North Western Shipping and Towage Co. P/L v Commonwealth Bank of Australia Ltd
[1993] FCA 168
•26 MARCH 1993
Re: NORTH WESTERN SHIPPING AND TOWAGE COMPANY PTY LIMITED
And: COMMONWEALTH BANK OF AUSTRALIA LIMITED and GJ MACHINE AND STEEL
CONSTRUCTION PTY. LTD. (In liquidation) (Receiver appointed)
No. SA G75 of 1992
FED No. 168
Number of pages - 24
Contracts - Charge - Sale of Goods
COURT
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
O'Loughlin(1) J.
CATCHWORDS
Contracts - Construction of - when does title pass from supplier of a component part to ship builder - issue of letters of credit - conditional or absolute payment - relationship of payment to passing of title - when does title in component part pass from ship builder to purchaser - meaning of "ready to be appropriated".
Charge - Fixed and floating - effective date of fixing of a charge.
Sale of Goods - Passing of property - performance of contract.
Donald H. Scott and Co Ltd v. Barclays bank Ltd (1923) 2 KB 1 - Applied
J.H. Rayner and Co Ltd and Oilseeds Trading Co. Ltd. v. Hambros Bank Ltd (1942) 2 All ER 694 - Applied
Saffron v. Societe Miniere Cafrika (1958) 100 CLR 231 - Applied
W.J. Alan and Co Ltd v. El Nasr Export and Import Co (1972) 2 WLR 800 - Followed
Re Brightlife Ltd (1986) 3 All ER 673 - Followed
Seath v. Moore (1886) 11 App.Cas 350 - Followed
Reid v. Macbeth and Gray (1904) AC 223 - Followed
Re Blyth Shipbuilding and Dry Docks Company Ltd; Forster v. Blyth
Shipbuilding and Dry Docks Company Ltd (1926) 1 Ch 494 - Followed
Sutton's Sales and Consumer Law in Australia and New Zealand (3rd ed., 1983)
Benjamin's Sale of Goods (3rd ed., 1987) para 354 et seq.
Tyree's Australian Law of Cheques and Payment Orders (1988) 46
HEARING
ADELAIDE, 12-13 November 1992
#DATE 26:3:1993
Counsel for the Applicant : Mr. W.J.N. Wells QC
Solicitors for the Applicant : Messrs Finlaysons
Counsel for the First
Respondent : Mr. N.W. Morcombe QC
Solicitors for the First
Respondent : Mr. N.P. Anderson
Counsel for the Second
Respondent : Mr. C.R. Eaton
Solicitors for the Second
Respondent : Messrs Eaton and Associates
ORDER
The Court orders that:
1. The preliminary question herein be answered as follows: That the two Marine "Z" Drive propulsion units are owned by GJ Machine and Steel Construction Pty. Ltd. (In liquidation) Receiver appointed) subject to a fixed charge in favour of the Commonwealth Bank of Australia Ltd.
2. The applicant pay the costs of both respondents.
The Court directs:
1. The first named respondent to bring in, within 14 days, short minutes of order.
2. Leave reserved to all parties to speak to the minutes.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
O'LOUGHLIN J. This matter has come before the Court on motion for determination of a preliminary issue. Pursuant to O29 r2, the Court has been asked to determine the question of the ownership of two Marine "Z" Drive propulsion units ("the propulsion equipment"). The applicant claims an unencumbered title as a purchaser and the first respondent ("the bank") claims that the plant is owned by the second respondent but subject to a fixed charge in favour of the bank.
On 3 October 1989, the second respondent, a boat builder, ("the builder") granted the bank an equitable mortgage by way of fixed and floating charge over its assets. That charge was duly registered with the Corporate Affairs Commission on 10 October 1989, within the time limited by the Companies (SA) Code. On 26 February 1991, the applicant entered into a contract with the builder for the construction of a tugboat; that contract is to be found in a memorandum dated 9 April 1991 ("the construction contract"). The provisions of sub-clause 22(1) of that contract are set out later in these reasons but at this stage it is sufficient to mention that it is an essential part of the applicant's case that the sub-clause had the effect of passing property in components for use in the tugboat as and when they were "appropriated to or intended for the vessel... or ready to be so appropriated...". It was the case for the applicant that the propulsion equipment was part of the components and that title to it had passed to the applicant because it was "ready" to be appropriated to the vessel prior to the fixing of any charge over it.
