A GUIDE TO BOAT BUYING

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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.

 

 

INTERNATIONAL MARINE INSURANCE BROKERS - BENNETT GOULD & PARTNERS, LONDON - POWER and SAIL BOAT INSURANCE, YACHT INSURANCE, LINERS, CARGO INSURANCE, CONTAINER SHIPS, TRAWLER INSURANCE, RIBs, OIL TANKERS and MORE - CLICK THIS LINK FOR DETAILS AND A QUOTATION

 

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