New horizons – fitness for purpose in shipbuilding contracts

A recent judgment from the Commercial Court (the “Court”) given in Neon Shipping Inc. (the “Buyer”) v Foreign Economic 7 Technical Corporation Co. of China, China Chang Jiang National Shipping Group Corporation Jinling Shipyard (the “Sellers”) highlights the need for shipbuilders, charterers and others to give careful consideration to the Sale of Goods Act 1979 (“SoGA”).

The Matter in Hand

The case involved a shipbuilding contract for the design, build and supply of a 57,000 dwt bulk carrier. After the completion of the vessel, sea trials were carried out and the Buyer accepted delivery on 12 November 2009. The contract provided for a guarantee period of 12 months, which expired on 12 November 2010.

The Buyer brought an arbitration claim, three years after delivery, regarding excessive wear of slew bearings. The Seller denied liability in respect of the alleged defects and relied on the guarantee which had expired. The arbitrators found that the 12 month time-bar in the contract applied and excluded all claims not notified prior to expiry of the 12 month guarantee period, including the Buyer’s claim.

The Buyer appealed to the Court submitting that the arbitrator incorrectly decided that the 12 month time-bar applied to all, not just some, claims. The Court dismissed the appeal but in its judgment the Court chose to consider whether section 14(3) of the SoGA is inapplicable to a shipbuilding project where the vessel is built for use in standardised trades or whether that section applies in any case where goods have been ordered for their normal purpose.

Section 14(3) of the SoGA provides that where a buyer, expressly or by implication, makes known to the seller any particular purpose for which goods are being bought, there is an implied term that the goods are reasonably fit for that purpose, whether or not that is a purpose for which the goods are commonly supplied.

Testing the Waters

Previous academic writing suggested that section 14(3) of the SoGA is intended to cover situations where goods are required for a specific (known) purpose and was therefore likely to be inapplicable in the majority of shipbuilding contracts. The Court disagreed and stated that there was no need for a particular purpose to be identified for the purpose of section 14(3) of the SoGA. Accordingly a purchaser can rely on “normal use” to receive the protection of that section, provided that normal use can be determined from reference to the contractual specification.

Considerations for Shipbuilders and others

The Court’s judgment is something shipbuilders should be aware of when negotiating and reviewing shipbuilding contracts. Questions to consider include:

• is the vessel that is being provided reasonably fit for normal purposes?
• can a claim be raised due to the vessel not being reasonably fit for normal purposes?
• have claims under section 14 of the SoGA been expressly excluded in the contract and is such an exclusion permitted in terms of the SoGA?
• is the contractual specification sufficient to imply a “normal use”?

Two final points to note are firstly that this judgment was given in England, however, as section 14 of the SoGA applies equally to both Scotland and England the Scottish courts may regard the ruling as strongly persuasive. Secondly, the Court’s decision on section 14(3) of the SoGA is not the central point of the judgment and therefore is more open to challenge.

If you would like further guidance on the points discussed in this article or if you have any other query on a shipping matter please contact Eleanor Lane, Iona Hunter or James McDonald.

Co-authored by David Ramage.