It was pleaded in paragraph 10 of the statement of claim, and not denied, that the applicant paid to the builder the first instalment of the basic contract price on 26 February 1991. According to schedule A to the statement of claim that amounted to $593,503.50, being 15% of the contract price of $3,956,690. The same schedule sets out particulars and dates of other payments by the applicant to the builder. It is claimed that they amount to $3,668,859.
On 27 February 1991, immediately following the conclusions of the negotiations for the construction contract, the builder gave an order to T.S.F. Engineering Pty. Ltd. ("TSF"), the Australian agent for Ulstein Marine Ltd of Canada ("Ulstein") for the construction of the propulsion equipment. At this early stage in the proceedings the parties are uncertain whether Ulstein or TSF should properly be described as the contracting party to this supply contract. As I have been told that nothing turns on it, I will proceed (for the purposes of narration) as if Ulstein was the contracting party and TSF was its Australian agent. Ulstein fulfilled its bargain and proceeded to manufacture the propulsion equipment and ship it to Australia. The supply contract incorporated the conditions contained in the General Conditions (for the supply of plant and machinery for export) that had been prepared under the auspices of the United Nations Economic Commission for Europe ("the UN European Conditions"). The first of the provisions in these conditions to which Mr. Wells QC, counsel for the applicant referred was clause 6, entitled "PASSING OF RISK". It provided:
"6.1 Save as provided in paragraph 7.6 (which deals with a purchaser who refuses delivery) the time at which the risk shall pass shall be fixed in accordance with the International Rules for the Interpretation of Trade Terms (Incoterms) of the International Chamber of Commerce in force at the date of the formation of the Contract. Where no indication is given in the Contract of the form of sale, the Plant shall be deemed to be sold 'ex works'. 6.2 In the case of a sale 'ex works', the Vendor must give notice in writing to the Purchaser of the date on which the Purchaser must take delivery of the Plant. The notice of the Vendor must be given in sufficient time to allow the Purchaser to take such measures as are normally necessary for the purpose of taking delivery."
According to the provisions contained in the Incoterms, "ex works" means:
"... that the seller fulfils his obligation to deliver when he has made the goods available at his premises (i.e. works, factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. This term thus represents the minimum obligation for the seller. This term should not be used when the buyer cannot carry out directly or indirectly the export formalities. In such circumstances, the FCA term should be used."
Counsel for the applicant, Mr. Wells, argued that these provisions were sufficient to justify the Court making a finding that title to the propulsion equipment passed from the supplier to builder "ex works" or on the date of payment (whichever was the later). Mr. Wells further argued that the propulsion equipment was obviously a component of the vessel and this was not disputed because of the provisions of sub-clause 22(1). According to Mr. Wells, the propulsion equipment was intended for the vessel, it was ready to be appropriated, a pre-condition of payment of the first instalment had been satisfied, and therefore title in the propulsion equipment passed immediately from the builder to the applicant. For the reasons that are set out hereunder, I am of the opinion that delivery "ex works" is not an issue that arises in determining the date upon which title was intended to pass. As is pointed out in Benjamin's Sale of Goods (3rd ed., 1987) para 352, when goods are sold "ex works", there can be uncertainty when the property passes. In the circumstances of this case, it being an international sale where the vendor/supplier Ulstein arranged (albeit at the cost of the purchaser) the delivery, including the international shipping to Australia, one does not readily conclude that title would have passed at the factory door. Furthermore, although it is not conclusive, Ulstein is the party named in the shipping and Canadian customs documents as the "Exporter". One would have thought that if title had passed, the name of the builder would have appeared in these documents. Other factors that weigh against the proposition that title passed "ex works" was the fact that there was no evidence to suggest that Ulstein had given the notice referred to in clause 6.2 of the UN European conditions and the additional fact that arrangements for payment of the propulsion equipment called for its prior arrival in Australia. But in my opinion, the issue is put beyond doubt by the express terms of sub-clause 8.3 of the UN European conditions. Subject to resolving the competing arguments about what date was the true date of payment by or on behalf of the builder, it seems clear to me that property in the propulsion equipment remained with Ulstein until payment was effected. Sub-clause 8.3 provides:
"If delivery has been made before payment of the whole sum payable under the Contract, Plant delivered shall, as the extent permitted by the law of the country where the Plant is situated after delivery, remain the property of the Vendor until such payment has been effected."
