DEMOLISHCON

DEMOLISHCON

Overview

DEMOLISHCON is a standard contract for the sale of ships for demolition and recycling. The latest edition of this contract is DEMOLISHCON, issued in 2001.

Supporting documents

Explanatory notes

The following explanatory notes are designed to provide some background information on the clauses of the various parts of the contract and a general overview of the amendments made in this revision.

PART I

PART II  

 


 

PART I

As mentioned, the DEMOLISHCON Standard Contract for the sale of Vessels for Demolition and Recycling follows the traditional box layout used by BIMCO. Part I of the form consists of boxes used to insert into the contract variable information pertaining to Part II. The recycling industry is a highly specialised trade and since it is common practice that vessels are sold without inspection, it is critical for the buyers to be told of the exact details of the vessel. The vessel must conform to her description as per the pertinent details provided in Part I, although it is clear that a vessel sold for recycling need not meet the same overall standard as that of a vessel sold for further trading. Therefore, to avoid that a buyer may try to renegotiate the price simply because of the overall condition of the vessel upon arrival at the delivery place, it has been provided that “The Sellers shall not be held responsible for any errors, omissions and/or the overall condition of the Vessel upon arrival at the place of delivery except for the items specified in this Part I”.

PART II

Preamble

The Preamble includes an express undertaking by both parties to comply with the Industry Code of Practice on Ship Recycling in accordance with the provisions of Clause 17. The Code establishes the procedures to be adhered to in the selling of a vessel for recycling and provides a framework of “best practice” for the contractual parties involved in the sale of a vessel for recycling. Reference is made to Clause 17 (Safety and Environment).

Clause 1 (Outright Sale)

It is common practice in the recycling trade that no inspection of the vessel is carried out by the buyers. Clause 1 of DEMOLISHCON reflects such practice by providing that no inspection has taken place and that the sale is outright and definite.

Clause 2 (Purchase Price)

This Clause has been drafted on the basis that it is common practice within the recycling trade to contract on the basis of a price per long ton lightweight. Reference is made to Box 37, which requires the parties to state both the lump sum price and the equivalent price per long ton light displacement.

Clause 3 (Deposit)

As security for the due fulfilment of the contract the buyers are required to lodge a deposit with the bank stated in Box 38. It was considered whether sub-clause 3.1 should provide a prescribed percentage of the purchase price. However, it was agreed to leave it to the parties to decide individually upon the size of the deposit and state accordingly in Box 38. This is important to note since the deposit will be forfeited to the sellers if the purchase price is not paid in the manner specified in the contract. Reference is made to Clause 19 (Buyers’ Default).

According to sub-clause 3.2 the deposit shall be made latest three banking days, as defined, after the signing of the contract. This is in accordance with general trade practice and notably different from SALESCRAP 87 which made the date of the contract the payment date for the deposit. Following trade practice in respect of the payment of the deposit involves the potential risk that a buyer may try to price the seller down by holding him to the contract although in some cases the buyers will pay the deposit before the parties sign the contract.

Clause 4 (Payment)

Clause 4 provides clear provisions as regards the payment of the purchase price. It is stated that the deposit shall be released and the balance of the purchase price be paid latest within three banking days following the sellers tendering notice of readiness of delivery. It should be noted that the payment has to be made in full, i.e., including bank charges. If the buyers do not pay the full purchase price the sellers have the right to cancel the contract in accordance with Clause 19.

Clause 5 (Financial Documentation)

Clause 5 lists a range of documents that the sellers must present to the buyers in exchange for the payment of the purchase price. It is appreciated that the documents that are required in connection with the sale of a vessel for recycling may vary depending on the relevant jurisdiction. The contractual parties may therefore wish to amend this Clause as appropriate.

It will be seen that according to sub-clause 5.1 (vii) the sellers shall provide a certificate according to which the sellers guarantee that at the time of delivery the vessel is free from all encumbrances and maritime liens or any other debts whatsoever. Although a duplication of the requirements in sub-clause 5.1 (i), it is a firm requirement by a number of recycling yards that the sellers provide such undertaking to avoid the situation that non-registered debts incur between the date of the bill of sale and the physical delivery of the vessel. Nevertheless, it may happen that a claim arises immediately prior to the time of delivery, which cannot always be guarded against and provisions have therefore been included in Clause 13 (Encumbrances and Maritime Liens, etc.) according to which the sellers shall indemnify the buyers against all consequences that arise from such claims.

Both parties have an interest in the smooth taking over of the vessel by the buyers and therefore sub-clause 5.2 provides that the sellers shall make available to the buyers copies of the documents listed in sub-clauses 5.1 (i) to (vii). The intention is to provide the buyers with copies of the relevant documents in the form they are supposed to have at the time of closing.

Clause 6 (Advance Notice of Arrival)

To enable the buyers to make the necessary arrangements for taking delivery the sellers are required to keep the buyers continuously advised about the vessel’s position and expected time of arrival.

