Category Archives: Transport

Commercial Court Confirms Traditional Understanding Of “As Is Where Is” In Ship Sale And Purchase Contract

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Michael Hirtenstein & Others v. Hill Dickinson LLP [2014] EWHC 2711 (Comm)

It will be recalled that in the case of Dalmare SPA v. Union Maritime Ltd (Union Power) [2012] EWHC 3537 (Comm), the Commercial Court, albeit in obiter comments, expressed the surprising and contentious view that the words “as is where is” were likely not sufficient to exclude from a sale contract the implied terms of satisfactory quality and fitness for purpose under s.14 Sale of Goods Act 1979 (“SGA”).

Those terms will be implied into sale of goods contracts (including ship sale contracts) entered into in the course of a business, but their inclusion is excluded if a term in the contract is inconsistent with the implied term (s.55 SGA). In Union Power, the Court commented that, if it had been required to decide the point, it would have found the words “as is” were not inconsistent with the implied terms to the extent of excluding them, that they were sufficient only to exclude a right to reject the goods, and would not exclude a claim for damages for breach of the implied terms.

This decision was surprising, given that market understanding has long been, in the context of ship sale and purchase and otherwise, that the terms “as is” or “as is where is” require a buyer to take a ship in the condition and state in which she is to be found at the point in time defined in the contract, all faults included, without any warranty as to quality or condition (see The Morning Watch [1990] and The Brave Challenger [2003]). Such a meaning would appear manifestly inconsistent with the inclusion of the s.14 implied terms.

The decision in Union Power therefore had potentially wide-ranging implications, notwithstanding the obiter nature of the comments.

Michael Hirtenstein & Others v. Hill Dickinson LLP

In Hirtenstein, the Court has now endorsed the traditional meaning of the words. The case arose following the purchase of a luxury yacht that suffered a major engine breakdown only an hour after delivery under the sale contract. The sale, on an amended MYBA form MOA, was on terms that she was sold “as is where is” save for certain specific warranties.

In this case,the parties all appeared to have a common understanding as to what “as is where is” means: that the yacht was to be purchased in her existing condition, be that good or bad, with no recourse against the Seller for any subsequently discovered faults. The Court further commented that it “would regard that phrase as self-explanatory. It clearly signified that the buyer would acquire the Yacht in whatever condition the boat was at the time of purchase with no right to complain subsequently…”.

The Court further dealt with the notion put forward in Union Power that the words “as is” do not by themselves exclude the implied terms but could only exclude a right of rejection, commenting that “Drawing such a distinction between the right to reject and the right to damages and treating the words ‘as is’ as excluding the former but not the latter seems to me most unlikely to reflect the expectations of ordinary business people or to be an interpretation that would occur to anyone other than an ingenious lawyer.”

Comment

The case therefore supports the view that the terms “as is” or “as is where is” are terms of art when it comes to contracts for the sale of goods, that such terms are inconsistent with any further right of recourse in respect of the condition of the goods, and that they are therefore inconsistent with the implication of warranties under s.14 SGA. That said, Union Power is still authority for the (also perhaps surprising) proposition that the words “as she was” in s.11 of the Norwegian Sale Form (“NSF”) 93 are not the same as “as is where is” and do not of themselves exclude the SGA implied terms. Therefore, anyone selling a vessel on that form of MOA must include a specific term excluding statutory or other implied terms, such as is found in NSF 2012 and the standard amendment to the MYBA form. We suggest it would also be good practice to include an explicit exclusion of warranties in any contract intended to be on truly “as is where is” terms.

Hong Kong Ship Arrest: Enforcing A Maritime Award Via The Backdoor?

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Handytankers KS v. Owners and/or demise charterers of M/V Alas (subsequently renamed Kombos) [2014] KHCFI 1281

In a potentially very significant recent judgment, the Hong Kong High Court has upheld the arrest of a vessel despite the Plaintiff already having obtained an arbitration award. The Admiralty Court effectively ruled that a ship can still be arrested despite the existence of an arbitration award, provided that the claim out of which the award originates properly invokes the in rem jurisdiction of the Court. The arrest was allowed to stand because the cause of action in rem remains alive so long as the arbitration award in personam against the owners of the ship remains unsatisfied.

