By Henry Holland, Senior Associate & Therese Makarious, Law Clerk

The Plaintiff, Noosa Cruises, entered into a contract for the purpose of selling its business to the First Defendant, Saltwater Noosa.  The business involved taking passengers on board a vessel for the purposes of cruising on the Noosa River.  The most significant asset of the business was the MV Catalina.

The sale contract provided Saltwater Noosa with the opportunity to have the vessel slipped and surveyed and provided a 14-day due diligence period in which Saltwater Noosa could satisfy itself that the vessel was seaworthy.  The contract also provided Saltwater Noosa with the opportunity to terminate the contract if it was not satisfied by its due diligence enquiries or its survey revealed a major structural defect to the hull which Noosa Cruises was not prepared to repair.

Prior to finalising the sale, Saltwater Noosa retained TD Marine Surveyors and Naval Architects (TD Marine) to survey the vessel.  Following the survey, Saltwater Noosa proceeded with the purchase and operated the business until October 2018 when problems were detected with the vessel and works were undertaken.  At that time, Saltwater Noosa stopped making repayments to Noosa Cruises as required under the sale contract.

Noosa Cruises made a claim for the debt due and owing by Saltwater Noosa.  Saltwater Noosa counterclaimed on the basis that Noosa Cruises breached the contract in failing to provide a vessel which was seaworthy and lawfully, properly, and safely able to carry 160 passengers.  Saltwater Noosa also claimed against TD Marine on the basis that TD Marine did not survey the vessel in a manner that was consistent with competent professional practice.

Two of the main issues that the Queensland District Court was required to determine were:

1. Was ‘seaworthiness’ an implied term in the sale contract?; and
2. Was the vessel lawfully, properly and safely able to carry 160 passengers at the time of entering into the contract?

Was ‘seaworthiness’ an implied term in the sale contract?

Saltwater Noosa contended that it was an implied term of the contract that the vessel would be seaworthy at the time that Saltwater Noosa took possession of it, which Saltwater Noosa argued was necessary to give business efficacy to the contract.

In considering Saltwater Noosa’s arguments, Judge Loury KC applied the reasoning of the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 in stating that five conditions must be satisfied before a term could be implied to give business efficacy to a contract, being that:

1. the term must be reasonable and equitable;
2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3. it must be so obvious that it goes without saying;
4. it must be capable of clear expression; and
5. it must not contradict any express term of the contract.

Judge Loury KC held that seaworthiness was not an implied term as the contract contained a 14-day due diligence period and included provision for the slipping and survey of the vessel and the right to terminate the contact if a major structural defect was found.

The inclusion of the due diligence provision indicated that the parties had turned their minds to the seaworthiness of the vessel and concluded that Saltwater Noosa was to be satisfied for itself that the vessel was seaworthy before proceeding with the sale.  An implied term that the vessel be seaworthy was therefore not necessary to give business efficacy to the contract as this is what the due diligence provision was intended to address.

Was the vessel lawfully, properly and safely able to carry 160 passengers at the time of entering into the contract?

Saltwater Noosa alleged that Noosa Cruises breached the contract because it promised to sell a vessel which was lawfully, properly and safely able to carry 160 passengers, and that in fact the vessel was not capable of carrying 160 passengers because its registration was based upon flawed technical advice provided by TD Marine and its director, Mr Terry Davis.

Judge Loury KC found that, at the time of entering into the contract, the vessel was lawfully, properly and safely able to carry 160 passengers.  However, after purchasing the vessel Saltwater Noosa conducted renovations which increased the vessels’ lightship weight, such that the vessel’s status was changed and it became subject to a new legislative regime.  The new legislative regime included an increase in the average weight attributed to each passenger from 65 kilograms to 80 kilograms per person.  This had the effect of reducing the vessel capacity to less than 160 passengers.

During cross-examination, a director of Saltwater Noosa accepted that he was advised by Mr Davis that the vessel was grandfathered (being a reference to the vessel having existing vessel status under the relevant legislative regime) and that a change of four percent to the vessel’s lightship weight would mean that the vessel would not meet the new regulations.  Despite that advise, Saltwater Noosa proceeded with the modifications which increased the vessel’s lightship weight by more than four percent.

In that context, Saltwater Noosa failed to establish that the vessel was not lawfully, properly and safely able to carry 160 passengers at the time the contract was entered into, or that Noosa Cruises had breached any relevant promise regarding the passenger capacity of the vessel.

Conclusion

Judge Loury KC held that Saltwater Noosa had no contractual right or entitlement at law to delay the payment of monies it had expressly agreed to pay to Noosa Cruises under the terms of the sale contract.  Judge Loury KC also held that TD Marine’s Terry Davis had surveyed the vessel in accordance with what was widely accepted by other professional at the time, and therefore did not breach any duty that was owed to Saltwater Noosa.  Judgment was made in favour of Noosa Cruises, and Saltwater Noosa’s claims against Noosa Cruises and TD Marine were dismissed.

Key takeaways:

1. When purchasing any asset, it is important to be aware of the terms of the sale contract and their effect.  If a dispute subsequently arises about the terms of the contract, Courts will generally only find that certain terms are implied in very limited circumstances and only if certain conditions are satisfied.
2. Before making any modifications to a vessel, vessel owners should be aware of the potential implications of the modifications.  In this instance, the modifications resulted in additional weight which had the effect of changing the legislative regime to which the vessel was subject, and decreasing the vessel’s passenger carrying capacity.

Mills Oakley successfully defended the claim under instructions from the liability insurers of the Second and Third Defendants, TD Marine and its director, Terry R Davis.