New ship sale clause from BIMCO provides Sellers with protection in relation to Buyers' potential scrapping of Vessels

When BIMCO's SHIPSALE 22 was prepared, it was decided by the drafting team (which included Jens Mathiasen of Schjødt) that the issue of recycling/further trading of Vessels would not be addressed in the new standard form. This decision was made on the basis that it would not be relevant to most transactions (especially those involving newer Vessels). There was also a concern that addressing this in the standard form could offer a false sense of security and not fully capture all aspects of the relevant parties' rights and obligations in connection with the recycling of Vessels. It was instead decided that a separate stand-alone clause would be drafted for Vessels being sold for further trading.

Against this background, in October 2023 BIMCO released a Ship Sales Further Trading Clause 2023 (FTC) to help Sellers mitigate their exposure if Buyers dispose of a Vessel after the sale (especially if this is done in violation of the rules and regulations on ship recycling).

The FTC is intended to be incorporated into a Memorandum of Agreement for the sale and purchase of a vessel (for example, SHIPSALE 22 or SALEFORM 2012), and will commit Buyers of the Vessel to continue trading the Vessel for an agreed fixed period. The length of the fixed period will be the core subject of the negotiation between Sellers and Buyers. From our experience, this is not always an easy negotiation and, therefore, we would suggest that this is discussed early in the process and – if possible - included in the initial recap/term sheet.

When negotiating the incorporation of the FTC, the parties must decide what the consequences will be if Buyers are in breach of the undertakings given. The parties can either elect that Buyers will pay liquidated damages or that Buyers will indemnify Sellers against all losses suffered by Sellers in connection with the breach. In either case, Sellers will also be entitled to seek injunctive or other equitable remedial relief from any competent court or tribunal.

Given the potential liability that Sellers face if a ship is subsequently scrapped, and the increased focused on compliance and environmental concerns, the FTC addresses a longstanding issue and is a welcome addition to ship sale agreements.

However, even if the FTC is included, Sellers will still need to be aware of potential liabilities/exposure that it could face. Indeed:

• although the Hong Kong Convention (which is due to come into effect in June 2023) and the EU Ship Recycling Regulation focus on the responsibilities of the shipowner at the time of recycling, these do not apply in all jurisdictions and/or the scrapping or recycling of a vessel may still have to comply with the Basel Convention and the Waste Shipment Regulation (under which Sellers could be deemed responsible as a "producer" of waste); and
• as everyone working within shipping will have noted from the media coverage of scrapping cases, the reputational risks for being associated with such cases are substantial (which is why the FTC includes a right for Sellers to disclose the existence and breach of the FTC).

It is therefore important that Sellers continue to protect their exposure (including to their reputation) so far as is possible when negotiating the sale of older vessels or vessels where the Buyers' intentions for the further use of the vessel are unclear, and incorporating the new BIMCO FTC, whilst it is not a complete protection, particularly as against primary exposure to authorities, is a potentially useful way to try to mitigate the position.

Please do not hesitate to contact us if you have any questions about vessel transactions and other shipping related matters. Schjødt has unique UK and Scandinavian offering with experienced lawyers advising on shipping industry questions across the world with offices in England, Denmark, Norway and Sweden.