How Does The Future IMO Ship Recycling Convention Address The Issue Of The Cash Buyer?

TradeWinds Ship Recycling Forum, 19 January 2009

Holman Fenwick Willan is, as many of you will know, a law firm

having close connections with the shipping industry: it was due to

a 'chance encounter' while representing a Greek shipowner

borrower 20 years ago that I met Arun Chauhan, then at the London

branch of Fidelity Bank NA, one of whose specialist areas was the

financing of ships being purchased for onward sale for demolition

on the Indian sub continent. There has since followed 20 great

years of involvement in this industry, representing banks,

investors, ship sellers, cash buyers and ship recycling yards:

resulting in a knowledge of an industry and a trade that I am very

pleased to share with you today.

One year ago, I and a number of my colleagues in Holman Fenwick

Willan's Ship Finance Group were giving lectures to

representatives of shipowners on the optimum ways to structure

newbuilding resale contracts: the maritime equivalent of buying and

selling on an apartment bought off the plan in Dubai. At that time,

in the columns of Fairplay and TradeWinds, there

were reports of up to ten concluded newbuilding resales compared to

one or two - a mere trickle - sales of ships for scrap.

One year ago, one of the cases in which we were instructed

involved the giving of advice to a cash buyer concerning the

description of the grade of stainless steel contained in a chemical

tanker his company has bought at a price of US$975 per light

displacement ton: almost a record price but not out of line at the

time.

Five months ago, over a lunch meeting with Jon Chaplin to

discuss the potential possible themes for this conference, I

suggested that this could include the consideration of how to make

the trade of the cash buyer a more 'bankable' activity.

Again, in hindsight, what temerity possessed me to suggest, then or

any other time, that the trade of the cash buyers and the ship

recyclers of the Indian sub continent was lacking in reliability:

au contraire, with the almost near complete collapse of

the bulk shipping market, it is the enterprise and the confidence

of the cash buyers that could be the perfect 'floor' for

anxious shipowners, banks and investors. Whilst the effect of the

credit crunch saw a significant drop in the price of ships sold for

recycling, this has since stabilised around the mid US$200 per ldt

level.

Occasionally, cash buyers are pejoratively referred to as

'middle men'. That is, however, exactly the same word as

its French equivalent namely 'entrepreneur', defined in the

Oxford English Dictionary as meaning "the owner or manager of

a business enterprise who, by risk and initiative, attempts to make

profits". Enterprise is defined as "a project or

undertaking especially one that requires boldness or

effort".

Today would, I believe, be a fitting occasion to pay tribute to

those whose "boldness and effort" has not only produced a

strong and viable industry in its own right but one which will

also, I am convinced, prove to be the salvation of the current hard

pressed bulk shipping sector1.

One of the questions that is frequently asked is why it is that

such cash buyers/entrepreneurs exist and flourish as they do, when

the vessels could equally be acquired, either on an as is,

where is, or delivered basis, by the relevant

recycling yard. There are others attending this conference who are

more qualified to answer this question than I: when I was starting

out in this business some 30 years ago, such direct contractual

arrangements were the norm, with shipyards in Taiwan doing business

directly with shipowners, via brokers, as evidenced by this passage

from Ocean Freights and Chartering which was published

around that time. Aside from the Hamburg-based house of Eckhardts,

there were no purely entrepreneurial buyers of ships for breaking

of the standing and commercial presence that we see today.

There was an echo of that stated need for 'bankability'

in a recent (5 December 2008) issue of "TradeWinds" with

reports of a Greek shipowner "advocating the delivery of

vessels going for demolition in countries other than their final

destination after being forced to re-negotiate deals when scrap

prices crashed"2.

In the interview, which was unusual for its insight into the

inner psyche, the shipowner concerned, Mr George Youroukos of

Technomar, was complaining of being "an easy target" for

renegotiated deals by agreeing to deliver his vessels to the

scrapping beaches, believing owners stood a better chance of

resisting such pressure "if they deliver ships at a neutral

venue".

