Dalmare v Union Maritime - The Union Power

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DMC/SandT/13/14

England

Dalmare SpA v Union Maritime Ltd & Anor

English High Court: Queen’s Bench Division: Commercial Court; Flaux J; [2012] EWHC 3537; 13 Dec 2012

SALE OF VESSEL "AS SHE WAS AT THE TIME OF INSPECTION": STATUTORY IMPLIED TERM AS TO QUALITY UNDER SALE OF GOODS ACT 1979: WHETHER SELLERS HAD EXCLUDED APPLICATION OF STATUTORY IMPLIED TERM; WHETHER SELLERS IN BREACH OF STATUTORY IMPLIED TERM

Mr Timothy Hill QC, instructed by Ince & Co LLP, for Dalmare SpA

Mr Simon Rainey QC, instructed by Clyde & Co LLP, for Union Maritime Ltd and Valor Shipping Ltd

Summary

The High Court dismissed the appellant sellers’ appeal against the Final Award of an arbitral Tribunal holding that a clause in the Memorandum of Agreement for the sale of a vessel stating her to be sold “as she was at the time of inspection” did not exclude the implied term as to satisfactory quality contained in s.14 of the Sale of Goods Act 1979 and that, on the facts of the case, the sellers were in breach of that implied term.

Case Note contributed by Ervin Tan, B.A. (First Class) Oxon., based in Singapore

Background

Appellant Sellers of a second-hand vessel (a 1994-built motor tanker) sold the vessel to the Respondent Buyers for US$7 million. The sale was made by a Memorandum of Agreement (“the MOA”) on the Norwegian Saleform 1993 (“Saleform 93”), which contained at clause 11, entitled “Condition on delivery”, a stipulation that “[t]he Vessel shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted”. [fn.1]

This was to be read in the light of clause 4 of the MOA, entitled “Inspections”, which stated in part that “Buyers have inspected and accepted the Vessel and the Vessel's classification records. The Buyers have also inspected the Vessel in Piraeus, Greece on August 18, 2009 and have accepted the Vessel following this inspection and the sale is outright and definite subject only to the terms and conditions of this Agreement”.

Buyers inspected the vessel at Piraeus in August 2009 and, through their agents, inspected the vessel’s class records, but failed to notice a reference therein to an incident in October 2002 which referred to damage to the no.1 crankpin of the main engine.

Just over one month after delivery, the main engine broke down, due to a significantly under-sized and out-of-shape no.1 crankpin in the engine. The Tribunal held that an implied term as to satisfactory quality under s.14 Sale of Goods Act 1979 (“SGA”) was to be implied in the sale contract, and rejected the Sellers’ argument that the terms of clause 11 excluded the SGA implied terms. The Tribunal found that the ovality of the crankpin had developed to such a state at the time of delivery that the crankpin bearing was likely to fail within a short period of normal operation of the main engine and, therefore, that the Sellers were in breach of s.14 SGA.

S.14 of the SGA reads in material part: “Where the seller sells the goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.”

Sellers obtained leave to challenge the Tribunal’s decision in the High Court.

Judgment

The Sellers challenged the conclusion of the Tribunal on the ground that it failed to recognise that the words “as she was” in clause 11 of the MOA had the same meaning as “as is, where is” in other sale contracts, and that such clauses were inconsistent with the SGA implied terms and therefore excluded by the statutory test in s.55(2) SGA. This provides that “An express term does not negative a term implied by this Act unless inconsistent with it”.

The question of law before the Court was whether a term as to satisfactory quality was implied into the contract by s.14 of the SGA. This in turn raised two further issues: first, whether cl.11 of the MOA, properly construed, was equivalent to the words “as is”, or “as is, where is”, and second, whether the latter phrases were apt to exclude s.14(2) pursuant to s.55(2) SGA.