Clause 7 (Notice of Readiness for Delivery)

This Clause provides important provisions in respect of the tendering of notice of readiness (NOR) and the documents, which must accompany the NOR. The documents vary a great deal depending on the jurisdiction in which the recycling yard is located. However, Clause 7 has been structured to list only the requirements common to the main recycling nations. Where the vessel is to be delivered in a jurisdiction with less stringent documentation requirements the parties will have to make amendments by deleting from the list the relevant items.

Particular attention is called to the provisions of sub-clause 7.4, which prescribe that the NOR shall be accompanied by an inventory in the form as recommended by the Industry Code of Practice on Ship Recycling. The inventory, which is to be completed by the Master or his authorised representatives, provides an estimate of all potentially hazardous or contaminating materials or substances on board the vessel, inherent in its structure, or as an integral part of the machinery and/or equipment at the time of the sale. It is recommended to make use of the standard form of inventory referred to which clearly exonerates the shipowners or any of their representatives from liability as a result of errors or omissions on their part in completing the inventory. Having no contractual force the inventory is meant as a guide to the recycling facility and its workforce in connection with the dismantling of the vessels.

Tanker vessels have to be delivered with their tanks cleaned and certified for hot work in accordance with the standards laid down in sub-clause 7.6. This is a very important provision since the explosion risk from non-gas freed tanks when vessels are being dismantled represents the biggest single safety issue.

Clause 8 (Delivery)

Sub-clause 8.1 sets out the conditions in which the vessel must be delivered. The Clause takes into account that in some areas there may be no breaking up berth and that delivery may be effected at the outer anchorage prior to beaching.

The provisions of sub-clause 8.2 emphasise the buyers’ obligation to designate another safe berth or anchorage if the original place of delivery agreed is inaccessible for any reason whatsoever.

Sub-clause 8.3 provides that if the sellers have been instructed to and deliver the vessel at a place other than that originally agreed they have fulfilled their contractual obligations with the same legal consequences as if delivery had taken place in accordance with the provisions of sub-clause 8.1.

Sub-clause 8.5 is a straightforward risk sharing provision according to which all risks and expenses fall upon the sellers until the vessel has been delivered. After delivery all such risks and expenses are transferred to the buyers.

Clause 9 (Time of Delivery/Cancelling date)

This Clause provides very important provisions in respect of the buyers’ right to cancel should the sellers not be able to effect timely delivery of the vessel.

Sub-clause 9.1 provides a period within which the vessel should be delivered. However, the crucial date is, of course, the one stated in Box 43, i.e., the cancelling date. If the vessel has not tendered NOR for delivery by the date stated in Box 43 then, no matter what the reason may be, the buyers may cancel the contract.

Sub-clause 9.2 (i) includes the so-called interpellation provisions. It has become common practice for BIMCO to include such provisions in its standard documents be it charter parties or other types of contracts. The purpose of the provisions is that the vessel shall not be required to proceed on a voyage to the place of delivery if it is clear to the sellers that despite their exercising due diligence, the vessel will not be able to arrive by the cancelling date, not knowing whether the buyers will maintain or cancel the contract once the vessel arrives. The provisions are particularly relevant in trades involving long ballast voyages and resulting high costs.

Sub-clause 9.2 contains provisions in respect of the new cancelling date in the event the interpellation provisions come into operation. It should be noted that whether or not the buyers decide to cancel the contract following the owners’ interpellation is without prejudice to their right to claim damages for any loss or damage incurred as a result of the sellers not being able to meet the original cancelling date.

Clause 10 (Beaching)

This Clause takes into account that not all places of delivery are of equal sophistication and that in some places the vessel may be required to beach. It is important to note, however, that where the vessel is required to beach, delivery will be deemed to already have taken place for all legal purposes. Reference is made to sub-clause 8.1 and Box 41. Thus, beaching of the vessel is entirely at the buyers’ risk and expense.

It is important to BIMCO that the beaching of the vessel does not in any way impact upon the safety of the crew. Therefore, specific provisions have been included to provide that the buyers shall use their best endeavours to assist in the safe disembarkation of the crew after beaching.

Clause 11 (Bunkers, Equipment etc.)

It should be stated clearly in Box 22 those items which are not to be included in the sale.

In some countries the buying and selling of bunkers are monopolised with no rights for the buyers to buy any remaining bunkers on board the vessel at the time of delivery. Sub-clause 11.2 therefore provides that any remaining bunkers together with lubricating oils, stores, etc. shall become the buyers’ property, it being left to the parties to agree otherwise where possible and if so wished.

Sub-clause 11.4 states clearly which items are always excluded from the sale.

Clause 12 (Light Displacement Tonnage (LDT))

The sellers shall provide the buyers with the documents listed in this Clause as evidence of the vessel’s light displacement tonnage. Proof of the vessel’s light displacement tonnage is of utmost importance to the buyers when purchasing tonnage for recycling.

Clause 13 (Encumbrances and Maritime Liens, etc.)

