LONDON SHIPPING LAW CENTRE SEMINAR SALEFORM ISSUES. THE UNION POWER DECISION Simon Curtis, Senior Partner Curtis Davis Garrard LLP

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1 LONDON SHIPPING LAW CENTRE SEMINAR SALEFORM ISSUES CLARKSONS PLC, Wednesday 8 May 2013 THE UNION POWER DECISION Simon Curtis, Senior Partner Curtis Davis Garrard LLP Ladies and Gentlemen, I am delighted to have been invited by The London Shipping Law Centre and by our old friends, Clarksons, to talk to you tonight about the recent decision of the Commercial Court in what is now widely referred to the Union Power case 1. Although a large part of our work is in the shipbuilding sector, my firm, Curtis Davis Garrard LLP, is actively involved in the secondhand ship sale and purchase market and we are very familiar with the standard forms, including the 1993 Norwegian Saleform, on the basis of which this global marketplace operates. As you will see from the next few minutes, we also feel very strongly that the Union Power decision is both wrong and, more importantly, that the general approach which the court has taken in this case to the interpretation to a widely used contract form is unfortunate and damaging to London s reputation as the leading maritime legal centre. So, although this talk was supposed to be entitled How relevant is the Union Power decision and how should it be addressed in the contract?, I am afraid that I taken the liberty of considering some broader questions than these, including that of the general approach taken by the Commercial Court to the issues raised by this case. Before looking at the decision, however, I would like to put to you two propositions one general and one maritime-specific - which would seem to me as a lawyer to be clear and self-evident (although you are, of course, entirely free to disagree...!). First, I would suggest that where, as in the case of the Norwegian Saleform 1993, a widely respected international industry association, such as BIMCO, publishes a detailed contractual form based upon substantial research amongst its members, any court, whether English or otherwise, should be extremely reluctant to tinker with its express terms. Such forms represent a distillation of knowledge and practice from within the industry in question and, in circumstances in which the parties obligations are extensively set out therein, I think they should in principle be viewed as comprehensive. 1 Dalmare Spa v- Union Maritime Limited and Valor Shipping Limited [2012] EWHC 3537 (Comm) 1

2 Particularly where the standard form has been in widespread use for a significant period of time, there should in other words be a very strong presumption against the implication of terms which supplement its express terms. The purpose for which international trade organisations publish such forms is to facilitate global commerce by eliminating the need for commercial parties, who will often be laymen of different nationalities, quickly and easily to agree the terms of a contract between them - this purpose is not served if such forms cannot safely be used without the involvement of legal advisors because their express terms may readily be substituted or supplemented by implied terms derived from the national law to which the parties agreement is subject. Of course, terms may need to be implied where the standard form is unclear or ambiguous, but not in my submission in any other circumstance; and certainly not to alter the commercial balance between the parties established by its express terms. The second, maritime-specific, proposition I would put to you is that the Norwegian Saleforms 1987 and 1993, and the earlier forms from which these were developed, have represented the standard contractual terms on which secondhand vessels have for decades been bought and sold by the international shipping community. As you are aware, sales on these forms are expressly based upon on the buyer s pre- or post contractual inspection of the vessel and her Class records, reinforced with promises by the seller to deliver her in the same condition as inspected, with her agreed Classification notation maintained and free of average (i.e. insurable) damage affecting such notation there is also an option for the parties to agree to drydocking of the vessel, in which case the NSF specifically provides for the rectification of defects which such drydocking reveals. However, at least as regards its express terms, there is no suggestion in the NSF that the seller agrees to assume any further responsibility to the buyer in relation to the quality or condition of the vessel at the time of her delivery. Now there may be those in this room who disagree, but I would submit that for decades the Condition on Delivery wording of the NSF (in particular the words as she is at the time of inspection in the 1987 Form and as she was at the time of inspection in the 1993 Form) has reflected the understanding of the international maritime community as to how ship sales actually work in other words, it is understood that the buyer conducts a detailed inspection of the vessel and her class records, accepts her on such basis and, provided that she maintains at the time of delivery the agreed Class notation and is in the same physical condition as when inspected, he is then obliged to take delivery without further recourse to the seller, at least as regards quality issues. Speaking personally, I have worked as a maritime lawyer in London for more than thirty years and I cannot remember handling in this period a single S & P dispute in which my clients either seriously asserted (or were required to defend) a damages claim related to the vessel s condition other than a claim (i) for a misrepresentation by the seller inducing the MOA; or (ii) for breach of the requirements regarding compliance with Class and freedom from average 2

