The purpose of this talk is to consider whether the conditions of satisfactory quality and fitness for purpose implied by the Sale of Goods Act 1979 apply to Norwegian Saleform and other contracts for the sale of second-hand tonnage and if so what is their effect. I will also consider in what circumstances buyers have a right to reject tender of delivery whether under the express or any implied terms.
Despite the number of decided cases involving the Norwegian Saleform, there appears to be surprisingly little discussion of the above questions even though many cases have involved allegations that might be thought to have raised issues that could have been argued on the basis of implied terms.
Express terms of Norwegian Saleform concerning condition of the ship (clause 11 of NSF '87 and '93)
Class maintained free of recommendations
The requirement that the vessel be class maintained free of recommendations began life as an additional clause commonly added to NSF '66. In The Buena Trader  2 Lloyds Rep 325, the Court of Appeal held the clause to be satisfied as long as the vessel was in class without recommendations even if the vessel suffered from defects of which the sellers were aware that, had they been notified to the classification society, would have resulted in class being withdrawn or a recommendation imposed.
Obligation to inform class of defects coming to attention of sellers
As a consequence of the decision in The Buena Trader, NSF '83 and '87 added an obligation on the part of the sellers to notify class of matters coming to their knowledge prior to delivery which upon being reported to class would lead to the withdrawal of the vessel's class or to the imposition of a recommendation. This obligation does not, however, appear in NSF '93 though it is often added as an additional clause.
Disputes arose as to whether the sellers' obligation to notify arose in relation to defects coming to their knowledge from the date of the contract, the last class inspection, buyer's inspection or some other date. These issues were resolved by The Niobe  1 Lloyd's 579 in which the House of Lords held that there was no time limit as to when sellers became aware of a notifiable defect. The obligation was one that sellers undertake has been fulfilled before the date of the contract and will be fulfilled up to the date of delivery.
Free of average damage affecting class
This rather odd phrase which only became part of the standard form in NSF '93 (previously being a common additional clause) was held by Goff J in The Alfred Trigon  2 Lloyds 333 to mean damage affecting class which had been caused by a peril ordinarily covered by insurance. It did not, therefore, cover defects arising through wear and tear and general old age. This interpretation was also adopted by Bingham J in The Star of Kuwait  2 Lloyds 641 and by Leggatt J in The Great Marine  2 Lloyds 250.
Condition as at time of inspection, fair wear and tear excepted
The obligation to deliver the vessel in the same condition as she was when she was inspected by the buyers fair wear and tear excepted has not given rise to much difficulty of interpretation but factual issues can arise as to what in fact was the condition of the vessel at the time of inspection and whether damage was due to fair wear and tear.
Defects not covered by clause 11 of NSF '87 and '93
The collection of obligations that has accumulated over the years and now forms clause 11 of NSF '93 does not necessarily ensure that the buyer takes delivery of a seaworthy ship free from defects. In particular the following would not amount to a breach of clause 11:
Damage affecting class caused by a peril not ordinarily covered by insurance, e.g.: damage to the main engine caused by burning of bad fuel but not involving crew negligence.
- Defects pre-existing buyer's inspections, e.g.: a latent defect that results in a breakdown or breach of watertight integrity shortly after delivery.
- A characteristic of the vessel that makes it unsuitable for the use intended by buyers even if such intended use and unsuitability is known to sellers.
There are, therefore, matters that are not covered by the express terms of the NSF which could well give rise to a claim under the implied terms of satisfactory quality or fitness for purpose if they were applicable. Also many claims brought under the express terms of NSF could give rise to an alternative (and possibly simpler) claim under the implied terms.
Absence of legal decisions on applicability of Sale of Goods Act implied terms
There are a number of legal decisions in which one might have expected the issue of Sale of Goods Act implied terms to be raised. These include:
- The Alfred Trigon (supra) which involved leaking tank tops (due to wear and tear) that required extensive repairs before class could be confirmed.
- The Buena Trader (supra) which involved wear and tear damage which it was alleged the sellers were aware would affect class.
- The Star of Kuwait (supra) which involved an amended NSF which provided for the vessel to be "free of average damage or defects affecting class". The argument was as to whether the word "defects" were qualified by "average". Bingham J held it was not.
- The Great Marine (supra) which involved a claim in respect of a damaged propeller. The issue was whether it was average damage and whether it affected class.
- The Andreas P  2 Lloyds 183 which involved severely corroded top wing tanks and defective anchor and chain. The issue was whether a recommendation had been imposed. It was held that there had in respect of the topside tanks in respect of which the surveyor informed his head office that he was imposing a recommendation but not in respect of the anchor and chain which he merely noted in his own file.
