URSABLOG: An Inspector Calls, Again

I was somewhat surprised to see an article called Pre-sale vessel inspections put S&P in the clear in Splash 24/7 by Campbell Johnston Clark (CJC) directors Jonathan Campbell and James Clayton, and associate Francesca Norman - with help from inspection company Idwal – saying that up to a “one third of transactions now make use of pre-sale ship inspections” as if this was an entirely new and welcome development and should therefore be encouraged. I was intrigued, so I read on:

?“Global inspection company, Idwal, reports that it has been an unprecedented year in terms of inspections related to S&P activity. UK-headquartered Idwal reports a 224% increase in transactional-inspection activity compared to 2020 and has seen a 34% increase in sellers’ conducting their own inspections and circulating reports to interested buyers.”

This does not surprise me. COVID-19 of course, combined with a booming market. But the authors make the following rather surprising, and ingenuous statement:

One significant difference to previous shipping booms is the presence of the pre-sale inspection which is now commonly reflected in the sale agreement for a vessel.

Not so I would argue. Pre-sale inspections take place in the majority of cases. It is only those in a real hurry that would waive physical inspection of the vessel completely in order to get the deal done, a feature of previous shipping booms.

In practice, this means that a seller will organise an inspection by an independent surveying company which is then included as part of a marketing package to potential buyers.

Ah so that is what they mean! This is true as far as it goes. But this trend took off due ?COVID, with sellers unwilling to have their crews put at risk by third parties, and an ?inability and willingness of buyers to send inspectors of their own to difficult and dangerous places, which has always been the case.

This results in a clear commercial advantage for all parties as sale and purchase? transactions are not delayed by having to wait for an inspection at the next port the vessel visits, which may be some weeks away.

I do not think this results in a clear commercial advantage for all parties, but this trend is obviously of huge commercial advantage for Idwal. The sellers may benefit too, but I don’t think the advantages – commercial or otherwise – are clear for the buyers at all.

In a hot market, not many parties want to contract “subject to inspection” due to the potential delays.

It is true that few people – including sale and purchase brokers I would add – want to contract “subject to inspection” at any time unless they have to, but that does not mean it does not happen. But to say that "Buyers and sellers can now contract with each other quickly and effectively on the basis of these pre-sale inspections" glosses over a multitude of problems for all parties, which I hoped that lawyers (and the lawyers of Idwal) would be aware of.

The article lays out two main reasons why sellers using a pre-purchase inspection as part of the marketing package is good for everyone.

The first reason:

potential buyers can immediately see the condition of the vessel in great detail, using a standard, recognised format from an independent service provider: the condition of the vessel is therefore presented impartially and transparently to the benefit of all associated with the transaction.

Although the Sellers commission the report and pay for it, the Buyers pay a ‘nominal fee’, usually US$ 1,000 each for a copy of the report. A share of this is used to reimburse the Sellers for the initial outlay of the report. If there is a great deal of interest in the vessel and many buyers purchase the report, I assume the Sellers actually make money in the process. It goes without saying that Idwal make more money too. And the report, however impartial and transparent it may be, is still made from the individual perspective of an independent surveyor, sub-contracted by Idwal. An inspection report produced by the buyers’ own appointed inspector may be completely different, because they know what concerns their buyers when buying a ship. A standard, recognised format does not really add much to this. An impartial and transparent report does not help the buyers very much. They want a report that is partial to them: they are relying on it to purchase the vessel.

The second reason:

the pre-sale report can be very important contractually as part of the sale agreement for a vessel which will typically be a Memorandum of Agreement … For example, a typical clause 4 of an MOA would read as follows….

“…. The Buyers have also reviewed and inspected the Vessels pre-purchase report at/in [x] (state place) on [x] 2021 (state date) and have accepted the Vessel….”

Therefore, this inspection report then becomes the basis for the condition of the ship when it is eventually delivered to the buyers. Under clause 11 of the MOA the sellers must (among other things) deliver the vessel to the buyers in the same condition as when it was inspected with fair wear and tear excepted. The inspection report would therefore become very useful in resolving condition arguments and price renegotiations that often take place right up to the moment of delivery.

This is misleading at best. This reads as though this is a concept suddenly dreamed up, or stumbled upon, by the good people of CJC and Idwal and it never existed before. Every pre-purchase inspection, whether done by Idwal, the Buyers themselves, another independent surveyor or whoever becomes the starting point in proving whether the condition on delivery is the same as when inspected. And the burden of proof is for the buyers.

The wording above is what appears in Clause 11 in SALEFORM 2012. Here is the wording of Clause 11 from SALEFORM 1993:

“shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted.”

And from SALEFORM 1987:

“shall be delivered and taken over as she is at the time of inspection, fair wear and tear excepted.”

Spot the difference? Yes, that’s right, there isn’t any. I haven’t managed to find the 1966 version, but the concept I am sure is the same. Whether the vessel is inspected, or even if it isn’t, the condition should be the same, fair wear and tear excepted. As to resolving arguments and price negotiations on delivery, the report, Idwal or otherwise, will not “become very useful in resolving condition arguments” if the parties are already fighting about it. Condition on delivery arguments are not made easier when the Sellers have commissioned the report to start off with.

