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Down the Conditional Acceptance and Escrow Agreement “rabbit hole”

This Article was published by YBAA Association of Yacht Sales Professionals, on their website on October 24, 2017.

Often a Broker, or any reasonable person, examines the legal aspects of particular situation only to be left with the feeling that they have just looked down a rabbit hole into a Lewis Carroll inspired wonderland. The reason is that frequently the law and reality have nothing to do with one another. In the reality of a broker’s world, a deal is not rejected and a contract survives even though the buyer may want a few fixes after survey. The buyer will frequently “conditionally accept” the vessel as long as this or that is fixed. The law sees this in a way which is different than the reality of brokerage. From the point of view of the law, the buyer made an offer which was accepted by the seller, at which point, there was a "meeting of the minds". The meeting of the minds included a term allowing the buyer to later reject the vessel, ending the contract, with no penalty. That is what the buyer does with the conditional acceptance when it is used in place of an addendum.

Frequently, the buyer does not really want to reject the vessel and walk away. However, the law only sees a rejection and the end of a contract. In order to pretend that the deal is still alive, and lessen the impact of the rejection, the rejection is accompanied by a counter offer to start a new deal. Contrary to the name, “conditional acceptance”, when used in this context, means the contract is at an end unless the Seller unilaterally chooses otherwise.

Assuming that the buyer’s counter offer is accepted, there is now a new "meeting of the minds" with fewer contingencies, however; the one which usually remains is that “the stuff” will be fixed unless the price was the adjusted term. [We] have seen more closings than not where there is something not repaired when the moment of truth arrives. The “work around” to save the deal is often the tried and true escrow agreement. This is another instance where the “conditional acceptance” is used but it is really an escrow agreement. In this context, there is nothing conditional and the vessel has really been accepted.

Zen and the Art of Escrow to the rescue. The four Cs will guide you and I am not referring to clarity, cut, color, carat. The four Cs are: Clarity of Language, Clarity of Quantities, Clarity of Conditions, and Clarity of Timing.

  1. Clarity of language is simply stating what you mean. The key to clarity of language is to think very narrowly yet completely. As an example, let us use the term “latches working.” Those two words do not constitute a proper term no matter how intuitive they may have seemed at the time of drafting. Ask yourself that if in four years you were to read these words would there be any doubt as to what actions were required? Did the drafter really mean, “the lock mechanism on the starboard side aft companionway will consistently engage and release when locked and unlocked with the key” or did the drafter mean that “every door latch and drawer latch and companionway lock throughout the vessel will be fully functional”. In the case which inspired this example, the intent would have been closer to the former rather than the later meaning.

  2. Clarity of quantities means to specify the relative value of the amount held back versus the other items on the list. In the case of a Ten Thousand Dollars hold back that is reduced to an escrow agreement and described as: “starboard engine leaking oil, missing current paper chart as promised, and canvas zipper detaching,” what is the relative value of each? How does that $10,000 break down across all three items? You may find that in addition to simple clarity as to the quantity of hold back that forcing the question reduces the holdback to a reasonable number when the Buyer is asked to quantify each line item in general terms. Assertions of a six-thousand-dollar zipper repair are hard to sustain with a straight face.

  3. Clarity of conditions will keep the discretion to a minimum. There is nothing more frustrating to an escrow agent than being thrust into a discretionary role. Similarly, there is little more frustrating to a Buyer or Seller then having a third party (frequently one of the Brokers representing the opposite party) decide to enforce, in a discretionary manner, what you thought was not discretionary. You must have some standard against which a condition is met or fails. Ideally the standard is always objective, but that will not always be possible. If a subjective standard is required then choose in the agreement who will make “the call.” For example, if the primary hold back was due to leaking engines, decide who will determine that there is no longer a leak in case that becomes an issue upon which the parties do not agree. In that circumstance, one could simply have specified that all leaks will be examined by a certified Volvo Penta mechanic and that mechanics’ decision as to whether the leak has been solved will be binding upon the parties, including the escrow agent.

  4. Clarity of timing will save the Buyer and Seller the headache of the deal which never seems to fully conclude. Sometimes the Broker will also have the headache of the last bit of commission wrapped up in the hold back. Consider weather delays. Perhaps a particular punch list item must be addressed after the close of winter. Does that mean that if not solved by the following August that the Buyer has any right to complain? What if consent on a particular item is never coming from the Buyer, such that, there is simply silence from the Buyer after alleged repairs. A bitter Buyer, with no limitations, has absolutely no reason to respond quickly or indeed at all, to the escrow agent’s request for confirmation that the funds may be released. A simple timer on a response after Seller tenders notice of completion will allow the release of the funds.

Descending into the rabbit hole can be a dizzying experience as you look into a crystal ball and attempt to imagine all the manners in which what you draft may “go sideways.” Your escrow agreements will improve with a little attention to the four Cs: Clarity of language, Clarity of quantities, Clarity of conditions, and Clarity of timing. Remember that barstool lawyers are a dime a dozen and can fuel descent into madness as you look though the warren beneath the rabbit hole. You may want to consider outsourcing this madness to your local maritime attorney. In most cases it should take an hour or less to draft a good escrow agreement for the transaction.

“But I don’t want to go among mad people,” Alice remarked.
“Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
“How do you know I’m mad?” said Alice.
“You must be,” said the Cat, “or you wouldn’t have come here.”

(Alice’s Adventures in Wonderland, Chapter 6)

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