England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		11 January 2000

The Hon Mr Justice Thomas

Introduction

There is before the court an appeal against three awards made in three arbitrations which were heard together. They concerned the building of three bulk carriers of 149,000 dwt by the Appellants (the builder) for the Respondents (the buyers) under contracts made respectively in February and April 1991 and in May 1993. Each of the buyers alleged that there were defects in the erection welding of the vessel which the builder had contracted to build and sell to it. Damages were claimed from the builder for the cost of repairing the welding of the first two of the vessels and for the depreciated value of all the vessels.

The arbitrators acceded to an application by the builder that they should determine as a preliminary issue whether, even if the buyers made good the allegations pleaded, the builder was nonetheless not liable under the terms of each of the shipbuilding contracts. The arbitrators decided the preliminary issue in favour of the buyers and concluded that the terms of the contracts did not, in the circumstances in which “acceptance” had taken place, exempt the builder from liability for the breaches.

The terms of the shipbuilding contracts

It is convenient first to outline the terms of the three shipbuilding contracts which were in materially identical form. Each contract followed the broad structure of a standard form of shipbuilding contract.

•    The first part of the contract (articles I - V) required the builder to build and complete the vessel in accordance with the specifications annexed to the contract; it required the vessel to be built according to the rules of a classification society, NKK.
•    The next part of the contract provided for sea trials, delivery and extensions of time for delivery and a warranty of quality (articles VI - IX). Following the usual terms of a shipbuilding contract, the builder was required to conduct trials and sea trials of the vessel and at the end of the trials the buyers were required to state whether they accepted that the vessel complied with the contract. It provided a regime to deal with delay and made provision for delivery of the vessel; this was a formal process in which documents were to be signed and a protocol of acceptance and delivery executed. The contract also provided a guarantee period of one year during which the builder was obliged to remedy any defects discovered and provided for exclusions of liability.
•    The next part of the contract (articles X and XI) dealt with the default and the rights of the buyer in certain circumstances to rescind the contract.
•    The final part of the contract (articles XII - XV) dealt with other matters such as insurance and arbitration. Nothing turns on those articles.

However, although these contracts followed the general format to be found in most shipbuilding contracts and employed wording that is commonly to be found in shipbuilding contracts, it is a feature of shipbuilding contracts that there are often detailed variations in the wording. These come about in the course of negotiations between the legal representatives of the builder and the buyers or sometimes because builders or their legal advisers have their own “house styles”; the principal disputes in this appeal result from such variations to the Shipbuilders Association of Japan standard form. Thus although the structure of this contract followed the broad standard form, effect must be given to the wording of this particular contract, even if that wording had achieved a result which might not, at first sight, accord with the general purpose of the standard form. A striking example of this is the decision of Ackner J in Harland & Woolf Ltd -v- Lakeport Navigation Co Panama SA [1974] 1 Lloyd’s Rep 301.

The issues that arose

The preliminary issues before the arbitrators were framed as follows:

“Assuming that there were defects in the vessel’s erection welding as alleged in the points of claim which defects were:

(i) latent in the sense that they were defects which were and could not ordinarily have been apparent to the [buyers] at or before the time the vessel was delivered to and accepted by the [buyers] and that there were not and could not ordinarily have been apparent to the [buyers] at any time during the guarantee period provided for in article IX.1

(ii) known by the [builder] to exist or to have occurred at the time the vessel was delivered to and accepted by the [buyers]

(iii) concealed by the [builder] from the [buyers] in the way alleged in sub-paragraphs (a) - (c) of paragraph 4(iii) of the interim points of reply:

(a) whether on the true construction of the contract and in particular article IX.3 thereof the claims for breach of the contract in the points of claim may be brought in respect of such defects.

(b) whether on the true construction of the contract and in particular article IX.3 thereof the losses claimed are recoverable.”

There was also an issue before the arbitrators as to whether there were implied terms of the contracts, but the buyers did not pursue that issue at the hearing of the preliminary issues before the arbitrators.

At the hearing before the arbitrators, the breaches of contract pleaded were characterised by the buyers as “deliberate”. In the course of argument before the court the buyers relied on the fact that not only were the breaches pleaded deliberate but the terms broken were highly significant and the consequences very serious. It will be necessary to explain this in more detail as an issue arose as to whether it was permissible for the buyers to adopt this course. However it became clear that it was possible to consider the effect on the issue of construction of the nature of the term broken, the manner of the breach and the consequences of the breach as a separate question from the other two questions which arose on the preliminary issues, if an assumption could be made for the purposes of those two questions.

