As a sequel to our newsletter on the Risk of Reliance on Standard Ship Sale Forms in March 2014, this newsletter will discuss another recent English case Dalmare SpA v Union Maritime Ltd [2012] EWHC 3537 (Comm) (“The Union Power”) which again concerns the terms of Norwegian Saleform 1993 (“NSF 1993”) as well as its relationship with the implied terms pursuant to the English Sale of Goods Act 1979 (“SOGA”).

Facts
By a memorandum of agreement on the NSF 1993 dated 4 September 2009 (“MOA”), the sellers agreed to sell and the buyers agreed to buy the subject vessel for US$7 million. The relevant clause of the MOA is Clause 11 which provides, inter alia, that “The Vessel shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted. However, the Vessel shall be delivered with her class maintained…without condition/ recommendation, free of average damage affecting the Vessels class.”

The buyers inspected the vessel and did not find any significant faults. The vessel was delivered in October 2009 and subsequently departed for a voyage in November 2009. Only some 30 hours after the vessel had departed, the main engine broke down. The buyers contended, among others, that the sellers were in breach of their obligation to deliver vessel of satisfactory quality implied into the MOA by virtue of s.14(2) of the SOGA as amended.

On the other hand, the sellers denied that any SOGA terms were to be implied into the MOA by relying on s.55 of the SOGA, which provides that an express term does not negative a term implied by SOGA unless inconsistent with it. They argued that the terms of clause 11 were inconsistent with the SOGA implied terms because the vessel was sold “as she was”.

The parties engaged in arbitration and the tribunal found in favour of the buyers, holding that the parties had not excluded SOGA’s implied term. The sellers appealed to the High Court.

The Sellers’ Appeal
The issue on appeal was whether a term as to satisfactory quality is implied into the MOA by s.14 of the SOGA. The sellers contended that the tribunal failed to recognise that the term “as she was” in clause 11 had the same meaning as “as is, where is”, which meant that a buyer should take the goods as he finds with no warranty or condition as to quality or fitness for purpose; therefore “as she was” in the NSF 1993 was inconsistent with the SOGA implied term as to satisfactory quality in s.14(2) and its application was excluded pursuant to s.55.

Further, the sellers argued that the second part of clause 11 begins with “However”, which indicated a qualification to what would otherwise be a simple obligation to deliver the vessel “as she was”; “class” was the only exception to “as is” nature so that the vessel were sold to the class standard, but not to the standard of satisfactory quality.

The issue on appeal was subdivided into 2 questions: (1) the narrower question was whether clause 11 was equivalent to an “as is, where is” basis of contract; and (2) the wider question was, if it is equivalent, whether it exclude the implied terms of s.14(2) in light of s.55.

Correct Approach of s.14(2)
To start with, the Court agreed with the buyers’ submission that the default position was that implied terms of s.14 of SOGA applied unless the parties had contracted out, which could be done either by expressly contracting out or by a clear and unequivocal statement of an alternative regime as to quality which was wholly inconsistent with s.14(2) as to satisfactory quality (e.g. an entire agreement clause). Clear language must be used in the contract if the statutory implied terms are to be excluded.

Narrower Question
The Court was of the view that “as she was” is a necessary part of the sentence in that it records the obligation of the sellers to deliver the vessel in the same condition as she was when inspected, save for fair wear and tear. However, such wording tells nothing about the sellers’ obligations with regard to quality of the vessel. Hence, it was held that “as she was” do not and cannot exclude the implied term as to satisfactory quality under s.14(2) of SOGA.

In respect of the second part of clause 11, the Court agreed with the tribunal that the fact that the vessel was also required to be delivered “with her class maintained…without condition/recommendation” suggested that clause 11 could have required the sellers to deliver the vessel in a better condition than when inspected. If the vessel is subject to a class condition/recommendation at the time of inspection, the sellers are under an obligation to repair the vessel so as to delete that condition/recommendation prior to delivery. Therefore, it was held that the obligations in the second sentence complement or supplement the obligation to deliver the vessel in a satisfactory condition pursuant to s.14(2) of SOGA rather than being inconsistent with it as argued by the sellers.

Wider Question
Given the findings on the narrower question, it was not necessary for the Court to reach a definitive conclusion on the wider question. However, the Court indicated that it would have concluded that the correct approach is to read down “as is” provisions as excluding the right to reject the vessel for apparent defects at the time of inspection whilst leaving the right to claim damages for breach of the implied terms under SOGA unaffected.

Subsequent Development and Implication
The dispute as to implied terms as in the Union Power would not arise if the Norwegian Saleform 2012 (“NSF 2012”) is adopted, which is the updated version of NSF 1993. NSF 2012 includes an “entire agreement clause” at the new clause 18, which specifically stated that “Any terms implied into this Agreement by any applicable statute or law are hereby excluded to the extent that such exclusion can be legally made.” This effectively excludes the implied terms as to satisfactory quality in s.14(2) of SOGA as disputed in the Union Power.

In light of the Union Power, second hand vessel sellers should consider using NSF 2012 instead of NSF 1993 for better protection brought about by the new clause 18. However, if NSF 1993 is to be used, sellers should make sure that terms are incorporated into the MOA to either expressly exclude any implied terms or to include an unequivocal statement of alternative regime as to quality, for example, stating that the vessel is sold on an “as is, where is” basis.

On another note, the ruling in respect of implied terms in Union Power is applicable, not only to sale and purchase of vessels, but also to all contracts for sale and purchase of goods in general. Whilst in Hong Kong, implied terms as to quality is stipulated in s.16(2) of the Sales of Goods Ordinance (Cap 26), if contracting parties wish to exclude the statutory implied terms, again very clear exclusion or unequivocal statements are essential in the contract.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.