Neon Shipping Inc v Foreign Economic 7 Technical Coporation Co. of China & Anor

A contractual guarantee and notice provision in a shipbuilding contract applied to any and all claims made after delivery where the clause, read as a whole, provided a single guarantee scheme. It was artificial to divide the guarantee into separate categories so that some claims had no effective notice period. A contractual fitness-for-purpose term under section 14(3) of the Sale of Goods Act 1979 may apply to a shipbuilding contract. The purpose may be the vessel’s normal use in accordance with its contractual specification. A detailed specification does not by itself exclude the statutory term, although the term must be consistent with the express contract.

The claimant contracted with the defendants for the design and construction of a bulk carrier. After delivery, the claimant alleged that the vessel’s cargo-crane bearings suffered excessive wear and sought to advance a statutory and implied fitness-for-purpose claim.

The arbitrators decided two preliminary questions against the claimant. They held that the proposed fitness-for-purpose term was not incorporated and that the contractual 12-month guarantee and notice provisions barred the claim. The claimant appealed under section 69 of the Arbitration Act 1996. The central issues were the construction of Article XI and the application of sections 14(3) and 55(2) of the Sale of Goods Act 1979.

1. Appeal dismissed. The arbitrators’ conclusion that Article XI’s 12-month time-bar applied was upheld.
2. Article XI was to be construed by reference to the natural meaning of its words, the contract as a whole and commercial good sense. The claimant’s proposed distinction between “Part I” claims concerning seaworthiness and contractual conformity and “Part II” claims concerning specified defects was artificial. It would create uncertainty about classification, leave some claims outside the notice and remedial machinery, and produce an unexplained two-tier scheme.
3. The words concerning the vessel being seaworthy and contractual in all respects formed part of the single contractual guarantee. The guarantee period and notice requirements therefore applied to all post-delivery claims falling within Article XI. The claim was consequently time-barred because no notice had been given within the contractual period.
4. Although unnecessary to the result, the judge addressed the fitness-for-purpose issue. Section 14(3) of the Sale of Goods Act 1979 applied to a shipbuilding contract. It was unnecessary to identify a purpose peculiar to the buyer: normal use was sufficient, provided it was understood as normal use in accordance with the contractual specification.
5. A detailed express specification did not automatically exclude the statutory term. The question under section 55(2) was whether the particular implied term was inconsistent with the express terms. The proposed term had been pleaded too broadly below. If reformulated consistently with the 30-tonne crane specification and continuous-operation requirement, the answer might have been different.
6. There was no point remitting the fitness-for-purpose issue to the arbitrators because the answer on the time-bar independently resolved the dispute.

• Arbitration: The arbitrators answered the fitness-for-purpose question in the negative and held that Article XI barred claims not notified within the specified period.
• High Court (Commercial Court): The appeal under section 69 of the Arbitration Act 1996 was dismissed. The arbitrators’ decision on the time-bar was upheld.