In Attorney-General of Botswana v Aussie Diamond Products Pty Ltd (No 3) [2010] WASC 141 (unreported), the Supreme Court of Western Australia considered principles relating to the construction of a CIF (cost, insurance, freight) contract for the sale of goods.

Background

The matter involved a restitution claim following an asserted breach of contract between the Department of Geological Survey of the Republic of Botswana and the defendant for the commissioning and supply of a drilling rig to the plaintiff. The rig was to be used for mineral exploration and geotechnical well drilling in Botswana. The claim was pursued principally on the basis that the purchase consideration wholly failed due to the defendant’s failure to commission the drill rig.

While the judgment includes a comprehensive discussion of the defendant’s commissioning obligations, this article is limited to Justice Murphy’s enunciation of the general principles underlying the proper law of the contract, particularly when subject to the Sale of Goods Act 1895 (WA) (the Act).

Which law?

The plaintiff argued that the contract was governed by Botswanan law and was not subject to a forum statute (being the Act). However, the plaintiff failed to plead the content of Botswanan law and, to the contrary, relied on common law principles applicable in Australia. The defendant maintained that Western Australian (WA) law was the proper law of the contract and that the Act applied either for that reason, or because the plaintiff did not displace the presumption that the law of Botswana is the same as the law of the forum.

In finding that WA law applied, Justice Murphy found that the contract was most directly connected with WA as the offer, quotation and all subsequent communications were in English, and the purchase consideration was in Australian dollars, to be paid by a bank in Australia upon the presentation of documents. Goods were to be supplied from Australia and CIF obligations were to be undertaken by the defendant in Australia. Justice Murphy further remarked that even if he was wrong about the proper law, in the absence of evidence that Botswanan law differed from forum law he would still apply forum law which includes any applicable forum statute relating to mercantile law. In passing, it was remarked that Australia (unlike Botswana) was a party to the United Nations Convention on Contracts for the International Sale of Goods (Convention), the provisions of which apply in each of the Australian states and territories to the extent that the Convention takes precedence over any provision of local law in case of any inconsistency with a foreign legal system (ss 5 and 6 of the Sale of Goods (Vienna Convention) Act 1986 (WA)).

Proper construction of the contract – general principles

The following general principles were enunciated as essential when dealing with the Act and a contract for the sale of goods:

  1. where goods are to be acquired after the making of the contract of sale, it may be construed as a contract to sell future goods and may involve the sale of goods by description,
  2. subject to any express terms, conditions implied by law may arise such as merchantable quality and fitness for purpose. Unless it is inconsistent with any terms implied by statute, an express term does not negate an implied condition or warranty under the Act,
  3. under a CIF sale, the buyer has no opportunity, nor is the seller bound to afford one, to examine the goods prior to delivery and the passing of property in the goods. Nevertheless, the buyer retains a contractual right to reject the goods once they are received. Pending the exercise of this right, property in the goods vests in the buyer subject to the condition that such property shall re-vest in the seller if, upon examination, they are not in accordance with the contract,
  4. a buyer’s right to reject the goods will include breaches of implied conditions of merchantable quality and fitness for purpose,
  5. where unexamined goods are delivered to the buyer, the buyer is not deemed to have accepted the goods unless and until it has had a reasonable opportunity to examine them,
  6. a buyer is deemed to have accepted the goods when it intimates to the seller that it has accepted them or does an act inconsistent with the ownership of the seller after the goods have been delivered, or if it retains the goods without intimating to the seller, within a reasonable period of time, that it has rejected the goods,
  7. where, on examination, there are defects revealing a lack of fitness for purpose or unmerchantability, the buyer’s delay in exercising its right to reject the goods, coupled with the buyer calling on the seller to carry out works on the goods, may be regarded as an acceptance of the goods,
  8. if a term is a condition (that is, an essential term), any breach of it will enable the innocent party to terminate the performance of the contract and sue for damages. However, our courts are reluctant to construe a term as a condition and often hold that a term is of such a kind that breach of it does not give a right to performance,
  9. upon breach of a warranty by a promisor, the innocent party may not quit its future obligations, and its only remedy is in damages,
  10. the Act only refers to conditions and warranties, but is equally applicable to intermediate terms in contracts for the sale of goods. An intermediate term, if breached, will give rise to an action for damages, but if the breach is sufficiently serious it also gives the innocent party a right to terminate the contract, and
  11. where a buyer has a right of rejection on one basis, and represents or creates an assumption that it no longer intends to reject the goods on that basis, the buyer may, by operation of estoppel or election, lose its right to reject the goods subsequently on that same basis.

Implications

It is of paramount importance that parties are clear in their understanding as to the terms of a contract. If a dispute arises requiring the construction of a contract of sale, a court will seek to ascertain the common intention of the parties by reference to what a reasonable person would understand by the language which the parties have expressed in their agreement. This usually encompasses a consideration of the surrounding circumstances known to the parties, as well as to the purpose and object of the transaction, including the market in which the parties operate.

A critical consideration relates to the manner in which one should act when an examination of the sale object reveals a failure to conform to the requirements laid down by the contract. Issues such as time and manner of rejection are vital to maintain the availability of remedies, and due regard should be had to the effect of contractual terms (for example, warranties and conditions) when negotiating agreements for sale of goods, particularly when contracting in foreign jurisdictions.