ACCEPTANCE INSPECTION OF THE REPAIRED
VESSEL CONSTITUTES A RIGHT AND A DUTY
- Shanghai Yuehai
Changxing Ship Engineering Co., Ltd. v. Wellmark Shipping Limited for dispute over a contract of
vessel repair
【Abstract】
If the ship owner neither inspects and
accepts the ship repair work, nor gives its opinions on the engineering
quality, he may not be deemed as having properly discharged his duty of
acceptance inspection, and should be held liable for breach of contract. In
this situation, the ship repairer may use its defense of simultaneous
performance to retain the ship, so that the ship owner will inspect and accept
the ship repaired as soon as possible.
In the ship repair contract, it is a right
AND obligation that the ship owner should inspect and accept the repaired ship.
Upon completion of the repair work, the ship owner should do this timely, in
accordance with relevant laws and regulations. If he disagrees with any repair
item, quality or price, he may declare it timely and negotiate with the ship
repairer for a solution, or may work with or request a third party to examine,
assess, audit or evaluate such item, quality or price.
【Facts】
Plaintiff:
Shanghai Yuehai Changxing
Ship Engineering Co., Ltd. (Hereinafter “Yuehai”)
Defendant: Wellmark Shipping Limited (hereinafter “Wellmark”)
From July to October 2000, a contract for
the repair of the ship “Shangjiang” concluded between
Yuehai and Wellmark through
fax specified the terms of payment as follows: 30% of the ship repair charge
should be paid to the bank account of Yuehai before
the ship left the shipyard of Yuehai; 30% should be
paid not later than 45 days after the leaving of the ship; and the remaining
amount should be paid not later than 90 days after the leaving of the ship.
After the repair work was done, Yuehai issued to Wellmark an invoice, which noted that the repair work ran
from October 6 to November 12 and that the price of the work was USD 500,000,
and which also further clarified the terms of payment in the contract of
repair: 30% of the price to be paid before the ship leaves the shipyard; 30% to
be paid on or before December 26, 2000; and the remaining to be paid on or
before February 12, 2001. Wellmark did not sign on
the invoice to confirm it, but remitted, through electronic transfer by Bank of
New York of the
Yuehai argued that a
contract for the repair of Shangjiang was concluded
between the parties through fax. Wellmark failed to
pay the price fully for the ship repair even after the court trial began.
Therefore, Yuehai requested the court to or order Wellmark to pay USD 200,000, together with interest, for
the ship repair.
Wellmark argued that
in the payment terms of the contract of ship repair, the ship owner should pay
40% of the price for the ship repair, that is, USD 200,000, within 90 days
after the ship leaves the shipyard. The ship left the shipyard on November 25,
2000. Therefore, Wellmark may make the above payment
at any time before February 25, 2001. It was before the final deadline when Yuehai brought the action in December 2000. Yuehai did not have the right to require Wellmark to pay the price ahead of the schedule. Also, Wellmark did not breach the contract at the time of the
action. Therefore, it lacked factual and legal bases for Yuehai
to bring the action in December 2000. This action should be dismissed.
Wellmark counterclaims
that the payment terms were specified in the contract for the repair of Shangjiang. Upon completion of the repair, Yuehai confirmed with Wellmark
the payment terms, together with the repair period and price. The
representative of Wellmark received and signed the
bill on November 12, 2000. The ship should leave the shipyard on the day, as Wellmark had performed all of its obligations under the
contract in a full and appropriate manner. However, Yuehai
illegally retained the ship on account of a dispute between the parties, which
resulted in
operational losses to Wellmark. In view
of the above, Wellmark requests the court to order Yuehai to compensate for the economic losses sustained by Wellmark.
Regarding the counterclaim, Yuehai argues that Yuehai had the
right to retain the ship because Wellmark had not
performed its duty of acceptance, as it failed to sign and receive the
Work-Done List and the invoice in accordance with relevant rules. This act of Yuehai did not constitute a breach of contract under the
contract for the ship repair.
【Judgment】
After the trial,
The contract concerned does not specify a
detailed timeframe for the delivery after the completion of the repair.
According to relevant laws and regulations, upon completion of the work under a
contractor’s agreement, the contractor shall deliver to the owner the completed
work, together with technical information and quality certificates, if
applicable. The owner shall inspect and accept the completed work. In the
existing case, upon completion of the repair, Yuehai
submitted to Wellmark the Work-Done List, and an
invoice which confirmed the repair period, the amount of the repair price, and
the payment terms. On the date of completion of the work, the representative of
the ship owner of Wellmark said that he/she received
only the Work-Done List. But, he/she did not inspect and accept the repair work
done, nor raised objection over the work quality timely. Also, he/she did not
sign to confirm the invoice. Therefore, from this act of Wellmark,
it could be determined that Wellmark, as the owner,
failed to timely inspect and accept the work done timely. It did not violate
relevant law that Yuehai suspended the delivery to Wellmark of the ship repaired. After Wellmark
signed on the Work-Done List un-annotated on November 21, the ship concerned
may leave the shipyard. It lacked bases in fact and law that Yuehai applied to seize the ship on November 23. This
caused the ship Shangjiang to be unable to be put
into operation timely. Yuehai should compensate for
the loss of Wellmark. Therefore, this loss of Wellmark should be limited to the business profit on
November 23 and 24.
