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Using Escrow Services

Recently, I have had a number of inquiries concerning the actual funds transfer in the sale of commercial ships. There are no set rules and the terms are generally set by the parties to the transaction. There are generally five ways for the escrow to be set up:

1.   NORWEGIAN SALES FORM - The Norwegian Sales Form provides that a joint bank account be set up to hold the funds deposited by the Buyer to assure his ability and willingness to complete the transaction. These funds may be designated as "earnest money", purchase deposit, escrow funds or buyer’s security. Regardless of the name, the deposit is designed to assure the Seller that the Buyer will complete the transaction if the vessel meets all of the terms of the offer to purchase.

2.   ESCROW SERVICES - Most banks and real estate escrow service will hold the deposit under an escrow agreement. The value of such a service is that the funds and fidelity of the escrow service is insured by a fidelity bond or other security supervised by the state. The principal problem that occurs is that these facilities are not familiar with maritime transactions and are many times uncomfortable with handling a situation in which they do not have experience. The bank and escrow service will charge for this service. The amount may range from a few hundred dollars to several thousand dollars.

3.   ATTORNEY TRUST ACCOUNTS - All attorneys maintain a "Trust Account". This is an account, generally monitored by the State, in which they deposit and disperse funds held for their clients. This is a very common way for the funds to be held and verified to the Seller.

4.   BROKER TRUST ACCOUNT - Most brokers maintain trust accounts in which deposit may be placed, held and dispersed as required. Most states do not require that these accounts be insured or that the broker have a fidelity bond. The states of California and Florida do require fidelity bonds, however, these are usually relatively low limits.

5.   DEPOSIT WITH SELLER - You may make a deposit directly with the Seller. The biggest problem arises if you have a dispute over the terms or conditions of the sale. The Seller may unilaterally refuse to refund the deposit and you will be required to hire an attorney and file suit. However, this type of deposit arrangement is routinely used in the transaction process.

Regardless of how the deposit is made, the purchase agreement needs to make explicitly clear the terms and conditions on which the sale is predicated. There needs to be an exact standard the vessel must meet, whether classification standards, personal inspection or otherwise before the deposit is committed and not subject to be refunded. There must be an exact date by which the parties will accomplish certain things and there must be an acceptance date by which the Buyer accepts the vessel.

When the acceptance date is reached, the buyer then pledges his deposit as a guarantee of his willingness to complete the deal. Ordinarily, it is at that point, at which the Seller removes the vessel from the market, starts refusing charters or other work and begins making the vessel ready for the sale to the Buyer. This depends upon how the Buyer intends to use and the exact nature of the transaction. I have a variety of forms in my book, “SHIP ACQUISITION & SALE".

A bank, attorney, or escrow service will require explicit escrow instructions which are signed by the Buyer and Seller and will follow those instructions solely. The most important point to remember is to have the agreement in writing.

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