|
The
purchasing a vessel can be a very complex transaction.
To begin with, admiralty law may not apply to issues
relating to the sale of a vessel itself unless other
circumstances are involved. If the vessel is considered
personal property, the Uniform Commercial Code
will apply and state courts will have jurisdiction. The
issues involved are many and may include shipbuilding
contracts, marine surveys, mortgages, leases (or
charters), liens and others.
While
the purchase of a pleasure boat is often made by and in
the name of its actual user, that is not the case for
large commercial vessels. Not only are corporate
entities involved but the entity acting as owner is
often a lessee or charterer. For reasons mostly related
to the tax provisions, many owners of a vessel choose to
hold the property as charterers. In addition, many
American vessel owners register their vessel in foreign
countries.
Among
the documents likely to be used in the sale of a vessel
are the letter of intent, a sales contract, a purchase
order and a bill of sale. A letter of intent is nothing
more than a document to hold the vessel pending a survey
or financing. In most commercial cases, however, the
sale contract is used. The contract sets out the terms
and conditions of the sale and specifies the rights and
obligations of the parties. Among the items covered are:
1. description of the vessel;
2. hull identification number;
3. engine or other equipment identification numbers;
4. registration or documentation numbers;
5. inventory of equipment included in the sale;
6. price and payment terms;
7. time and place of delivery;
8. a statement of mortgages, liens and claims;
9. terms and conditions for a survey;
For
vessels purchased directly from a shipbuilder a few
considerations should be made. While contracts relating
to the construction of ships or the supply of materials
to a vessel are not within admiralty jurisdiction, tort
claims for negligent construction or design of a vessel
are. The shipbuilding industry also includes naval
architecture companies, businesses that manufacture and
supply component parts, and other related services.
Although their contracts are not within admiralty
jurisdiction, shipbuilders and component manufacturers
are subject to suit in admiralty jurisdiction for
products liability. Such torts for products liability
have recently been introduced in maritime law but court
interpretation remains narrow on the subject. A
manufacturer has no duty under either negligence or a
strict products liability theory to prevent a product
from injuring itself. A claim in admiralty, therefore,
cannot be brought where the only loss claimed is
economic loss resulting from the product injuring
itself.
So
called "red letter clauses" are provisions and
exculpatory clauses inserted in shipbuilding contracts
designed to affect the duties, rights and obligations of
ship builders. In general, they attempt to do some of
the following: (a) exclude express and implied
warranties; (b) place a ceiling on damage exposure; (c)
limit the time for filing suit; (d) limit liability for
cost of repair or replacement of defective materials;
(e) exclude the cost of attorneys' fees. The validity
and rights under said clauses is determined according to
state law on ship building and other contracts outside
admiralty jurisdiction. In most cases, the applicable
state law will be Article 2 of the Uniform
Commercial Code.
Warranties
are important to ship builders and to those who choose
to purchase a vessel directly from a builder, or rely on
the services of a naval architect. Express warranties
are affirmations of fact made by the seller or any
description of the goods that constitutes the basis of a
deal between seller and purchaser and which are normally
contained in the written contract. Two implied
warranties are very important: the implied warranty of
merchantability and the implied warranty of a fitness
for a particular use. The implied warranty of
merchantability in essence assures that the goods are up
to the standards of the trade and are fit for the
ordinary purpose for which they are to be used. The
warranty of fitness for a particular purpose is created
when the seller knows the specific purpose which the
buyer has for the goods and also knows that the buyer is
relying on the seller's skill and judgement to provide
goods suitable for that purpose or use.
A
bill of sale is a document which actually transfers
title to the vessel. States have special forms for the
sale of a vessel. The Coast Guard also has its own form
and only that federal form may be used to document a
vessel with the Coast Guard. A purchase order is a
contract normally used for the purchase from
manufacturers or for the special order of a vessel. It
normally contains provisions for limitation of liability
as well as inventories of items included.
Given
the large sums involved in the purchase of a large
commercial vessel, central to the transaction is the
ship mortgage. The Ship Mortgage Act of 1920
conferred maritime lien status to ship mortgages, which
meant they became entitled to admiralty jurisdiction.
However, it only covered a mortgage on a "vessel of
the United States over 200 gross tons and upwards".
The Act was expanded to relax the 200 tons
requirement in 1935 and to extend the "preferred
status" of mortgages under the Act to certain
mortgages on foreign ships. The real efforts by Congress
to attract private capital to finance the building and
operation of a mercantile fleet did not come until the Merchant
Marine Act of 1936. Title XI of the Act
created a system of federally guaranteed or insured
ship financing. With the Ship Financing Act of
1972, Congress expanded and consolidated the Title
XI program in order to make ship financing
virtually risk-free to the investor and attractive in
traditional money markets.
The
Title XI program and its developments have come
to assume great practical importance for commercial
vessels financing. The guarantee pledges "the full
faith and credit of the United States" to the
payment of principal and interest on guaranteed
obligations. The guarantee of principal is normally
restricted to 75% of the cost of construction,
reconstruction or reconditioning, as determined by the
Secretary of Commerce. The guarantee is to be secured by
a mortgage entitled to preferred status under the Ship
Mortgage Act and existing vessels may be mortgaged
to secure future construction.
In
order for the mortgage to have its preferred status,
certain formalities must be followed. Section 926 of the
Act states three conditions before a mortgage, bill of
sale or conveyance can be admitted to record:
1.
the mortgage or other document must "state the
interest of the grantor or mortgagor in the vessel, and
the interest so sold, conveyed or mortgaged";
2.
the mortgage or other document must have been
acknowledged before a notary or other qualified public
official;
3.
when the vessel's port of documentation is changed, the
collector of customs at the new port must be furnished
with a certified copy of the record of the vessel at the
former port.
Section
922 sets additional requirements as follows:
"a
mortgage which includes property other than a vessel
shall not be held a preferred mortgage unless the
mortgage provides for the separate discharge of such
property by the payment of a specified portion of the
mortgage indebtedness. If a preferred mortgage so
provides for the separate discharge, the amount of the
portion of such payment shall be indorsed upon the
documents of the vessel."
A
mortgagee must also comply with the public notice
provisions of the Mortgage Act. These require
that the mortgage be properly recorded with the
collector of customs and that certain information about
the mortgage be indorsed on the ship's papers. More
specifically, two documents must re on record. The first
is an original of the mortgage executed by both parties.
The second is an affidavit to the effect that the
mortgage is made in good faith and without any design to
hinder, delay or defraud any existing or future creditor
of the mortgagor or any lienor of the mortgaged vessel.
The requirement is jurisdictional. If the affidavit is
not filed or filed improperly, the mortgage does not
receive its preferred status.
An
important part of the acquisition process, whether it is
a pleasure boat or a large commercial vessel, is the
search for liens. As we have mentioned above, a vessel
can be burdened by a mortgage which can be duly
recorded. Other recorded liens can also be present. If
the vessel is documented, a search should include the
Coast Guard Office of Marine Inspection at the vessel's
home port where liens or mortgages outstanding against
the vessel should be on file. If the vessel is
registered, a search should be made at the county
clerk's records office for the court which has
jurisdiction over the place where the vessel is
registered or where the owner resides or where the
corporation which owns the vessel is domiciled.
Unfortunately, it is possible that hidden liens may be
present which cannot be discovered at the time of sale.
For a more detailed discussion on liens we refer the
reader to the section on liens of this article.
| 