The background facts

The Kombos was chartered by the Plaintiff to PT Arpeni Pratama Ocean Line Tbk (“APOL”) under a Shelltime 4 charterparty (the “Charterparty”) for five years. The Charterparty contained an LMAA arbitration clause, pursuant to which the Plaintiff brought proceedings in London for damages for breach of the Charterparty and unpaid hire due under it. A final award in the region of US$9 million for damages and unpaid hire (the “Award”) was made in favour of the Plaintiff in March 2013.

In April 2014, the Plaintiff invoked the Hong Kong Court’s in rem jurisdiction by arresting the Dewi Umayi (the “Vessel”) owned by APOL. The arrest papers made two important points clear to the Court. First, the arrest of the Vessel was sought for the purpose of providing security for the anticipated judgment in rem in the arrest action, not as a means of enforcing the Award. Second, the claim as pleaded in the endorsement to the writ was one falling under section 12A(2)(h) of the High Court Ordinance (the “Ordinance”), namely a claim arising out of any agreement relating to the use or hire of a ship.

The judgment

Counsel for the Defendant sought to argue that the arrest was fundamentally in the nature of an application to enforce the Award. He continued that this was an abuse of process as, in Hong Kong, there was no head of Admiralty jurisdiction that permitted an arrest to enforce an arbitration award in such circumstances. Counsel for the Defendant also submitted that the arrest procedure was not available once a plaintiff’s claim had crystallised in the form of a judgment or arbitration award.

The Court agreed that there is no head of Admiralty jurisdiction in Hong Kong for the enforcement of arbitration awards. Section 12A(2) of the Ordinance does not cover a claim arising out of “an arbitration agreement“. However, the Court went on to state that it was reasonably clear from a number of judgments of the English and Hong Kong courts that the Court would have in rem jurisdiction if the claim were based on the original cause of action under the charterparty. This is because the cause of action in rem, being different in character from a cause of action in personam, does not merge in the judgment in personam. Instead, it remains available to the person who has it as long as, and to the extent that, the in personam judgment remains unsatisfied.

Consequently, the Court ruled that as the Plaintiff’s claim was pleaded as one for damages arising under a charterparty, it was in substance and in form a claim “arising out of any agreement relating to the use or hire of a ship“. Section 12A(2)(h) of the Ordinance was thereby invoked. It was perfectly legitimate for the Plaintiff to arrest the vessel and keep her arrested as security in respect of any judgment that it may obtain after a hearing in the in rem proceedings.

Comment

This judgment does not go so far as to amend the law regarding the grounds for arrest in Hong Kong. A plaintiff cannot arrest a vessel to enforce a claim based on an unsatisfied arbitration award; this would require an expansion of the jurisdictional heads under section 12A of the Ordinance. In addition, any applicant in Hong Kong would need to ensure that it did not fall foul of provisions of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance.

However, provided that the underlying cause of action does fall within Section 12A of the Ordinance, and is correctly pleaded, then it may now be possible to arrest a ship in Hong Kong despite the existence of an arbitration award. Whilst not directly being an arrest to enforce the award, that may well in effect be the result of such an arrest.

It is unclear at the time of writing whether this case will be appealed. However, for now it remains the decision of the Admiralty Court and presents an opportunity for those holding unsecured arbitration awards of an appropriate maritime flavour to pursue enforcement, or enhance settlement leverage via a route previously considered to be unavailable.

SLOT Applications At Turkish Civil Aviation

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Principally, the Turkish civil aviation legislation is prepared by two authorities in Turkey: Directorate General of Civil (“DGCA”) and the General Directorate of State Airports Authority (“GDSAA”). DGCA regulates and ensures the development of the civil aviation activities therefore GDSAA performs the management of Turkish airports and controls the Turkish airspace as a state owned enterprise since 1984.

In consideration of the duties and responsibilities of each two above mentioned authorities, the SLOTs regulations have been mentioned on laws and directives drafted by the DGCA until 17 June 2010. After 17 June 2010, the legal authority for SLOT application was transferred to GDSAA by the Ministry of Transport (restructured and named as Ministry of Transport, Maritime Affairs and Communication as of 01 November 2011).However, in current situation, the legal responsibility for SLOT applications is at the DGCA but the legal power is still exercised by GDSAA.