I know of no law in Australia that would prevent Ulstein from retaining title until payment and none was suggested: indeed the sub-clause is in the nature of a "Romalpa clause" (Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd. (1976) 2 All ER 552). In my opinion, sub-clause 8.3 constitutes an express term in the supply contract stating when property is to be transferred (see Sutton's Sales and Consumer Law in Australia and New Zealand (3rd ed., 1983). This is a case where an express provision is not contradicted by other terms (such as the incorporation of the Incoterms). On the material presently before the Court it is a true indication of the intentions of the parties that the property in the propulsion equipment would only pass from the supplier to the builder upon "payment of the whole sum".
I turn then to address the circumstances of payment. For this purpose I have had recourse to the agreed book of documents and to the information contained in the statements of agreed facts as augmented in some uncontentious areas by the contents of one or two of the numerous affidavits that have been filed in this matter. It is an agreed fact that when the construction contract between the builder and the supplier was entered into in February 1991, payment by means of irrevocable letters of credit was one method of payment within the contemplation of the parties. In the events that transpired, the builder ultimately offered and either TSF or Ulstein accepted payment by this means. Accordingly, on 15 November 1991, the builder applied for the facility of Irrevocable Documentary Credit through the bank's Para Hills branch in the sum of US $56,268.00 and separately in the sum of CAN $434,095.58; both applications named TSF as the beneficiary. On the same day, Documentary Credit was issued by the bank in favour of Westpac Banking Corporation Sydney severally in respect of the two sums of money referred to in the two applications.
In each case the letters of credit included, as conditions on their face, the production in duplicate of a commercial invoice, the production of insurance policies or certificates endorsed in blank covering nominated risks (and for not less than the full invoice value plus 10%) and the production of a full set of clean "on board" Bill of Lading to the order of shipper and endorsed in blank marked "freight prepaid".
Each of the builder's applications for Irrevocable Documentary Credit contained these provisions:
"In consideration of the Bank establishing this credit I/We jointly and severally agree as follows:
1. I/We hereby undertake to provide sufficient funds to meet the amount of drafts or drawings or any other payments under the credit together with all costs, commissions and bank charges and interest for any period by which the date of payment by the Bank or your correspondent precedes the date of my/our payment to you
2. I/We authorise the Bank at any time after the issue of the credit whether before or after the Bank has made payments to debit my/our account with sums sufficient to meet all liabilities under the credit including costs, commissions, bank charges and interest as aforesaid.
3. ...
4. ...
5. I/We hereby authorise the Bank to retain as security the relative documents and goods by way of pledge and in the event of payment not being made by me/us as aforesaid I/We authorise the Bank to sell by public auction or private treaty, dispose of or otherwise deal with the relative goods as it may think fit and to collect any amounts due or to become due under the Insurance Policies and I/We undertake to pay on demand the amount of any deficiency on any sale or Insurance together with all usual commission, and all costs, charges and expenses incurred by the bank in connection therewith or otherwise."
Although they could not be regarded as conclusive these provisions suggest at the least, first, that it was within the contemplation of the builder and the bank that "the issue of the credit" could precede and would not necessarily be co-terminus with any "payments" that might be made by the bank and, secondly, and notwithstanding the existence of its 1989 equitable mortgage, the bank was able to secure itself against non payment by the builder by obtaining both the documents and the goods (i.e. the propulsion equipment), and exercising a power of sale.
