UK: The Smart Contracting Bulletin January 2013

Last Updated: 11 January 2013
Article by Chris Kidd and Phillippa Hook

"As is" sales of rigs and vessels – sellers (and buyers) beware!

English Commercial Court decides second hand units have to be of satisfactory quality and fit for purpose

Much debate has centred around whether sales of rigs or vessels using or based on the Norwegian Saleform 1987 or 1993 exclude the obligation on the seller to ensure that the vessel is of satisfactory quality and fit for purpose pursuant to the Sale of Goods Act 1979, as amended ("SOGA"). A recent decision of the Commercial Court in London clarifies the position.

This commentary looks at the recent case of Dalmare SpA v. Union Maritime Limited and Valor Shipping Limited ("Union Power") [2012] which, to the surprise of many, has determined that implied terms of quality and fitness for purpose under SOGA do apply to the sale and purchase of second hand rigs and vessels using or based on the unamended Norwegian Saleform 1987 and 1993.

Background

The sellers agreed to sell a 1994 built motor tanker to the buyers for US$7 million in accordance with a Memorandum of Agreement (the "MOA") on the Norwegian Saleform 1993 ("Saleform 93"). The vessel was found to be in satisfactory condition both on pre-delivery inspection and in a survey conducted on delivery. However, about a month after delivery, the main engine broke down only some 30 hours into a voyage due to the failure of a crankpin bearing in the main engine. On investigation the crankpin was found to be significantly undersized and oval.

The buyers commenced arbitration and successfully contended that there was a breach of the implied term as to satisfactory quality implied into the MOA by virtue of section 14(2) SOGA. The sellers appealed to the Commercial Court in London.

Issue

Clause 11 of the MOA stated, "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 Vessel's class..."

SOGA implies terms about quality and fitness into English law contracts for the sale of goods in the course of a business. Section 14(2) provides that there is an implied term that the goods supplied under the contract are of satisfactory quality. However, the implied terms may be excluded under section 55 of SOGA, either by express agreement or because an express term in the contract is inconsistent with a term implied by SOGA.

The question in issue was whether a term of satisfactory quality was implied into the MOA by SOGA? The judge addressed this as two separate questions:

  1. was clause 11 in the MOA equivalent to an "as is, where is" basis of contract, assuming that phrase has the effect of excluding the SOGA implied terms?; and
  2. if the answer to the first question was that clause 11 is equivalent, does "as is, where is" exclude the implied terms in accordance with section 55?

As both the tribunal and judge stated, the issue whether SOGA implies terms as to quality and fitness for purpose into Saleform MOAs is one which has arisen many times in London arbitrations but, surprisingly, is an issue which has never previously been addressed directly by the English Courts.

The Commercial Court expressly confirmed that SOGA applies to contracts for the sale of second hand vessels.

Judgement

The judge concluded that "as she was" in clause 11 of the MOA was not capable of bearing the same meaning as the phrase "as is, where is". He agreed that the tribunal was right to conclude that the words "as she was" created an obligation to deliver the vessel in the same condition as when she was inspected and went on to say that those words say nothing about what the Sellers' obligations are, either on inspection or delivery, as regards the quality of the vessel. Consequently they did not exclude the implied term as to satisfactory quality under section 14(2) of SOGA.

The judge further determined that conditions of class are separate to the quality of a vessel and found the additional clause 11 requirements that the vessel be delivered with her class maintained and free of average damage were not inconsistent with the implied terms under SOGA such that the latter were excluded; the class obligations do not impinge on the obligation to deliver a vessel of satisfactory quality imposed by SOGA, notwithstanding that this may well impose obligations on the Sellers to deliver the vessel in a better condition than on inspection. The judge therefore found in the Buyer's favour.

The judge did not therefore need to decide the second question in issue but nevertheless expressed a provisional view that, for a number of reasons, there is considerable force in the argument that the words "as is" are not expressly inconsistent with the statutory implied terms so as to exclude them pursuant to section 55 of SOGA. He did not think, however, that this would lead to a right to reject the vessel. In most cases it would only permit a claim in damages for breach of the implied terms.

Implications

This decision has a wider impact beyond the sale and purchase of conventional vessels and is of importance to the energy and offshore industries where the sale and purchase of second hand rigs and vessels are very often carried out using the Norwegian Saleform or a contract based on the 1987 or 1993 versions. Parties will need to consider expressly and clearly contracting out of the SOGA implied terms, failing which the vessel will need to comply with those terms on delivery in addition to any specific requirements in the contract.

Parties may also like to bear in mind that the 2012 version of the Saleform removes any issues about implying the statutory terms as to fitness for purpose and quality by expressly excluding their application thereby confirming the "as is" nature of the sale.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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