The principals that set out the legislative framework for SLOTs is as follows;

  • Decision of the Council of Ministers 2003/5930, 24 July 2003
  • Law No: 5431 Law on the Duties and Organization of the Directorate General of Civil Aviation, 10 November 2005.
  • GDSAA Directive on SLOT Applications (“Directive”)

As a step on the path to European Union membership, Turkey had has the resolution and determination to rapidly fulfill its obligations in order to start accession negotiations at the earliest time and participate in the European Union’s enlargement dynamics.

To this end, in National Program for the Adoption of the Acquis which has been declared through the decision of the Council of Ministers, numbered 2003/5930. Accordingly in transportation policy of Turkey, a strategy plan and program concerning Turkey’s main transport infrastructure needs within the scope of the Transport Main Plan Strategy has been decided to be determined by the Ministry of Transport, with the cooperation of the Undersecretariat of the State Planning Organization (SPO), the Ministry of Settlement and Public Works, the Ministry of the Interior, and the Ministry of Energy and Natural Resources. EU legislation concerning Trans-European Networks (TEN) Guidelines have also been taken into account during studies to determine the infrastructural objectives of the Transport Main Plan Strategy.

This strategy document including the adoption and implementation of EU legislation on air transport and necessary legislative changes to adopt Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the allocation of SLOTs at community airports has been proposed to be approved by the Minister / Council of Ministers on 31 December 2004 and to enter into force on 31 December 2005.

After and as the requirement of the Decision of the Council of Ministers 2003/5930, the Turkish parliament has enacted the law, Law on the Duties and Organization of the Directorate General of Civil Aviation to regulate the elements related to the organization, duties, authorization and responsibilities of the DGCA with special budget, associated with the Ministry of Transport and Communications, and holder of public corporation status.

By this law, the first writing regulation in relation to the SLOT applications has been provided and the Air Transportation Department of the DGCA has been appointed as the unit responsible to ensure the SLOT application on aerodromes with intensive traffic and to make and to follow up the necessary arrangements in this matter. After the decision of the Ministry of Transport on 17 June 2010, the GDSAA has been designated to ensure the SLOT allocations and applications. Today the only secondary legislation in which the SLOT applications are defined in Turkish Law is the Directive.

The Directive has been promulgated to the purpose of setting out the principles and procedures in SLOT applications at scheduled or coordinated airports. The scheduled or coordinated airports and air carriers using those airports, their representatives, airport operators, air traffic service units, commissions and committees evaluating the demands of the SLOT with the tariff organizers and coordinators, and other relevant persons, institutions and organizations are subject to the Directive in SLOT applications within Turkey.

Pursuant to the article 11/1 of the Directive, at the beginning of each scheduling period, series of SLOTs of the previous year’s same scheduling period are placed in the SLOT pool.

Article 11/1 shall not apply when the following conditions are satisfied;

(a) a series of SLOTs has been used by an air carrier for the operation of scheduled and programmed non-scheduled air services, and

(b) the series of SLOTs in question has been operated by that air carrier for at least 80 % of the time during the scheduling period for which it has been allocated.

In such case that series of SLOTs shall entitle the air carrier concerned to the same series of SLOTs in the next equivalent scheduling period, if requested by that air carrier. In a situation where all SLOT requests cannot be accommodated to the satisfaction of the air carriers concerned, preference shall be given to commercial air services and in particular to scheduled services and programmed non scheduled air services. In the case of competing requests within the same category of services, priority shall be given for year round operations or to air carriers entitled to use the coordinated airport as the base. Re-timing of series of SLOTs before the allocation of the remaining slots from the pool to the other applicant air carriers shall be accepted only for operational reasons or if SLOT timings of applicant air carriers would be improved in relation to the timings initially requested.

