In the fast-paced world of ship sale and purchase (S&P), timing is everything. When millions of dollars are expected to change hands promptly between counterparties, even short delays can derail closing timelines, lead to contractual defaults, and trigger costly disputes.
With the decline of traditional payment letters and conditional SWIFT messages in maritime transactions, escrow arrangements and balance pre-positioning have become the standard mechanism for de-risking payment flows in ship sales. However, this shift has introduced new complexities. Increasingly, we are seeing situations where buyers issue payment instructions in good time – particularly to pre-fund accounts, only for the funds to be held up en route. The culprit is often not inefficiency, but compliance reviews by the receiving or intermediary bank. The latter is a particular issue since neither party has a direct relationship with that bank, making tracking of held payments very difficult.
As global sanctions regimes expand and evolve, so too does the role of the U.S.-based correspondent banks in policing cross-border payments – sometimes at the expense of closing deadlines. While these delays are nothing new, their growing frequency and unpredictability raise important questions for parties structuring both deposit and balance payments: when funding is delayed through no fault of the parties, who bears the risk and cost of delay when funds are frozen – and what can be done to prevent the deal from sinking?
The problem
Ship sale contracts typically involve two key payment obligations: the deposit, often 10% of the purchase price, and the balance. Both are frequently routed through escrow/pre-positioning arrangements, particularly in international transactions where counterparty risk and regulatory scrutiny are higher.
There is usually a clear expectation that payments will clear within a short timeframe – typically one to three banking days. However, compliance or “Know Your Customer” (KYC) reviews by intermediary or correspondent banks can disrupt this process, resulting in delays of several days or even weeks. These delays can trigger a domino effect, disrupting Notices of Readiness (NOR), deferring delivery, and, in some cases, leading to default under the Memorandum of Agreement (MoA).
SHIPSALE 22 and deposit delays
Recognising these issues, BIMCO’s latest standard form MOA, SHIPSALE 22, includes a new provision: Clause 5(e). This clause addresses scenarios where the deposit payment is delayed due to compliance screening by the escrow agent’s bank or a correspondent bank. Provided the delay is not attributable to the buyer’s negligence, the clause grants a two-banking day extension to the deposit deadline.
Ordinarily, the deposit is due within three banking days after all the following:
(i) the MoA has been signed and exchanged;
(ii) the escrow agreement has been signed and exchanged;
(iii) the escrow agent confirms the account is ready to receive the funds; and
(iv) all subjects (if any) have been lifted.
This provision offers a limited but important buffer for buyers facing regulatory-related banking delays. However, it is not replicated in older or more commonly used forms – such as the Norwegian Saleform 2012 (NSF 2012) – which is silent on this issue.
Balance payments: a continuing risk
For balance payments, there is no equivalent grace period under either SHIPSALE 22 or NSF 2012. Both forms require direct payment to the sellers no later than three banking days after the NOR is tendered. To manage this risk, parties often include a bespoke clause in the MoA requiring the balance to be lodged with the law firm or other professional firm acting as balance holder a certain number of banking days before the expected delivery date, typically based on the approximate delivery notices. However, where such language is absent or unclear, banking delays can expose buyers to the risk of default – even if payment instructions were timely.
The legal issues under English law
(i) Payment time and risk allocation
Under English law, unless agreed otherwise, the buyer’s payment obligation is not fulfilled until cleared funds are received into a requisite account. If the MoA does not address banking delays, the risk generally sits with the buyer. This means that, even where delays are due to intermediary bank checks, the buyer may still be technically in breach if funds arrive late.
(ii) “Time of the essence” clause
Ship sale contracts often make time “of the essence”. English courts typically uphold such provisions. As a result, delayed funding – even where caused by external compliance checks – may entitle the seller to terminate the contract, retain the deposit, and in some cases, claim damages beyond the deposit (as reflected in Clauses 13 and 18 of NSF 2012 and SHIPSALE 22, respectively), particularly where delivery is missed or the NOR is invalidated.
(iii) Force majeure and frustration: A misplaced shield
Force majeure and frustration arguments are unlikely to succeed in this context. Banking delays caused by compliance reviews are not considered “unforeseeable”, under English law, especially given the current regulatory environment. Unless the contract includes express force majeure language covering such circumstances, parties should not assume these doctrines will excuse late performance.
Practical and commercial considerations
1. Prepositioning documentation
As the use of contractual prepositioning arrangements becomes more common in S&P transactions, it is increasingly important that the governing documents clearly allocate responsibilities in the event of payment delays. The sale agreements should outline the consequences of delayed funds: for example, whether delivery timelines are affected, whether any grace periods apply, and under what circumstances, if any, the contract may be terminated. These considerations apply equally to both deposit and balance payments, each of which may face distinct regulatory hurdles and timing pressures.
2. “Receive in cleared funds”
It is essential for the MoA to be specific as to when payment obligations are considered fulfilled. Is it when the buyer initiates the transfer? When the account holder confirms receipt? Or only once the funds are fully cleared? Ambiguity at this point is a common source of dispute, particularly in transactions with tight delivery windows.
3. Timetabling
With most S&P deals conducted in U.S. dollars, and funds routed through U.S.-based clearing banks, compliance-related hold-ups are a growing issue. Parties should avoid making assumptions that bank transfers will be completed within a standard 1–2-day timeframe and should instead build in additional buffers where possible to accommodate potential sanctions screening, anti-money laundering checks and KYC. Contractual timelines for both deposit and balance payments should reflect these real-world banking risks to manage expectations and reduce the likelihood of default or termination simply because a payment is stuck in transit.
4. Indemnity and interest provisions
Parties should review indemnity and interest provisions within the MoA and related payment agreements and consider how to allocate financial responsibility where delays occur (regardless of the reason for such delay). Clear and balanced drafting assists with managing expectations and reducing the risk of disputes where delays affect completion timelines. Whether liability arises regardless of fault, or only in certain scenarios, these provisions should be clearly set out.
Conclusions
Banking compliance delays are no longer exceptional—they are becoming a consistent feature of cross-border ship sale transactions, particularly where U.S. dollar payments and intermediary banks are involved. What once may have been viewed as an isolated banking issue has become a structural risk that parties must proactively manage. Left unaddressed, these delays can jeopardise deal timelines, trigger contractual defaults, and, in some cases, cause transactions to fall apart entirely.
To avoid these outcomes, parties should be proactive in identifying and managing payment risks at the contractual negotiation stage. That includes reviewing how payment obligations are defined, how risk is allocated between buyer and seller, and whether the documentation provides practical solutions if funds are delayed en route – especially where deposit or balance payments are routed through high-risk jurisdictions or regulatory environments.