3 damage affecting Class. And I would take a small bet that the overwhelming majority of barristers, solicitors and claims handlers here tonight are, if you will excuse the pun, in the same boat. However, as you know, in Union Power, decided in December 2012, the High Court has challenged, indeed turned on its head, at least the second of these propositions. The case concerned the sale on the Norwegian Saleform 1993 of a secondhand product tanker. The vessel was fifteen years old and both seller and buyer knew that she would shortly need to undertake her third special survey, a circumstance which may well have generated her relatively modest sale price of US $7 million. This was therefore a lady in her late middle age, who had almost certainly worked hard all her life, and could be expected at this stage to be exhibiting a number of aches and pains. In accordance with the usual terms of the NSF 1993, Clause 4 of the MOA provided that:- The 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 Clause 11 of the MOA provided, again in the standard terms, that the Vessel shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted. Prior to concluding the MOA, the buyers had inspected the vessel and her Class records, which included a specific reference to damage having previously been sustained by the main engine no 1 crankpin. Following conclusion of the MOA and her delivery, the vessel was drydocked and the special survey was undertaken; the no 2 and no 4 crankpin bearings were opened up and inspected, but not the no 1 bearings, the new Classification Society (ABS) having decided that this was unnecessary. Thereafter, during the course of her first voyage under her new ownership, the main engine broke down and it was discovered that the no 1 crankpin bearing had become deformed. Factual and expert evidence before the arbitration tribunal led the arbitrators to conclude that the deformation of the bearing was the cause of the breakdown and that, at the time of delivery of the vessel, the bearing was likely to fail within a short time period under normal operating conditions. In the circumstances the buyers argued inter alia that the sellers were in breach of an implied term of the MOA that the vessel should be of "satisfactory quality". As you are aware, unless (essentially) the parties have otherwise agreed or 3

4 there is an custom or trade usage within the relevant market to the contrary, such a term is implied by s. 14(2) of the Sale of Goods Act 1979 into English law contracts for the sale of goods, which (on long established authority) include ships, rigs and other maritime equipment generally. Although I am told that evidence of custom and practice was submitted to the arbitration tribunal, this was not referred to in the award, in which the arbitrators concluded that the wording of Clause 11 of the NSF 1993 was insufficient to evidence an agreement to exclude the operation of the 1979 Act. They held that the sellers were in breach of the implied term as to "satisfactory quality" and that the buyers' claims in damages succeeded in full. Against this background, the High Court (Hamblen J.), decided that the arbitrators decision in this respect was both open to serious doubt and raised an issue of general public importance he accordingly granted leave to appeal. The appeal itself was thereafter heard by Flaux J., who held as follows:- that the words "as she was at the time of inspection" in Clause 11 of the NSF 1993 merely record an obligation upon the Seller to deliver the vessel in the same condition as she was at the time of the buyer s inspection i.e. in this case before the MOA was signed in the Judge s view, the words indicate nothing regarding the vessel s intrinsic condition or quality at the time either of inspection or on delivery; that because the wording of Clause 11 has on this interpretation no bearing on the issue of the vessel s intrinsic condition or quality, it is incapable of constituting an agreement between the parties that the implied term of satisfactory quality should be excluded from the sale terms; that secondhand vessels sold pursuant to MOAs on NSF terms are not, in the absence of cogent evidence of market custom to that effect, sold to a Class standard but also to the Sale of Goods Act standard of satisfactory quality. He specifically found that the obvious limitations of Class indicate a need for the buyer to be protected by the implication of additional terms; and although this was not relevant to his decision, and his comments are therefore obiter, that a provision in a ship sale contract providing for sale on an as is basis (as opposed to as was at the time of inspection ) merely excludes the buyer s right to reject the vessel, whilst preserving his right to claim damages for breach of the statutory implied terms. In reaching his decision, the Judge undertook a detailed analysis of a range of English and Canadian law authorities since 1853 (including one relating to the supply 4

5 of military equipment to the East India Company!) and undertook a semantic analysis of a number of similar terms, including as is, as is, where is, as she was, taken with all faults and as it stands. Although he appeared to accept that the words as she is when inspected (in the 1987 Form) and as she was when inspected (in the 1993 Form) are co-terminous, he concluded that both of these terms have a different connotation from the expression as is or as is, where is, although even the latter expressions are in his view inadequate to exclude the statutory implied terms. (It should incidentally be noted in this context that Flaux J. specifically declined to follow The Morning Watch decision in 1990,in which Philips J. (as he then was) had held that:- the term as is has a clearly recognised meaning in a contract of sale. The purchaser takes the object sold as he finds it without any warranty as to quality or condition. Although conceding that The Morning Watch was of obvious assistance to the sellers of the Union Power, Flaux J. felt in my view very questionably - entitled to disregard it because Philips J. had not considered the specific question of whether the term as is constituted an effective exclusion of the statutory implied terms as envisaged by section 55 of the Act). It should also be observed that, because there was no reference in the award to market custom and practice, Flaux J stated at several places in his judgment that he no material upon which to make any finding that the statutory implied term of satisfactory quality was excluded on this basis. Flaux J. therefore upheld the arbitrators award, holding that the sellers were in liable in damages to the buyers for the costs of repair of the main engine; it seems in his view to have been immaterial that previous damage to the no. 1 crankpin bearings had been highlighted in the vessel s Class records, which (as I have indicated) the buyers had inspected before deciding to enter into the MOA. The Judge then pretty much skated over the huge practical problems of determining what is meant by the requirement of satisfactory quality in the context of a fifteen year old trading asset, stating merely that the exercise may be a difficult one, as the tribunal in this case recognised, but by no means impossible. For what they are worth - and there are many of you here tonight who know more about this subject than me - my views in relation to the Union Power decision are as follows:- First, both as a matter of language and commercial commonsense, it was wrong of the Judge to hold that the requirement of delivery of the Vessel in the condition as was when inspected did not clearly indicate that the sale was without further hidden warranties; this led to a result which was contrary to a market understanding on which basis of 5

