The Evolution of the Ship Sale and Purchase transactions in the Digital Age
Transport & Logistics Focus
Yasser MadkourSenior Counsel,Transport & Insurance
Giannis Petras Associate,Transport & Insurance
Fares AbdullahTrainee Solicitor,Transport & Insurance
The COVID-19 pandemic has served as a catalyst for change in numerous sectors worldwide, including the shipping industry, especially with respect to ship sale and purchase transactions. This transition from traditional to digital methods has introduced significant alterations in the way businesses operate and deals are conducted. Nevertheless, it is important to note that while the landscape has evolved, certain foundational elements remain crucial to the process. This article delves into the transformation of the industry, its present challenges, and the effective strategies developed to mitigate these concerns.
Despite the shift towards digitalisation, the fundamental procedure of purchasing a ship remains largely consistent, with certain aspects retaining their original form before the conclusion of a sale. As a general rule, the process typically commences with the interested parties participating in preliminary negotiations, whereby the prospective buyers or sellers engage a ship brokerage firm to conduct discussions on key commercial elements such as the proposed price, the necessary deposit, the scheduled dates for delivery, and the stipulated inspections.
As can be appreciated, there is caution from the side of the parties of not unintentionally creating a legally binding agreement in the aforementioned initial commercial stage. Thus, lawyers generally enter into the discussion when these preliminary negotiations are completed. Following this, it is highly recommended that parties perform a preliminary due diligence on the other party. This step involves a thorough inspection of the vessel and a detailed verification of its ownership.
It is self-explanatory that finance considerations are crucial for the prospective buyers, thus at the stage of identifying a vessel, the buyers shall take into account the financial aspects related to the vessel and whether they may proceed with a purchase utilizing their existing cash deposits, or whether financing will be required. Factors such as whether the vessel is under a mortgage or any other form of encumbrance are vital, as they directly influence the buyer's ability to secure a clean title to the vessel, as well as financing from a lender (which would aim to obtain a first priority mortgage on such vessel). These terms, along with details from the preliminary negotiations and inspection findings, are diligently documented in the Memorandum of Agreement (MOA) – the primary sales contract governing the transaction.
In the wake of the pandemic, traditional face-to-face meetings have been largely replaced by virtual platforms like Zoom and Microsoft Teams
In the wake of the pandemic, traditional face-to-face meetings have been largely replaced by virtual platforms like Zoom and Microsoft Teams. While this shift towards the digital world has introduced considerable savings in resources and time, it has also led to the emergence of new challenges, particularly in the management of crucial delivery documents.
Prior to 2020, a closing in a ship sale and purchase was largely an in-person process. Such physical meetings, usually with in-person attendance of representatives of the parties and of their legal counsel in the same venue, provided a suitable forum for resolving issues, such as the release of the vessel's mortgage and the payment of the purchase price. These meetings facilitated a smooth exchange of release instructions and provided assurances about the funds' availability. As can be understood, the physical presence of the parties fostered an element of clarity and predictability to the process. However, the transition to the digital closing procedures has introduced an element of mistrust, particularly in instances where the parties have had no prior commercial relationship, necessitating the development of strategies to alleviate these risks.
In that context, in practice parties and their legal counsels have not only adopted innovative solutions, but they have also begun to utilize to a greater extent tools which already existed before 2020 and continue to be even more significant in the digital closing process. One example of this kind involves the utilization of escrow agents, who serve as impartial third parties in sales transactions. In the event of a closing, the inclusion of an escrow agent can provide certainty to both the seller and the buyer, as the relevant escrow agreement (together with adequately amended MOA provisions to reflect the escrow arrangement) will ensure that the purchase price will only be remitted to the seller at the moment of the signing of a dated and timed PDA. In other words, an escrow arrangement aims to ensure that the purchase funds and the change of ownership over the vessel occur (to the extent possible) simultaneously, thus protecting both parties’ interests. Notwithstanding the fact that escrow arrangements already existed prior to 2020, it is self-explanatory that their significance and occurrence has increased in light of the reality of digital closings.
However, the traditional payment arrangements remain at large in place, even during the electronic closing processes. Thus, as an alternative, in the absence of an escrow agent, the purchase price can be propositioned directly with the seller’s bank using a SWIFT MT 199 message. This specific message directs the bank regarding the necessary conditions, serving as a reliable tool in the digital transaction process.
Additionally, the release of funds under the MT 199 can be made conditional upon the receipt of the relevant delivery documents. These documents could include the Bill of Sale, a Certificate of Ownership and Encumbrances, and an executed PDA.
In an effort to accommodate these digital changes, BIMCO released SHIPSALE 22 on 25 April 2022. This updated MOA provides for ship sale and purchase. The MOA incorporates modern practices such as the option for virtual documentary closing and electronic signatures while preserving the essence of traditional methods.
Apart from the electronic closing arrangements, BIMCO’s MOA introduces a series of innovative features, including clauses addressing sanctions, anti-corruption and confidentiality. By including these, it paves the way for time and cost savings during negotiations, replacing the traditional SALEFORM 2012 that has served as the standard MOA for many years.
The digital era has brought a wave of change to ship sale and purchase industry practices, affecting traditional processes and introducing a range of challenges. However, the shipping industry has adapted effectively, and together with the shipping professionals, including legal counsels, have developed robust solutions and strategies that ensure continued efficiency and certainty in transactions. With BIMCO's updated MOA serving as a prime example, it is clear that traditional methods can harmoniously merge with contemporary, digital practices to achieve results that mirror the pre-COVID-19 era. These efforts signify the shipping industry's resilience and adaptability in an increasingly digital world.
For further information,please contact Yasser Madkour, Giannis Petras, or Fares Abdullah
Published in August 2023