Those questions can be summarised as:

(1) Did article IX exclude liability for defects arising from breaches of the express terms of the contract discovered after the expiry of the guarantee period, or if it did not, did it nonetheless limit the damages recoverable?

(2) Was any exclusion of liability under article IX dependent upon “acceptance” or “notification of acceptance” under article VI?

(3) Did article IX exclude liability for matters of the nature pleaded in the points of claim and interim points of reply?

For the first two questions, I have proceeded on the assumption that the term broken was not significant, that the breach was not deliberate and the consequences of the breach were not serious.

(1) Did article IX exclude liability for defects arising from breaches of the express terms of the contract discovered after the expiry of the guarantee period, or if it did not, did it nonetheless limit the damages recoverable?

The buyers’ primary contentions were encompassed within this first question as those contentions did not depend upon the nature of the term broken, the manner of the breach or the consequences of the breach. As I have stated, I shall therefore consider this question on the basis that the term broken was not significant, that the manner of the breach was not deliberate and the consequences were not serious. It was the buyers’ contention that, even in these circumstances, article IX did not exclude the builder’s liability for defective welding. Their argument was founded on the basis that the welding was defective in breach of three express terms of the contract:

•    article I.1 which required the builder to construct the vessel in accordance with the terms of the contract and specifications
•    article I.2 which required the builder to build the vessel in accordance with the rules of NKK
•    article I.7 which required the materials supplied to be in accordance with NKK’s rules and that the vessel be built in a sound and workmanlike manner according to first class shipbuilding practice.

It was the buyers’ case that there was no exclusion of liability on the terms of article IX for breach of these express terms, quite irrespective of the nature of the term broken, the manner of the breach or the consequences of the breach.

The facts relevant to the first and second questions

It is sufficient to summarise the facts as follows:

•    After the sea trials, the contract provided by article VI that the builder should notify the buyers of their completion and the buyers should then notify the builder of their acceptance or rejection of the vessel. This exchange of telexes did not take place and the buyers did not notify the builder of its acceptance or rejection as required.
•    However each vessel was accepted by the buyers; on delivery of the vessel, a protocol of delivery and acceptance was executed for each of the vessels.
•    The protocol in respect of the Seta Maru was signed on 25 June 1992. It recited the fact that the builders delivered the vessel in accordance with the provisions of the contract and then provided that the buyers

“hereby accept the delivery of the aforesaid bulk carrier and certify the same is delivered in accordance with the provisions of the contract and that the Protocol of Delivery and Acceptance does not release [the builder] from its liabilities under the provisions of Article IX of the contract”

•    The defects in the welding of the Seta Maru were first discovered on 17 November 1995 – over 2 years after the expiry of the 12 month guarantee provided for in article IX.1. The defects were not and could not ordinarily have been apparent to the buyers on acceptance or delivery or at any time during the guarantee period.
•    The Saikyo was delivered on 31 March 1993 and the protocol executed; the defects in the welding were first discovered on 16 December 1994 – nine months after the guarantee had expired.
•    The Suma was delivered on 4 November 1994 and the protocol executed; as a result of the defects discovered on the other vessels, the Suma was inspected during the guarantee period for similar defects. These were discovered and replaced by the builder.

•    The defects were in the erection welding of the vessels; in the case of the Seta Maru and the Saikyo, each suffered a casualty involving an ingress of water through the shell plating.

•    In the case of the Seta Maru and the Saikyo, the buyers claimed for the cost of repairs, the reduction in market value, management costs and loss of earnings; in the case of the Suma, no claim was made for the cost of repairs as these had been met by the builder. At the hearing before the arbitrators, the claim in respect of management charges was not considered as it was not possible to identify which part of these were recoverable as costs of repair.

The terms of article IX

Article IX.1 provided:

Guarantee of Material and Workmanship

The Builder, for a period of twelve months following acceptance by the Buyer of the vessel, guarantees the vessel, her hull and machinery and all parts and equipments thereof which are manufactured, furnished or supplied by the Builder and/or its subcontractors under this contract against all defects in materials and/or workmanship on the part of the Builder and/or its subcontractor; provided, however, that the Builder’s warranties under this contract do not extend nor apply to the Buyer’s supplies (as defined hereinafter). The Builder’s obligations under this Article are limited to the repair and replacement at its costs of all defects against which the Builder’s guarantees are given under this Article.”

