Hong Kong - Lessons Learned from the Sale Of A Yacht Gone Wrong
Hong Kong has no shortage of yachts, and with luxury yachts for sale comes deluxe contract disputes. The rules that govern contracts for the sale of private boats are mostly the same as those that govern all other contracts for the sale of goods, but there are additional complexities that parties to the sale of a private vessel should be aware of. To help break down the laws governing breach of contract disputes over yachts, available remedies, and suggested best practices to mitigate damages and protect one’s rights, we spoke with Laracy & Co. in association with Hill Dickinson.
Conventus Law: What is the law governing contracts for the sale of goods such as yachts in Hong Kong?
Laracy & Co.: The law governing contracts for the sale of goods in Hong Kong consists of the Sale of Goods Ordinance (Cap. 26) (“SOGO”) and – as regards issues common to the whole of contract law and the law of sale that has not been codified – the Common Law. Whilst additional protections are also accorded to consumer buyers by statute, buyers of yachts are unlikely to benefit from most of them, either because yachts are explicitly excluded (as by the Schedule of the Consumer Goods Safety Ordinance (Cap. 456)) or because it is unlikely that yachts can be regarded as of a type ordinarily supplied for private use, consumption or benefit (see, for example the Unconscionable Contracts Ordinance (Cap. 458)). On the other hand, the Control of Exemption Clauses Ordinance (Cap. 71) (“CECO”) may protect buyers of yachts where the contract is on the seller’s written standard terms of business. The CECO will not apply however, where the parties’ places of business or habitual residences are in different territories and/or if the yacht has to be carried from one territory to another territory.
CL: Your firm recently won a judgment on behalf of an international yacht broker in the High Court of Hong Kong against a purchaser who refused to accept delivery of a yacht and sought to rescind the contract. Simpson Marine Ltd v. Luan Gang  HKCFI 851; HCAJ 171/2011 (20 May 2016).
a.) In that case, the court heard testimony from the purchaser on why he rejected delivery and the seller’s witnesses on the condition of the yacht, and after finding the buyer to be recalcitrant and the seller’s witnesses to be reliable and truthful, reached a decision that was favourable to the seller. Broadly speaking, if a purchaser finds herself in the situation where she does not want to accept delivery of an item such as a yacht, what are her rights under the laws in Hong Kong in this respect?
L&C: The SOGO provides the buyer with a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract, (i) on request on tender of delivery and (ii) where the goods are delivered to the buyer and she has not previously examined them. The buyer must be afforded this opportunity before the lapse of a reasonable time, after which she would be deemed to have accepted the goods. The buyer will also be deemed to have accepted the goods where, after being afforded such an opportunity, she made known to the seller that she has accepted them or she does an act inconsistent with the seller’s ownership. These rules can be contracted out of except where the buyer deals as a consumer, in which case his/her right to examine after delivery cannot be waived or excluded by agreement.
In Simpson Marine, the buyer of the yacht claimed damages for late delivery. The buyer argued that the yacht had to be deliverable when it arrived in Hong Kong. The relevant contract provided that “boat deliver to HK before 12th July 2010”, which the court held to refer merely to the yacht’s arrival in Hong Kong and not delivery to the buyer. The yacht in fact arrived 9 days before 12 July 2010. As the contract had not fixed any time for the seller to deliver the yacht to the buyer, the SOGO applied and the seller was only bound to deliver within a reasonable time.
After the yacht’s arrival in Hong Kong, the seller had to carry out commissioning work to make it deliverable to the buyer, work which is commonly required for new yachts. The buyer had requested a set of joystick controls (which were optional) and, shortly after the yacht’s arrival in Hong Kong, certain extra items. The buyer argued that due to the time taken to fit the additional items, the yacht was not deliverable until November 2010. The seller’s records were that the joysticks were installed by 12 August 2010, prior to a sea trial on 18 August 2010. The court held that the yacht was deliverable as a whole as at 18 August 2010 even if one optional item of the yacht had encountered a minor and rectifiable problem, and was placed at the disposition of the buyer on that day. The court also found that a reasonable time for commissioning was one to two months after the yacht’s arrival in Hong Kong, and further allowance should be given for installation of the extras. There was thus no delay on the part of the seller.
Thus, where a purchaser does not want to accept delivery of an item such as a yacht, she should have a legitimate reason supported by evidence. Whether the complaint be “not of merchantable quality” or “not fit for purpose,” the buyer should make contemporaneous records and take photographs of the goods.
b.) CL: What consequences should a buyer be aware of in the event the court rejects the buyer’s reasons for refusing acceptance?
L&C: The consequences depend on whether property in the goods had passed to the buyer. Where property has not passed, the seller may make a claim for any loss occasioned by the buyer’s neglect or refusal to take delivery and a reasonable charge for the care and custody of the goods (section 39, SOGO), and/or damages for non-acceptance (section 52, SOGO).
Where property has passed, in addition to the remedies just mentioned, the seller may also make a claim for the price of the goods (section 51, SOGO).
In Simpson Marine, the buyer had paid the price for the yacht in full, but sums remained payable for the extra items. The seller thus counter-claimed for the balance due and its costs of berthing and maintaining the yacht.
CL: In Simpson Marine the purchaser had already paid the seller for the yacht, but since the purchaser refused to accept delivery, the seller was left with costly berthing and maintenance fees. In an effort to minimise these costs, your firm arrested the yacht and was able to sell it following a High Court Judicial Sale. What is a High Court Judicial Sale?
L&C: A High Court Judicial Sale is the sale of an arrested vessel (with all property on board the ship which is owned by the ship owner) ordered by the High Court. The sale is usually public, unless there are special reasons justifying a private sale. The gross proceeds of the sale shall be paid into court, and then substitute for the ship itself as the target of the arresting party’s claim(s).
The benefit of a Judicial Sale for a successive buyer is that the Court involvement serves to “wash clean” almost all prior encumbrances and claims against the vessel that are not notified to the Court promptly following an order for the Judicial Sale.
a.) Under what circumstances will the court allow a Judicial Sale?
L&C: A High Court judicial sale may be ordered either before or after judgment. It may be ordered pendente lite, which means pending trial, only where there is “good reason”, such as where heavy and continuing costs of maintaining the arrest will be incurred over a long period and the value of the Plaintiff’s security for its claim will be diminished as a consequence.
In Simpson Marine, the yacht (which was registered in the name of a company upon the buyer’s request and whose sole director and shareholder was the buyer) was arrested to obtain security for the claim for the maintenance and mooring expenses of the yacht and the outstanding sum owing for the extra items (under sections 12A(2)(l), 12A(2)(m) and 12A(2)(o), High Court Ordinance). It was then sold pendente lite.
b.) Who receives the proceeds from the sale?
L&C: The sale proceeds will first be paid out to reimburse costs incurred by the Admiralty Bailiff in effecting and maintaining an arrest, and then the costs incurred by a plaintiff for the arrest and sale. The sale proceeds are then paid out in the following order: possessory liens and maritime liens, mortgages, statutory liens, and unsecured creditors of the ship owner. The seller in Simpson Marine held a statutory lien.
c.) Why may this be a better course of action than just waiting for a judgment against the purchaser to recover costs or liens?
L&C: An arrested vessel serves as security against which the underlying claim may eventually be enforced, and which therefore protects against the ship owner’s subsequent insolvency.
For further information, please contact:
Damien Laracy, Partner, Laracy & Co in association with Hill Dickinson Hong Kong LLP
Bryan O'Hare, Partner, Laracy & Co in association with Hill Dickinson Hong Kong LLP