Richard M. Gunn Partner/Master Mariner Shipping That’s Not What It Says! An Analysis of English Law Warranties in Shipbuilding Contracts Richard M. Gunn Partner/Master Mariner

What is a Warranty? Under English contract law there are two main types of contractual terms: Conditions These are terms that go to the root of the contract. Breach would allow termination. Warranties These are less significant than conditions and are usually written in the form of an assurance or promise. Breach brings a claim in damages. [Innominate terms – halfway house between the two]

Examples of Warranties Most ship-building contracts will come with a warranty of quality, for example: Subject to the provisions hereinafter set forth, the SELLER undertakes to remedy, free of charge to the BUYER, any defects in the VESSEL which are due to defective material and/or bad workmanship on the part of the SELLER, the BUILDER and/or its sub-contractors, provided that the defects are discovered within a period of twelve (12) months after the date of delivery of the VESSEL and a notice thereof is duly given to the SELLER as hereinafter provided. Warranties do not cover all eventualities! Source: https://www.retrotvmemories.com

Examples of Warranties Other shipbuilding warranties can include: Guaranteed Speed Trial speed, guaranteed: 15.0 knots (hereinafter called the “GUARANTEED SPEED”) at N.S.R. clear bottom, in calm and deep sea, on about 47% displacement of the design draft condition. Guaranteed Fuel Consumption Fuel consumption, guaranteed: Guaranteed Fuel oil rate of main engine to be 159.7 gr/kW/hr at N.S.R. using diesel oil with a lower calorific value of 42,709 kJ/kg at the shop trial of the engine manufacturer, based on ISO condition, and this rate to be subject to the tolerance margin of six percent (6%). (hereinafter called the “GUARANTEED FUEL CONSUMPTION”).

Remedies for Breach of Warranty There are different remedies for breach of warranty under common law and for breach of contract Common Law Breach of a warranty does not entitle the buyer to terminate the contract, but rather gives rise to a claim for damages. Contract According to most shipbuilding contracts, breach of the warranty of quality will mean that the Seller is obliged to make the Builder rectify the defect. If they do not do so, then at that point the Buyer can bring a claim for damages.

Cost of Warranty Claims To decide whether there has been a breach of a contractual warranty in shipbuilding cases can be a very expensive process: To judge whether there has been a more than de minimis defect caused by the seller, the builder, or their sub-contractors can be a document heavy exercise, on which in the opinions of experts are almost always needed (sometime more than one) This means that the legal costs of such disputes can mount up quickly. Copyright Emily Cadman 15 September 2015 Source: https://www.ft.com/content/b625a4b8-5b9d-11e5-9846-de406ccb37f2

Specific Examples of Warranty Disputes (1) In a dispute over the building of a 84,700 MTDW Bulk Carrier there was a warranty as follows: The VESSEL shall have the BUILDER’s Hull No. [xxx] and shall be constructed, equipped and completed in accordance with the provisions of this CONTRACT, and the Specifications being amended and supplements by DNo. [xxx] Meeting Minutes dated [xxx] and [xxx] Extra Item List dated [xxx] and the General Arrangement Plan (hereinafter collectively called the “SPECIFICATIONS”)…

Specific Examples of Warranty Disputes (1) The relevant part of the Specifications provided as follows: The propeller to be designed to absorb M.C.R. output of the main engine at about 4% higher revolution than the specified engine revolution at M.C.R. output, under fully loaded and clean bottom condition of the vessel in calm and deep sea (emphasis added).

Specific Examples of Warranty Disputes (1) The phrasing here was important. Only the ‘design’ of the propeller was warranted – not its performance As long as the design of propeller was theoretically capable of absorbing the M.C.R. output of the engine at the set level, the shipbuilders would not be in breach of this warranty, even if the specific propeller they built was not actually capable of doing so. This provision did not give any sort of guarantee as to the performance of the propeller. There was also some ambiguity over the word ‘about’, which gave some leeway, but unclear as to how much. Source: https://en.wikipedia.org/wiki/Propeller

Specific Examples of Warranty Disputes (2) A contract for a luxury multi million dollar megayacht included a standard guarantee that “the Vessel, its Appurtenances, Components, materials and workmanship” would match the Specification for 12 months.

Specific Examples of Warranty Disputes (2) However it also contained the following clause: The warranty contained in this Clause replaces any other liability, guarantees, warranty imposed or implied by law, custom or statute, in respect of the condition of the Vessel after acceptance of the Vessel and shall be the full extent of the Builder’s liability in respect of the matters referred to in this Clause XV and the Purchaser exclusive remedy for any defects or shortcoming in the Vessel after delivery. The Builder shall have no responsibility or liability for any defects in Vessel after delivery other than specified in this Clause XV, nor shall the Builder in any circumstances whatsoever be responsible or liable for any damage, losses or expenses (whether special, direction, indirect or consequential), including (without limitation) for loss of income, earning, or profit deriving from the obligations of the Builder under the Agreement. The warranty in this Clause furthermore replaces and excludes any liability, warranty, term or condition imposed or implied by any law, custom or usage (emphasis added).

Specific Examples of Warranty Disputes (2) A dispute arose as to the quality of the paintwork on the Vessel. The Tribunal ordered a preliminary issue hearing of whether the exclusion clause in the warranty set out on the previous slide excluded the purchaser’s claims for damages under the following heads: Loss of use and enjoyment of the Vessel Cost of engaging a third party to replace the ‘Paint System’ Diminution of the value of the Vessel Further relief for failure to follow the Specification Copyright: https://www.123rf.com/profile_mihmihmal

Specific Examples of Warranty Disputes (2) A dispute arose as to the quality of the paintwork on the Vessel. Decision The Tribunal decided that, absent fraud, the Builder’s only obligation concerning the condition of the Vessel after delivery is the guarantee set out in Clause XV of the Contract. The guarantee forms a “complete code” that the Purchasers had to follow to bring their claim.

Specific Examples of Warranty Disputes (3) In a dispute over the building of a 34,000 DWT Bulk Carrier there was a standard warranty as to speed and fuel consumption. However, there was also a clause as follows: If the deficiency in actual speed of the VESSEL, upon trial run is more than five-tenths (5/10) of one knot below the guaranteed speed of the VESSEL, then the Buyer may, at its option, reject the VESSEL and rescind this Contract in accordance with provisions of Article X hereof, or may accept the VESSEL without any reduction in the contract price.

Specific Examples of Warranty Disputes (3) This is an example of a warranty being turned into a condition. Normally failure to comply with a warranty would not allow termination of the contract, but in this case, a breach allows the Buyer to reject the vessel. In this particular case the dispute was an issue over biofouling affecting the performance of the vessel and meeting of classification society requirements. Was this a factor to be taken into account in determining whether the “actual speed” of the vessel was in compliance? Termination is a serious consequence so good evidence required to be persuasive.

Summary Construe the words and their meaning not necessarily the parties’ intentions. Be careful what you write. And then be careful what is done.

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