6 which hundreds, if not thousands, of similar contracts have been concluded over many decades; Secondly, the approach adopted by Flaux J of undertaking a detailed semantic analysis of the language of Clause 11 to generate a result which is in my view both uncommercial and contrary to the understanding of the market represents a judicial technique which I at least - had thought was in abeyance following the decision of The Supreme Court in The Rainy Sky; it is disappointing, and in my view damaging to London's reputation in international legal marketplace, that the pragmatic no nonsense approach to taken by Lord Clarke in The Rainy Sky was not replicated by the Court in Union Power; Thirdly, where international contract forms such as the NSF 1987 and 1993, promulgated by a widely respected trade association and almost universally adopted by a global industry, define a detailed contractual regime, the English, or any other national, courts and arbitration tribunals, should be very reluctant to supplement its terms by implying provisions from their national laws. In other words, and as I have said, there should exist in law a very strong presumption that such standard forms are intended to be comprehensive and not to be supplemented by other terms whose existence may be entirely unknown to the shipowners and other laymen for whom the form was originally drawn up and published. The judge's view (expressed at paragraph 25 of his judgment) that if commercial parties do not want to be subject to the implied terms as to satisfactory quality and fitness for purpose they can contract out of those implied terms is in my view simply misguided when applied to a global industry such as shipping where international businessmen such as shipowners have chosen to use a comprehensive standard form of contract, and have agreed upon English law to govern it, I think our courts should as a matter of general principle be very reluctant to assume that they have also agreed to overlay that contract with an additional statutory regime which may be entirely unknown to them; this particularly so given that an accurate analysis of their respective rights and obligations will require a detailed knowledge of, and the ability to interpret correctly, our national caselaw. Now it is of course important to note that the Clause 18 of NSF 2012 expressly excludes any terms implied into this Agreement...to the extent that such exclusion can legally be made. As we have heard, there is an ongoing debate as to whether this language is sufficient to exclude the statutory implied condition of satisfactory quality although there is no doubt that the 2012 Form can itself amended to make it unquestionably effective to achieve such objective. To answer the specific question 6

7 how should Union Power be addressed in the contract?, I would suggest by wearing a very large belt and braces to match. But my point is that many buyers and sellers will, no doubt, wish to continue to use the 1993 form with which they are familiar and, whether they come from Moscow or Manila, it is not sensible to require them expressly to amend a standard form of this type to exclude English statutory implied terms which are inconsistent with the overall philosophy of a sale by inspection and run contrary to long-standing market understanding. So, in summary, I would suggest to you that the Union Power decision flies in the face of commonsense. And I would also say to you that I am not the only English lawyer who is unhappy about this far be from me to blow another law firm s trumpet, but I think we can all agree that Clifford Chance is a leading global practice and one which, lacking a significant maritime presence, has no axe to grind at all on this issue. In its Contentious Commentary published in January of this year, Clifford Chance expressed in admirably clear language its own view on Union Power:- The detailed issue in [Union Power] was whether a contract for the sale of a ship excluded the term of satisfactory quality implied by section 14 of the Sale of Goods Act... Flaux J wrapped himself in ancient case law on construction in order to conclude that the clause in question... was insufficient to exclude the term implied by section You don't have to be an arch anti-technicalist, like Lord Hoffmann, to regard [Union Power]... as rather curious. The words of the contract were not read as the reasonable person would do so but with a detailed technical knowledge of historic and ambiguous case law leading to a result that was quite probably the reverse of that which the reasonable person might expect. Hear, hear I say! It seems likely that this issue will come before the High Court again, probably once more on appeal from a London arbitration award. It is in my view to be hoped that the Union Power decision will not be followed in such circumstances or that, if the court feels bound by that decision, the trial judge will, at the very least, permit this issue to be considered by the Court of Appeal. If so, it will in my view be in the interests of commercial commonsense and London's reputation in the international legal marketplace should the appeal judges choose to adopt an entirely different approach from that followed by Flaux J. Thank you very much. 7