Article IX.2 made provision for the giving of notice as promptly as possible after discovery of defects; it also provided that there was no liability for defects discovered prior to the expiry date of the guarantee, if notice was not given within 30 days of the expiry of the 12month guarantee period.

Article IX.3 was in the following terms:

“Extent of the Builder’s Liability

(a) The Builder shall have no obligation under this guarantee for any defect discovered after the expiration of the guarantee period specified hereinabove and for any defects whatsoever in the Vessel other than the defects specified in Section 1 of this Article. Nor shall the Builder in any circumstances be liable for any indirect, consequential or special losses, damages or expenses, including, but not limited to, loss of time, loss of profit or earning (whether of the Vessel, her master, officers, or crew, or of the Buyer, its officers, agents or employees) or demurrage or towing or pilot charges or dockage, directly or indirectly incurred or occasioned to the Buyer by reason of the defects specified in Section 1 of this Article or due to repairs or other work done to the Vessel to remedy such defects.

.............

(d) The guarantee contained as hereinabove in this Article replaces and excludes any other liability, guarantee, warranty and/or condition imposed or implied by the law, customary, statutory or otherwise, by reason of the construction and sale of the Vessel by the Builder for and to the Buyer”.

Article IX.3(b) excluded liability for defects or damage caused by enumerated events such as perils of the sea, fire and negligent conduct on the part of the buyers and article IX(3)(c) excluded liability for defects or damage caused by repairs alterations and the like carried out by a person other than the builder.

Article IX.4 provided:

Remedy of Defects

(a) The Builder shall at its expense remedy all defects against which the vessel is guaranteed under this Article by replacing or repairing the defective part of parts at the shipyard.

The other paragraphs of article IX.4 dealt with the position where the vessel could not be returned to the builder. Article IX.5 made the guarantee conditional upon the buyer operating the vessel prudently.

The meaning of article IX

It was common ground that article IX.3(d) excluded the liability of the builder under any implied term (whether implied by operation of law or by statute) but did not exclude liability for breach of an express term of the contract: Andrews -v- Singer [1934] 1KB 17.

The central issue on the first question therefore was, on the assumption made, whether on the terms of this particular contract, although other liabilities had been excluded, the liability for breach of the terms of article I had been excluded or whether the builder remained liable without any contractual limitation either in time or otherwise for a breach of those express terms. It was not disputed that it might appear, at first sight, unusual that the parties had effectively excluded liability for implied terms, provided a guarantee for twelve months, but yet had agreed that the builder would remain liable for breaches of the express term of the contract without any contractual limitation in time. Whether the parties had intended this result must be ascertained by an analysis of the wording in accordance with well established principles; the summary of those principles and the relevant authorities in the judgment of Rix J in BHP Petroleum v British Steel plc [1999] 2 All ER (Comm) 544 at p at p 550 to 554 has been of considerable assistance.

Article IX must be read as a whole. Approaching the article in this way, it is first clear that sections 1, 2 and 4 provided a comprehensive code for a guarantee.

•    The terms of article IX.1 provided for a guarantee against all defects in material and workmanship for a period of 12 months following acceptance of the vessel, with the builder’s obligation being limited to the repair and replacement at its cost;
•    Article IX.2 provided for the giving of notice of defects falling under the guarantee.
•    Article IX.4 dealt with the remedying of defects under the guarantee.

Next, the effect of article IX.3 (b), (c) and (d) was also clear:

•    article IX.3 (b) and (c) excluded liability for defects caused by the matters (such as perils of the sea, negligence by the buyers or repairs by others) set out in those paragraphs;
•    article IX. 3(d) excluded liabilities arising otherwise than under the express terms of the contract.

The question then arises as to the meaning of Article IX.3(a) in this context. The first sentence read:

The Builder shall have no obligation under this guarantee for any defect discovered after the expiration of the guarantee period specified hereinabove and for any defects whatsoever in the Vessel other than the defects specified in Section 1 of this Article.

Was this intended to exclude liability arising under the express terms of the contract otherwise than under the terms of the guarantee contained in article IX.1 or was it intended to define the extent of the liability under the guarantee?

