Nordisk Skibsrederforening

BIMCO PUBLISHES “SHIP SALES FURTHER TRADING CLAUSE”

Last month BIMCO published its “Ship Sales Further Trading Clause” [1] (hereinafter referred to as the “Clause”). The launch of the Clause is timely, given BIMCO’s assessment that a total of 15,000 vessels may be recycled by 2032, which is more than twice the number of vessels that have been recycled in the last 10 years.[2]

A possible increase in recycling appetite should work as a reminder for shipowners to ensure that proper due diligence is performed when selling older tonnage. This due diligence should also include contractual protection, which is where this Clause is of relevance. The entry into force of the Hong Kong Convention, as also touched upon in our September Circular, will hopefully also play its part in improving the recycling standards, whilst also paving way for more recycling capacity at acceptable standards being made available.

Scheme of the Clause
The Clause is intended to be used in MOAs when selling older vessels, to evidence that the vessel is not being sold for recycling. Its core element is an undertaking from the Buyers to the Sellers that they will continue to trade the Vessel for an agreed period (referred to as the “Applicable Period”) in sub-clause (b). The length of the Applicable Period must be negotiated by the Parties, and the Clause will not operate unless they do so.

Our experience with similar clauses is that the period inserted depends largely on the type of vessel that is sold, but a period of between 12 and 36 months is common. The Buyers’ undertaking to continue to trade the Vessel does not apply in circumstances where the Vessel is subject to an “actual, constructive or compromised total loss”.

To avoid a situation where the Buyers of the Vessel could simply sell the Vessel upon delivery from the Sellers and then circumvent the obligations under the Clause, sub-clause (c) sets out that if the Buyers during the Applicable Period sell the Vessel, the Buyers must ensure that

  • the further agreement to sell the Vessel includes provisions on substantially the same terms as the Clause and
  • they exercise due diligence to ensure that the new buyer intends to continue to trade the Vessel for the remainder of the Applicable Period.

Sub-clause (d) outlines the consequences should the Buyers breach the undertakings set out in sub-clauses (b) and (c). The Parties can elect between two alternatives[3]:

  • Alternative d(i) sets out a liquidated damages provision, obliging the Buyers to pay a pre-agreed amount to the Sellers, which sum is expressly to be a “legitimate and fair estimate of the Sellers’ estimated damages”; or
  • Alternative d(ii) sets out an indemnification provision, requiring the Buyers to indemnify the Sellers against any kind of possible loss that the Sellers may suffer as a consequence of the Buyers’ breach of the Clause.

Sub-clause (e) allows the Sellers to seek injunctive relief or other equitable remedies as may be available before any competent court or tribunal, whilst sub-clause (f) allows the Sellers to disclose the Clause in case the Buyers should be in breach of the same.

Further Observations
It will be interesting to see whether the Clause will gain traction in the industry. There is an obvious conflict between the Sellers’ and the Buyers’ interests when deciding the length of the Applicable Period in sub-clause (b), but this is also the case when negotiating clauses limiting the Buyers’ utilization of the Vessel in a way that can cause harm to the Sellers after delivery.

We believe that the Further Trading Clause may be a helpful clause to include for Sellers where concerns arise as to whether Buyers do really intend to continue trading the Vessel. If so, inclusion of the Clause may provide some comfort for the Sellers. The Clause is not, however, to be used in connection with recycling sales.[4]

For the avoidance of doubt, contractual regulation alone is not sufficient to give the Sellers of an aging Vessel sufficient comfort that it will not be recycled in violation of any applicable laws. As always when considering selling older tonnage, proper due diligence, and assessment of both the Buyers and the recycling market is important to minimize the risk of being entangled in criminal proceedings should the Vessel in question be recycled in violation of applicable environmental regulations. Careful assessment must also be made as to whether the Buyers have the necessary financial means to fulfil any payment obligations towards the Sellers that may arise under the Clause.

The Nordisk recycling team has extensive experience in recycling matters and remain available to assist members and non-members with queries in relation to recycling of vessels. For further information, please contact:

Mats E. Sæther (msaether@nordisk.no)
Olav Eriksen (oeriksen@nordisk.no)
Ola Granhus Mediås (omedias@nordisk.no)

 

 

[1] Nordisk’s Ola Granhus Mediås was on the drafting sub-committee

[2] https://www.bimco.org/news-and-trends/market-reports/shipping-number-of-the-week/20230516-snow

[3] In case the Parties do not elect between the two alternatives, sub-clause (ii) being the indemnity provision, shall apply.

[4] In a sale for recycling, Sellers are advised to use suitable clauses dealing with how the recycling is to be conducted. Nordisk has drafted a set of clauses that is available for members upon request.