Summary of Development in Respect of a Sale and Purchase of a Second Hand Vessel Under the 1993 Norwegian Sale Form

Recently the High Court in England and Wales took the opportunity to rule that the condition of a second hand vessel, sold pursuant to the terms of the 1993 Norwegian Sale Form (NSF 1993), was as a matter of English law subject to the satisfactory quality regime stipulated in Section 14(2) of the Sale of Goods Act 1979 (SOGA) as amended. Section 14 of the SOGA states that where the seller sells goods in the course of business there is an implied term that the goods supplied under the contract are of satisfactory quality. Section 14 (2B) of SOGA sets out how satisfactory quality is gauged. Section 55 of SOGA states the circumstances upon which the provisions of the SOGA can be excluded from any contract.

In the Union Power case the High Court, for the first time, was invited to determine whether a term as to satisfactory quality was implied into the NSF 1993 through Section 14 of the SOGA. The court ruled that Section 14 of the SOGA was implied and upheld the decision of the tribunal. The reasons are set out below but first the facts of the case.

Brief Facts

The Union Power (Vessel) was a motor tanker. The parties concluded the sale and purchase of the Vessel on the terms of the NSF 1993. The sale price was US$7 million. The Vessel was classed by RINA.

Pursuant to Clause 4 the Buyers were deemed to have inspected and accepted the Vessel and the Vessel’s classification records. The physical inspection of the Vessel took place on 18 August 2009. The sale was on outright and definite basis subject to the terms and conditions of the NSF 1993. Pursuant to Clause 11 the Vessel was to be delivered and taken over as she was at the time of inspection, fair wear and tear excepted, and to be delivered with her Class maintained and extended to 30 September 2009 without condition/recommendation.

The Vessel’s Class records were inspected and the surveyors failed to pick up a reference to an annotation in the Class records identifying damage to crank pin number 1 in the main engine that occurred back in October 2002. The Vessel was delivered in Turkey on October 2009. She was immediately dry docked and ABS (the class society that had taken over from RINA) carried out a special survey. During that survey the crankpin bearings of number 2 and 4 units were opened up and found in satisfactory condition. However, when the Vessel proceeded on a voyage to Malta to load cargo on 6 November 2009 the main engine broke down and on opening the crankcase it was discovered that number 1 crankpin had failed. The crankpin was significantly undersized and oval. It was not meant to be oval shaped and experts believed that the oval shape was the cause of engine failure.

The Buyers claimed that the unique oval shape amounted to an “average damage affecting Class” which was a breach of Clause 11; alternatively, a breach of the implied term in Section 14 of SOGA. The Sellers denied SOGA applied in these circumstances. The Sellers argued that the presence of Clause 11 made this a “as is where is” sale so there was no recourse to them for failure to deliver a vessel of unsatisfactory quality.

The Issues

The tribunal took the view that Clause 11 meant that the Buyers were entitled to delivery of the vessel in the same condition as when inspected and where the vessel was subject to a Class condition or recommendation as at the time of inspection the seller was contractually obliged, as per Clause 11, to repair and rectify the condition or recommendation prior to delivery. The position is the same for average damage affecting Class. On the other hand the term “as is where is“ meant the state and condition as it is in and where it is in on delivery. Given that Clause 11 required the Sellers to attend to a condition or recommendation it would not be accurate to describe the sale as an “as is where is” basis sale. Accordingly, the phrase “as she was” and sold on “outright and definite basis” did not equate to an “as is and where is” basis. The phrases had different implications. The court held that Clause 11 of the NSF 1993 was not equivalent to an “as is where is” sale.

“As she was” meant that once a Vessel was inspected by a prospective purchaser on a specific date the Vessel remained in the possession of the seller and the seller was free to trade the Vessel as it saw fit at their risk but the Vessel could only be taken over by the buyers at delivery “as she was at the time of inspection, fair wear and tear excepted” but with the Vessel Class maintained “…without condition or recommendation...and …free of average damage affecting Vessel’s Class”. The phrase “as she was” is a record of what the buyers are entitled to receive at the time of delivery which also meant attending to repairs to remove the condition or the recommendation in the Class certificates, if any. The step to repair and rectify is not what is expected from a “as is where is” sale.

Second, the court rejected the argument that there was an express agreement in the NSF 93 form to exclude the SOGA regime or that there was a course of dealing to that effect. In any event the latter was not pleaded so the court did not deal with the point.

Finally, the court noted that Class themselves were not prepared to give a guarantee on the quality of their standards. The inspection Class certificates contained an exclusion clause which stated that Class did not guarantee that proper technical standards are maintained at all times or that the ship in question was seaworthy. As Class was not prepared to deal with issues connected to the quality of the vessel the court felt duty bound to import an independent implied term as to satisfactory quality to ensure there was a proper sale. That said, parties are at liberty to expressly exclude the SOGA regime if they so wish.

Conclusions

Clause 18 of the 2012 Norwegian Sale Form excludes the SOGA regime. Alternatively, parties can also adopt the words in Clause 18 of the NSF 2012 version to exclude the SOGA regime if they use the 1993 NSF. Ultimately what matters is whether the parties have used express and clear words to exclude the SOGA regime if they wish to exclude the satisfactory quality regime. In situations where the buyer wishes to have the protection of SOGA it is recommended that they conclude the sale and purchase on the NSF1993 version in which case in the event there is a default post-delivery they will be able to sue the sellers in damages. Alternatively, the buyer can conclude the sale and purchase contract on the NSF2012 version but it is suggested that clause 18 is deleted if they wish to sue the seller for post-delivery damages. If acting in the capacity of the seller you may wish to conclude the sale on an unamended 2012 NSF where the seller cannot face claims for unsatisfactory quality under English law.

In instances where the contract has a reference to the phrase “as is where is” the prevailing view is that there is no recourse to satisfactory quality. For now, it is good law that the phrases “as she was” and “outright and definite” is not the same as “as is where is” so Clause 11 as it stands in the NSF 1993 will give the buyer a right to sue for damages for breach of SOGA.