If a requested SLOT cannot be accommodated, the coordinator shall inform the requesting air carrier of the reasons therefore and shall indicate the nearest available alternative slot. The coordinator shall, in addition to the planned SLOT allocation for the scheduling period, endeavor to accommodate single SLOT requests with short notice for any type of aviation, including general aviation. To this end, SLOTs remaining in the pool or SLOTs available at short notice may be used.

As it is clearly recognized the Directive’s relevant articles that set out the rules and conditions for allocation of SLOTs in Turkey are fully adapted from EU Regulation 95/98.

Pursuant to the article 12/1 of the Directive, transfer of SLOTs shall be provided in following conditions:

(a) By an air carrier from one route or type of service to another route or type of service operated by that same air carrier;

(b) Between parent and subsidiary companies, and between subsidiaries of the same parent company,

(c) As part of the acquisition of control over the capital of an air carrier,

(d) In the case of a total or partial take-over when the slots are directly related to the air carrier taken over

Exchange of SLOTs shall only be provided one for one, between air carriers. The transfers or exchanges referred above shall be notified to the coordinator and shall not take effect prior to the confirmation by the coordinator. The coordinator shall decline to confirm the transfers or exchanges if they are not in conformity with the requirements of the Directive and if does not satisfy the criterias of that airport operations would not be prejudiced, taking into account all technical, operational and environmental constraint.

SLOTs allocated to a new entrant may not be transferred for a period of two equivalent scheduling periods, except in the case of a legally authorized takeover of the activities of a bankrupt undertaking. SLOTs allocated to a new entrant may not be for a period of two equivalent scheduling periods, except in order to improve the slot timings for these services in relation to the timings initially requested.

The airports subject to SLOT applications in Turkey are defined in article 16 of the Directive as follows:

(a) Istanbul Ataturk Airport, scheduled or coordinated airport in summer and winter

(b) Antalya Airport, coordinated in summer, rescheduled in winter

(c) Ankara Esenboğa, İzmir Adnan Menderes,Milas-Bodrum, Dalaman, scheduled in summer and winter

(d) Istanbul Sabiha Gökçen Airport, scheduled in summer and winter as of 2010

Request for SLOT allocation and change at a coordinated airport for scheduled and programmed non-scheduled flights shall be approved by the coordinator providing that the request is based on operational reasons and rationale.

Slot requests for scheduled flights are evaluated according to the calendar adopted and implemented by IATA all over the world. The requests not in conformity with this calendar are not considered appropriate. The requests of air carriers, not using the airport as base for long stay exceeding 3 hours for passenger transport, 5 hours for cargo transport require the approval of the department responsible for the parking lot. Parking lot availability shall in no case mean that the SLOT hours are appropriate.

Collisions And Reserve Ships: Liner Operators Beware!

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Darya Bhakti [2013] 2 HKLRD 926

The quantification of damages for the loss of use of a ship damaged in collision where her owner maintains and substitutes a reserve ship for his damaged ship came up for determination recently in Hong Kong, and in the modern day setting of a liner operation run by a consortium of container ship owners. The case in question was The Darya Bhakti in the Hong Kong Court of Appeal.

Reserve ships

Liner operators of container ships are committed to providing regular services with scheduled sailing times and port rotations. In order to maintain such services, they must have similar, and ideally identical, ships available as replacements to provide cover for those occasions when one of the ships in service has to be withdrawn for repair. In earlier years, a suitable replacement ship would often be readily available in the market for short-term charter but the option of chartering-in has become considerably more difficult with the increasing specialization of container ships in terms of their carrying capacities, speeds and fuel efficiencies. An increasing number of liner operators today therefore are investing in reserve ships; that is, a sister ship that is kept deliberately idle in order to be readily available for use as a replacement when another of her sisters in service has to be withdrawn for any reason, such as after collision.

Loss of use

Where a ship is damaged in collision, her owner is entitled to claim damages for the loss of the use of that ship during the period it is out of service undergoing repair (the period of detention). Where the owner has no other ships available and charters in a replacement ship to substitute for his damaged ship during the period of detention, he can recover these chartering-in costs as damages. What is the position, however, where the owner keeps a reserve ship and elects not to charter in but to substitute the reserve ship for the damaged ship?

