VES-13-18 CO:R:P:C 111677 GEV
Chief, Technical Branch
Pacific Region
One World Trade Center
Long Beach, California 90831
RE: Protest No. 27047-004006; Vessel Repair Entry No. 86-949991-
7, dated May 5, 1986; Date of Arrival: May 4, 1986; Port of
Arrival: Long Beach, California; Vessel Name: SEA-LAND
LIBERATOR V-70; Voyage No. 70
Dear Sir:
Reference is made to the above-captioned protest seeking
reliquidation on the basis of foreign shipyard work having been
performed pursuant to a warranty recognizable under the decision
of the Court of International Trade in the case of Sea-Land
Service, Inc. v. United States, 683 F. Supp. 1404 (1988).
FACTS:
The vessel was taken abroad for the purpose of having a mid-
body addition inserted in order to lengthen the vessel by some
one-hundred (100) feet. This was accomplished and the vessel was
redelivered to Sea-Land by the shipyard on April 24, 1985. The
work was performed under a construction contract which was
identical for twelve (12) Sea-Land vessels which were modified at
nearly the same time. The standard contract contained a warranty
clause (Article XI WARRANTY OF QUALITY), containing two time
elements, which read as follows:
(b) Guarantee Period. The guarantee of the contractor
shall expire:
(i) for defects in design, material or workmanship
which the owner might discover by the exercise of due
diligence: twelve (12) months from the date of
redelivery of the CONVERTED VESSEL.
(ii) for defect in material or workmanship which could
not be discovered by the exercise of the owner`s due
diligence (i. e. , latent defects): twenty-four (24)
months from the date of redelivery of the CONVERTED
VESSEL.
The warranty provisions are conditioned upon timely written
notice being given by the owner to the shipyard within 20 days
following the expiration of the warranty period.
ISSUE:
Whether the court-established elements for warranty
recognition are present in this case, as detailed in the case of
Sea-Land Service, Inc. v. United States, 683 F.Supp. 1404 (1988).
LAW AND ANALYSIS:
In the case of Sea-Land Service, Inc. v. United States, 683
F. Supp. 1404 (1988), the Court addressed whether repair work
performed on a newly constructed vessel subsequent to its
delivery to the owner might be considered to be part of the new
construction contract. Simply put, the Court considered whether
"completion of construction" is a viable concept so as to render
the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven.
The Court found completion of new construction to be a valid
concept, subject to specific conditions, which are:
1. "All work done and equipment added [must be] pursuant
to the original specifications of the contract for the
construction of the vessel ...."
2. "This basic standard is limited to work and equipment
provided within a reasonable period of time after
delivery of the vessel."
The contract for construction of the subject vessel
contained clauses guaranteeing for twelve (12) months any area of
the vessel for which the builder accepted responsibility under
the contract and specifications, conditioned upon written
notification from the owner of any covered defect within the
agreed upon 12-month period.
In reviewing the warranty case on remand from the Court,
Customs had the opportunity to review the contract, the
specifications, and a so-called "guarantee notebook." This
document consisted of numerous guarantee items, some generic in
nature and some specific, and represented the written
notification of defects from the owner to the builder as required
by the contract. Each noted defect was recorded on a separate
sheet and assigned a "G" guarantee number. Each was dated,
signed by an owner's representative and a builder's
representative, and contained a short narrative of the specific
complaint.
In that case, we found that the court-ordered criteria had
been satisfied and that the "reasonable period of time" for the
warranty period was the one-year period specified in the
contract. We have since held likewise in similar cases, and have
adopted the one-year limit as the benchmark for honoring new
construction warranties which otherwise qualify.
As previously mentioned, the construction contract under
consideration provides a two-year warranty clause relating to
"latent defects". It is the intention of the Congress, as
reflected in the record of hearings concerning amendments to
sections 3114 and 3115 of the Revised Statutes of the United
States (the predecessor provisions to 19 U.S.C. 1466(a) and (d)),
that the statute not recognize latent defects. At that time,
the House of Representatives and the Senate were considering
different amendatory language. The following is recorded in
regard to the latent defect issue:
[Senator] Barkley. In other words, as I understand the
Senator, according to the House provision if some portion of
the ship on the voyage over wears out or a defect is
disclosed prior to the sailing of the ship from the home
port, that repair may be made in a foreign port without
paying the 50 percent tax?
[Senator] Fletcher. Yes.
[Senator] Barkley. But under the Senate committee
amendment, no such circumstances could exist. The only
repairs that could be exempted from payment of a 50 percent
tax are repairs made necessary by reason of stress of storm
or weather. In other words ... she can not repair any
ordinary wear and tear of machinery or appliances that
could not have been reasonably discovered prior to the
sailing of the vessel ....
[Senator] Fletcher. That is exactly what it means.
(Congressional Record, September 19, 1929, p. 3782)
The quoted legislative history amply demonstrates that
latent defect will not excuse duty under the statute. The Senate
version was, of course, the version which was adopted and is
incorporated in the present statute.
The question now to be addressed is whether the Sea-Land
Service, Inc., supra., court-ordered criteria and/or contract
requirements have been satisfied in this case.
We note that the repair bills being protested in this case
indicate repairs having been effected both before and after the
expiration of the one year and twenty-day period specified in the
warranty clause of the contract. Reference to the entire record
fails to reveal any written notification of defect by the owner
to the shipyard, and the fact that repairs were made after the
stated period had expired will not permit us to assume that
notification was given in any case other than that in which we
find an invoice from the original vendor stating that work was
performed at no charge. If repair work is performed by remote
contractors as permitted under the contract, there must be
evidence that the builder was notified before repair or that the
vessel operator was reimbursed by the original vendor (see
Article XI (4) of the contract).
In this instance, we note a "no charge" invoice from the
original vendor for Item 21 (MHI - butt welds) as well as
invoices for inspection (Item 22 - ABS) and supervision (Item 23
- Posa) of the same repair operation. In addition, the remaining
costs that are protested (also on Items 21 and 23) cover
miscellaneous nondutiable expenses (i.e., telephone, telefax,
travel, etc.) incurred during the time the repairs in question
were made. Accordingly, since the record does contain evidence
which satisfies the criteria established in the case of Sea-Land
Service, Inc., supra., the protest in this case must be granted
as to those items.
HOLDING:
Inasmuch as there is evidence that the foreign shipyard
operations claimed to be covered by warranty were performed
pursuant to the conditions of the warranty clause of the contract
for construction under consideration, the protest is granted as
to the named items.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch