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Fit for purpose obligations in shipbuilding contracts

News / / Fit for purpose obligations in shipbuilding contracts

Neon Shipping Inc v. Foreign Economic 7 Technical Corporation Co. of China and China Chang Jlang National Shipping Group Corporation Jinling Shipyard [2016] EWHC 399 (Comm)

Vessels are often built for the purpose of well-known standardised trades. A recent Commercial Court decision, which also highlights the importance of giving notice of guarantee claims in good time, considered whether fitness for purpose obligations can be implied into shipbuilding contracts where a vessel is built for use in a standardised trade that is well-known to, and understood by, both the buyer and the builder. 

The background facts

China Chang Jlang National Shipping Group Corporation and Foreign Economic 7 Technical Corporation of China agreed to design, build and supply a 57,000 dwt bulk carrier for Neon Shipping Inc. 

The specification provided by way of “General Description of the Ship” that the vessel was “to be designed and built as a single screw motor driven bulk carrier for normal worldwide service” and the capacity of the deck crane to be 30 tonnes. 

The guarantee provisions contained a guarantee period of 12 months from the date of delivery and specified that notice of claims be given within 30 days after the end of the guarantee period. The Buyer’s claim that the slew bearings of the cranes were subject to excessive wear, such that the Buyer’s managers decided to limit the future operation of the cranes to 27 tonnes on hook and 20 tonnes using grab, was not notified within this period.

To try and get around the time bar in the contract, the Buyer argued in arbitration proceedings that:

1.  the contract contained an implied term as to fitness for the particular purpose of “utilisation bulk carrier for normal worldwide service” including for the loading, carriage and discharge of heavy cargoes; and continuous use of the vessel’s cranes (including grabs);

2.  the 12 month time bar, which excluded the Seller’s liability for late notified claims, did not apply to any and all claims whatsoever made after delivery of the vessel, including the claim for breach of the implied term.

The arbitrators found that the contract did not contain the implied term suggested by the Buyer and that the 12 month time bar applied and excluded all claims not notified prior to the expiry of the guarantee period, including the Buyer’s claim. 

The Commercial Court decision

The Commercial Court upheld the arbitrators’ decision on the interpretation of the time bar. Of wider interest, however, are the Court’s comments on whether the implied term of fitness for purpose incorporated into a contract by the Sale of Goods Act 1979 (“SOGA”) applies where the vessel is built for a standardised trade which is well-known to, and understood by, both the buyer and the builder. 

Section 14(3) SOGA provides that where a seller sells goods to a buyer, and the seller knows that there is a particular purpose for the goods, there is an implied term that the goods supplied are reasonably fit for purpose “whether or not that is a purpose for which such goods are commonly supplied”. The Buyer argued that the vessel was “purchased for a particular purpose, namely utilisation bulk carrier for normal worldwide service” and, therefore, the contract included an implied term that the vessel would be reasonably fit for such purpose. 

The Seller, in its defence, relied on an extract from the Law of Shipbuilding Contracts (4th Ed) by Simon Curtis which states:

“Section 14(3) will not, however, normally assist the purchase of a new building in a quality dispute. The subsection is designed to cover the situation in which the goods are required for a specific purpose made known to the seller before the contract is signed; it is as such likely to be inapplicable in the overwhelming majority of shipbuilding projects in which the vessel is built for use in standardised trades which are well known to, and understood by, both the buyer and the builder.” 

The Court, however, took the view that an implied term within section 14(3) SOGA could be implied if it was consistent with, and indeed put into effect, the terms of the specification. Contrary to the extract cited by the Seller, the Court thought that there is no need, for the sake of section 14(3), for a particular purpose to be identified and “normal use” (albeit, in accordance with the contractual specification) is sufficient.  

The Court, therefore, indicated that section 14(3) SOGA could apply in a case where goods have been ordered for their normal purpose (including ships being built for standardised trades). However, the question of whether or not a clause containing a general description of goods sold could be regarded as inconsistent with the implied term, so as to negate the implication of the implied term, would depend on the circumstances.  

Comment

Although the time bar issue determined the outcome in the case, and it turned on the precise wording of the clause, this judgment serves as a useful reminder for buyers to ensure that notifications of defects/claims are made within the specified notice period. 

The Court has made it clear that, whilst parties may be surprised to find a term under section 14(3) SOGA, regarding fitness for purpose, being implied into a shipbuilding contract – especially if the contract is made up of lengthy and detailed documentation as a result of considerable negotiation - the Court will nevertheless imply such a term if it is consistent with the contract. If, as is usually the case, the intention of the parties is to exclude implied terms under SOGA, then the parties should incorporate an express exclusion in the contract. 

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

David Choy

David Choy Managing Associate

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