The authorities

Surprisingly, there are very few reported shipping cases that directly address this issue and such cases as there are date back to the early part of the last century and involve claims for loss of use by non-profit making organizations. These cases do suggest, however, that the owner of a reserve ship trading commercially for profit is entitled to recover loss of use based upon the market rate of hire for such a ship at the time of the collision. As the authors of the leading textbook on collisions note:

“The case where a sister ship otherwise idle takes the place of the damaged vessel must be distinguished from the situation where a stand-by or reserve vessel is specifically kept for that purpose. Here a claim will lie for substantial damages for detention…

There is no clear English authority on the measure of recovery, but US authority tends to give the reasonable rate of charter hire for the ‘spare boat’.”

The Darya Bhakti

OOCL’s vessel, OOCL China, was damaged in collision with the Darya Bhakti whilst on time charter to MISC, following which MISC stopped paying hire to OOCL. The liner consortium of which both MISC and OOCL were then members – the Grand Alliance -substituted the OOCL Japan, another OOCL vessel and identical sister ship that the members of the Grand Alliance had been keeping in reserve. OOCL subsequently claimed damages for the loss of the use of the OOCL China based upon the lost time charter hire for the period that the OOCL China was out of service undergoing repair.

The owners of the Darya Bhakti argued that as OOCL had sub-chartered back some of the slots on the OOCL China from MISCand had not paid slot charter hire to MISC during the detention period, and as all of the containers on board the OOCL China were carried to destination by the OOCL Japan so that the collision did not cause OOCL to suffer any loss of freight income, OOCL’s claim for loss of use had to be reduced accordingly to take account of the “saved” slot charter hire. The Court at first instance agreed, and this decision was upheld by the Court of Appeal.

In reaching this conclusion, the Court at first instance appears to have treated the OOCL Japan as an idle sister ship rather than as a reserve ship; and the Court of Appeal considered this approach to be correct, surprisingly concluding that if the OOCL Japan was a reserve ship, it was a reserve ship of the Grand Alliance and not a reserve ship of OOCL.

Comment

The decision in this case is a particularly disappointing one, not only for OOCL but for all liner operators. It is to be hoped that there will soon be another opportunity for the common law courts to re-visit this issue of reserve ships and the appropriate method for assessing loss of use following a collision, but until then…liner operators beware!

District Court Evaluates Express Warranty Of “Airworthiness”

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Texas Court Determines That “Airworthy” Is an Unambiguous Term That Controls Over More General Disclaimers of Warranties

HIGHLIGHTS:

  • The “as is” clause does not negate the express warranty of an “airworthy” aircraft.
  • The terms “airworthy” and “certificate of airworthiness” are technical terms capable of only one reasonable interpretation – compliance with FAA’s technical and legal requirements.

In Luig v. North Bay Enterprises, Inc., a Texas District Court recently considered a seller’s obligation to deliver an “airworthy” aircraft in the context of an aircraft purchase agreement that also contained an “as is” clause.1 The contract involved the sale of a 50-year-old Bell helicopter that had undergone several changes, including the removal of the turbocharger engine. After the buyer conducted a pre-purchase inspection and indicated several items to be repaired, the seller delivered the aircraft to the buyer with the requested repairs completed.

Subsequent to delivery, the seller commenced suit seeking a declaratory judgment that it delivered the aircraft in accordance with the contract. The buyer asserted a counterclaim seeking damages for breach of contract on the basis that the aircraft failed to meet the contractual delivery condition because it was not “airworthy.” Following discovery, the parties cross-moved for summary judgment. The cross-motions required analysis of two material contract terms.

  1. The first provided that the purchaser agreed to “accept the Aircraft in an ‘as is where is’ condition.”
  2. The second provided that the aircraft would be delivered “with all systems in an airworthy condition and a current Certificate of Airworthiness.”

The “As Is” Provision Disclaimed All Implied Warranties

With respect to the “as is” clause, the seller argued that the parties intended the clause to waive all express and implied warranties and other objections to the condition of the aircraft. The seller contended that it was irrelevant whether the aircraft was delivered “in an airworthy condition” because the purchaser had agreed to accept the aircraft “as is” after having an opportunity to inspect the aircraft and documentation. Conversely, the buyer argued that the “as is” clause was merely boilerplate language that should not be given effect in light of the nature of the transaction and the totality of the circumstances.