To sum up,
Disagreeing with the first-instance
judgment, Wellmark appealed to the High People’s
Court of Shanghai. After the trial, the High People’s Court of Shanghai held
that the original judgment was clear in the determination of the facts, and
correct in the application of relevant laws. The appeal is dismissed and the
original judgment is affirmed.
【Analysis】
The contract of ship repair that was established
between Wellmark and Yuehai
through fax was legal and effective. Upon completion of the repair, Yuehai was obligated to deliver the ship repaired to Wellmark,
and Wellmark was obligated to pay the repair price
fully according to the time schedule specified in the contract. The key to this
case is how to determine the act of Wellmark to
refuse to inspect and accept the repaired ship.
I.
The right and obligation of the ship owner to inspect and accept the ship
repaired
As a type of contractors’ agreement, the
contract of ship repair should be governed by the provisions on contractor’s
agreement in the Contract Law. Article 261 of the Contract Law provides that
“Upon completion of the work under a contractor’s agreement, the contractor
shall deliver to the owner the completed work, together with technical
information and quality certificates, if necessary. The owner shall inspect and
accept the completed work.” As different from the pure physical delivery under
a sales contract, the inspection and acceptance under a contractor’s agreement
includes not only the physical acceptance, but also the examination and
confirmation of the work done by the undertaker. From the purpose of the
contractor’s agreement, it is a right of the owner to examine and accept the
work done. From the perspective of law, to do so is also an obligation on the
owner. Therefore, upon completion of the work done, the owner should timely
inspect and accept the work done. It is a breach of contract if he refuses to
do so without proper grounds.
The contract of ship repair is a
professional contractor’s agreement, which involves complicated technology and
processes. The work to be done is often diverse and huge, and potential repair
jobs are many. It is also possible that the repair items are increased, and the
originally specified repair items and fees may be changed with the agreement of
the parties. Any increased/decreased items and costs (commonly known as the
plus/minus account) from it will be confirmed one by one or as a package by the
parties. These costs will often be paid by the ship owner, together with the
final payment for ship repair, upon the completion of the work. Therefore, the
Work-Done List and the bill, which records the repair items, period and fees,
constitute an inseparable part of the contract of ship repair. In the existing
case, the Work-Done List and the bill are important and immediate evidence for Yuehai and Wellmark to perform
the contract concerned, and for the determining of their rights and obligations.
As Wellmark failed to inspect the ship repaired and
to sign on the Work-Done List and the bill, this indicates that the parties to
the contract concerned did not confirm the repair items. Since the status of
the subject matter to deliver was not ascertained, it would lead to a dispute on the
items and fees of the ship repair Yuehai let the ship
go,.
Generally if it disagrees with the repair
item, quality or price, the ship owner may declare it timely, and negotiate
with the repairer for a solution. It may also work with or request a third
party to examine, assess, audit or evaluate such item, quality or price. In the
case of an overhaul, the parties may specify a test voyage to examine the
conditions of the ship. The ship owner may decide whether to accept the ship on
the basis of the test voyage, or request further repair. If it is difficult for
the ship owner to discover any potential defects in the ship through the
short-term test, the parties may specify a warranty period. After the
preliminary inspection and acceptance, the ship owner may first take possession
of and operate the ship. In case of any quality issue due to the repair that
arises within the warranty period, it may require the repairer to fix it or
compensate for the additional cost of the repair. In the existing case, Wellmark signed on the Work-Done List submitted by Yuehai, and annotated on it “receive only”. It neither
inspected and accepted the ship repair work, nor gave its opinions on the
engineering quality. It is determined that it has not properly discharged its
duty of inspection and acceptance.
II.
The defense of simultaneous performance
Article 66 of the Contract Law provides
that “Where the parties owe performance towards each other and there is no
order of performance, the parties shall perform simultaneously. Prior to
performance by the other party, one party is entitled to reject its requirement
for performance. If the other party rendered non-comforming
performance, one party is entitled to reject its corresponding requirement for
performance” This clause is deemed in the Chinese circle of legal theories as
the defense of simultaneous performance. As a deferred right of defense granted
to the parties, it has the purpose of excluding the risk that the other party
may not perform its obligations accordingly, if one party has performed its
obligations. More importantly, it is intended to cause the opposite party to
perform their obligations as soon as possible, so that it can obtain the
principal party’s performance. However, to protect the safety of transaction
and to prevent the parties from misusing their rights, the law makes strict
conditions for the application of the defense of simultaneous performance: 1.
