2. The content of and stages of transaction is somewhat different from that of a new building. The entire process comprises of three phases namely pre-delivery, delivery and post delivery
1st Phase – Pre-delivery
- Essential documents are collected from both seller and buyer by the brokers
- Drafting of MOA
- Buyer pays deposit (usually 10% of the purchase price)
- Inspection of the vessel
- Timeline and sequence of closing is agreed upon
- Seller makes arrangement to terminate insurance, discharge mortgages if any and arranges for deletion of vessel from existing flag
- Seller gives advance notice of readiness for delivery of vessel by seller
- Buyer makes arrangement for insurance, registration of vessel with classification society, crew, bunkers and registration of vessel.
2nd Phase – Delivery (physical delivery on board ship and documentary delivery ashore)
- Place of delivery – safely afloat.
- possessory lien on vessel if price is not paid. This lien has priority over buyer and mortgagee’s claims.
- Sales tax.
- Parties may agree to deliver in international waters to avoid sales tax at port or accepting delivery in a repair yard.
- Seller to arrange facility for inspection.
- Documentary Delivery: Lawyers, agents, brokers and bankers meet ashore for the delivery of documents
- final inspection
- trading certificate and other documents ready to be handed over with the ship
- simultaneous payment of purchase price by Buyer, discharge of Seller’s mortgage and transfer of title by Seller to Buyer
- Seller then instructs their representatives on board to deliver the ship to Buyer
3rd phase – Post Delivery
- Buyer registers ship in his own name
- Buyer changes from temporary registration to permanent registration.
Problem arears in Sale and Purchase of Second hand vessels
Disputes often times arise between the seller and buyer and the Courts would be required to determine on the following issues:
- whether or not the MOA is a binding contract (where MOA subject to details or contract)
- when property passes from seller to buyer (MOA signed when vessel is in undeliverable state)
- whether sale by NSF is a sale by description (specific inspection obligation) The Court generally regards the MOA as a binding document except where it is expressly made subject to contract or subject to further details being provided. In Star Steamship Society v Beogradska Plouidba (The “Junior K”) (1998) Vol 2 LLR the Court held that the MOA did not constitute a binding agreement because it contained the words “subject to gencon CP” which could be reasonably construed to mean subject to further details
Checklist for due diligence prior to closing of a purchase
We are conversant with the legal issues involved and the processes for acquiring a vessel from commencement of negotiation to closure and we will drive the entire process on your behalf as the prospective ship owner/seller. Below are some matters that will be taken care of by us as your solicitors;
- Search the Register and obtain a Transcript of Registry to confirm the ownership of the ship and to ascertain if there are any mortgages registered against the ship.
- Search in the Corporate Affairs Commission (“CAC”) or its equivalent to ascertain that the seller is duly incorporated under the laws of the country in which it is located.
- Check if there are any mortgages, debentures or floating charges registered against the seller at the CAC or its equivalent which relate to the ship.
- Check the memorandum and articles of the seller or the equivalent statutory documents if the seller is an overseas company to confirm that the seller has power to sell the ship.
- Check that the seller has taken all required corporate action, for example passing a board resolution to approve the sale.
- Check that no winding up or bankruptcy petition has been presented against the seller.
- Search in the Admiralty Registry to see if any in rem claims have been issued against the ship. The Admiralty Registry will search to ascertain if a claim in rem has been issued against a ship if the applicant gives a sufficient reason for requiring this information.
- Check with the port authority whether the ship is under arrest or detention or whether there is an arrest warrant against the ship at the port where she is to be delivered.
- If the sale contract so provides, arrange for the pre-delivery survey to confirm that the ship conforms to the requirements of the sale contract.
- Check the documents to be handed over on closing:
- Bill of Sale
- Transcript of Registry or Certificate of Ownership showing no mortgages.
- Class confirmation Certificate
- Certified board resolutions of the seller
- Power of Attorney of the seller
- Commercial invoice for the ship
- Commercial invoice for bunkers, lubricating oil and other items.
