Explanatory notes to Designated Entities Clause for Sale & Purchase Agreements

Background

The need for a charter party provision to protect parties against dealings with persons or undertakings prohibited from engaging in trade, commerce or financial transactions, has been addressed through the Designated Entities Clause.

The same principles apply to sale and purchase agreements. However, the specialist aspects involved require a modified regime to reflect respective party needs and adequately protect buyers and sellers during the transaction period. BIMCO has, therefore, now developed a parallel Designated Entities Clause for Sale & Purchase Agreements.

Summary of main features

The Clause, which can be used for SALEFORM and other sale and purchase agreements, applies to identified persons or entities (including designated vessels) whose activities are restricted or prohibited by United Nations Resolutions, European Union laws and regulations or the United States of America. Buyers and sellers are each required to warrant that they are not so designated and that they are contracting as principals and not acting on behalf of a designated entity. Sellers’ further warranty that the vessel is not a designated vessel or chartered to or carrying cargo for prohibited interests, is also designed to protect the position of buyers taking on a pre-existing charter or other continuing contractual commitment. The warranty provisions apply from the time of entering the agreement until the purchase price has been paid in full and sellers have taken delivery of the vessel.

Lists of designated persons and entities are liable to be updated and amended at frequent intervals; details are publically available and, as appropriate, can be monitored. If a party is, or becomes, identified as a designated person or entity, or a vessel is designated, the Clause provides flexibility for the innocent party to act as necessary in the circumstances. In most cases, guidance is likely to be requested from the innocent party’s Government or regulatory authorities. However, in contrast to the charter party clause, there is no express reference to “Owners’ flag state” as this might not be easy to determine where a vessel’s registry changes during the sale process, although there is nothing to rule out such an approach in appropriate circumstances. If guidance is not given or available, the agreement can be terminated immediately.

Despite international agreement on designated entities, some states apply their own anti-blocking or similar legislation to counter the effects of a boycott or other targeted action affecting their trading interests. The Clause therefore provides that parties shall not be required to break their own laws. This is a potentially difficult area and legal advice is likely to be required where there is tension between competing legislative obligations.

The Clause contains the customary indemnity provisions. However, while buyers and sellers each undertake to indemnify the other for any loss or damage, this is unlikely to be enforceable against a party that is or becomes a designated entity and, therefore, unable to make or receive any payments. This could have far-reaching financial implications once a deposit or other payment has been made.

Detailed provisions

Sub-clause (a) sets out the scope, basis and application of the Clause covering restrictions or prohibitions imposed against specified persons, bodies and vessels (“designated entities”) by the United Nations, European Union and United States of America;

Sub-clause (b) establishes a time limit for the respective parties’ obligations which begins on the date of entering the agreement and expires once buyers have paid the full purchase price and taken possession of the vessel on delivery by sellers;

Sub-paragraph (i) the parties each warrant that they are not subject to any of the restrictions or prohibitions in sub-clause (a);

Sub-paragraph (ii) the parties each warrant that they are acting as principals and not for undisclosed prohibited third parties;

Sub-paragraph (iii) the sellers warrant that the vessel is not a designated vessel and is not and will not be chartered to or carrying cargo for a prohibited person or entity. Account is therefore taken of any existing charter or commitments that will continue in place under the buyers;

Sub-clause (c) sets out procedures to be followed where either party becomes aware of the other’s breach. The innocent party is likely to seek guidance from, and follow instructions or advice given by, regulatory or administrative agencies to which that party is subject. If guidance is not available, the agreement can be terminated by the innocent party;

Sub-clause (d) addresses the position where a party’s compliance with regulatory requirements would be a breach of or offence under that party’s national law; and

Sub-clause (e) is the standard indemnity provision modified to meet the particular needs of sale and purchase although in practice recovery is likely to be problematic where loss or damage results from the defaulting party being or becoming a designated entity.

Originally published in BIMCO Special Circular No. 11, 9 December 2013 - Designated Entities Clause for Sale and Purchase Agreements