Five days later, on 20 November 1991, the builder requested and obtained amendments to each letter of credit. The expiry date in each case was changed from 15 December 1991 to 15 January 1992 and an additional condition was added that "Documents must be presented within 49 days of on board date of Bill of Lading".
It was the case for the applicant that the submission of the letters of credit by the bank to Westpac, as the banker for TSF on 15 November 1991 or, alternatively, on 20 November, constituted payment so that, subject to delivery "ex works", title would pass from the supplier to the builder in terms of sub-clause 8.3 of the UN European conditions. If that submission is accepted, then for the reasons earlier set out, sub-clause 22(1) of the construction contract would be activated so as to pass title in the propulsion equipment from the builder to the applicant.
The propulsion equipment left Ulstein's premises in Canada in two containers on 22 and 25 November 1991. They were shipped on a vessel which departed Vancouver, Canada, for Australia on 16 December 1991; it arrived in Australia on or about 13 January 1992. On 16 December 1991 an unendorsed Insurance Certificate and an unendorsed Bill of Lading were raised with respect to the propulsion equipment. On 2 January 1992 the unendorsed Bill of Lading was presented to Westpac by TSF. On the same day Westpac advised the bank of receipt of the documents required by the letters of credit but also informed the bank of the discrepancies. On 10 January 1992 the bank informed Westpac that the builder refused to accept the discrepancies. Attempts to remedy them were protracted and it was not until some unspecified date between 23 and 31 January 1992 that the Bill of Lading was endorsed in blank. By this stage, however, both letters of credit had expired and so had any liability on the bank to honour them. Thereafter the matter appears to have drifted on into March 1992 before the builder purportedly agreed to accept the remaining discrepancies.
By letter dated 12 March 1992 and received on 13 March 1992 Westpac forwarded to the bank all the documents that had been required by the letters of credit, once more noting the discrepancies but requesting their acceptance. There then followed the action by the bank which has been the catalyst for this litigation. Although no explanation was given in the statements of agreed facts, it seems reasonably apparent that the bank must have been aware that the builder's financial circumstances were, at the least, suspect and possibly worse. In any event, by notice dated 16 March 1992, which was delivered on the same day, the bank issued a notice to the builder fixing its charge over the propulsion equipment. Having, as it thought, secured its position, the bank then forwarded to Westpac Banking Corporation the sums referred to in the letters of credit for the ultimate benefit of either Ulstein or TSF.
For the bank, it was submitted that it obtained an effective charge over the propulsion equipment on 16 March 1992 and that it is entitled to deal with it as part of its security. Counsel for the builder supported the arguments that were advanced on behalf of the bank.
I have already identified the case for the applicant: it claims that title to the propulsion equipment passed to it from the builder under sub-clause 22(1) of the construction contract either in late November 1991 when the equipment left Ulstein's works and the builder obtained title "ex works" or, alternatively, on 15 or perhaps 20 November when the bank issued the letters of credit and thereby effectuated "payment". On either scenario, the applicant claims that its title is superior to the bank's.
This, of course, is one of those typical cases where two innocent parties have suffered from the financial collapse of a third and are now fighting each other in an attempt to salvage some of their losses. At stake is a valuable and important piece of equipment worth in excess of AU $500,000. Both parties can claim, in commercial terms, some justification for making their competing claims. The applicant has paid most of the purchase price - less than $300,000 out of almost $4 million remains due. On the other hand the bank, being under no obligation to pay under the letters of credit (because of their expiry date) claims that it was wholly justified in securing itself in return for the financial accommodation that it gave the builder.
Paragraph 21 of the first statement of agreed facts is in these terms:
"On 17 March 1992 the sums referred to in the letters of credit were forwarded to Westpac Banking Corporation pursuant to the letters of credit for the benefit of Ulstein Marine Limited or TSF on or after 17 March 1992."
