In this decision, the Western Australian Court of Appeal considered whether failure to commission a drilling rig in accordance with all of the requirements of the contract of sale amounted to a breach of an essential or intermediate term, entitling the appellant to rescind the contract and recover the contract price.

Key learnings

The court found that the obligation to commission the rig was merely an ancillary obligation to the essential obligation to deliver a rig which complied with the requirements of the contract. The case provides useful guidance about:

  • the characterisation of contract terms; and
  • deemed acceptance of goods and the consequences of acceptance.  

Case note

The case concerned a contract for the sale, delivery and commissioning of a drill rig. The vendor, Aussie Diamond Products, delivered the unassembled rig to Botswana in July 2004 but the commissioning of the rig was plagued with difficulties and required numerous repairs and modifications to be made. Most of these were resolved at the vendor’s expense and the rig was capable of performing all modes of drilling by the time the Department purported to rescind the contract in December 2007.

Commissioning of the rig required the rig to be tested for “down-the-hole” drilling and diamond core drilling. By the time of the purported rescission down-the-hole testing had been performed by the vendor but and diamond core testing had not (though the Department itself had in fact successfully completed such testing).

As a consequence, the Department did not dispute that the rig was fit for its intended purpose or of merchantable quality. Rather, the Department’s entitlement to terminate was said to arise solely from “the Vendor’s failure to commission the drill rig by failing to demonstrate a reasonable and continuing capacity to conduct normal drilling operations”.

The Court of Appeal considered that the Department’s case was an attempt to conflate the obligation to commission the rig with the obligation to supply a rig which was fit for its intended purpose, which the court rejected. The court held that the failure of a purchaser to obtain a substantial part of the benefit for which they had contracted flows from the inability of the equipment supplied to perform in the manner required, not from the supplier’s failure to demonstrate that capacity.

In concluding that the obligation to commission the rig in accordance with the contract was a warranty, rather than an essential or intermediate term justifying termination, the court had regard to:

  • the fact that only about 1% of the contract price was attributed to the obligation to commission and train Departmental personnel (this though not determinative, was relevant); and
  • the adequacy of damages as a remedy for the breach. Here there was no suggestion that:
    • someone other than the vendor could commission the rig; or
    • the costs of doing so would be prohibitive or beyond the Department’s capacity.

The Court of Appeal also found that because the Department had retained possession and control of the rig from the time of breach of the promise to conduct diamond core drilling (March 2006) until the purported rescission (December 2007), the Department had accepted the rig.

Under section 11 of the Sale of Goods Act 1985 (WA) once a buyer has accepted goods they may only treat a breach of a “condition” as a breach of a “warranty” and not as grounds to reject the goods and terminate. Under section 35 of the Act a buyer is deemed to have accepted goods (among other things) if after the lapse of a reasonable time they retain the goods without intimating to the customer that they are rejecting them. Here the Department had been in possession of the rig for three years before purporting to rescind the contract.

The case demonstrates the need for buyers to:

  • characterise obligations such as commissioning as being essential if they wish to have secure termination rights in the event of breach; and
  • avoid delay in terminating once testing discloses serious defects in a delivered product or system.  

To see the full judgment in this case, please click here.