UK: Shipbuilding Contracts – Limitation Periods And Sale Of Goods Act

In Neon Shipping Inc. v. Foreign Economic 7 Technical Corporation Co. of China and another [2016] EWHC 399 (Comm) the Commercial Court dealt with an appeal from London arbitrators in a dispute arising out of a shipbuilding contract ("SBC").

The time bar issue

The SBC provided in Article XI that:

Article XI Guarantee

1. Guarantee

Seller guarantees that Vessel, and all parts thereof that [are] manufactured or supplied by Seller, its sub-contractors and/or vendors under this Contract, will be seaworthy and contractual in all respects, and will be free from all defects which are due to defective design, construction, calculation, material or workmanship (collectively "Guarantee Defects"), upon delivery and for a period of twelve (12) months from the Date and Time of Delivery ("Guarantee Period").

2. Notice of Defects

Buyer shall notify Seller by telex or facsimile promptly after discovery of any Guarantee Defects for which claim is made. ..... Except as otherwise provided below, Seller shall not be under any obligation for a Guarantee Defect unless notice of such Defect was sent to Seller not later than thirty (30) calendar days after the end of the Guarantee Period. ....

Notwithstanding a valiant attempt to rely upon, inter alia, the comma (underlined in the above) in the first paragraph of Article XI to differentiate between claims relating to the contractual requirement that the vessel be (i) "seaworthy and contractual in all respects", and those relating to whether the vessel was (ii) "free from all defects which are due to defective design, construction, calculation, material or workmanship", it was held that the twelve (12) month time bar provision in Article XI applied to any and all claims whatsoever.

The Sale of Goods Act 1979 ( "SOGA") issue

The Judgment includes consideration of whether section 14(3) of the Sale of Goods Act 1979 ("SOGA") is inapplicable to a shipbuilding project in which the vessel is built for use in standardised trades, or whether section 14(3) applies in any case where goods have been ordered for their normal purpose. This involved considering whether, for the purposes of section 55(2) SOGA, a clause containing a general description of the goods to be sold can be regarded as inconsistent with the implied terms provided in section 14.

Section 14(3) provides:

Where the Seller sells goods in the course of a business and the Buyer, expressly or by implication, makes known:

(a) to the seller; or

(b) where the purchase price or part of it is payable by instalments and the goods were previously sold by a credit-broker to the Seller, to that credit-broker,

any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller or credit-broker.

Section 55(2) provides:

An express term does not negative a term implied by this Act unless inconsistent with it.

The parties had agreed that the SOGA applied to the SBC. However, at the arbitration, reliance had been placed upon the commentary in a standard shipbuilding text book in which it is said that "Section 14(3) will not, however, normally assist the purchaser of a new building in a quality dispute." The Court said that that did not correctly state the law, which is that there is no need, for the purpose of section 14(3), for there to be a particular purpose identified, as evidenced by the words used, namely "whether or not there is a purpose for which the goods are commonly supplied". "Normal use" is sufficient, being normal use in accordance with the contractual specification.

It was therefore held (albeit obiter) that section 14(3) applies in any case where goods have been ordered for their normal purpose: there is no obstacle in principle to implying a term as to fitness for specific purpose into a ship sale contract, even when sold for the purpose of well-known standardised trades; although in this particular case there was no basis for implying such a term into the SBC. In any individual case, it will be necessary to consider whether, for the purposes of section 55(2) SOGA, a clause containing a general description of the goods to be sold can be regarded as inconsistent with the implied terms provided in section 14.

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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