As far as I am aware, the only case in which the implied terms of merchantability and fitness for purpose have been discussed is in the old case (not NSF) of Lloyd del Pacifico v Board of Trade  35 Lloyds 217. In that case it was held that even if the terms were to be implied there was no breach on the facts and the terms were in any event excluded by a clause providing that the vessel "shall be taken with all faults and errors of description without any allowance or abatement."
It may be that no Sale of Goods Act implied terms argument was raised in any of the above cases save Lloyd del Pacifico because of an express provision excluding such terms. The standard NSF '87 and '93 forms do not have any express clause clearly intended to exclude implied terms but there would be nothing to prevent parties agreeing such an exclusion. The absence of any such argument in the earlier of the above cases could be due to the inclusion in the corresponding clause of NSF '66 of words that could amount to an agreement to exclude the implied terms: "after [delivery] the Sellers shall have no responsibility for possible faults or deficiencies of any description." No such words appear in NSF '87 or '93.
Perhaps all those involved in the reported cases on clause 11 took the view that the statutory implied terms did not apply to an "as is" contract for the sale of secondhand ships. If they did take that view, were they right to do so?
Do the Sale of Goods Act implied terms apply to NSF '87 and '93 contracts?
By s.14 of the Sale of Goods Act 1979 (as amended) a term as to satisfactory quality is implied into a contract when "the seller sells goods in the course of a business". If in addition the buyer makes known to the seller the purpose for which the goods are bought, there is an implied term as to fitness for purpose.
The mere fact that a shipowner's business is the chartering and trading of ships and that a ship sale is only an occasional or unique activity dose not mean that such a sale is not in the course of that shipowner's business (Stevenson v Rogers  QB 1028 in which a fisherman was held to be selling goods in the course of a business when he sold his boat.)
There is nothing in the Act that restricts the implied terms to contracts for the sale of new goods. What little authority there is on the implied terms as they apply to second-hand goods concern the sale of second-hand cars (Benjamin's Sale of Goods 6th Ed para 11–061). While complete freedom from defects is not required from a second-hand car it is required to be "in a roadworthy condition, fit to be driven along the road in safety" (Bartlett v Sidney Marcus Ltd)  1 WLR 1013).
The statutory terms are, therefore, to be applied unless excluded by the terms of the contract. The Act itself lays down the test to apply in s.55 which states:
"(1) Where a right, duty or liability would arise under a contract of sale of goods by implication of law, it may (subject to the Unfair Contract Terms Act 1977) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both partes to the contract.
(2) An express term does not negative a term implied by this Act unless inconsistent with it."
In the absence, therefore, of a course of dealing or binding usage (notoriously difficult to establish) the question comes down to whether the statutory terms are inconsistent with the express terms of the contract. NSF '87 and '93 provide:
"4. The Buyers ... have inspected ... and accepted the Vessel ... and the sale is outright and definite
[Alternatively provision is made for inspection and subsequent notice of acceptance]
11. The Vessel ... subject to the conditions of this contract ... shall be delivered and taken over as she is at the time of inspection, fair wear and tear excepted."
Goldrein in Ship Sale and Purchase (3rd Ed) expresses the view (at p.203) that a term as to fitness for purpose "may be capable of implication into a ship sale contract" but that a term as to satisfactory quality will be implied "less frequently". No reasons are given for these views (see now 4th Ed. At p.261).
Although the words "shall be taken with all faults and errors of description without any allowance or abatement" were held in the Lloyd Pacifico case (supra) to exclude the implied terms, a similar clause: "goods shall be taken with all faults and defects, damaged or inferior" was held in Chris Hill Ltd v Ashington Piggeries  AC 441 to exclude only the right to reject but did not affect the right to claim damages for breach of the implied term. The words "sold as seen and inspected" in relation to a second-hand car were held to exclude the implied warranty of merchantable quality under the 1893 Act (Hughes v Hall (1981) RTR 431). A different view was expressed in Cavendish-Woodhouse Ltd v Manley 82 LGR 376 in which "bought as seen" was held to mean simply that the customer had seen the goods. Both these cases were, however, concerned with offences under the Trade Descriptions regulations.
In London arbitrations some tribunals have held the statutory terms to be implied into Norwegian Saleforms contracts and some have not. The majority of the awards of which the author is aware, however, have held the statutory terms to be implied.
