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Good Faith Deposit
by Mike Vaughn

I recently was asked what is the purpose of a "good faith deposit" in making an offer on a ship. The answer caused me to reflect upon several recent deals that failed. After giving some detailed thought to the various projects, they had a common thread.

A "good faith deposit" is generally a sum of money placed in escrow at the time an offer is made. As I indicated in a previous article, a written offer is essential to set forth the full terms and details of the agreement.

In projects where I negotiate on behalf of the owner, I require a deposit equal to 10% of the total offer be placed in my trust account or in a separate escrow account held by a licensed escrow service.

The owners negotiated all three recent deals directly. In each case they were familiar with the buyers and believed that they were serious. One owner indicated to me that a deposit "might scare off the buyer".  In fact, the reverse is true. A serious buyer should have his funding in place and be ready to put up a deposit to secure the right to purchase the ship.

If an owner accepts an offer and deposit, he is legally obligated to sell the ship to the buyer on those terms even if he receives a better and higher offer.

Without a firm contract and deposit, the owner may decide to accept the higher bid. So, the protection will flow each way.

There are serious dangers in accepting an offer without a deposit and written agreement. In one of the recent deals, the owner employed attorneys, drafted complicated charter purchase agreements, and paid his CPA for tax advice, all at his expense. When the deal collapsed, the owner was out his expenses.

Our general rule is that nothing happens until there is a deposit on account. Once that takes place, revisions of the offer, charter agreements, financing agreement and all other terms may be resolved.

Personally, I see the deposit as a device that separates the "lookers" from the "buyers". A deposit is a level of commitment by the buyer to his offer.  It is his commitment to complete the deal.

Historically, the purchase of large ships is done under a Norwegian Sales Form. This specifically requires 10% held in a joint account. The contract requires that the buyer be permitted to completely inspect the vessel and determine that it meets all requirements of class. If it does meet all class requirements, the buyer has effectively purchased the ship.

With "classed" ships, i.e., ships certified by ABS, Lloyds, etc., you may purchase a ship that is underway, thousands of miles at sea, without ever seeing the vessel.

With more modest-sized ships, the buyer will want to undertake a realistic inspection and survey process. With a deposit in escrow, the owner will be more likely to permit detailed examinations, opening of tanks and more difficult areas of the vessel to inspect. In addition, if a vessel is fully in service, any inspection may affect the owner's business and therefore he may be reluctant to permit too much interference unless he is assured of the buyer's ability and willingness to compete the project.

Within the last six months I have refunded a number of deposits because after detailed inspections, the buyers found that the vessels were not suitable for their projects.

This form makes the offer contingent upon a number of items. Principally, a complete survey, sea trial and inventory. If any one of those items is not satisfactory to the buyer and he notifies the owner within the time limit, his refund is fully refunded.

Consequently, if you are preparing to make an offer, make sure your financing is in place, you have an inspection and survey team or person ready to go; and that you are quite sure of what you are "really" looking to buy.

Best of luck on your projects.
Mike Vaughn

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