Reference is made to sub-clause 5(vii) providing that the sellers in exchange for the purchase price shall furnish the buyers with a certificate according to which the sellers guarantee that at the time of delivery the vessel is free from all encumbrances and maritime liens or any other debts whatsoever. As mentioned earlier there may nevertheless be situations where non-registered encumbrances, claims or debts arise prior to delivery. To cater for those situations Clause 13 provides that the sellers shall indemnify the buyers against all consequences that may arise out of such claims.

Clause 14 (Taxes, Dues and Charges, etc.)

This Clause is self-explanatory.

Clause 15 (Buyers’ Watchmen)

It is common practice in the recycling trade to give the buyers the right to place watchmen on board the vessel on her arrival at the place of delivery. The number of watchmen is to be clearly stated in Box 44. Since the watchmen are on board at the sole risk and expense of the buyers it is important that they sign the sellers’ letter of indemnity prior to their embarkation. It should be noted that the watchmen must not interfere with the operation of the vessel.

Clause 16 (Purpose of Sale)

When selling a vessel for recycling, the sellers want to make sure that the vessel is sold for recycling only and that the buyers do not continue trading the vessel for their own account and thereby become competitor to the sellers, or resell the vessel to a third party for further trading.

The provisions of Clause 16 are aimed at protecting the sellers against such events. Should the buyers decide to continue trading the vessel or resell to a third party this will amount to breach of contract against which the sellers will have a claim for damages.

Clause 17 (Safety and Environment)

As mentioned in the introduction it was important to underpin in DEMOLISHCON the political imperative of the Code of Practice on Ship Recycling as regards safety and environment while taking into account the obligations it may be feasible for the sellers to adhere to.

It was felt that this was best achieved by a general reference to the Code of Practice as set out in the first paragraph of Clause 17 whereby both the sellers and the buyers declare themselves to be familiar with the Code; the sellers use their best endeavours to give information to the buyers in respect of its recommendations and the buyers, likewise, use their best endeavours to comply with those recommendations. The obligation to undertake their best endeavours suggests that neither the sellers nor the buyers should be held accountable for information that is provided or relied upon in good faith but which may appear not to be entirely correct.

The Code of Practice urges those entities entering into a contract for the sale of a vessel for recycling to consider the working practices and facilities in the recycling yard to ascertain that safe and environmentally sound practices are being conducted in respect of recycling. This may be possible where the sale is between the registered owners of the vessel and the yard. However, where intermediaries are involved, which is most often the case, the owners are unlikely to know the final destination of the vessel at the time of the sale and will, therefore, be unable to ascertain that appropriate standards are conducted in the yard as regards safety and environment.

The drafting committee realised that the only way to overcome this problem would be if the sellers were allowed to visit the relevant ship recycling facility. However, the question remained whether the sellers should be allowed to do so before or after delivery. Before delivery, would presuppose that the sellers always know of the buyers’ choice of recycling yard and therefore be in a position to influence such choice – which is seldom the case. It was therefore agreed that the second paragraph of Clause 17 should provide for the buyers to ensure that after delivery the sellers shall be allowed to visit the yard to ascertain that appropriate standards in respect of safety and environment are complied with. This should avoid any grey areas as regards what may be known to the sellers between the interval of them signing the contract and the delivery of the vessel.

Clause 18 (Exemptions)

This is a general exemptions clause exonerating both the buyers and the sellers from any liability in the event delivery is prevented as a result of events outside the parties’ control. It was agreed that events might occur, which make it impossible for the buyers to take delivery of the vessel. Therefore, unlike some exemption provisions, Clause 18 applies both ways. It should be noted that the contract will be terminated automatically in the event of a force majeure event preventing either party from fulfilling its obligations, although this is not clearly stated in Clause 18.

Clause 19 (Buyers’ Default) and Clause 20 (Sellers’ Default)

In line with the drafting committee’s general policy to produce an equitable form of contract with clear and balanced terms, much care has been taken in the drafting of Clauses 19 and 20. In case of default or non-execution by either the sellers or the buyers, a right to cancel or claim compensation is vested in both parties together with interest at LIBOR plus 3%. It should be noted however, that for the buyers to claim compensation together with interest under Clause 20 as a result of the sellers’ non-compliance with its provisions, they must prove negligence on the part of the sellers.

Clause 21 (Dispute Resolution Clause)

This Clause, previously the “Law and Arbitration Clause”, is the latest edition of BIMCO’s standard suite of dispute resolution provisions. In addition to BIMCO’s Law and Arbitration Clause 1998, the provision incorporates a new mediation clause. The mediation clause is designed to function in conjunction with the chosen arbitration option, whether that is English law, London arbitration, US law, New York arbitration, or law and arbitration as agreed. Mediation is a technique that is recognised as offering savings in costs and time over traditional methods of dispute resolution for certain types of disputes. BIMCO’s mediation clause is only triggered once arbitration proceedings have commenced and then runs in parallel with those proceedings, if the parties so choose. This has been done to ensure that one party cannot invoke mediation as a delaying technique.

Clause 22 (Notices)

The Notices provision is designed to provide a single point of reference establishing the agreed method of communication between the parties for the duration of the contract period.


Copyright

Copyright in DEMOLISHCON is held by BIMCO.

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