- Safety and International Trading Certificates: ISM Certificate International Loading Certificate International Tonnage Certificate International Safety Equipment Certificate International Safety Construction Certificate International Safety Radio Certificate ISPS Code compliance documents
- Certificate of Deletion – if ship has to be deleted from its current Register or letter of undertaking to deliver a Certificate of Deletion within a specified time.
- Protocol of Delivery and Acceptance.
Applicable law on ship building contract
To the builder, shipbuilding contract is a construction contract (work and material) but from a buyer’s point of view especially if it is a new ship it is a contract for the purchase of a ship i.e. sale of goods contract. The problem for the courts is therefore to decide whether it is a sale of goods contract or a construction contract. The uncertainty is understandable because the law defines a contract of sale as a contract where the seller transfers or agrees to transfer the property in goods (usually ascertained goods) to a buyer for a price – Section 3 Sale of Goods Law Cap 174, Laws of Lagos State, 1994. The Court would have to determine whether an agreement to construct a building, in this instance a vessel, can properly be regarded as a contract of sale where the subject matter is unascertained. This confusion is applicable only to a contract for a new building.
Sale and purchase of an existing ship falls squarely under the sales of goods contract since the second hand vessel is an ascertained and specific good. Historically, English law treated shipbuilding contracts as sale of goods contracts and thus the principles of contract law governed the obligations and liabilities of parties. See McDougall v Aeromarine of Emsworth [1958] 2 LR 345 where a yacht delivered by builder to buyer was held not to be seaworthy or of merchantable quality. Applying the principle of contract for sale of goods, the court held that the Buyer was entitled to rescind the shipbuilding contract and that the builder was not entitled to any further installment rather the Buyer was entitled to the refund of the purchase price. However, English Courts have in recent times recognized common features between ship building contracts and construction contracts. In Stocznia v Latvian Shipping [1995] 2 LR 592 where the facts were similar to McDougall, it was held that the second installment remained due to the Builder despite the cancellation of the contract because there was no total failure of consideration. The court applying construction laws held that the contract was not merely for the sale of the hull but for construction and sale of the hull and that the construction was part of the consideration. The practice now is that the courts will look at particular issues to be addressed and apply either sale or construction principles or both as may be appropriate. Generally when the issue is on title or passing of property, sale of goods law is applied but if the issue is on construction or installmental payment then it is treated as construction contract. The consensus though is that shipbuilding contract falls squarely under the law of contract albeit of a “hybrid nature”.
The Merchant Shipping Act requires a formal evidence of transfer of ownership by way of a Bill of Sale as evidence of ownership. The sale may affect third party rights, but will not affect maritime liens or mortgages as these attaches to the vessel and survives transfer of title with the exception of judicial sale. The seller usually warrants or guarantees that there are no encumbrances.
How to acquire a ship: Other methods of owning a ship
- Order of Court: One can acquire a ship through an Order of Court in various circumstances. The most familiar one is Order the sale of a ship where the sale is to satisfy a judgement. Ownership could also be acquired by transmission e.g. bankruptcy and also where the vessel is subject to forfeiture.
- Order for Sale: The court is empowered to make Orders for a sale of ship where the claimant establishes a valid maritime claim on the ship against the ship in satisfaction of the court’s judgement for the claimant. Honourable Justice Belgore as he then was granted an Order for the sale of M. V. Rhodian Trader in Joseph Eustace Fernando & Ors v The Owners of M.V Rhodian Trader, NSC 1985, Vol 4 p,339 where it was held that the plantiffs had a lien on the vessel and were thus entitled to its sale in satisfaction of their wages. For proper title to pass to any purchaser of a ship subject to the sale Order of the court, the sale must be conducted by an Admiralty Marshall and held by public auction 21 days after advertisements in two national newspapers.
We provide Maritime and Shipping law services
CONTACT US via telephone call or whatsapp on 0708 424 1826 or send an email to info@thejubileelegal.com