So expressed, it would seem as if the parties have agreed that the bank effected payment by force of the provisions of the letters of credit. I would have thought that the bank was under no compulsion whatsoever to make any payment after 15 January when the letters of credit expired; and if that be the correct position then, when the bank did make payment on 17 March, an assessment of the rights of the various parties on or after that date would have been made disregarding the earlier issuance and subsequent expiry of the two letters of credit. The position is clearly explained in Donald H. Scott and Co Ltd v. Barclays bank Ltd (1923) 2 KB 1 at 11 per Bankes L.J.:
"... it may be stated generally that where a banker issues a letter of credit he is entitled to performance of all conditions precedent before he can be required to pay the amount specified, and if he stipulates as a condition precedent that he shall have a full set of clean bills of lading and an approved insurance policy, he is entitled to have those very documents, or at the least documents not materially differing from those documents, before he can be compelled to honour drafts upon him."
See also J.H. Rayner and Co Ltd. and Oilseeds Trading Co. Ltd. v. Hambros Bank Ltd (1942) 2 All ER 694. In that latter case a bank, at the request of a buyer, issued a letter of credit available on the production of certain documents including a Bill of Lading covering a shipment of "Coromandel groundnuts in bags". The Bill of Lading, when presented, referred to "machine shelled groundnut kernels" but also referred to an accompanying invoice which correctly described the goods. The Court of Appeal held that the bank was justified in refusing to pay.
However, as the parties have chosen to present their arguments as if payment had been made pursuant to the letters of credit I will proceed on that premise. Thus the applicant presented its argument on the premise that the issue between it and the bank was not whether payment to the supplier had or had not been effected by way of irrevocable letters of credit but rather that payment had been effected by that means and the issue to be determined was the effective date of the payment.
In Saffron v. Societe Miniere re Cafrika (1958) 100 CLR 231 the High Court decided that a stipulation for payment by letter of credit merely identified a primary and not an exclusive source of payment such that the buyer of goods remained responsible for payment when the letter of credit was not honoured. Therefore the issues in Saffron's case were different from those now under consideration. Nevertheless, the case is instructive in its discussion about confirmed and unconfirmed irrevocable letters of credit and the likelihood of the first being an "absolute" payment and the other a "conditional" payment. In W.J. Alan and Co Ltd v. El Nasr Export and Import Co (1972) 2 WLR 800 Lord Denning M.R. said at 811 that when an irrevocable letter of credit is issued the question will arise in each case:
"... whether the credit is to be regarded as absolute payment of the price, or as conditional payment of it, or as no payment at all but only a means by which payment may be obtained; that is, as collateral security."
But if the letter of credit is to be accepted as a conditional payment then it bears much the same features as a cheque. As the Master of the Rolls explained:
"It is analogous to the case where, under a contract of sale, the buyer gives a bill of exchange or a cheque for the price. It is presumed to be given, not as absolute payment, nor as collateral security, but as conditional payment. If the letter of credit is honoured by the bank when the documents are presented to it, the debt is discharged. If it is not honoured, the debt is not discharged: and the seller has a remedy in damages against both banker and buyer." (813-814)
The same concept of conditional payment attaches to the debtor/creditor relationship: see Tyree's Australian Law of Cheques and Payment Orders (1988) at 46 where the author explains that, absent special arrangements, the time of payment is generally taken to be the time at which the cheque was delivered.
If, therefore, as the authorities suggest, conditional payment for the propulsion equipment was made, at the latest, on 20 November 1991, what consequences flowed from it becoming absolute when funds were made available by the bank in March 1992. Counsel for the applicant argued that there was a retrospective operation so that on 17 March title passed from the supplier to the builder (and thence from the builder to the applicant) but with effect as from 20 November 1991. But the short answer to this proposition, assuming it to be correct, must be that any retrospective vesting of title would occur subject to such competing rights and equities as may have arisen in the meantime. In other words, if the bank validly fixed its charge on the propulsion equipment then title in the property may have moved from the builder but it did so subject to the bank's charge.
