BIMCO Ship Sales Further Trading Clause 2023 – protecting the seller against unlawful recycling
On 11 October 2023 BIMCO adopted the Ship Sales Further Trading Clause 2023, which is designed to be included in memoranda of agreement for the sale and purchase of vessels, such as BIMCO’s Saleform and Shipsale standard form contracts. The clause is intended to provide protection for the seller against the buyer’s subsequent disposal of the vessel in contravention of any regulations related to ship recycling. It seeks to achieve this by imposing an obligation on the buyer to continue to trade the vessel within an agreed post-sale period. The clause is particularly relevant for the sale of older tonnage.
The background for the development of this clause lies in the very real concerns related to traditional ship breaking practices at some of the breaking facilities, particularly in South East Asia such as Bangladesh, Pakistan and India, where vessels have been (and to some extent, still are) broken up effectively by hand, with little or no concern for the potential environmental damage, pollution or the health and safety of the workers.
In response to these concerns, a number of protective regulations have been put in place over the past few decades, including the Hong Kong Convention 2009 (which will enter into force in 2025), the EU Ship Recycling Regulation of 2013, the Basel Convention 1989, the Basel Ban Amendment 1995, and the EU Waste Shipment Regulation 2006. There are also various private initiatives such as the Responsible Ship Recycling Standards pursuant to which banks often include compliance requirements in financing agreements.
Whilst a shipowner obviously has full control as to how and in what manner a vessel is recycled whilst a vessel remains under its own ownership, once a vessel is sold and the owner no longer has any proprietary interest in that vessel, any subsequent disposal of that vessel in contravention of the applicable ship recycling regulations can still lead to significant reputational and financial damage for the original owners.
The purpose of the Ship Sales Further Trading Clause 2023 is to address these concerns and to provide protection for the seller against the potentially significant legal and reputational risks related to breaches of any such regulations.
Obligation to trade the vessel
The buyer’s primary obligation under the clause is to “continue to trade the vessel” for a specified time period determined by the parties, the so-called “Applicable Period”. The length of the Applicable Period will be a matter of commercial negotiations, where relevant factors may include the specific characteristics of the sale and the age and value of the vessel.
The clause does not prevent the buyer from suspending trading for reasons related to the vessel’s operation, such as dry-docking, maintenance, lay-up or repairs. Exceptions from the duty to operate the vessel apply, however, when the vessel is subject to a total loss.
The buyer has an obligation to include similar clauses in any sale and purchase agreement they may enter into if they sell the vessel on to a third party during the Applicable Period. The terms in the new sale and purchase agreement in this respect shall be substantially consistent with those in the original sale and purchase agreement for the remainder of the Applicable Period. In the same subclause, the buyer is also obliged to conduct due diligence on the prospective new buyer to the extent necessary to ensure that they will continue to trade the vessel. In this way, the original seller’s position is intended to be protected even if the buyer sells the vessel to another party.
Remedies
The clause has two different and alternative remedies in case the buyer breaches its obligations. Under the first alternative, the seller may demand that the buyer pays a pre-agreed sum to the seller as liquidated damages for breach of the obligation, but this alternative only applies if selected by the parties and it requires the pre-agreed sum to be inserted into the clause.
Under the second alternative, the seller may hold the buyer liable for any losses incurred by the seller as a result of the breach, e.g. fines and expenses.
The clause finally stipulates that in addition to the above remedies, the seller may seek injunctive or equitable remedies and may also, notwithstanding any other provision in the sale and purchase agreement, disclose the existence and content of the clause and the nature of breach of the buyers’ obligations. Of course, if the buyer is an SPV company, with no assets other than the vessel, once the vessel is sold (either to another owner/operator or for demolition), the indemnity for losses incurred by the seller as a result of the breach is likely to be somewhat worthless. To protect against this, sellers should consider obtaining a corporate guarantee from a company of good financial standing within the buyer’s group in order to ensure that they are more likely to be able to effectively claim on that indemnity in the future.