Ship recycling is subject to comprehensive regulations, due to the several problematic aspects it poses for both the environment and workers. However, when selling vessels, sellers face the risk of being held accountable if the buyer violates regulations related to recycling ships.
Intended to protect sellers, BIMCO Documentary Committee approved a new “Ship Sales Further Trading Clause” on 19 October 2023. The clause imposes an obligation on the buyer to continue to trade the vessel during an agreed period. In this article we’ll review the purpose of the Ship Sales Further Trading Clause, as well as obligations, consequences, and the actual effect of the clause.
Purpose and background - Why was this clause needed?
Ship recycling is subject to comprehensive regulations, such as the Basel Convention 1989, the Hong Kong Convention 2009 (which will enter into force in June 2025) and the EU Ship Recycling regulations. As mentioned - if the relevant regulations and conventions are not complied with, the seller of a vessel may face reputational risk or in worst case criminal charges for having sold the vessel for recycling, while concealing it as an ordinary second-hand vessel sale.
The “Further Trading Clause” aims to provide the seller with protection against the risk of being held accountable if the buyer disposes of the vessel in violation of any rules and regulations related to the recycling of the vessel. The clause is particularly relevant for the sale of older ships.
The clause is intended to be negotiated and included into Saleform 2012, BIMCO’s SHIPSALE 22 or other standard Memorandum of Agreement (MOA) and is particularly relevant for the sale of older ships.
The full clause can be found on BIMCO’s web page, see Ship Sales Further Trading Clause 2023.
Obligations under the BIMCO “Further Trading Clause”
BIMCO’s New Ship Sales Further Trading Clause confirms that the sale and purchase of the vessel is conducted with the intention of further trading the vessel, as defined by subclause (a). The specific period which the buyer commits to continue trading the vessel is to be specified by both parties, as outlined in subclause (b).
Exceptions to the buyer’s obligation for further trading under the clause occurs if, “the Vessel is subject to an actual, constructive, or compromised total loss.”, cf. subclause (b)
Under subclause (c), the buyer is also obligated to include a similar subclause (a) and (b) in the event of a re-sale of the vessel within the applicable period. The similar subclause shall cover the remaining part of the applicable period agreed upon between the original seller and buyer. Additionally, the buyer is also required to perform “such due diligence as is necessary to be satisfied that the Transferee shall continue to trade the Vessel.”
Consequences for violation of the clause
Subclause (d) of the further trading clause outlines the consequences for the buyer if they breach one or more of the undertakings specified in subclause (b) or (c), as set out under the obligations above.
The specific consequences that the seller can apply may be agreed upon between the buyer and the seller. Subclause (d) presents two alternative consequences:
- The buyer shall immediately pay upon demand to the seller, by way of liquidated damages and not as a penalty, an agreed sum, which the seller and the buyer agree is a legitimate and fair estimate of the sellers’ anticipated damages of a breach by the buyer
- The buyer shall indemnify the seller and their affiliates and their respective directors, officers, employees, agents and representatives against any losses, incurred by the seller arising out of or in connection with such breach(es)
Consequence number one only applies if this is agreed by the parties, and they have deposited a specific sum. Where a sum has not been deposited, consequence number two applies. Both consequences are broad in scope and pose significant financial risk for the buyers.
Additionally, the new further trading clause allows the seller to seek injunctive or other equitable remedial relief from any competent court or tribunal. Furthermore, the seller shall be entitled to disclose the existence and content of the clause and the nature of the buyers’ breach of subclause (b) and/or subclause (c).
What is the effect of the “Further Trading Clause”?
Although the further trading clause aims to protect the seller, it does not as such give them any greater protection against reputational risk and/or criminal charges. However, the new clause brings awareness of the risks, and shows that the seller has had concern about the issue - which is a relevant factor when considering potential liability connected to unlawful recycling within sale of vessels.
Do you have any questions regarding BIMCO’s Ship Sales Further Trading Clause, or other concerns regarding sale and purchase of ships? Contact one of our lawyers specialized in shipping.