(www.MaritimeCyprus.com) On 19 October 2023, BIMCO released its long-awaited Ship Sales Further Trading Clause. This important new clause is intended for MOAs concerning sale and purchase of vessels and is designed to protect sellers of second-hand tonnage from liability under the ship recycling rules by ensuring that buyers continue to trade the vessel for an agreed period after the sale.
BIMCO’s release of the further trading clause (the “FTC”) is well timed, as an aging fleet, cooling markets, and increasingly stringent environmental regulations are set to make recycling more attractive in the coming years, particularly in those segments experiencing overcapacity. Owners are well advised to be attentive to the applicable regulations and ensure that they include appropriate contractual protections to manage their risk when selling and/or recycling vessels.
The FTC explained
The FTC seeks to mitigate the risk to the seller should the buyer fail to comply with the applicable ship recycling regulations. In brief, the FTC requires the buyer to continue trading the vessel for a certain period after the sale (the “Applicable Period”). The longer the time between the sale and the recycling of the vessel, the clearer it will be that the decision to recycle was made by the new owner without the involvement of the seller. As explained further below, this can be a crucial factor when determining the sellers’ liability under applicable ship recycling regulations.
The FTC consists of six subclauses (a)-(f) which can be incorporated into MOAs such as the SHIPSALE 22 or SALEFORM 2012. Subclause (a) merely expresses the buyers’ intention to use the vessel for further trading. Subclause (b) is the central operating provision, setting out the duration of the Applicable Period – to be agreed by the Parties on a case-by-case basis – in which the buyer undertakes towards the seller to further trade (and not recycle) the vessel unless the vessel is subject to an actual, constructive or compromised total loss. The clause clarifies that any time spent anchoring, laying-up, repair or convention works will still be considered as ‘further trading’.
Should a buyer enter into a subsequent agreement to sell the vessel (as the seller) during the Applicable Period, subclause (c) provides that the agreement shall include terms with substantially the same effect for the balance of the Applicable Period.
By way of remedy for breach of a buyer’s undertakings in the FTC, subclause (d) provides a choice between a standard indemnity clause in favour of the seller or liquidated damages. If no amount for liquidated damages is inserted, the indemnity clause will apply. The seller is also expressly permitted to seek injunctive or other equitable remedies as may be available before any competent court or tribunal, see subclause (e). Importantly, subclause (f) allows the seller to disclose the FTC in the event of the buyer’s breach, allowing the seller to protect its reputation and put the “blame” solely on the buyer.
The need for the FTC under the old “waste shipment” regime
For decades, the recycling of vessels has been subject to the 1989 Basel Convention which has been implemented in the EU through the Waste Shipment Regulation. These two “waste shipment” instruments apply to the export/import of any type of “waste”, including vessels destined for recycling, provided the “waste” (vessel) is within the territory of a Basel or EU state.
Apart from the actual exporter, the “producer” of the waste is also responsible for observing the relevant control procedures under the waste shipment rules. As such, if shortly after a sale a buyer scraps the vessel without obtaining the required export/import licenses from the authorities, the seller risks being held liable as a “waste producer” on the basis that they were (or should have been) aware that the vessel would be scrapped. This is based on the premise that the seller is enabling the buyer to scrap the vessel through the sale. In such circumstances, the seller may face fines and/or reputational damage, and their management could even face prison sentences.
As a matter of law, the seller is required to exercise due diligence to ensure that the buyer will not be recycling the vessel just after the sale. In practice, it may be very difficult to determine whether the seller exercised the required due diligence or whether the seller may be held liable if e.g. the seller scraps the vessel not immediately but some time post-sale. In such event, the authorities may potentially ask: Did the seller really know the buyer intended to scrap the vessel?
The FTC published by BIMCO, in combination with due diligence on the buyer’s intentions, provide a layer of protection for the seller against the risk of sanction under the waste shipment rules.