I turn therefore to consider the circumstances of the charge. On 16 and 17 March 1992, whether the bank forwarded funds to Westpac because of the contents of the letters of credit or whether it did so as a banker voluntarily supplying financial accommodation to a customer, it was entitled to look for and take security for the advance of funds that it was about to make. It had earlier been supplied with a copy of the construction contract and it is possible that it knew of, or is deemed to have known of the provisions of clause 22. That does not affect its position because of its prior rights under the equitable mortgage, clause F.1 of which permitted the bank:
"at any time and from time to time by notice in writing to the Mortgagor to determine the floating character of the charge aforesaid as regards all assets hereby charged or any particular asset specified in any such notice and thereupon the charge as regards such asset shall become and operate as a fixed charge and shall cease to be a floating charge."
The notice that the bank served on the builder was clearly intended to invoke this provision of the mortgage. It claimed:
"Notice is hereby given pursuant to Clause F.1 of the Equitable Mortgage dated 3 day of October 1989 in favour of Commonwealth Bank of Australia and registered at the Corporate Affairs Commission for South Australia and numbered D00200905 that the floating nature of the charge created thereby over the Company asset (Marine Z drives 360 degrees rotatable propulsion units model 1350-H. Serial Numbers 1739-001 and 1739-002) is hereby determined whereby the charge in respect of the abovementioned asset only is to become and operate as a fixed charge."
Counsel for the applicant claimed that the notice dated 16 March 1992 was a nullity. It was argued that either title had passed to the applicant via the builder, four months earlier in November 1991 or, if that argument was rejected, then title did not pass until actual payment was made and that was, at the earliest, on the next following day 17 March 1992.
In my opinion this last proposition is too simplistic; it overlooks the commercial realities of the situation. It is not appropriate to look at the conduct of the bank on 16 March in a vacuum as its action of that day was but a part - albeit an integral part - of a larger transaction which had commenced a few days earlier when its customer had informed it that it would waive the remaining discrepancies in the documents. The clear inference is that the bank made a commercial decision that it would advance funds for the benefit of its customer, the builder, conditional upon it taking appropriate security. That security could have been a registered Bill of Sale and the applicant would have been powerless to prevent that transaction. As it was, the bank was content to convert its floating charge to a fixed charge over the propulsion equipment with effect as from the instant of time when title passed from the supplier to the builder. In my opinion there was one temporal transaction in which the following events are to be treated as occurring contemporaneously:
- the lending of moneys by the bank to the builder; - the use of those moneys by the builder to acquire title to the propulsion equipment from the supplier; - the obtaining by the bank of its security over the propulsion equipment.
It was not suggested that it would have been beyond the power of the bank in other circumstances to convert a floating charge to a fixed charge in respect of a nominated asset nor was it suggested that the notice of 16 March was otherwise deficient. Re Brightlife Ltd (1986) 3 All ER 673 is authority for the proposition that the parties may agree in the security documents that a floating charge would crystallise into a fixed charge on the giving of an appropriate notice to the borrower.
But even if there was a temporal break in the transaction there is nothing wrong in a secured creditor, knowing of the imminent acquisition by his debtor of an asset (to be acquired out of funds advanced by the creditor), serving upon the debtor, in advance, a notice advising the debtor that the floating charge will be converted to a fixed charge in respect of the subject asset immediately upon its acquisition.
The conclusions that I have reached are to this effect: it is quite likely, because of the expiry of the letters of credit, that payment for the propulsion equipment was made independently of the letters of credit on or shortly after 17 March 1992. If that is not the case, however, and there was a conditional payment for the equipment as a consequence of the issue of the letters of credit in November 1991, that conditional payment did not, because of clause 8.3 of the UN European conditions, effect a transfer of title. The reference in that sub-clause to delivery before "payment of the whole sum payable under the contract" and the retention of title until that event emphasises that there was no transfer of title until March 1992. In either event, the acquisition of title was accompanied by the coterminous fixing of the charge.
