If I could pinpoint the catalyst of my legal career it would have been the Friday Legal Eagle slot on The Jimmy Young BBC radio show in the early 1970s. Consumer rights lawyer and father of modern consumer legislation in England David Tench introduced me and millions of others to the phrase that “Merchandise needed to be fit for purpose and of merchantable quality”. I was possibly 10 years old at the time, but this phrase, or variations on a theme thereof, has been one of the constants throughout my legal career.
In any contractual relationship where person (A) is buying from person (B) a physical article the buyer wants certainty that he is getting what he is paying for. Even those who are not legally trained will be familiar with at least one Latin maxim, namely caveat emptor, which means “let the buyer beware”. In modern consumer law the phrase became somewhat redundant, yet its direct descendant in the shipping world lived and prospered in the phrase “as is, where is” or “as is, where lying”, which effectively means that the seller of a ship could say to a buyer of a ship: “What you see is what you get; carry out whatever inspections you so wish, but as the seller of the vessel I am giving you no warranties except for title and liens”. As Tom Stoppard would say, for the length of a bible, everyone understood what that meant, until late last year when a landmark commercial court decision turned the law on its head.
In yachting sales, the normal situation is that the buyer sea-trials the yacht in question and IF he wishes to proceed, he conducts a condition survey, examines the records of the yacht and he concludes the sale. He does so having had every opportunity to test and enquire into the yacht’s condition. No one honestly relies on the implied statutory conditions of fitness for purpose and satisfactory quality. As a buyer the onus is on you to satisfy yourself as to the condition of the yacht, which is more so in an “as is, where is” sale where the sale is on the basis that the buyer takes the yacht with all its faults, whether or not those faults are obvious.
The case in Dalmare SpA v Union Maritime Ltd [the “Union Power”] (2012) focused on whether a commercial ship sale and purchase contract excluded the concept of satisfactory quality implied by the Sale of Goods Act 1979. In deciding the case the court also considered the fact of the words “as is” or “as is, where is” in sale and purchase contracts more generally.
In the Union Power case the contract provided that: “The Buyers have inspected and accepted the Vessel and the Vessel’s classification records. The Buyers have also inspected the Vessel in Piraeus, Greece, on 18 August, 2009, and have accepted the Vessel following this inspection and the sale is outright and definite subject only to the terms and conditions of this Agreement… “
The vessel was 15 years old and due for her third and quite expensive classification society special survey. The vessel had been around the block a few times. There was, however, an engine problem shortly after her delivery and buyers argued successfully in court that there was an implied term that the vessel should have been of “satisfactory quality”, notwithstanding the buyer’s inspections of the vessel. Justice Flaux agreed and confirmed that the arbitrator was right to find that the sellers had to pay for the engine repair and stated that: “If commercial parties do not want to be subject to the implied terms as to satisfactory quality and fitness for purpose they can contract out of those implied terms.”
The extract from the contract would suggest that buyers and sellers knew what they were buying, BUT the judge said that if you do not want the implied terms to bite, you must expressly exclude them, not just assume that they do not apply, and to that end you must be clear that the only words that matter are the words in the contract. That would call for what is known as the ‘Entire Agreement’ clause. In other words, if you don’t see it spoken about in this contract positively, it does not apply.
It is also important to consider the 2012 English High Court case of Air Transworld Ltd v Bombardier Inc which upheld the decision in The Mercini Lady, which decided that any exclusion clause must expressly use the word “conditions” in order to exclude conditions implied by statute. How does this affect the buying and selling of previously owned yachts? Firstly, it is perhaps useful to recap the three relevant clauses from the Mediterranean Yacht Brokers Association Memorandum of Agreement (“MYBA MOA”) upon which most secondhand yacht sale and purchase agreements are concluded on. Clause 15 (Sellers Warranties), which provides the normal express warranties as to title, Clause 34 (Exclusions), is useful to set out in full and states:
“Save as provided for in Clause (15) every representation, condition, warranty or other undertaking whether expressly or implied by statute, common law, custom or otherwise howsoever in relation to the VESSEL, fault or errors in her description or her quality or her fitness for any particular purpose whether made or given before or after the date of this Agreement are hereby excluded for all purposes”.
And finally Clause 36 (Agreement) which, again, is useful to set out in full, states: “This Agreement and its executed Addenda attached, if any, constitute the entire Agreement between the Seller and the Buyer and it is agreed and understood that there are no other duties, obligations, liabilities or warranties implied otherwise….”
The MYBA MOA Exclusion clause excludes “… every representation, condition, warranty or other undertaking whether expressly or implied by statute…”, which provides the protection a seller needs from implied terms, BUT as a buyer if you are looking for a fit-for-purpose warranty from a seller, you would be looking to strike out the word “condition” from Clause 34 of the MYBA.
One possible drafting anomaly arises in Clause 36. Clause 36 oddly attempts to repeat Clause 34, but the word “condition”, which is in Clause 34, is not repeated in Clause 36. It possibly could now be argued that the contractual conditions as to satisfactory quality which flow from the Sale of Goods Act may not necessarily be excluded from the MYBA MOA, or at least it could be argued that there is a contradiction between the intention of the two clauses. In my opinion, from a seller’s perspective, it means you might not have successfully ring-fenced your obligations to what is actually said in the contract. There is an easy fix. I would delete everything in Clause 36 that now appears after words: “This Agreement and its executed Addenda attached, if any, constitute the entire Agreement between the Seller and the Buyer”.
The judge in Union Power indicated that if he had to decide on “as is where is”, it would have been his view that “as is” should be read to exclude the right to reject the vessel for defects which were apparent at the time of inspection, but if defects arose after the event they would lead to a right to a claim in damages for a breach of implied terms as to quality – BUT ONLY IF the implied conditions as to quality had not been excluded. However, the judge in Union Power warned that his was not a definitive conclusion on the point and that it was open to be considered on a case-by-case basis turning on established custom or market meaning which might affect on his interpretation.
Nevertheless, this decision is of great significance for the sale and purchase of secondhand ships, including yachts, which will now require a reassessment of the obligations imposed by a contract which had discounted the application of the Sale of Goods Act implied terms as a possibility. This is especially the case if you are not using the MYBA MOA to buy or sell a yacht. Union Power is not limited to secondhand yacht sale and purchase contracts. Union Power is equally applicable to clauses that exclude liability in supply contracts as well as shipbuilding contracts.
As to the MYBA MOA, one must look at the exclusions under Clause 34 of the MYBA MOA and ask the following, “Is this enough to exclude the implied terms imposed on the Seller from the sale of the yacht?” In my opinion, yes, they are, but I have nagging doubt about Clause 36. The law is now very clear that such exclusion language of the type that appears in Clause 34 must be specific and to be effective must amount to an unequivocal statement of an alternative regime as to quality which is “…. wholly inconsistent with the Section 14 (2) Implied Terms as to satisfactory quality, such as an entire agreement clause”.
Is the MYBA MOA unequivocal? Should we be looking to replace the current MYBA exclusion clause and entire agreement clause that exists within the current MYBA MOA? Although I think the MYBA MOA exclusion clause is fine as it is, given the recent case law, MYBA and any lawyer advising on a yacht sale and purchase should take into consideration the impact of those judgments on the MYBA MOA.
This article originally appeared in The Superyacht Report.