The FTC under the new “flag state” regime – still relevant?
The 2009 Hong Kong Convention finally reached the level of international support required to enter into force following ratification by Liberia and Bangladesh in June this year. Thus, from 26 June 2025, the Hong Kong Convention will apply to all vessels under the flag of a convention state and to all ships, irrespective of flag, being recycled at approved recycling facilities in convention states. Notably, large recycling states such as India and Türkiye have ratified the convention, which will hopefully help to ensure that the convention sets the international minimum recycling standards, including with respect to vessels flying the flags of non-convention states.
As to EU flagged vessels, the Ship Recycling Regulation – which is based on the Hong Kong Convention – will, as a matter of EU law, take precedence over the requirements set out in Hong Kong Convention and add certain requirements on the approval of ship recycling facilities.
The Hong Kong Convention and the Ship Recycling Regulation share the principle that only the registered owner at the time of the recycling operation will be responsible to fulfil the owner’s duties. Unlike the waste shipment rules, there is no statutory basis for any responsibility on part of the previous owner (the ‘seller’) as “waste producer”.
At face value, this seems to fully solve the issue for the seller. However, there are still at least three good reasons why the seller should incorporate the FTC in MOAs involving old vessels.
First, there is still a risk that the Hong Kong Convention/EU Ship Recycling Regulation will not apply. As the seller has no control over the flag following the sale, the buyer may decide to operate under a non-EU/Hong Kong Convention-flag.
Second, even if the vessel is under a Hong Kong Convention flag, the parties may still need to observe the rules in the export/import states. For example, the EU Waste Shipment Regulation would still apply as a matter of EU law if a Hong Kong Convention-flagged vessel is sold while in EU waters and subsequently sent for scrapping, as this regulation is not subordinate to the convention. As such, the seller may still be liable as a “waste producer” for any failure to obtain the required export/import licences under the EU Waste Shipment Regulation.
Third, the seller may wish to include the FTC to protect against the risk of reputational damage. Even if the seller does not risk legal sanction, they will want to avoid being identified with a vessel that is scrapped illegally and this may be reason enough for the seller to include the FTC.
Green Recycling Clauses – bridging the gap?
In our view, the FTC is a well-structured clause which will, if accepted by buyers, hopefully, be an effective tool to protect sellers from liability under the ship recycling rules and against reputational harm. One foreseeable difficulty, however, is to agree upon the length of the Applicable Period. While sellers will benefit from a long period, buyers may be hesitant to make long commitments for old vessels, as their plans will always depend on the market conditions. In some circumstances, sellers demanding a lengthy Applicable Period could prevent the buyer from purchasing the vessel at all. Furthermore, the FTC will not help when it is clear – also for the seller – that the buyer intends to recycle the vessel – in accordance with all requirements – shortly after the sale.
To bridge this problem, sellers may consider supplementing the FTC with a green recycling clause (“GRC”), requiring buyers to recycle the vessel in accordance with green recycling standards and applicable law, irrespective of the timing of the recycling operation. In fact, there are no persuasive arguments for not including a GRC in MOAs for near end-of-life vessels, whether the FTC is included or not. The FTC and the GRC serve the same purpose – ensuring compliance with ship recycling rules – but the GRC allows the buyer more flexibility where there are no longer good prospects for further trading the vessel. As with the FTC, the GRC should provide for liquidated damages, indemnities and/or injunction relief to counter any breach on the buyers’ part.
Importantly, neither the FTC nor the GRC will relieve the seller from undertaking its due diligence obligations under the waste shipment rules – but the GRC provides a further tool to help ensure the buyer complies with all applicable rules of the flag state and the other states concerned.
In the coming years, it will be interesting to see how the FTC will be received in the market and whether the market will also include GRCs. Perhaps BIMCO will also consider following up its great work on the FTC with a GRC for general use in MOAs for near end-of-life vessels.
Source: Gorrissen Federspiel