Background

Who has title of goods in a construction contract? And when does title transfer? This issue was recently investigated by the Supreme Court of NSW in NEXTracker Inc v ACN 003 906 093 Pty Ltd (formerly RCR O’Donnell Griffin Pty Ltd (in liquidation in the context of the Australian Standard suite of contracts.

The decision is a reminder of the importance;

1.       of having clearly drafted contract terms; and

2.       the parties to a contract for the supply of goods being aware of their rights and responsibilities regarding the title in the goods to be supplied.

 

So, what happened?

On 11 July 2018, NEXTracker Inc (NEXTracker) and ACN 003 906 093 Pty Ltd (formerly RCR O’Donnell Griffin Pty Ltd (in liquidation) (RCR) entered into an Australian Standard 4911:2003 General Conditions of Contract for the Supply of Equipment Without Installation (Contract) under which NEXTracker was to supply equipment and materials to RCR to be used in the construction of the Greenough River Solar Farm in Western Australia. The Contract sum was $USD5,246,973.

All but three of the consignments to be delivered in accordance with the Contract were shipped from ports in the United States or China between 25 August 2018 and 30 November 2018. Three consignments were airfreighted.

Apart from payment of the deposit, RCR made no payment in respect of the goods.

What was the issue in this case? 

The main issue in this case is whether the title to the goods (i.e. the ownership) transferred from NEXTracker to RCR. Whether or not this transfer occurred is particularly important as RCR was forced into external administration on 21 November 2018 and subsequently liquidation on 26 March 2019.

The goods had also been sold at the time of the hearing and the proceeds of the sale were held on trust by RCR’s Solicitor, pending the outcome of the case.

The significance of this is:

·         if title in the goods did pass to RCR, NEXTracker would be required to seek to recover the Contract price through the liquidation process, meaning it would have to contend with RCR’s other creditors; and

·         if title did not pass, NEXTracker would receive the balance held on trust from RCR’s Solicitor.

This issue of whether title transferred was not as simple as whether RCR took possession of the goods (as discussed below).

What provisions of the contract did NEXTracker rely upon?

NEXTracker relied on the second paragraph of clause 20.2 in arguing that title in the goods was only to pass upon payment for the same, which never occurred. Clause 20.2 stated:

Ownership of, and unencumbered title in, the Equipment … shall pass to the Purchaser at the time or times specified in Item 28.

If the Equipment … is to be imported, ownership of the Equipment … shall pass to the Purchaser upon:

(a)           payment to the Supplier of the value of the Equipment to be so imported; and

(b)           receipt by the Purchaser or an agent of the Purchaser of a clean on-board bill of lading or airways bill, as the case may be, drawn or endorsed to the order of the Purchaser, appropriate insurance certificates and a customs invoice for the Equipment or that part, as the case may be.”

The time stated in item 28 was the “Date that the Purchaser receives the confirmed marine (or transit) insurance policy and the Equipment has been loaded on to the boat at the port of origin.”

The other requirements of clause 20.2 had been satisfied, but not clause 20.2(a).

RCR relied on item 27 of the Contract in arguing that title in the goods passed when the goods were loaded for shipping at the point of origin and certain documents were supplied by NEXTracker, which did occur.

Legal principles

The Court considered four key legal principles in arriving at its decision:

1.       the parties’ rights and liabilities under a contract are determined objectively by reference to its text, context and purpose.[1]

2.       In determining the meaning of the terms of a commercial contract, it is necessary to ask what a “reasonable businessperson” would have understood those terms to mean.[2]

3.       Words in a contract should generally be interpreted in a way which gives them effect rather than in a way which makes them redundant (except where the alternative construction of their words is inconsistent with other provisions or the commercial purpose of the contract.[3]

4.       Where additions have been made to a standard form contract and there is an inconsistency between the standard terms and the added ones, more weight should be given to the added ones.[4]

What did the Court decide?

The Court held:

·         Although item 27 of the Contract was the place where the parties were to state when the risk in the goods passed and nothing more, they added further details than were contemplated by this item, by stating “Risk of loss and title for the equipment shall pass from the supplier to the purchaser at the port of origin”.

·         If effect was to be given to items 27 and 28 according to their terms, the second paragraph of clause 20.2 would be rendered ineffectual. As additions to the standard form contract, items 27 and 28 must prevail over clause 20.2.

·         The preference for item 27 was further supported by the terms of the original quotation, which was stated to form the contract between the parties until a formal agreement was entered into and stated: “Title and risk of loss for the product shall pass to the ordering entity at the port of origin”.

·         It follows that a “reasonable businessperson” would have intended for this to be reflected in the contract.

·         If NEXTracker was correct, title in the goods would not pass until payment in full had occurred, which under the Contract, coincided with the “successful commissioning of the equipment but not later than 90 days after acceptance of the equipment”. This would mean that there would likely be a period during which the goods had been incorporated into the solar farm but remained the property of NEXTracker. This could hardly have been the parties’ intention.

·         Therefore item 27 prevailed and RCR had title in the goods from the port of origin.

·         The claim was dismissed.

 

Takeaways

The decision is a stark reminder of having clear provisions in the contract around the trandfer of risk and title. Ensure your contract clearly states the time at which title in the goods or materials passes from the supplier to the customer. Further, ensure any special conditions are reflective of the parties’ intentions as these will likely be given greater weight in the event of a dispute;

 

[1] Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104
[2] Ibid.
[3] XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215
[4] Ryan v Ferguson (1909) 8 CLR 731

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.