Fitness for purpose obligations are important to keep in mind when negotiating construction contracts, particularly supply contracts. The recent case of Alpine Beef Pty Ltd v
Trycill Pty Ltd [2010] FCA 136 highlights that even if a contract does not include an express obligation of fitness for purpose, a warranty of fitness for purpose may be implied.
This warranty may arise under statute or may be implied by law.
Background
Some contracts for supply include an express term which requires that the finished product is fit for purpose.
Where there is no express term, the obligation may be implied by statute or under the common law.
Each Australian State has its own version of the Sale of Goods Act. In
Victoria, section 19(a) of the Goods Act
1958 implies a term that goods must be reasonably fit for the purpose for which they were bought provided that the purpose was made known to the supplier and the customer relied on the supplier’s skill.
The obligation may also arise under the Trade Practices Act 1974 (Cth)
(TPA) in certain circumstances.
In broad terms, a statutory warranty that the completed Goods will be reasonably fit for their intended purpose may arise where the following conditions are satisfied:
• where the customer notifies the supplier of the particular purpose for which the work is required;
• it is within the course of the supplier’s business to supply the goods or services;
• there is nothing in the contract which expressly excludes implication of such a term; and
• the customer relied on the supplier’s skill and judgement.
1
The definition of the particular purpose will vary according to the contract in question.
2 The purpose may be made known to the supplier during the negotiations stage, either verbally or in writing. In some cases, the courts may find that the purpose was made known by implication.
Alpine Beef Pty Ltd v Trycill Pty Ltd
[2010] FCA 136
This case concerns an oral contract for the design and manufacture of a luxury yacht. It highlights the practical implications of fitness for purpose and merchantable quality obligations.
The Facts
Sean Howard ( the Applicant ), principal of Alpine Beef Pty Ltd ( Alpine
Beef ) commissioned the building of a luxury yacht in around May 1998 by a well known luxury boatbuilding company, Trycill Pty Ltd, registered as
Boatspeed ( Boatspeed ). Alpine Beef claimed that Boatspeed had made the following oral and written representations:
• if Boatspeed was commissioned to build, and built, an 86 foot luxury cruising sloop based on the hull design it would be of great durability, high quality and free of defects; and
• Boatspeed has the capability to make first-class vessels with a particular emphasis on the high quality of
Boatspeed’s product; and
• Boatspeed had built luxury yachts that were “perfect”.
Within weeks of the yacht being delivered to Alpine Beef, blistering emerged in the yacht’s hull.
Boatspeed carried out initial repairs, but then denied liability for any further repairs. Despite this, Boatspeed continued to tell Alpine Beef that it was willing to carry out repairs and often did so until around 2007.
Between 2007 and 2008, Alpine Beef had a third party carry out repairs to the cost of around $330,000. Alpine
Beef commenced proceedings to recover these costs. The Applicant claimed that Boatspeed:
• had breached the contract to build a quality yacht; and
• had contravened the TPA having represented that the yacht would be of high quality, without defects and otherwise “perfect”.
Flick J in the Federal Court, dismissed the proceedings on the basis that he found that the party the Applicant had used to initiate proceedings, Alpine
Beef, was not a party to the contract and that the Applicant had contracted in his individual capacity. In addition, the TPA claim was statute barred, since the Applicant had not brought the action within the six year period required under section 82(2) of the
TPA.

Fitness for Purpose
Despite this finding, His Honour considered the issues and found that terms as to fitness for purpose and merchantability would have been implied by the conduct of the parties and by reason of section 19 of the Sale of Goods Act 1923 (NSW) ( Goods Act ).
Flick J concluded that the luxury yacht probably was not of merchantable quality and that Boatspeed had breached the implied conditions under the Goods Act . However His Honour noted that Boatspeed had not contravened the TPA in making statements as to the quality of their products, since Boatspeed had reasonable grounds for making such statements.
Flick J found that the blistering on the hull of the yacht did not affect its fitness for the purpose of being sailed as a luxury vessel or adversely affect the valuation of the boat conducted by the Applicant. His Honour referred to evidence demonstrating that the integrity of the structure was not affected by the blistering in the long or short term.
Merchantable Quality
His Honour found that the yacht was not of merchantable quality as required under section 19 of the Goods
Act. Flick J did not accept that
Boatspeed’s arguments that the blistering was a mere “aesthetic” or
“cosmetic” condition and noted that no luxury yacht that has been properly manufactured should ever exhibit such level of blistering. Despite this His
Honour accepted Boatspeed’s contention that a purchaser generally has no right to expect a “perfect article”.
Flick J cited the judgment of Dixon J in
Australian Knitting Mills Ltd v Grant
(1933) 3 for the proposition that:
The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonable sound order and condition and without special terms.
In the present case, Flick J noted that
Alpine Beef would not have accepted delivery or would have demanded that the defect be rectified if it had become aware of the defect prior to delivery.
Although they had no right to expect the vessel to be in “perfect” condition, the extent of the problem was extensive and expensive to remedy and could therefore the vessel was not of merchantable quality.
The Judge concluded that if the
Applicant had been entitled to recover loss or damage, that loss or damage would have been assessed at the cost of the repairs undertaken by the
Applicant, plus interest from the date when the monies were paid for the repairs.
Implications for Customers
As a customer, it would be ideal to have the benefit of both express and implied obligations of fitness for purpose.
Express terms are preferable as these terms are more onerous than the statutory obligations. These obligations generally take effect regardless of whether the supplier was informed of the exact purpose and the obligation is not qualified by
‘reasonableness’.
Customers often use fitness for purpose obligations as a way of filling in any gaps in the Specification. While this assists the customer it is important to ensure that the
Specification meets the customer’s requirements to avoid a possible dispute in the future. Express fitness for purpose obligations should also be properly identified to prevent a possible dispute regarding the boundaries of the obligation.
Implications for Suppliers
Suppliers should be aware of express fitness for purpose obligations as well as clauses that state that the purchaser has relied on the supplier for the appropriateness of the material to be supplied. If possible, it would be ideal to expressly exclude all implied warranties of fitness for purpose (to the extent permitted at law) and to delete any provision imposing an express obligation of fitness for purpose or reliance on the supplier’s skill and judgment. If this is not possible, it is preferable that fitness for purpose clauses should be amended to refer to the Specification.
Update –––– The owners of Boatspeed,
Peter and Sari Ullrich, say they have been financially devastated after multimillionaire Sean Howard liquidated, Alpine Beef, that owed the couple about $470,000. Justice
Geoffrey Flick found against Mr
Howard and ordered Alpine Beef to pay part of the Ullrichs' substantial legal costs on an indemnity basis. Five months later, Mr Howard put Alpine
Beef into liquidation. During the trial, the Ullrichs did not ask the court for
Mr Howard to put up a security for their costs. This is the second time in three years that Alpine Beef has been put into external administration.
Penny Swain
Director pswain@molinocahill.com.au
Jane Levinson
Lawyer jlevinson@molinocahill.com.au
Endnotes
1. Dorter and Sharkey, Building and
Construction Contracts in Australia : 1.520 .
2. Lloyd QC, ‘Problems of Fitness of the
Product’ (1990) 6 BCL 10
3. Australian Knitting Mills Ltd v Grant (1933)
50 CLR 387 at 418
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