It was argued for the buyers that the first sentence was to be construed as defining the liability of the builder under the guarantee, but not the liability that would otherwise exist for breach of an express term of the contract. The argument relied on the words “no obligation under this guarantee” being read as a phrase governing both parts of the remainder of the sentence so that it read, “no liability under this guarantee for any defect discovered after the expiration of the guarantee period “ and “no liability under this guarantee for any defects whatsoever in this vessel other than the defects specified in section 1 of this article”. In this way, the sentence dealt with the date by which defects had to be discovered and the nature of defects which were covered; it made clear that the liability under the guarantee extended only to defects discovered before the expiry of the guarantee and only to defects within the scope of article IX.1 - defects in material and workmanship.

I do not accept that argument. Paragraph (a) article IX.3 must be read in context as part of article IX.3 where the other subparagraphs were intended to and did exclude liability. Just as it was clear that paragraphs (b), (c) and (d) excluded liability for the matters set out in those paragraphs, paragraph(a) was , in my view, also intended to and did exclude liability. What article IX.3(a) did was to exclude liability for defects arising from a breach of an express term of the contract unless there was liability under the terms of article IX.1, just as article IX.3 (d) excluded other liabilities which did not arise under the express terms of the contract. In my judgment, the first part of the first sentence excluded liability under the guarantee for defects which were not discovered during the 12 months; that part therefore excluded defects which might have existed or occurred during the 12 month period but which were not discovered within that period. The second part of the first sentence excluded liability under the contract for any defects other than those specified in article IX.1.

The second sentence of paragraph (a) followed naturally on from this; it excluded liability for indirect and consequential loss and damage by reason of the defects specified in article IX.1. Where there was a claim for a defect within article IX.1, then it made clear that no claim could lie for matters such as consequential loss or damage which the buyer suffered by reason of the defect within article IX.1. That was what the second sentence achieved; what it excluded was consequential loss or damage referable to the defects specified in article IX.1 or due to work done to remedy such defects. Where there were other claims, then the exclusion in that sentence did not cover the consequential losses, as claims for defects arising from breach of express terms were excluded by the first sentence and claims for breach of other obligations excluded by article IX.3(d).

Read in this way, article IX.3 was a comprehensive provision forming part of what was in my view a complete code for dealing with defects discovered after the delivery of the vessel.

In contrast the construction advanced by the buyers and accepted by the arbitrators made paragraph (a) of article IX.3 largely superfluous. For example, if the second part of the first sentence was read as meaning that the builder has no obligation under the guarantee for defects in the vessel other than the defects specified in section 1 of the article, then it gave that part no meaning; clearly there could not be any liability under the guarantee set out in article IX.1 (which itself specified the defects covered) for defects that were not specified in article IX.1.

On the assumption made for the purposes of this question, in my judgment therefore the terms of article IX provided for a guarantee for defects discovered after the buyers accepted delivery of the vessel; article IX.3 excluded liability for defects arising from breaches of the express terms of article I beyond the liability expressly assumed under article IX.1; article IX.3 was therefore not confined to exclusion of breaches of implied terms. This result accords with the general commercial purpose of the contract and the particular variations to the standard form used in this contract.

The scope of the exclusion for different kinds of damage

The builder accepted that, if the first sentence of article IX.1 did not (contrary to the conclusion I have reached) exclude their liability for defects arising from breaches of express terms of the contract save to the extent there was a remedy under the guarantee, they were liable for the costs of repairing the Seta Maru and the Saikyo. However they contended that the second sentence nonetheless excluded liability for loss of earnings (as consequential losses) and any claim for diminution in value (as special loss or damage).

In view of the conclusion I have reached on article IX, this question does not arise. However, as I have already stated, in my view, the second sentence of article IX excluded consequential loss or damage solely referable to the defects specified in article IX.1 or due to work done to remedy such defects. In my view the words are clear; that is all the second sentence excluded. Although the arbitrators gave a different construction to the first sentence of articleIX.3(a) to the one I consider correct, they reached the same view as I have expressed on the limited nature of the exclusion in the second sentence.

There was also argument before the arbitrators as to the claim for diminution in value; on the arbitrators’ conclusion, the point did not arise, but they expressed the view that if, contrary to their conclusions, the claim for breach of article I was covered by article IX, the claim for diminution in value was excluded by the last sentence of article IX.1. I agree with that view. The liability the yard accepted under article IX.I was limited to repair and replacement; this of necessity meant that there was no claim for diminution in value.

(2) Was any exclusion of the liability under article IX dependent upon “acceptance” or “notification of acceptance” under article VI?

