CONTENTS
Introduction
The interplay between contractual terms and so-called implied terms is a significant aspect of contractual interpretation. Under Norwegian law, the Sale of Goods Act 1988 (“SGA 1988”) governs the sale of second-hand tonnage, mandating specific conditions for the vessel at the time of delivery, even when sold “as is”.
A question that often arises is: are the requirements of the SGA 1988 applicable to the sale of a second-hand vessel conducted under the Norwegian Saleform 2012 (“NSF 2012”) and is it governed by Norwegian law? This question was addressed in two recent cases, one in arbitration and another through court proceedings.
Background – the Entire Agreement Clause in Norwegian Saleform 2012 and “The Union Power” Case
The NSF 2012 sets minimal requirements regarding the vessel’s condition at delivery. The buyers have the right to inspect the vessel and must then decide whether to reject it or accept it with the consequence that “the sale being definitive and absolute, subject only to the terms and conditions of this Agreement” (Clause 4). At the time of delivery, the vessel must be in the same condition as it was during the inspection, with some exceptions related to cargo on board, class conditions, and average damage affecting the vessel’s class (Clause 11).
Therefore, on reading the wording of Clause 11 alone, the buyers bear the risk of hidden defects, which has led to arguments that these contracts should be supplemented with implied terms or background law. In the English law case Dalmare SpA v Union Maritime Limited and Another (The Union Power)[1], it was established that Clause 11 of the Norwegian Saleform 1993 (similar to Clause 11 under the NSF 2012) did not exclude implied requirements set by the English Sale of Goods Act 1979. Consequently, the Saleform was revised and now includes an explicit clause to exclude implied terms (Clause 18):
“The written terms of this Agreement comprise the entire agreement between the Buyers and the Sellers in relation to the sale and purchase of the Vessel […]
Any terms implied into this Agreement by any applicable statute or law are hereby excluded to the extent that such exclusion can legally be made. Nothing in this Clause shall limit or exclude any liability for fraud.”
The drafting committee of the NSF 2012 stated regarding Clause 18 that – “Although the clause is designed to work under any system of law, under English law it should effectively exclude the implied terms of the Sale of Goods Act 1979”, which also indicates that the intention is to exclude implied terms under Norwegian law as well. As we shall see, however, this has not proven to be that straightforward.
Entire Agreement Clauses and condition requirements under the Norwegian Sale of Goods Act
The SGA 1988 includes provisions regarding the condition of goods in “as is” sales. According to Section 19 of the Act, a defect exists, inter alia, if the seller has neglected to provide information about significant aspects of the vessel or its use which he must have known about and which the buyer had reason to expect to receive, provided that the omission can be assumed to have influenced the purchase, or if the vessel is in significantly worse condition than the buyer had reason to expect based on the purchase price and other circumstances.
However, Section 3 of the SGA 1988 states that “provisions of the Act do not apply to the extent that otherwise follows from the agreement, established practice between the parties, or trade usage or other custom that must be considered binding between the parties” – which appears to align with the intentions behind Clause 18 of the NSF 2012. Yet, the legal status of these clauses remains uncertain due to the typical civil law approach taken by courts and tribunals that favours a consideration of reasonableness.
Over the past year, the seemingly contradictory terms of Clause 18 in NSF 2012 and the above-mentioned sections of the SGA 1988 have been central in two cases.
In the arbitration case where Nordisk successfully represented the sellers, the tribunal initially determined that the parts of the vessel in discussion was in poor condition at the time of delivery. Nevertheless, it upheld that the contract terms were sufficiently clear: the ship was sold “as she was at the time of inspection, fair wear and tear expected.” Thus, the buyers had accepted the vessel in its existing state upon inspection. Although there was disagreement over the scope of the above-mentioned clauses in the NSF 2012, particularly regarding the threshold for the buyers to establish a breach of contract, the tribunal did not need to resolve these disputes because it found any claims to be time-barred.
In a separate court case involving the vessel named “Heide”[2], the district court adopted a case-specific assessment. The key arguments for establishing the scope of the entire agreement clause were (1) that the buyers had accepted the vessel post-inspection “subject only to the terms and condition of this Agreement”, (2) the acknowledgment of the contract as an industry standard developed over a long period, (3) the reasonableness of allocation of risk given the vessel’s age and price. The conclusion of the district court was that the requirements in the SGA 1988 could be derogated from in this specific case. The court of appeal did not consider it necessary to address the interpretative questions raised by clause 18 since they did not consider there to be a breach of contract regardless. The case was not accepted into the Supreme Court for an appeal.
Thus, unfortunately, the status of these clauses remains uncertain under Norwegian law, as there is no definitive legal authority yet on this.
Key takeaways
Under English law, the general understanding is that the allocation of risk for hidden defects rests with the buyers, unless misrepresentation or fraudulent behaviour by the sellers is proven. If the buyers wish to shift this risk to the sellers, specific alterations to the contractual wording are necessary.
Under Norwegian law, the situation is less definitive. In our view, one must conduct a case-specific review of the contract and the transaction as a whole. Given that the NSF 2012 is a well-established, negotiated industry standard form and that Clause 18 explicitly excludes the relevance of implied terms under the applicable law, it might be presumed that the SGA 1988 is also excluded, unless case-specific contractual terms suggest otherwise.
This highlights the importance of conducting a thorough inspection and possibly amending contract terms to more explicitly reflect the intentions of the parties when it comes to the condition of the vessels being sold.
[1] [2012] EWHC 3537 (Comm)
[2] THOD-2021-15445
By Anders Rønningen