#time-bar

Neon Shipping Inc v (1) Foreign Economic 7 Technical Corporation Co. of China (2) China Chang Jlang National Shipping Group Corporation Jinlin Shipyard [2016] EWHC 399 (Comm)

“The prospect of some heads of [warranty] claim having a 12 month time limit, and other claims having no time limit at all, and uncertainty as to which category specific claims fell into would be a goldmine for lawyers - and far removed from what the parties stated in their shipbuilding contract and what would have reflected their reasonable and objective intentions. Per Messrs Mark Hamsher, Christopher Moss and Lindsay Gordon (Arbitrators).

Facts:

Shipbuilding contract for the design, build and supply of a 57,000 dwt bulk carrier governed by English law and containing an arbitration clause.  

Clause 13 of the contractual Building Specification provided under “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”. Clause 33 “Cargo Handling System” specified the capacity of the deck crane to be as follows: “(for reference only) 30 [tonnes] .. The cranes to be prepared and fitted with all required fittings for working with motor grabs [and] ..to be fully rated for continuous operation”.

The vessel was delivered on 12 November 2009. Article XI of the Contract provided for a Guarantee Period of 12 months, which expired on 12 November 2010.  

Three (3) years after delivery of the vessel, Buyer claimed that that the cargo cranes were faulty. No notice of the defects about the cranes was given within the Guarantee Period of 12 months. The Defendants denied liability in respect of the alleged defects, and further relied upon Article XI of the Contract which provide that:

Article XI

1.    Guarantee

Seller guarantees that Vessel, and all parts thereof that [are] manufactured or supplied by Seller, its sub-contractors and/or vendors under this Contract, will be seaworthy and contractual in all respects, and will be free from all defects which are due to defective design, construction, calculation, material or workmanship (collectively “Guarantee Defects”), upon delivery and for a period of twelve (12) months from the Date and Time of Delivery (“Guarantee Period”).

2.    Notice of Defects

Buyer shall notify Seller by telex or facsimile promptly after discovery of any Guarantee defects for which claim is made.  Buyer’s notice shall be followed by a letter setting forth, insofar as is reasonably possible, the full particulars as to the nature of Guarantee Defects and the extent of the damage. Except as otherwise provided below, Seller shall not be under any obligation for a Guarantee Defect unless notice of such Defect was sent to Seller not later than thirty (30) calendar days after the end of the Guarantee Period.  Telex notice that a claim is forthcoming will be sufficient compliance with the notice requirements.

6.    Limitation of Guarantee and Liability

The guarantee provided in this Article is exclusive for the period after delivery of the Vessel, and Buyer hereby waives all other remedies, warranties, guarantees or liabilities, express or implied, arising by law or otherwise (including without limitation any obligation of Seller with respect to fitness, merchant ability, and consequential damages), whether or not occasioned by Seller’s negligence. …

At the Arbitration the Buyer sought permission to re-amend paragraph 4 of its Claim Submissions as follows: “The contract further contained the following implied terms by operation of law:-

4.3 That the Buyer having expressly or by implication made known to the Seller that the Vessel was to be purchased for a particular purpose, namely utilisation bulk carrier for normal worldwide service including: 4.3.1 the loading, carriage and discharge of heavy cargoes; 4.3.2 continuous use of the Vessel’s cranes (including with grabs); the Vessel would be reasonably fit for such purpose.”

This amendment was opposed, and it was agreed that the Arbitrators should hear and resolve two preliminary issues on the assumed basis that the amendment would be permitted.

First Question: On its true construction, did the Contract contain the implied term as to fitness for purpose alleged by the Claimant in paragraph 4.3 of the re-amended Claim Submissions?

Second Question: On the true construction of the Contract and of Article XI in particular, did the 12 month time-bar provision excluding all of the Respondents’ liability for claims notified later than 30 calendar days after the end of the Guarantee Period apply: (a) to any and all claims whatsoever made after delivery of the Vessel (as the Respondents contend); or (b) only to claims for defective design, construction, calculation, material and workmanship but not to.. claims that the Vessel was not seaworthy or contractual in all respects. .. (as the Claimant contends)?