?Let me suggest the following scenario:

-?????????A buyer has bought an inspection report as above, and negotiated the purchase of the vessel

-?????????The vessel is delivered to the buyers in the same condition as when inspected

-?????????After delivery, the boiler breaks down, and subsequent investigation shows that the independent surveyor missed some very basic points, including in the maintenance logs and so on, or if he did see them failed to report them

-?????????The Buyer was unable to claim damages from the Sellers, because legally speaking the Sellers were not in default

-?????????The Buyer was also unable to claim damages from the independent surveyor because the report was full of disclaimer clauses

-?????????The Buyer will now only use their own inspectors, or independent ones that they trust and have used before

-?????????They (and their brokers - including this one) have subesequenty missed out on business because they were not able to inspect other vessels using trusted inspectors

?

This is a true story. Buying a ship is a big deal, and Buyers tend to take due diligence seriously. The Buyers of this ship lost a lot of money in the process.

I also object to the wording above, i.e.

…inspected the Vessels pre-purchase report at/in [x] (state place) on [x] 2021 (state date) and have accepted the Vessel following this inspection….

This is not strictly the case. It should rather be:

…have purchased a pre-purchase report from Idwal, commissioned and originally paid for by the Sellers, and have accepted the vessel…

It doesn’t help the Buyers much but at least spells out the situation more clearly. Whichever wording is used however, it is the wording that follows which is significant:

… and have accepted the vessel following this inspection and the sale is outright and definite, subject only to the terms and conditions of this Agreement.

This means that the Buyers have done all their due diligence, and have no further comment. This rather innocuous looking wording is actually extremely important, because it takes negotiations from the realms of ‘maybe’ to ‘definitely’ and a contract is formed. And if either party feels that there has been a breach of contract, then it follows that damages will follow, or in worse cases, claiming that the other has defaulted on the contract itself.

It follows therefore that the if the supposed breach has been caused by arguments about the condition of the vessel, the report itself becomes the basis for discussion. CJC say:

The over-riding feature of the Pre-Sale Inspection is that it adds greater transparency to the sale and purchase process. The report gives any potential buyers a true and sensible assessment of the vessel at the time of purchase. This allows the buyers to make an informed decision regarding the vessel and its condition as well as highlighting areas which may need investment in the future to build an accurate investment analysis picture.

Yes, but this depends on the quality of the report itself. I do not wish at all to question the quality and integrity of Idwal, but this is a report done by a human being, and is subject to their opinions. The score (a mark out of 100) that goes with each vessel is necessarily subjective, however much box ticking goes into the process and whatever standard format may be used.

The transparency offered is not only advantageous to the buyers but also to the sellers. By investing in a Pre-Sale Inspection, the sellers are equipping themselves with sufficient evidence of the condition of the vessel (including any deficiencies), allowing them to defend any claim from the buyers for defects which were not present at the time of inspection.

I can see that from the lawyers’ point of view this makes life a whole lot easier. Arguments are made based on a document commissioned by the Sellers, seen by them, and then used by the Buyers to waive away any rights that they may have, for better or worse, when discussing the condition of the vessel. A secondhand ship is not a washing machine, or car, but a multimillion dollar asset that needs a crew of people to operate complex machinery in risky environments, that is being bought to make owners money. The buyers should remember that going down this route means that the concept of caveat emptor (let the buyer beware) becomes more critical, not less, if they rely on such reports.

CJC go on:

The shipping world in general is facing calls for greater transparency at all levels and the Pre-Sale Inspection report is just one way in which ship owners can answer that call.

Which owners? The sellers or the buyers? Are these reports available to Port State Control or Classification Societies? NGOs? I don’t think so.

One final point to consider is the role of financiers in a ship sale and purchase transaction. The value of a Pre-Sale Inspection report will not be lost on any potential lenders who typically rely on valuations. The greater transparency offered by the Pre-Sale Inspection report could well result in such reports being a requirement for any future financings in relation to second-hand ship sale and purchases.

So CJC and Idwal hope. I hope not. Will financiers now only finance a ship with an Idwal score of 70 and above? Will a valuation by a broker, or VesselsValue, use the score to increase the value of a ship up or down? I have long said that shipbrokers should not inspect ships, and surveyors should not value them. Look out for a merger or other joint venture between Idwal and VesselsValue in the future as a very dangerous development for both ship finance and ship sale and purchase.

Of course, as a ship sale and purchase broker, I appreciate that these reports make my life easier. It’s an easy way to sell a ship, and I don’t have to deal with all those tedious things like obtaining permission and agents details, checking the COVID requirements in various ports, and can say “here’s the report, what do you think?” I have been a broker buying and selling ships where such reports have been used, and I have also done deals where inspections have been waived completely. In the end I can only act on the instructions and authority given to me by my clients. And this is the world we live in: if I refuse to have anything to do with it, I quickly become irrelevant.

But I worry about it. Secondhand ships are not standard products, and the rights and liabilities of buyers and sellers are being eroded by this ‘standardisation’, a process driven by commercial interests who are arranging and making money out of the pre-purchase inspections themselves. Buyers and sellers should go into the process with eyes wide open, and aware of the implications. Pre-sale vessel inspections, of the type advocated by CJC and Idwal, do not put S&P in the clear, they just create different problems that owners, brokers, lawyers, financiers and indeed independent surveyors should think about before embracing the ‘new normal’ with open arms.

Simon Ward

www.ursashipbrokers.gr