I turn finally to consider sub-clause 22(1) of the construction contract. If it is assumed that the bank's security is faulty, does sub-clause 22(1) operate to transfer title in the propulsion equipment to the applicant?
The normal rule, according to Benjamin's Sale of Goods (3rd ed., 1987) para 354 et seq., is that where there is a contract for the sale of goods that are to be manufactured (such as the construction contract) the property in the goods will usually pass to the buyer when the goods have been completed and appropriated to the contract by the seller with the assent of the buyer. As Lord Watson explained in Seath v. Moore (1886) 11 App Cas 350 at 381:
"There is another principle which appears to me to be deducible from these authorities and to be in itself sound, and that is, that materials provided by the builder and portions of the fabric, whether wholly or partially finished, although intended to be used in the execution of the contract, cannot be regarded as appropriated to the contract, or as 'sold', unless they have been affixed to or in a reasonable sense made part of the corpus."
However, that presumption can be rebutted by the expressed different intention of the parties. Benjamin's continues:
"The terms of the contract may provide that property in goods to be manufactured and sold shall pass to the buyer while they are in the course of manufacture and before they are completed. Such an agreement is one which is sometimes found in contracts for the construction of ships, where it is the practice to provide for the property in the uncompleted ship to pass to the buyer as and when an instalment of the price is paid corresponding to a certain stage in the progress of construction. There is no doubt that a contract can be so framed as to pass the property at any stage before completion. But it is a question of the construction of the contract in each case, at what stage the property shall pass; and a question of fact in each case whether that stage has been reached."
Clause 22(1) of the construction contract is in the following terms:
"The Vessel as it is constructed and all components whether wholly or partially finished from time to time appropriated to or intended for the Vessel or approved by the Owner or the Owner's Representative or ready to be so appropriated or approved whether in the Builder's yard or workshop or elsewhere on or off the Builder's premises and whether or not numbered pursuant to sub-clause (2) of this clause immediately on payment of the first instalment to the Builder of the basic contract price payable hereunder in respect of the Vessel or upon the same subsequently thereto being so appropriated intended or approved or ready so to be (as the case may be) become and remain the absolute property of the Owner (but at the risk of the Builder) notwithstanding that any components shall subsequently be worked upon by the Builder or otherwise processed or incorporated into the Vessel and shall not be within the ownership order or disposition of the Builder but the Builder shall at all times have a lien thereon for any unpaid purchase money PROVIDED HOWEVER that the passing of property under this sub-clause shall in no way affect or impair any right of cancellation or discharge of this contract which the Owner has under this contract or otherwise by law." (emphasis added)
It seems reasonably apparent that the genesis of this clause was a provision in a contract that was considered by the House of Lords in Reid v. Macbeth and Gray (1904) AC 223. The relevant clause was not as detailed as clause 22 for it merely provided that:
"The vessel as she is constructed, and all her engines, boilers, and machinery, and all materials from time to time intended for her or them, whether in the building-yard, workshop, river, or elsewhere, shall immediately as the same proceeds become the property of the purchasers, and shall not be within the ownership, control, or disposition of the builders, but the builders shall at all times have a lien thereon for their unpaid purchase-money." (emphasis added) (at 225)
Before construction was completed the shipbuilders in Reid v. Macbeth and Gray became bankrupt. At the date of the bankruptcy a quantity of iron and steel plates numbered and identified by markers showing their intended position in the vessel were lying at railway stations at the order of the shipbuilders. Both the trustee of the sequestrated estates and the purchasers of the ship claimed ownership of the plates. Despite the attempt by the purchasers to claim title as "materials from time to time intended for her" it was held that the contract was for the purchase of a "complete ship" and that the iron and steel plates could not be regarded as appropriated to the contract.