The Arbitrators answered “No” to the First Question. With regard to the Second Question they concluded that the 12 month time-bar provision excluded all claims not so notified, including the Buyer’s amended claim.  In doing so they also expressed inter alia that “The prospect of some heads of [warranty] claim having a 12 month time limit, and other claims having no time limit at all, and uncertainty as to which category specific claims fell into would be a goldmine for lawyers - and far removed from what the parties stated in their shipbuilding contract and what would have reflected their reasonable and objective intentions”

The Buyer appealed and submitted that Article XI.1 is bifurcated into two separate guarantees or Part 1 and Part 2 claims as follows:.

Part 1 claims

That the vessel was not “seaworthy and contractual” within Article XI.1, and a failing or inadequacy in the cranes supplied by third party suppliers, leading to inadequate performance and unfitness for purpose. Buyer argued that the comma after “in all respects” signifies the end of reference to Part 1 claims. They argued that “and” after the comma is disjunctive.

Part 2 claims

That the vessel was not “free from all defects which are due to defective design, construction, calculation, material or workmanship”, which requires notification to be made within the Notice period of 30 days after the end of the Guarantee Period.

As their claim was in respect of Part 1 claims, Buyer argued that the notice provisions in Article XI.2 (including the provisions in XI.4 and 5) was not applicable. Also, the Assistance provision in XI.10 relating to the guaranteed period is irrelevant.

However, the Court considers the bifurcation of Article XI.1 as wholly artificial as there was no real dichotomy between two different claims.  Further, there was no commercial or other justification for the two different schemes. They added that “the argument is constructed as a tabula in naufragio for a Buyer who has not given notice”.

During the course of the judgment, the Court also considered the question “Whether s.14(3) of the Sale of Goods Act 1979* (“SOGA”) is inapplicable to a shipbuilding project in which the vessel is built for use in standardised trades, or whether s.14(3) applies in any case where goods have been ordered for their normal purpose?”

They held that the answer was the latter as there is no need, for the purpose of s.14 (3) for there to be a particular purpose identified. Normal use in accordance with the contractual specification will suffice.

Also, the Court did not accept that a passage from an industry shipbuilding law book (referred to during the Arbitration) correctly reflect the law.

The Passage:

“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.”

According to Mr. Justice Burton, perhaps what the author “meant was that reliance upon the implied term was unlikely to be necessary in a shipbuilding contract which makes express provisions for a specification which is agreed by both parties to be applicable to the purpose for which the vessel was required.”  

Held:

The Court upheld the Arbitrators’ decision, added that the 12-month time-bar provision in Article XI of the Contract applies to any and all claims whatsoever and dismissed the Buyer’s appeal.

Statute referred to:

*Section14 (3) of the Sale of Goods Act 1979 (“SOGA”): “Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known.. any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the Buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller.”

Cases referred to:

Britain Steamship Co Ltd v Lithgows Ltd [1975] S.C. 110 (newbuilding)

Preist v Last [1903] 2 KB 148 (the hot water bottle case)

The Mercini Lady [2011] 1 Lloyd’s Law Rep 442 (sale of gasoil on standard FOB terms),

Air Transworld Limited v Bombardier Inc [2012] 1 Lloyd’s Law Rep 349 (Aircraft)

The Union Power [2013] 1 Lloyd’s LR 509 (paragraph 24) (Ship sale on the Norwegian Sale Form)

Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441

Comment:

Even though Shipyard prevail, it may only be a pyrrhic victory for them and their Suppliers considering possible lost business opportunity for repeat orders, referrals and track record. They and Crane Suppliers should consider analysing why the cranes failed after only 3 years as the lessons learnt will assist them achieve a better quality product (assuming that the faulty cranes in questions were properly maintained and not misused). The consequence for Buyer is that shipyards has been put on notice that they are potential litigious partners.

While the standard warranty period is usually 12 months from delivery, it is commercially possible to negotiate or purchase extended warranty for 24 months.  For contract clarity on defects warranty provision and /or to avoid an evergreen warranty, parties could consider something along the language in Clauses 35 and 37 (a) to (d) of Bimco, NEWBUILDCON.

Finally, as shipbuilding contracts are complex and scope for disputes could be market driven (especially during the lull time), it must be managed and negotiated by experienced professionals.