Sometimes an additional clause is agreed to state that the sale is on an "as is" basis. I am not aware of any arbitration decision that has had to construe such a term but in one award the view was expressed that the conclusion might well be different if such words were included in the contract. The Award stated:
"We also mention that the sellers' 'as is' argument has no appeal to us. Many sale and purchase contracts are on this basis but this is made clear by use of the well-known words 'as is', used by those involved in the ship sale and purchase market. No such words were in our contract."
The sellers' "as is" argument referred to in the above extract was that the terms of clause 11 and in particular the words "as she was at the time of inspection" have the same meaning as "as is". It is difficult to see how, if the standard wording of clause 11 is not inconsistent with the statutory terms, that a clause stating that the sale is on an "as is" basis is so. It may be that the arbitrators were intending to refer to some usage in the sale and purchase market as to the meaning of "as is". If any case were to be run on the basis of such a usage then evidence of such usage would be required. I doubt very much, however, if there is a sufficiently clear and universal meaning attached to the words in the market.
I consider that the arbitrators in the above-mentioned cases were correct to hold that the statutory implied terms applied to NSF contracts and were not inconsistent with the express terms of the contract and that any court would reach the same conclusion. The requirement that an express term must be "inconsistent" with the statutory terms in order to negative them is a difficult test to overcome. In particular:
- The mere fact that the NSF includes detailed provisions regarding the condition of the vessel on delivery which might imply an intention on the part of the contracting parties not to include the statutory terms which overlap substantially with the express terms is insufficient to exclude them.
- The provisions for inspection in clause 4 are not inconsistent with the statutory terms but do provide some protection for any defects which such inspection ought to have revealed.
- The provision in clause 11 that the vessel shall be taken over "as she is at the time of inspection" is not inconsistent with the implied terms in that it is not inconsistent with a right to claim damages for unsatisfactory quality or unfitness for purpose.
- Even an additional clause that the vessel will be delivered "as is" would not in my view be inconsistent with the statutory implied terms. Either such a clause could be interpreted as a reference back to clause 11 or a mere truism. All goods are delivered "as is" at the time of delivery.
- The clause held in the Lloyd del Pacifico case to exclude the statutory terms might well not now be held sufficient. At that time there was no "inconsistency" test to overcome and although "without any allowance or abatement" might reasonably be understood to exclude any comeback for unsatisfactory quality, construed strictly it could be limited to excluding abatement or reduction in price but not a claim for damages.
Can a buyer reject for unsatisfactory quality or unfitness for purpose?
The statutory terms being conditions (s.14(6) SoGA 1979) carry with them a right to reject goods in the event of breach of the conditions (subject to the exception in respect of "slight" breaches in non-consumer sales introduced by s.15A of the SoGA 1979 added in 1995). It is open to the parties to agree, however, not to treat the terms as conditions but only as warranties giving rise to a claim in damages.
The first point to consider is whether the "inconsistent" requirement applies. I do not think it would. The implied terms are not being excluded, the question is simply whetherthe parties have agreed to treat a breach of condition as a breach of warranty. No special rules of construction need be applied.
NSF '93 provides that the buyers "have inspected ... and accepted the Vessel" (cl.4) and that the vessel "shall be delivered and taken over as she was at the time of inspection". I am not aware of any direct authority on the effect of these words in the NSF but I do not consider that these words effectively exclude the right to reject a vessel for breach of the statutory implied terms. The clause (set out above) held to be effective to exclude the right to reject in the Ashington Piggeries case was in very different terms.
What amounts to unsatisfactory quality or unfitness for purpose of a second-hand ship?
One approach to minimise the impact of the statutory terms is to argue that compliance with the express NSF is sufficient to comply with the statutory terms. No-one can expect perfection in a second-hand ship. What can reasonably be expected is compliance with the express terms of the widely used NSF. This argument does not work, however, since the express terms are subject to requirements of knowledge (defects coming to attention of sellers) and causation (average damage) which are absent from the statutory terms.
The authorities, such as they are, mainly concern second-hand cars. In Business Applications v Nationwide Credit  RTR 332 the Court of Appeal upheld the judge's dismissal of a claim for unmerchantable quality of a second-hand car where the car had been driven for 800 miles but then broke down with burnt out valves and worn valve guides. The car cost £14,850, the repairs cost £635. Parker LJ said that the buyer of a second-hand car has to expect defects to develop sooner or later (p.336H). The court did, however, stress the importance of roadworthiness and that subject to the circumstances other factors such as comfort, handling and appearance could be relevant to merchantability of a second-hand car. In Lee v York Coach and Marine  RTR 35 the Court of Appeal reversed the trial judge and held that a car found to have defective and dangerous brakes, even though the defect could be repaired for £100 (as against purchase price of £355) was not merchantable or fit for its purpose.
