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17 April 2013
The English courts have found that the standard wording of the Norwegian Shipbrokers' Association's Memorandum of Agreement (the 1993 Norwegian sale form) does not exclude an obligation on a vendor to ensure that the ship or offshore unit being sold is of satisfactory quality and fit for purpose, as implied by the English Sale of Goods Act.
The 1993 sale form is the most popular of the pro forma contracts used for the sale and purchase of second-hand vessels and offshore units. It has always been the subject of some speculation whether the standard form (of both the 1987 and 1993 versions) excludes terms as to satisfactory quality and fitness for purpose, which are implied in contracts of sale by the Sale of Goods Act 1979. The recent decision in Dalmare SpA v Union Maritime Limited has now put this debate to rest, as it has been held that such terms are to be implied unless expressly excluded.
Pursuant to a memorandum of agreement based on the form, the vendors agreed to sell a 1994-built motor tanker, the Calafuria, to the buyers for $7 million. As per the standard wording, Clause 11 of the form provided that the "[v]essel shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted".
The vessel was found to be in satisfactory condition both on the pre-delivery inspection and during a survey conducted on delivery. However, a month after the delivery of the vessel, the main engine broke down due to a defective crankpin. The buyers commenced arbitration and the arbitrators held that there was a breach of the term as to satisfactory quality implied in the form by the Sale of Goods Act, and that accordingly the buyers were entitled to damages. The vendors appealed to the Commercial Court.
Section 14 of the Sale of Goods Act states that it is an implied term in respect of goods supplied under sales contracts governed by English law that they are to be of a satisfactory quality. This term will not be implied where the parties expressly exclude such terms, or where an express term of the contract is inconsistent with such implied term.
The vendors argued that the words 'as she was' in Clause 11 had the same meaning as the words 'as is' or 'as is, where is' or other similar phrases. They maintained that it was settled law that such phrases meant that on delivery the buyers were required to take delivery of the goods in the condition that they found them – warts and all – with no implied warranty of quality or fitness for purpose.
The buyers argued that the terms implied by Section 14 apply unless the parties had expressly contracted out of them, or had provided for a clear alternative regime as to quality that was wholly inconsistent with the implied term. The buyers maintained that neither outcome had been achieved in this case.
The court found in favour of the buyers. It was held that the implied terms were to be considered as incorporated unless the parties had specifically contracted out of them, which had not been done in this case. The judge also found that the words 'as she was' did not bear the same meaning as the phrase 'as is, where is'. It was clear that the words 'as she was' created an obligation on the part of the vendors to deliver the vessel in the same condition as she was when inspected.
Significantly, the judge noted that had he had been asked to determine the issue, he may have found the 'as is' provisions often provided in sale and purchase contracts to be consistent with the implied terms of the act. Consequently, such words would have been insufficient to exclude the implied terms as to quality and fitness for purpose.
This ruling has important implications for the terms agreed for the sale and purchase of second-hand rigs or vessels. Buyers and sellers must carefully consider whether they intend the terms of the act to apply to their contracts. If not, then express wording is required to exclude – expressly and unequivocally – such terms from applying.
In February 2012 the Norwegian Shipbrokers' Association introduced an updated version of the form intended to replace the 1993 version. Clause 18 in the 2012 version of the form contains an express provision stating 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". These words effectively exclude the act's implied terms from applying to the contract, and thereby restore the position to the recognised 'as is' nature of the contemplated sale.
The relevance of this decision extends beyond ship sale and purchase since the act may well imply terms into all 'as is' contracts for the sale and purchase of goods governed by English law, unless expressly excluded.
For further information on this topic please contact Joe McGladdery or Jonathan Page at Wikborg Rein by telephone (+44 20 7367 0300), fax (+44 20 7367 0301) or email (firstname.lastname@example.org or email@example.com).
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