The opening words of article IX made it clear that the guarantee period of 12 months ran from acceptance of the vessel. “Acceptance” was a term used in two senses in the contract – notification of acceptance of conformity with the contract after sea trials under article VI and acceptance of the vessel on delivery under article VII. The arbitrators considered that it was notification of acceptance by the buyers under article VI (and not article IX.3) that was the operative provision to exclude liability for defects save to the extent a remedy was provided in article IX.1, though concluded that the provision had not on the assumed facts taken effect. It is necessary therefore to refer to the terms of articles VI and VII of the contract.

The terms of Articles VI and VII

As I have already mentioned, the contract provided by Article VI for sea trials to take place:

•    Under Article VI.1 the buyers were to receive notice of the sea trials; if their representative did not attend, then the builder was entitled to conduct the trials and the buyers were obliged to accept the vessel on the certificate of the yard and NKK that the vessel was found on the trials to conform to the contract and specification.

•    Article VI.4 provided:

Method of Acceptance or Rejection

(a) Upon telex notification by the builder of the completion of the trials of the vessel the Buyer shall, within six (6) days thereafter, notify by telex the builder of its acceptance or rejection of the vessel and, if the buyer shall give notice of rejection of the vessel, such notice shall include specific and detailed reasons therefor.

(b) In the event that the result of the trial run indicate that the vessel or any part thereof including its equipment does not conform to the requirements of this contract and/or the specifications, then the builder shall investigate the cause of the failure and the proper steps to be taken to remedy the same and shall complete whatever corrections and alterations as may be necessary, and upon telex notification by the builder of completion of such alterations or corrections, the buyer shall, within six (6) days thereafter, notify by telex the builder of its acceptance or rejection of the vessel. If the buyer shall give notice of rejection of the vessel, such notice shall include specific and detailed reasons therefor on the basis of the alterations and corrections by the builder.

(c) In the event the buyer fails to notify by telex the builder of its acceptance or rejection of the vessel together with specific and detailed reasons for rejection (if appropriate) within the applicable period of time provided in the preceding paragraphs (a) and (b), the buyer shall be deemed to have accepted the vessel and the vessel shall then be ready for delivery.

•    Article V1.5 provided:

Subject to the provisions of Article IX hereof, the buyers’ notification of acceptance under this Article VI.4 shall be final and binding so far as conformity of the vessel to this contract and the specifications is concerned and shall preclude the buyer from refusing formal delivery of the vessel as hereinafter provided, if the builder shall have complied with all other conditions for delivery as set forth herein. the vessel shall remain at the builder’s risk until final formal delivery to and acceptance by the buyer.

The contract then provided by Article VII for delivery.

•     Article VII.2 provided:

Upon fulfilment by the buyer and the builder of all of their respective obligations with respect to the vessel as stipulated in this contract, delivery of the vessel shall be made forthwith within 7 days after the vessel is ready for delivery, as provided in article VI hereof; provided that notice of readiness of delivery shall have been given to the buyer by the builder hereunder. Concurrently with delivery of the vessel, each of the parties hereto shall give to the other a signed protocol of Delivery and Acceptance, acknowledging delivery of the vessel by the builder and acceptance thereof by the buyer......”

•    Article VII.3 provided:

Upon delivery and acceptance of the vessel, the builder shall deliver to the buyer the following documents, which shall accompany the Protocol of Delivery and Acceptance:...........”

The meaning of acceptance in article IX

In my view, acceptance in the first line of article IX meant acceptance of the vessel by the buyers on delivery by the builder, accompanied by the protocol of delivery and acceptance. This was the date from which the guarantee period was to run. This was also the view formed by the arbitrators; in summarising the facts, they took the expiry date of the guarantee to run from 12 months from the date of delivery (ie the date on which the vessel was delivered and accepted). It is therefore clear that “acceptance” in article IX had nothing to do with the state of the vessel after the completion of the trials or the operation of article VI.

That in my view was the sole relevance of acceptance for the purposes of article IX; it was otherwise a complete code and was not dependent on article VI. There is no reference in article IX to article VI and there is nothing in its language or the structure of the contract to make that article dependent on article VI.

