Law Bites – July 2020
Ship demolition, also known as ship scrapping is an essential process in the shipping industry. It acts as a balancing lever to restore market equilibrium in times of ship oversupply1. The number of ships being scrapped has been on the rise in the recent years.
This article briefly explains the process and offers practical tips in the handling of such transactions.
There are two main ways that a ship owner can sell his/her ship for scrap. Firstly, by direct engagement between the ship seller and the shipbreaking yard or alternatively a cash buyer acting as the intermediary between the ship seller and the shipbreaking yard. Normally, a cash buyer method of transaction is used in order to facilitate the process. The shipbreaking yard normally requires a deposit and a bank letter of credit to go through with the transaction.
A. Choice of form
Agreements for the sale and purchase of vessels from scrap can be drafted from scratch. Often though, buyers and sellers would use one of the standard forms available. An example is BIMCO’s DEMOLISHCON which was formerly known as SALESCRAP 87. While this is a useful form, parties are free to negotiate and amend terms as they deem fit in the circumstances.
B. Whether towage is required
Often, the ship to be scrapped would not be in the same geographical location as the scrap yard. Depending on the condition of the ship, the seller or buyer may need to arrange for the ship to be towed to the scrap yard. The ship for scrap generally must be able to meet the barest conditions for seaworthiness and cargo worthiness. Class must be maintained or issued on the way to the scrap yard. If the ship is damaged, laid up or cannot operate on her own power then she must be towed and a towage certificate must be obtained. Parties may have to enter into a separate towing agreement using BIMCO’s TOWCON. The costs of towage and who is to bear the same must be negotiated between parties.
C. Consider who should do the cleaning of the vessel before ship demolition
Usually fuel tanks must be cleaned before demolition. For tankers in particular, they have to be gas-freed and sludge removed so that cutting torches can be used. Parties should also consider what are the requirements of the ship yard and also any legal requirements.
D. International Maritime Organization (“IMO”) guidelines on ship recycling
Ship recycling is the term used by the IMO for what most shipowners term as ship scrapping. IMO adopted the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ship in 2009. The said convention sets out guidelines for inter alia, the preparation of the ship for scrapping. These aim to deal with the concerns set out above in relation to safety and environmental concerns. While the convention is not yet in force, it sets out the best practices that the seller and/or buyer ought to endeavour to meet.
E. Dispute resolution method
The DEMOLISHCON provides for arbitration in London pursuant to the LMAA rules as the default method of dispute resolution. Parties may wish to consider another seat for the arbitration under a different arbitral institution. For example, parties may wish to consider an arbitration under the SCMA or SIAC. The latter provides for the implementation of an emergency procedure which can expedite the dispute resolution process.
Overall, shipping demolition is a crucial aspect of balancing the demand and supply of ships especially in a time when other modes of transport are thriving2. We will continue to see an increase in ship demolition over the years. It is imperative that both buyers and sellers be well apprised of the legal requirements and seek legal assistance whenever an issue arises.
1 Jugović, A., Komadina, N. and Hadžić, A. (2015). Factors influencing the formation of freight rates on maritime shipping markets. Scientific Journal of Maritime Research, 29, pp.23–29.
2 Buxton, I.L., 1991. The market for ship demolition. Marit. Pol. Manag. 18 (2), 105–112.
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