CONTENTS
By Georg Scheel 
We have recently been involved in a Norwegian arbitration where the main issue was the meaning of “within a reasonable time” in the context of a yard’s duty to rectify delivery defects.
We represented a shipowner who had ordered a newbuilding from a yard. The shipbuilding contract contained the following provisions:
Article X – Warranty of quality
1. Extent of Builder’s responsibility
Save as provided for below, and provided always that the deficiencies have been rectified within a reasonable time, the Builder shall have no responsibility for defects or the consequences thereof (including loss of profit and loss of time) discovered after the Delivery and Acceptance of the vessel.
2. Guarantee
The Builder undertakes to repair and rectify at his own cost and expense and free of charge to the Buyer, any defects………….. which are caused by faulty design, defective material and / or poor workmanship……….
3. Rectification of defects
If the Builder is liable for defects as aforesaid, its obligations shall be as follows:
a) The Builder shall rectify the defect or cause the defect to be rectified at its own costs. Provided the defect is remedied within a reasonable time, the Builder shall have no other liability for any damage or loss caused as a consequence of the defect, except for ….”
The newbuilding was a reefer vessel with a step-up gear connected to the main engine in order to produce electricity. The main engine normally provided an input of 100 rpm, with the gear’s output of 1800 rpm being used to drive a generator. Most of the electricity so produced was used to cool the cargo. Whenever the step-up gear was not operational the vessel had to use its auxiliary engines to produce electricity. Because the auxiliary engines ran on MDO, while the main engine ran on much cheaper IFO, the owners suffered a loss whenever they had to generate electricity using the auxiliary engines.
A defect was found in the step-up gear prior to delivery of the vessel, and the parties agreed that the owners should be compensated by a fixed sum per week until installation and testing of the repaired gear was satisfactorily completed. This process was estimated to take about 17 weeks.
The vessel was delivered in March 2007 and the repaired gear was installed in August 2007. However, the gear failed the subsequent tests and was taken off the vessel for further repairs.
In May 2008 the gear was repaired and installed, this time completing the tests satisfactorily. The yard paid the agreed compensation from delivery up until the time installation was completed.
In November 2008 the gear malfunctioned. The gear was disconnected and sent to the yard’s subcontractor for repair. The gear was re-installed on the vessel in November 2009. After working reasonably well for a period, the gear broke down again in November 2010. The yard then decided to order a new step-up gear from a different manufacturer. The replacement gear is now scheduled to be installed at the end of 2011.
The owners claimed compensation for economic loss suffered in respect of all periods during which the gear was out of order, essentially on the basis of the weekly compensation agreed on delivery. The yard was prepared to pay for all the repairs, but refused to pay any compensation for the economic loss suffered by the owners, referring to Article X of the shipbuilding contract, as quoted above.
The arbitrator found that the various breakdowns of the step-up gear probably had a common cause relating to a fundamental design defect, rather than constituting several unrelated breakdowns with specific and different causes. He held that “within a reasonable time” therefore must be evaluated on the basis of the entire period from delivery until final completion of the repair work, i.e., a period of about four-and-a-half years, during which the gear was out of use for approximately three years. Even though the yard had paid full compensation for the first period of more than a year when the gear was out of order, this period should according to the arbitrator nevertheless be taken into account when deciding whether the repairs had been done within a reasonable time. The arbitrator further held that in most cases a period of four-and-a-half years would undoubtedly exceed what was meant by “within a reasonable time”, even if the gear had worked for some of that period.
The arbitrator then considered what would be a reasonable time. He started by considering how many attempts should be allowed to the yard for rectifying the defects. Every time the gear broke down, extensive repairs were necessary and the arbitrator found that a reasonable time for repairing the damage would be 45 weeks. In the arbitrator’s opinion, the yard should be allowed at least two attempts to repair the gear without being in breach of the “within a reasonable time” provision. Taking into account the fact that the defect had limited impact on the running of the vessel, and that the economic loss was modest, the arbitrator found that 135 weeks (with some margin) would be the “normal repair time allowed”. Since more than 135 weeks had elapsed, he agreed with the owners’ submission that the yard had not repaired the gear within a reasonable time.
The arbitrator further held that under the Norwegian Sale of Goods Act, a failure by the yard to repair within a reasonable time would entitle the owners to claim damages, even if the yard had not acted negligently. The owners consequently succeeded in the arbitration and were awarded costs, although the amount of the damages was somewhat reduced compared to the owners’ claim.
The case is of general interest. The basic principle that a seller must rectify defects within a reasonable time in order to be able to rely on a clause limiting liability is also something we often find in contracts subject to English law. Nevertheless, it is difficult to find English authorities on what constitutes “a reasonable time” in this area of law. Each case will to a large extent depend on its own facts. In our opinion, it is fair for the seller to be allowed at least one attempt to repair a defect, even if such an attempt requires a significant period of time.
The seller must also be given some time to investigate the likely cause of a defect or breakdown and how to rectify it.
The arbitrator’s approach in this particular case was probably correct, namely that one has to look both at the actual time required for the repairs (with the yard/seller being obliged to try to rectify the defect as quickly as possible in the circumstances), and at the nature and extent of the losses suffered by the owners due to the defect, as this will influence the length of time that may appropriately be allowed. However, if we accept that the yard’s duty to effect speedy repairs is less stringent in cases where the owner’s daily losses (and accordingly the yard’s potential liability to compensate) are low, it must follow that the more severe the consequences of the defect are for the owners, the stricter is the obligation on the yard to effect speedy repairs.
If the breakdown of the step-up gear had caused the vessel to become inoperable, it would seem doubtful that the yard should be allowed two attempts (each taking 45 weeks) to rectify the defect. On the other hand, it would seem reasonable for the yard to have at least one attempt to rectify the defect without being liable in damages.
This case is an example of how difficult it can be to estimate what is “reasonable”.