The effect of failing to exchange the telexes specified in article V1.4

However the arbitrators concluded that article VI.5 was the important operative provision which excluded liability for defects arising out of an express breach of the contract; that whether it took effect depended upon article VI.4. In their award, the arbitrators recorded that at the hearing the point taken by the buyers in relation to a failure to carry out the procedure in article VI.4 seemed “ a fairly innocuous one”. However it is clear that, after the hearing in the light of information that the exchange of telexes contemplated by article VI.4 had not taken place and further submissions, that point became of decisive importance. The arbitrators decided that because the telex required by article VI.4 had not been exchanged, the buyers could not rely on the provisions of article VI.5; compliance with article VI.4 by sending the telex was essential if the terms of article VI.5 were to be satisfied. They further held that article IX was not a complete code in itself and it had to be read subject to compliance with article VI, as it was article VI.5 which prevented the buyers from bringing a claim for damages for breach of article I.

I do not consider the arbitrators’ conclusions were correct for two reasons.

First compliance with article VI.4 by sending the telex was not a condition to article VI.5 taking effect.

•    Paragraph (c) of article VI.5 provided that if the buyers did not send a telex notifying their acceptance or rejection, then the buyers were deemed to have accepted the vessel.
•    It therefore followed that a telex notification of acceptance was not necessary; even if there was no telex notifying acceptance, then the buyer was deemed to have accepted the vessel.
•    But even without that provision in article VI.4(c), the reference in article VI.5 to acceptance under article VI.4 was a reference to acceptance that the vessel conformed with the contract and specifications. The acceptance did not have to be in any particular form; a form could not have been required as there were provisions dealing with deemed acceptance (see also article VI.1). In my judgment, it was acceptance that brought article VI.5 into operation and not a particular form such as the sending of a telex.

Secondly, article VI.5 was a non rejection clause and it did not in any way affect the operation of article IX; thus, even if strict compliance with article V1.4 was required and therefore the terms of VI.5 were not satisfied, the exclusion of liability in article IX did not depend on it.

•    The reference in article VI.5 to article IX was inserted to make it clear that an acceptance of the vessel (which was final and binding as regards conformity with the contract and specifications) did not in any way preclude a guarantee claim available under article IX. Thus if there was a latent defect at the time of acceptance (even if it could have been ordinarily discovered by the buyers), a claim was not precluded.
•    The provision in article VI.5 that acceptance was to be regarded as final and binding as regards conformity with the contract and specifications was made for the purpose of ensuring that the buyers could not thereafter refuse delivery. Article VI.5 made this clear by stating that the buyers were precluded from refusing formal delivery. It was a non rejection clause. There were in the 1970s and 1980s numerous instances known throughout the shipbuilding industry where refusal of delivery was made on the basis that there was some non compliance with the contract or specifications; this provision was designed to exclude that possibility and prevent rejection, once the procedures in article VI.4 had been complied with or acceptance made. It did no more than that.
•    Article VI.5 did not exclude any rights other than the right to reject; if there were latent defects, article VI.5 did not affect the buyers’ rights when they were discovered. There were no words that excluded liability for latent defects in Article VI. Whether those rights were limited depended on the operation of article IX.
•    Furthermore, even if the provision affected the buyers’ rights other than the right to reject, it only had evidential effect and could only take effect as an estoppel: see Chitty on Contracts 28^th edition, paragraphs 720-1. On the facts assumed for the purposes of the preliminary issue, there could be no estoppel.

The buyers put forward further arguments about the scope of article VI.5, but in view of the conclusion I have reached that that article did not restrict the buyers’ claims made in the arbitration, it is not necessary to deal with them at length.

•    They suggested that, if contrary to the view I have formed article VI.5 precluded claims for breaches, its scope was limited; that as article VI.5 referred only to compliance of the vessel with the specifications and contract, it did not preclude the buyers’ claim for the builders’ failure to follow NKK’s rules. In my view this argument is untenable. The obligation to comply with the rules of NKK is a contractual obligation and clearly within the scope of article VI.5. As many of the obligations to comply with class and the general standards of the contract overlap, it would be nonsensical to draw the distinction suggested.
•    The buyers also suggested that article VI.5 did not cover latent defects or those known by the builder to exist. However as the purpose of the provision was to deal with non rejection and the buyers rights were otherwise not affected by it, I see no reason to limit the clear words in the way suggested by the buyers.

Thus I conclude that any exclusion of liability under article IX was not dependent on acceptance or notification of acceptance under article VI.

(3) Did article IX exclude liability for matters of the nature pleaded in the points of claim and interim points of reply?

