Implied Terms in Shipbuilding Agreement

Implied Terms

David Seah LLB London

Introduction: Contract terms in shipbuilding contract governed by English law (and perhaps in certain jurisdictions that have closely related rules) can simply be categorized into express or implied terms (common law and statute). Where the parties have not expressly excluded implied terms in the contract, terms will be implied (the Sale of Goods Act 1979 [SOG]) [1] into the contract that the goods supplied (in this case the vessel), should; where sold by description, correspond with that description (s.13); be of satisfactory quality (s.14 (2)); and where the buyer makes known the purpose for which the goods are required, be reasonably fit for that purpose (s.14 (3)).

Correspond with Description: Previously, where goods do not correspond with description, this has been strictly construed against the Seller. In Arcos Ltd v E.A Ronaasen & Sons [2], contract description was for wooden staves ½”thick. However1% of the goods supplied was more than 5/8^th, and the rest was between ½” and 5/8” thick. It was held to be a breach of implied condition as to description even though the goods were still merchantable as staves. However there has been a shift away from this strict approach (Ashington Piggeries Ltd v Christopher Hill Ltd) [3].

In *Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1WLR 989 HL [4], it was held that the hull number of the vessel had no special significance for the parties so as to raise it to a matter of fundamental obligation. The words ‘hull number 354’ was not intended to be part of the description of the vessel. The vessel contracted for was the vessel tendered. The purpose of the hull number in the context of this contract was without a significant meaning, other than to identify the vessel which has not been constructed nor did it had a name at the time of fixing the charter. The House of Lords held that it was only where a particular item in a description constituted a substantial ingredient of the identity of the thing sold that it was to be treated as a condition. * [During this period when the vessel was rejected, the oil market has fallen sharply].

Satisfactory Quality: The core requirement as to quality is that the goods supplied under the contract should be of 'satisfactory quality'. Goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of the description of the goods, the price (if relevant) and all the other relevant circumstances (s14(2)). The standard is thus one of reasonable expectations. This is amplified by section 14(2B) which lists a number of factors to be taken into account as ‘aspects of quality’ in an appropriate case. They include: (a) fitness for all the purposes for which goods of that kind are commonly supplied; (b) appearance and finish; (c) freedom from minor defects; (d) safety; and (e) durability.

The Court of Appeal in Clegg and another v Olle Andersson [2003] [5], has held that the test was whether a reasonable person would think the goods satisfactory, taking into account their description, price and all other relevant circumstances. In this case a yacht supplied with overweight keel was rejected by Buyer. It also decided that on the facts, a reasonable person would consider that the yacht was not of satisfactory quality because of the overweight keel, the adverse effect it had on safety and the need for more than minimal remedial work. The buyers had therefore established a breach of condition under s 14(2) of the 1979 Act. It has been said in Bramhill v. Edwards [6] that "The reasonable person must be one who is in the position of the buyer, with his knowledge; for it would not be appropriate for the test to be that of a reasonable third party observer not acquainted with the background of the transaction."

Fitness for Purpose: This requires that where goods are sold in the course of a business and the buyer expressly or impliedly makes known to the seller any particular purpose for which the goods are bought, the goods must be reasonably fit for that purpose, whether or not that is a purpose for which the goods are commonly supplied, except the circumstances show that the buyer does not rely on the seller, or that it is unreasonable for him to do so (s.14 (3)).

In the case of Cammel Laird & Co v Manganese Bronze & Brass Co [7], shipbuilder had supplied the specifications that stated that the leading edges of the propellers were not accurately shown in the drawings and that it was for seller to use their own judgment as to how to taper the propeller fines lines. The ship failed a performance test because the propellers created too much noise. The court held that it was sufficient if reliance was placed on the skill and judgment of the sellers to some substantial extent. With regard to the part of the work that was left to the skill and judgment of the sellers, there was a breach of implied condition that the propeller should be reasonable fit for the purpose in which it was required.

However if the defendants were not aware nor were in a position to exercise skill and judgment, the position will be different. In Slater v Finning [8], new camshaft were fitted to the 'Aquarius II', a fishing vessel. The first new camshaft failed in use, as did two replacements. The owner eventually sold the vessel and the engine was replaced. The old engine (with no replacement to the camshaft) was fitted into any vessel, and it worked satisfactorily for long periods. It was held by the House of Lords that the 'Aquarius II' had an unknown and unusual characteristic, a tendency to create excessive torsional resonance noise. The camshaft was required to be fitted in the engine of a vessel with particular abnormality or idiosyncrasy. As the defendants were not aware nor were in a position to exercise skill and judgment they were not liable.

Lastly under Section 15A, SOG if the seller’s breach of a term implied by ss13, 14 or 15 is so slight that it would be unreasonable for the buyer to reject the goods, then the breach is to be treated as a breach of warranty. The test is an objective one, from the point of view of a reasonable Buyer. The burden of proof is on the Seller to show that the breach is so slight that it would be unreasonable for the Seller to reject the goods. Under the Act, a breach of condition will entitle the party not at fault to treat the contract as repudiated whereas a breach of warranty only give rise to a right to damages, but not a right to reject the goods and treat the contract as repudiated.

Footnotes

[1] Sale of Goods Act 1979 (SOG), as amended by the Sale and Supply of Goods Act 1994 (SSGA)

[2] [1933] AC 470 HL

[3] 1972 1 WLR 989 HL

[4] Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1WLR 989 HL , See also Sanko SS Co Ltd v Kano TradingLtd [1978] Lloyd’s Rep 156

[5] Clegg and another v Olle Andersson (trading as Nordic Marine) [2003] 1 All ER (Comm) 721

[6]Bramhill v. Edwards [2004] EWCA CIV 403

[7] Cammel Laird & Co v Manganese Bronze & Brass Co [1934] AC 404

[8] Slater v Finning [1996] 2 Lloyd’s Rep 353

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