Short & Sweet: Ship Sale and Purchase #7 – Condition of the Vessel

| Insight

It was great to have been chased by our contacts, asking for our follow up article in our Sale & Purchase series. In this 7th piece, we focus on the warranties regarding Vessel's condition.

Clause 11 of NSF 2012 (Condition of the Vessel) – so what if it’s breached?

The requirements and standards of Clause 11

Clause 11 of the Norwegian Saleform 2012 is one of the most critical as it regulates the condition of the Vessel on delivery from the Seller to the Buyer. The Vessel is required to be:

  • As she was at the time of inspection, fair wear and tear excepted
  • Free of cargo and free of stowaways
  • With her class maintained without conditions/recommendations
  • Free of average damage affecting class
  • With the Vessel’s class certificates and national certificates, as well as other certificates she had at the time of inspection, valid and unextended without conditions/recommendation of class or relevant authorities.

The above must be read in conjunction with Clause 5 (b) which states that the Seller shall tender Notice of Readiness when the Vessel is «… physically ready for delivery in accordance with this Agreement», and with Clause 14 which gives the Buyer a right to cancel the agreement if Notice of Readiness is not validly tendered before the Cancellation Date and/or claim damages (if the failure is due to the proven negligence of the Seller).

Documented Inspection

First of all, it is important for both the Buyer and the Seller to properly document the condition at the time of inspection. A proper inspection report with sufficient details and pictures should be prepared. Without sufficient evidence of the condition at the time of inspection, the Buyer will struggle proving its claim and the Seller defending any such claim. Although it is not too common, it would be an advantage if the report is changed, that it is signed by both parties’ representatives to make sure there is no disagreement as to the condition at time of inspection. Also from Sellers’ perspective it is important to document any deficiencies etc. at the time of inspection to avoid facing a near delivery claim from the Buyer that those were not existing at the time of inspection.

Class status

It is also important to note that, as per the standard wording, the Vessel shall be in class and without conditions/recommendations of class. This warranty does not refer to the condition at inspection, but to the class status. So, if there is a condition of class existing at the time of inspection, which the Buyer might be accepting, the Seller must make sure to amend the wording of the Clause 11 for such potential deficiency that is to be agreed at inspection. Otherwise, the Seller will have to rectify before delivery, in order to meet the warranted class status.

Often we face situations where there is a deficiency and Buyer argues that it would qualify as a condition of class, if class had inspected the Vessel. However, if a condition is not yet imposed as class has not inspected, the Buyer cannot claim a condition of class. Then, the Buyer must rely on the requirement that the Vessel should be «free of average damage affecting class». While the Singapore Ship Saleform of 2011 refers only to «damage affecting class», the Norwegian Saleform 2012 qualifies this to «average» damage. This can be described as damage that is covered by customary hull and machinery insurance, which will typically exclude damage due to ordinary wear and tear, corrosion etc.

Breach of clause 11 and Buyer’s rights and risks

We often experience claims and negotiations under this Clause 11. A Buyer will often claim that they can walk away if the deficiency is not corrected, and claim substantial compensation to stay in the transaction. In identifying such deficiencies, a Buyer will have to be sure that these are deficiencies against the clause 11 obligations of the Seller, and not frivolous allegations, as the Seller is otherwise entitled to expect performance by the Buyer in taking delivery, and while the Buyer has parted with its deposit. A Seller (assuming it accepts it is a deficiency) will typically claim that the Buyer can only claim the cost of repair. Singapore Sale Form clearly states that the Buyer can only reject delivery if the deficiency has substantial impact upon the Buyer’s ability to trade the Vessel, otherwise the remedy is damages.

Clause 11 of the Norwegian Saleform 2012 is silent on this point, and it often is perfunctorily left without amendments. Can a Buyer then deny taking delivery of the Vessel on account of Seller’s failure to comply with clause 11?

Not black and white

If English law is chosen to govern the contract, the answer to the question falls squarely into a grey zone –a grey zone of its own genre.

To attempt a simplification of how English law categorises contractual terms: there are two black-and-white types and a hybrid (grey) type. The two clear types are «Conditions» and «Warranties» and the third hybrid is known as Innominate, or Intermediate terms. This might be legalese, but the difference between them is critical when examined under a default scenario, so, stay tuned.

Breach of a Condition entitles the wronged party to both terminate the contract and claim damages, whereas breach of a Warranty entitles the wronged party only to damages, without the power to terminate. On the other hand, even if somewhat enigmatically, Intermediate Terms will be attributed powers of either a Condition or a Warranty, depending on the actual context and construction, and depending on the nature of the breach and its foreseeable consequences. (It has to be noted that the parties can agree to strengthen such terms as the NSF clause 11 to make them expressly Conditions, by changing the wording to that effect, so that breach of such term will allow the wronged party to terminate too – a change which might or might not be accepted by the Seller.)

So, a Buyer who finds (and has a strong incentive ($)to find) any items not in compliance with Seller’s obligations under clause 11, might still not be able to terminate and deny taking delivery, let alone claim back his deposit. As mentioned already, it of course depends on the nature and consequences of Seller’s breach under clause 11.

No statutory implied terms

We should also note that with the exclusion of implied terms effected under the waiver in clause 18 of the NSF 2012, such terms as the ones implied by the Sale of Goods Act 1979 are excluded from the contract, and the Buyer cannot rely on such. That means, amongst other, that the «fitness for purpose» is no longer a requirement to be met by the Vessel sold, unless it is stated in the contract (i.e. it is redundant if stated in earlier communications between the parties, by effect of the «non-reliance» part in clause 18 of the NSF 2012 which annuls such communications). That leaves clause 11 to impose such conditions on the status of the Vessel and its certificates as are expressly identified therein – and no further. And, as per the print form NSF 2012, the benchmark of the condition of the Vessel or the Vessel’s certificates, is as per «inspection».

Conclusion

Therefore, a Buyer who, on account of a breach by the Seller of clause 11, will attempt to regard the contract as repudiated (i.e. justifiably terminated), and attempt to deny taking delivery or accepting a Notice of Readiness from the Seller, will better seek legal advice as to the strength of its arguments. The Buyer’s lodged deposit could be at stake – at the minimum.