Welcome, Mr Youroukos, to the world of ship recycling : the

answer to your problem is solved by the sale of your ship, wherever

it is in the world, to the cash buyer, giving you both the ability

that you require to deliver the vessel in a neutral location

against security of payment and, if well advised, also providing an

English law governed sale contract providing for London arbitration

/ English Court jurisdiction in the event of a dispute plus your

right to retain the deposit of 10% or even 20% paid by your cash

buyer. Plainly Mr Youroukos was tempted by the higher prices

available from a "delivered basis" sale, finding to his

cost the effect of a 25% to 30% re-negotiation in the contract

price by reason of the collapse in the market between contract and

completion.

Blaming the cash buyer for this state of affairs, i.e. expecting

the cash buyer to stump up and suffer a massive loss (occasioned by

the inability or unwillingness of the cash buyer's own onward

purchaser to meet its original obligations) is perhaps an

understandable reaction in times of such extraordinary market

movements. From the viewpoint, therefore, of the trading shipowner,

it is the sale of the vessel on a delivered basis that carries the

risk, not dealing with a cash buyer per se.

Treatment of cash buyers under the new IMO Recycling

Convention

At HFW we have been following the gestation process of the IMO

Recycling Convention for some years: having a particular interest

after seeing clients get caught by embargoes of exports of ships by

governments applying the rules of the Basel Convention or its

equivalent in domestic legislation.

The above Convention is a reference to the Basel Convention on

the Control of Trans-Boundary Movement of Hazardous Wastes and

their Disposal (UNEP), a treaty which was adopted on 22 March 1989

and entered into force on 5 May 1992. There is, as we know, a

continuing debate going on between environmental groups and the

shipping industry as to the applicability of the Basel Convention

to ships destined for recycling. As has been observed, the

recovering of metals is clearly within the disposal operations

under the Basel Convention and therefore as long as a ship is

destined for scrapping, there is, so it is argued, an intention to

dispose and therefore a ship destined for scrapping is

"waste" under the Basel Convention. If, in addition, a

ship includes hazardous substances, either as cargo residuals or in

the chemical composition of its structure, it is then hazardous

waste for the purpose of the Basel Convention and its export must

follow the provisions of the Basel Convention (including criminal

charges for illegal traffic where the provisions are not

observed)3.

That the IMO has responded as relatively promptly and

co-ordinatedly that it has is commendable when one considers that

the regulation of how ships are broken up, which is essentially a

land based activity, is not at first sight within the IMO's

original remit. Indeed, the new Convention will, if adopted, be the

first IMO instrument to impose mandatory environmental standards

and social norms covering workers' health and safety on

land-based facilities, as well as on international shipping.

The purposes of the IMO, as summarised by Article 1(a) of the

Convention on the International Maritime Organisation (1958)

are:

"to provide machinery for

co-operation among governments in the field of governmental

regulation and practices relating to technical matters of all kinds

affecting shipping engaged in international trade; to encourage and

facilitate the general adoption of the highest practicable

standards in matters concerning maritime safety, efficiency of

navigation and prevention and control of marine pollution from

ships".

The IMO (via the MEPC), recognising the needs of the shipping

community to show itself as capable of making rules for the

environmentally sound management of ship dismantling, took the

recycling of ships on board as a key development area. The report

of the correspondence group of the MEPC 49th session of

28 March 2003 provides clear indices of the thought processes

informing the development of what we now see in the draft

Convention. At that time, the focus of the committee was not this

Convention but the work on the development of the IMO Guidelines on

Ship Recycling which were adopted as Reslolution A.962 (23) on

5th December 2003.

What is interesting, however, from the point of view of the cash

buyer, is that even at this early stage in the process, there was

consideration of the responsibilities of this key stakeholder in

the regulation of the recycling process.

When lawyers are called upon to comment on ambiguous provisions

of laws or conventions, it is sometimes helpful to have access to

the "travaux preparatoires" (also known as the

"ash cans of the legislative process").

In the UK, this might be found in the report of the

parliamentary debates as recorded in "Hansard" or a

"white paper" published before the adoption of the

relevant statute. In the case of the IMO Ship Recycling Convention,

one of the places where this may be found is in the report of the

co-ordinator of the correspondence group on ship recycling, i.e.

Annex 1 to the report of the MEPC's 49th session of

28th March 2003 referred to above.

This report states four 'key principles', namely:

the minimalisation of hazardous materials and waste

the 'polluter pays'

the need to...