The parties must be indebted to each other under a mutual contract; 2. Both the
obligations that the parties owe each other must have reached their deadlines;
3. The other party failed to effect its obligation or rendered non-conforming
performance; and 4. The other party’s performance is feasible.
In the existing case, Yuehai
and Wellmark entered into a contract of ship repair.
In the agreed period of delivery, Yuehai had the duty
to deliver to Wellmark the ship that has been
repaired under the contract, and Wellmark had the
duty to inspect and accept the ship so repaired in accordance with the Contract
Law. Although the contract does not specify the order of priority for the
performance of the above duties, and although the Contract Law does not provide
for the order of priority between the delivery by the contractor of the
completed work and the inspection and acceptance by the owner of such work, the
receiving action of the owner is in a complicated state, in fact, which
comprises inspection and acceptance. It is unnecessary and
impossible to divide the two acts in time or space. Moreover, Yuehia retained the ship repaired on the ground that Wellmark failed its duty of inspecting and accepting the
ship. In terms of its attribute, this action counters the claim of Wellmark to release the ship, and was a right of opposition.
In terms of its purpose and cause, it was used to seek Wellmark’s
co-performance of the payment duty and the inspection and acceptance duty,
other than to ensure the performance of an obligation, or to consider any
circumstances that render Wellmark, as one of the
parties, impossible to perform the contract, such as the serious degradation of
its business, or the loss of its business reputation. In terms of its
application, this incidental duty is closely related to the realization of the
purpose of the contract. It is also explicitly provided for in the Contract
Law. It can be determined that this duty is associated with or as a
consideration for the delivery duty of the repairer. Therefore, pursuant to the
relevant provisions of the Contract Law, it should be determined as an exercise
of its defense of simultaneous performance that Yuehai
retained the ship.
III.
The ship owner’s implicit anticipatory breach of contract
(I) The term
“anticipatory breach of contract” defined
The term “anticipatory breach of contract”
means that after a contract is effectively established, and before it comes to
its performance period, one of the parities, affirmatively and explicitly
states that it will not perform the contract, or one of the parties
anticipates, on the basis of any objective fact, that the other party will not
perform the contract when it becomes due. The first situation is that one of
the parties clearly states its intention to not perform its obligations under
the contract. The second situation is that although without a statement of
non-performance, one of the parties has caused itself to be in a state of
non-performance. When the opposite party holds solid evidence that the party
will not or not be able to perform the contract, the anticipated non-performing
party is unwilling to provide necessary security for its performance. Thus,
anticipatory breach of contract can be explicit or implicit.
(II) Constitutive elements of implicit
anticipatory breach of contract
Article 108 of the Contract Law provides
that “Where one party expressly states or indicates by his conduct that it will not
perform his obligeations under a contract, the other
party may hold him liable for breach of contract before the time of
performance.” Pursuant to this clause, an anticipatory breach of contract can
be expressed explicitly by statement or written notice, or implicitly by the
action of the actor so that the other person may know it from such action. It
is generally accepted that an implicit anticipatory breach of contract must
include the following six elements. 1. The existence of an effective contract;
2. The breach of contract occurs after the contract is established, but before
the date for the performance of the breaching party arrives; 3. There is no
justifiable cause for the breach; 4. The other party expects that the breaching
party will not or not be able to perform its duties under the contract when the
term for such performance expires; 5. The abiding party must hold solid
evidence; and 6. The breaching party, as implicitly anticipated to breach the
contract, cannot or is unwilling to provide security for its performance within
a reasonable period.
In the existing case, the contract of ship
repair between Wellmark and Yuihai
was legal and effective. Also, it occurred, after the contract was established
and before the remaining payment for the repair was made, that Wellmark refused to sign on the Work-Done List and to
examine the ship repaired. Since Wellmark had refused
to examine the ship and to declare its cause for so doing until Yuehai brought the action, it can be reasonably presumed,
according to the doctrine of good faith, that Wellmark
would not perform its duty of paying the remaining amount of the money for the
repair. Therefore, the act of Wellmark contained the
constitutive elements of implicit anticipatory breach of contract, and Yuehai was entitled to remedial actions to protect its own
legal interests. Thereafter, Wellmark inspected and
accepted the ship, but did not pay the remaining amount of the money during the
court trial and after the performance period for its payment expired.
Therefore, the court decided that Wellmark shall
perform its duty of payment.