Before the arbitrators, it appears that the nature of the builder’s breach was characterised as “deliberate”. The arbitrators stated at paragraph 5 and 6 of their award:

5. For the purposes of the preliminary issues we were asked to assume that the allegations set out in the Points of Claim (which go into greater detail than we have done in the preceding paragraph) were true. We were further asked to assume (i) that the defects we have described were latent (in the sense that they were not and could not ordinarily have been apparent to the Buyers on or before delivery or at any time during the guarantee period); (ii) that they were known by the Yard to exist at the time of delivery; and (iii) that they were concealed from the Buyers, in that the unrepresentative character of the areas inspected by NKK was not disclosed to them.

6. These are serious allegations. They have not been investigated for the purposes of these preliminary issues and we do not know whether they can be proved. We therefore emphasise that they have been assumed by us to be true for the purposes of these preliminary issues only.

In paragraphs 18, 19 and 20, they continued:

18 The buyers argued that we ought to begin our analysis of this point by identifying the kind of breach with which we are concerned; and then asking ourselves whether the provisions of article IX were intended to cover such a breach. Our attention was directed in this connection to Suisse Atlantique [1967] AC 361, particularly to a passage in the speech of Lord Wilberforce at pp 434-5 where he stated:

“.. depending on what the party in breach “deliberately” intended to do, it may be possible to say that the parties never contemplated that such a breach would be excused or limited: and a deliberate breach may give rise to a right for the innocent party to refuse further performance because it indicates the other party’s attitude to future performance. All these arguments fit without difficulty into the general principle: to create a special rule for deliberate acts is unnecessary and may lead astray.”

19. Thus, the Buyers argued, we were (on the assumed facts) concerned with deliberate breaches, which the Yard must have anticipated and intended would not be discovered by the Buyers until after the guarantee periods had expired. The guarantee provisions related to claims under the guarantee, but not to claims where the Buyers’ ability to bring the claims earlier (or to reject the vessels prior to delivery) had been frustrated by the Yard’s concealment of the true position.

20. The allegations that have been made by the Buyers are, as we have already said, serious. It would be surprising, in our view, if (assuming they were true) the Buyers were to find themselves without a remedy in respect of them. In expressing this view we do not lose sight of the possible impact of periods of limitation; but leaving those on one side, we would expect the common law to provide a remedy of some kind for the conduct alleged. After all, the Buyers have (on their case) paid for and taken delivery of vessels in which the material and workmanship was seriously sub-standard, in circumstances where those deficiencies were concealed from those who might otherwise have expected to discover them.

21. To that extent we accept the Buyers’ submission founded on Suisee Atlantique We do not think Article IX was intended by the parties to prevent the buyers from bringing a claim in those circumstances. However, it does not necessarily follow that their remedy is to be found in contract; and , indeed we think that it is not….

It is clear from these passages that the concentration in the argument before the arbitrators was on the deliberate nature of the breach; the arbitrators held that it mattered not for the buyers’ contractual claim whether or not the breach was deliberate; they considered that articles VI.5 and IX were wide enough to cover all breaches of article I of the contract, “whether “deliberate” or not”, provided that the procedure in article VI.4 was followed. They added that the true nature of the buyers’ complaint was that they were deceived and that might give rise to a complaint in tort. Such a claim would not be excluded by article IX, but no such claim had been made.

At the hearing before the Court, the buyers took a wider position, though they made it clear that they were not advancing a claim for fraud or deceit. They referred to a passage in the tenth edition of Professor Sir Guenter Treitel’s treatise on the Law of Contract (1999) at p 205 ff where there is a discussion of the question of the seriousness of a breach of contract in relation to an exemption clause; a difficult question remained unresolved as to the effect of the decisions in Suisse Atlantique and Photo Production Ltd v Securicor [1980] AC 827 on a number of cases where the seriousness of the breach had been a ground for holding an exemption clause did not apply. The discussion then analysed the question of seriousness by reference to the nature of the term broken, the consequences of the breach and the manner of the breach.