The Lloyd del Pacifico case (supra) is not of great assistance. There a turbine engined ship bought in 1919 when tonnage was scarce and all shipping business was profitable traded profitably for three years but then had to be re-engined to compete with non-turbine powered vessels. Not surprisingly the court found no breach of the fitness for purpose condition.
Satisfactory quality and fitness for purpose are essentially factual issues. Much will depend on the circumstances: is the vessel intended for immediate trading or for conversion or scrap? What is its age and the price as compared to other similar vessels? Cases on second-hand cars cannot be directly applied since a car driver does not proceed on his journey with a crew of qualified engineers on board. Nevertheless, defects which would affect seaworthiness or prevent trading for a significant period would be likely to amount to unsatisfactory quality.
In one arbitration, a loose oil pipe which caused oil starvation and main engine breakdown shortly after delivery of the vessel and excessively worn cylinders due to burning defective fuel were held to amount to a breach of the statutory terms. Since however, it was also held that these defects had come into existence since buyers' inspection of the vessel, there was also a breach of clause 11 ("as she was at time of inspection, fair wear and tear excepted"). There was, therefore, no point in seeking to appeal the award on the statutory terms issue.
I am aware of another arbitration award in which a vessel was held not to have been of satisfactory quality or fit for purpose because she was arrested prior to delivery in respect of claims against sister vessels. This case demonstrates that the statutory implied terms are not merely concerned with the mechanical state of the vessel. Leave to appeal the award was apparently given but the appeal was not pursued.
Can the buyer reject for breach of the express terms of the NSF?
The law as to whether compliance with the express terms of clause 11 of NSF '93 is a condition precedent to delivery is not entirely clear. In The "Aktion"  1 Lloyds Rep 283, obligations as to the vessel's condition similar to those now found in clause 11 were held by Hirst J. not to amount to conditions precedent to delivery but only innominate terms which would only entitle the buyer to reject if the breach is so serious as to deprive the buyer of the substance of the benefit it was the intention he should receive from sellers' performance of the contract.
Hirst J. also held in the same case that a NoR for delivery could be served even though the vessel was not ready for delivery at the time the notice was served. That part of his decision has been disapproved in the Court of Appeal (Zegluga Polska v. TR Shipping  2 Lloyds Rep 341) and has in any event been superceded by a revision to the NSF which makes it clear that NoR can only be given when the vessel was ready for delivery. Clause 5 of NSF '93 now provides that NoR can only be given when:
"the vessel is at the place of delivery and in every respect physically ready for delivery in accordance with this agreement"
As well as reversing the effect of the decision in The "Aktion" as regards the NoR, the revision to clause 5 may also have reversed the effect of the decision as regards whether compliance with the clause 11 conditions is a condition precedent to delivery. Although I am not aware of any court authority, I consider that, under the wording of the NSF '93, compliance with clause 11 is a condition precedent to delivery.
Effect of delivery on right of rejection
Under the SoGA the buyer does not lose the right to reject for breach of condition following delivery unless he intimates that he accepts the goods, acts inconsistently with the right to reject or until he has had an opportunity to examine the goods to ascertain whether they comply with the contract (SoGA 1979 s.35).
In the case of a sale on a NSF, the buyer will normally have examined the vessel but this will usually only be a superficial examination conducted afloat without any opening up. In any event, the inspection takes place some time before delivery and is arguably not an inspection "for the purpose of ascertaining whether the goods are in compliance with the contract" (SoGA 1979 s.35(2)). Opportunities for inspection at the time of delivery are normally restricted especially if there is no dry-docking.
I have seen it suggested that the terms of clause 11 which provide that the vessel will "be taken over as she was at the time of inspection" exclude any right of rejection following delivery. I do not consider that these words have this effect. It would be necessary, in my view, to add words such as "with all faults and defects" as found in the Ashington Piggeries clause set out above.
It has also been suggested (Goldrein 4th Ed. p.154) that the protocol of delivery required by clause 8 of NSF '93 could exclude the right to reject following delivery. While this will depend on the terms of the protocol, I do not consider that the protocol required by the contract would have this effect since the purpose of the protocol is simply to confirm the time and place of delivery.
If acting for sellers: make sure the contract contains an express clause excluding the statutory implied terms and excluding any right to reject following delivery.
If acting for buyers: in addition to claiming in respect of breach of the express NSF terms consider also claiming for unsatisfactory quality and unfitness for purpose. If a major defect is discovered soon after delivery consider whether there is a right to reject the vessel.
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.