In Re Blyth Shipbuilding and Dry Docks Company Ltd; Forster v. Blyth Shipbuilding and Dry Docks Company Ltd (1926) Ch 494 was another case dealing with a ship building contract. Clause 6 of the contract contained a provision for construction to proceed under the inspection of the purchaser's surveyor and:
"From and after the payment by the purchasers to the builders of the first instalment on account of the purchase price the vessel and all materials and things appropriated for her should thenceforth, subject to the lien of the builders for unpaid purchase money including extras, become and remain the absolute property of the purchasers." (emphasis added) (at 495)
Clause 8, which dealt with default by the purchasers, allowed for rescission of the contract:
"... in which case the purchasers shall thereupon cease to have any interest or property in the vessel, and the same shall become and be the sole property of the builders, free from any claim on the part of the purchasers..." (at 496)
After the first two instalments of the purchase money had been paid and the vessel had been partly constructed, a receiver was appointed in an action commenced by debenture holders of the shipbuilding company for enforcing their security. In determining the respective rights of the debenture holders and the purchasers, Romer J., at first instance, concluded that property in the uncompleted vessel had passed to the purchasers.
Romer J. considered clauses 6 and 8 and compared them with the equivalent clauses in Reid v. Macbeth and Gray. He said:
"Are they clauses which, like clauses 4 and 5 in the contract in Reid v. Macbeth and Gray, were merely intended by the parties to form a security, or are they clauses which indicate the intention of the parties that the property should pass? In my opinion, according to their true construction, they do indicate an intention that the property in the uncompleted vessel should pass. That would appear to be the natural meaning of the words used, and there is nothing in the earlier part of the agreement to indicate that the words were not intended by the parties to bear their natural meaning. On the contrary. The fact that the ship was to be paid for by instalments and was constructed under the inspection of the purchasers (though such facts are not conclusive in themselves) strongly point to the conclusion that the property in the uncompleted vessel was intended to pass." (507)
On appeal Warrington L.J., whilst affirming the decision by Romer J., explained at 516 that the contract was for the sale of a particular chattel, that is, the ship and not for detached chattels; he said:
"The contract is for the sale not of detached chattels which these worked materials not yet added to the ship are, but it is a contract for the sale of a particular chattel, which is the ship. I think that the result of the argument in this case has been to convince me that the word 'appropriated' is used in this contract top express really what would have been inferred to be the intention of the parties if we had had nothing but the contract for the building of the ship and the payment of certain instalments as the building progressed."
Sargant L.J. was of the same opinion for he considered that there had to be a definite act such as "the affixing of the property to the vessel itself" (518) to constitute appropriation although he did allow additionally for "... some definite agreement between the parties which amounts to an assent to the property in the materials passing from the builders to the purchasers."
So far therefore, the authorities are clear that title to chattels "intended for" or "appropriated for" a vessel does not pass from the shipbuilder to the vessel's purchaser unless there is an "affixing" to the vessel or a "definite agreement". It would seem that the draftsman of clause 22 of the construction contract was alert to this situation for there is no doubt that the language of clause 22 goes much further than the terms that were considered in Reid v. Macbeth and Gray and in Re Blyth. I refer, in particular, to the words "ready to be so appropriated". They suggest, along with the rest of the language in the clause, a readiness on the part of the contracting parties to permit title to pass in detached chattels before an act of affixing.
What then of the propulsion equipment? Had it, on 17 March 1992, advanced to that necessary stage in the progress of the vessel's construction so that one could say that the propulsion equipment stands "ready" to be appropriated, that is, ready to be affixed to the vessel? I think not. The information that is before the Court is limited to the agreed fact that the propulsion equipment arrived from Canada in Adelaide on or about 13 January 1992. That would not amount to the necessary readiness. At the least, the equipment would need to be under the control of the builder and worked up (if any such work was necessary) to the stage that it was ready for installation in the vessel.
In my opinion, the answer to the preliminary question is that the propulsion equipment is owned by the builder subject to a fixed charge in favour of the bank. I direct the bank to bring in, within 14 days, short minutes of order reflecting the conclusions that I have reached. Liberty is reserved to the parties to speak to those minutes. The applicant must pay the costs of both respondents.
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