The preliminary issue was framed by reference to the points of claim and points of reply; the pleadings in respect of the Seta Maru made allegations that can be summarised as follows:

•    The welding procedures (CO2 gas shielded single sided semi-automatic arc welding with backing strips) approved by NKK for the bottom shell plating, the topside tank bottom plating round gunwales, bilge strakes and internal members were not carried out by the builder . There were other defects in the other welding of the vessel.
•    The builder made known to the individual welders the parts that NKK would inspect with the intention that greater care should be taken with those and they would not be representative of the vessel’s welding
•    On one occasion NKK required further radiographic inspection; this revealed defects in the welding, but these were not repaired. Neither the results of the inspection nor the failure to repair was made known to NKK or the buyers.
•    There were widespread defects in the erection welding “giving rise to a substantial risk of cracks developing (as in fact occurred) and a substantial risk of serious structural failure”

On this basis (which must be assumed to be correct for the purposes of the preliminary issue in relation to the Setu Maru), it appears:

•    The term broken was plainly one that was very important; ensuring that the particular welds identified in the pleading met the requirement of the classification society was important to the structural integrity of the vessel.
•    The consequences of the breach were potentially very serious; it is well known that catastrophic consequences can follow from welding on the vessel’s hull that is defective.
•    The manner of the breach was serious as the builders knew of deficient welding in the vessel’s structure and allowed her to be delivered and go to sea in that state.

Although the pleadings did not specifically set out the significance of the welds which were defective nor spell out in any detail the potential consequences to the vessel, the argument before the court made the true nature of the buyers’ case clear. Indeed, it became clear that the conduct pleaded against the builder gave rise to the allegation that they delivered a vessel which they knew was not seaworthy and which could encounter a catastrophic casualty. Although the buyers alleged this very serious conduct, they made clear that they did not contend that the builder had acted fraudulently.

However, the analysis of the issues before the arbitrators proceeded purely by reference to the manner of the breach and not to the two other considerations to which I have referred. Proceeding on the narrow basis that the only relevant consideration was the deliberate manner of the breach and the importance of the term broken and the potentially catastrophic consequences of the breach should be ignored, the question for decision would be whether article IX did or did not on its true construction cover a deliberate breach, even if one did not have regard to the nature of the term broken or the serious nature of the consequences of the breach.

However looking at the wider issues in fact raised by the pleadings and not merely at the matter in the way in which it was argued before the arbitrators, there would plainly be a stronger argument that article IX.3 did not apply to a breach having all the characteristics of the seriousness alleged than if regard was had only to its deliberate nature. A further question would then arise as to whether it was appropriate to determine as a preliminary issue whether the article did so or not, or whether that question should only be considered after a determination of the factual issues.

The builder contended that, as the matter had been argued before the arbitrators and decided by them only on the basis that the breach was deliberate, it was not permissible for the court to consider the appeal on a wider basis by having regard to the nature of the term broken or the consequences of the breach; the experienced aribtrators had not taken those matters into account. Indeed the builder contended that in view of the way in which the case had been conducted before the arbitrators, it might not be permissible for the buyers to advance the case that is contained in their pleadings.

I consider that there is force in the argument that the court should not consider the issue on a wider basis than that argued before the aribitrators. This is an appeal under the Arbitration Act solely on a question of law on a preliminary issue in an arbitration. The determination reached by the arbitrators to hear a preliminary issue and their decision on that issue was on a much narrower basis than the basis on which it became clear before the court that the buyers’ claim was actually made. It seems to me that it is for the arbitrators to decide whether it is now impermissible (as the builder contended) for the buyers to advance the case actually contained in their pleadings, whether a preliminary issue is appropriate in those circumstances and what course to adopt. These are procedural matters within the jurisdiction of the arbitrators and not within the jurisdiction of the court on an appeal on a question of law. It is not for the court to pre-empt that decision by determining the question in the preliminary issue on the basis that actually emerged from the pleadings, given the position taken by the builder in relation to whether it is permissible for the buyers to advance that case.

On the other hand, it would in my view be undesirable for the court, in those circumstances, to express a view on the preliminary issue which, although framed by reference to the pleadings, was on the basis that the pleadings only alleged that the breaches had the characteristic of being deliberate and not any of the other characteristics pleaded. It would be artificial to do so in the circumstances, pending the arbitrators’ determination of the matters that are within their jurisdiction. However, as I have already set out, the buyers’s primary argument did not depend on the nature of the term broken, the manner of the breach or the seriousness of the consequences; it has therefore been possible to answer the question on the assumption that the that the term broken was not significant, that the breach was not deliberate and the consequences of the breach were not serious.

Conclusion

I therefore answer the question in the preliminary issue

(a) claims for the breaches pleaded in the points of claim cannot be brought outside article IX , but only to the extent that they are pleaded without reference to the seriousness of the terms breached, the manner of the breaches and the consequences of those breaches.

(b) No, If the claims are encompassed within article IX; but if they are not, yes.

I remit the matter remitted to the arbitrators for their further consideration.