As a preliminary point, Flaux J noted that the correct starting point was that the s.14 implied terms would apply to this English law contract of sale unless the parties contracted out of s. 14. Further, since the Sellers did not contend that the statutory implied terms were excluded by the course of dealing between the parties, the Tribunal was correct in adopting s.55(2) SGA as its starting point.

On the first issue, Flaux J approached the issue by considering a long line of authorities on exclusion clauses including Photo Production [fn.2] , the Hardwick Game Farm case [fn.3] and The Mercini Lady [fn.4], and concluded that clear language must be used in the contract to exclude statutory implied terms which have the status of conditions of the contract. This was a strict rule that could not be departed from. Flaux J also considered the recent case of Air Transworld Ltd v Bombardier Inc [fn.5], where Cooke J held that the detailed exclusion clause contained in the parties’ contract was effective to exclude the application of the statutory implied terms of the SGA.

Flaux J agreed with the Tribunal’s reasoning that the words “as she was” used in the first sentence of cl.11 of the MOA were a necessary part of a sentence that was recording the obligation to deliver the vessel in the same condition as she was when inspected. He went on to say:

“In other words, they are part of a temporal obligation which arises because, usually, there will be a period of time of weeks or even months between inspection and delivery. However, those words tell one nothing about what the sellers’ obligation are, either on inspection or delivery, as regards the quality of the vessel. Hence they do not and cannot exclude the implied term as to satisfactory quality under s.14(2) SGA.”

The words “as she was” in the present case were incapable, the judge said, of bearing the same meaning as the free-standing words “as is, where is” in a sale contract, assuming – for the purposes of argument – that those words do exclude the statutory implied terms. The judge continued: “Even if the [sellers] were right that a possible meaning of the words “as she was” was to exclude the implied terms, it remains the case that the [sellers] cannot establish that that was the only meaning the words were intended to have, since plainly the context indicates the temporal purpose of the words, to make it clear that the vessel is to be delivered in the same condition as when inspected. Given the strict approach to construction of terms alleged to exclude the implied terms consistently adopted by the courts. .. the fact that even on the sellers’ best case the words must have more than one meaning is fatal to the sellers’ case that these words exclude the statutory implied terms. Furthermore, given that an obvious sensible meaning of the words is as part of the temporal obligation to which I have referred, section 55(2) defeats the [sellers’] argument, since it cannot be said that the first sentence of clause 11 is inconsistent with the implied term in secion 14(2).”

On the second issue, - whether the words “as is, where is” are sufficient to exclude the statutory implied terms of satisfactory quality - Flaux J held obiter that the words do not amount to an express provision inconsistent with the statutory implied terms so as to negative them pursuant to s.55(2) SGA. Flaux J found that the lack of evidence before the Court as to the genesis of the phrase “as is”, and the lack of consistent authority – both in case law and in the textbooks – as to its meaning, meant that the expression “as is” was not a term of art. Further, to accept this short phrase as encompassing a meaning that could negative the statutory implied terms ran counter to the strict rule found in a long line of case law that clear language must be used in the contract to exclude statutory implied terms.

On the other hand, the judge was attracted to an interpretation of those words which would exclude the buyers’ right to reject the vessel but not preclude them from claiming damages for breach of the implied term as to satisfactory quality - see the judgment of Davies L.J. in Christopher Hill Limited v Ashington Piggeries Limited [fn.6]. But that was not the case here.

As a result, the Sellers’ appeal failed on both the first and second questions and, on the facts of this case, the term as to satisfactory quality was to be implied into the contract by s.14 of the SGA.

Footnotes 1 Clause 11 continued:

"However, the Vessel shall be delivered with her class maintained extended to 30 September 2009 without condition/recommendation, free of average damage affecting the Vessel’s class..."

2.Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

3.Hardwick Game Farm v Suffolk Agricultural and Poultry Producers Association Ltd [1969] 2 AC 31

4.Bominflot v Petroplus Marketing (The “Mercini Lady”) [2010] EWCA Civ 1145

5.[2012] EWHC 243 (Comm)

6.[1969] 2 Lloyd’s Rep. 425.