The court stated that where an “as is” clause is an important part of the basis of the bargain and entered into by parties of relatively equal bargaining position, a buyer’s agreement that he is not relying on representations by the seller should be given effect. The pre-purchase inspection indicated that the parties understood that they would disclaim implied warranties upon acceptance. Thus, the court determined that the parties intended, at minimum, to waive implied warranties through the use of the “as is” clause.

The “As Is” Provision Did Not Disclaim the Express Warranty of “Airworthiness”

The court then evaluated whether the airworthiness clause constituted an express warranty and, if so, whether the parties intended to disclaim it. Applying the Uniform Commercial Code, the court stated that any affirmation of fact or promise made by the seller to the buyer that relates to goods and becomes part of the basis of the bargain creates an express warranty that the goods must conform to the affirmation or promise. Citing U.S. Supreme Court precedent,2 the court held that the terms “airworthy” and “certificate of airworthiness” are technical terms capable of only one reasonable interpretation – compliance with FAA’s technical and legal requirements – and do not “merely mean that a person may be able to safely fly the aircraft.” Because the term “airworthy” is not ambiguous, the written assurance of airworthiness rises to the level of an express warranty. The court then considered interpretation and construction rules to determine that the parties did not intend to disclaim the specific “airworthiness” warranty by virtue of the general “as is” clause.

Aircraft Not “Airworthy” When It Does Not Conform to the Type Certificate

Because the facts were uncontested, the court found it appropriate on summary judgment to address the seller’s obligations that it deliver an “airworthy” aircraft. The court reiterated the FAA statutory scheme that to be airworthy an aircraft must conform to the type certificate approved for that model aircraft and be in a condition for safe operation. Here, it was uncontested that the prior modifications to the aircraft’s engine altered the aircraft such that it did not meet the specification for the aircraft model type listed in the airworthiness certificate. The court further determined that there was insufficient evidence regarding compliance with certain airworthiness directives. Accordingly, the court found that the aircraft was not “airworthy.”3

Recognizing the Contractual Importance of an “Airworthy” Aircraft

Importantly, courts continue to take the view that “anecdotal” suggestions of an individual aircraft’s compliance with its type certificate do not meet the evidentiary standard necessary to establish airworthiness. For instance, in Luig, the court rejected the seller’s unsupported assertion that an FAA field office had issued a letter stating that the modifications to the engine were properly documented and that FAA did not think a type change was necessary. In an earlier case, a New York District Court rejected a seller’s argument that auxiliary center tanks on a commercial aircraft had been FAA-approved because there were anecdotal reports that a small number of other aircraft of that model type registered and operating in the United States had auxiliary center tanks.4

This litigation serves as another reminder that the requirement to deliver an “airworthy” aircraft necessitates the parties’ understanding of the required regulatory approvals at the time they enter into an aircraft purchase agreement. This understanding is especially important because these types of disputes will almost always be subject to expert analysis and scrutiny given the comprehensive nature of the FAA regulatory scheme. Indeed, in Luig, the seller’s own expert witness rebutted his initial opinion and conceded during deposition that “if I had to do it again today, I would say it was unairworthy.”

Footnotes

1. __ F. Supp. 3d __, 2014 WL 5431887 (N.D. Tex. Oct. 27, 2014).

2. See United States v. S.A. Empresa de Viacao Aerea Rio Grandense (Varig Airlines), 467 U.S. 797 (1984). 

3. The court denied the plaintiff’s motion for summary judgment on the breach of contract claims because it found that under Texas law damages were permitted  only when the seller failed to deliver the goods, the buyer rejected the goods, or the buyer revoked its acceptance of the goods. Here, the uncontested facts demonstrated there was no fact issue that the buyer’s acceptance was final. 

4. See Austrian Airlines Oesterreichische v. UT Finance Corp., 567 F. Supp. 2d 579, 592 (S.D.N.Y. 2008), aff’d, 336 Fed. Appx. 39, 2009 WL 1940715 (2d Cir. July 2, 2009).