26.11.2021

How watertight is your boat building contract?

New Zealand boat builders beware.

A Western Australia Court of Appeal decision has recently dismissed an appeal against a judgment ordering a boat builder to repay instalments in full. 

In Scott Fury (trading as Fury Custom Boats) v Nasso [2021] WASCA 171 the Court of Appeal upheld the findings of the trial judge, who determined that an agreement to design and build a custom-made fishing boat was a contract for the sale of a completed vessel, not a build contract.  

As a consequence, the boat builder’s “contractual right to receive and retain payment was dependent upon him performing the whole of the contract by completing construction of the vessel and delivering it”.

The boat builder’s failure to deliver the vessel under the contract entitled the buyer to a full refund of all payments made. 

The Facts

Mr Nasso wanted a custom-made dual console fishing boat.  He engaged Mr Fury, an experienced boat builder who had built a vessel for him before.  Mr Fury prepared plans with the help of a naval architect.  Mr Nasso was involved with the development of the plans, however, Mr Fury did not pass the cost of the architect on to Mr Nasso as it was always accepted that Mr Fury would retain the plans and the resultant mould, and would use these in the future with other customers.  The design in question was the first of its kind in Australia.  

In September 2014, Mr Fury and Mr Nasso entered into a contract.  The fixed price for the contract was AUD275,400.  Payment was structured into 4 stages.  

By April 2015 Mr Nasso had paid AUD115,400 (which included the deposit and the first stage payment).  As is usual, this provided the builder with the cashflow to fund the construction.  

It became apparent to Mr Nasso during the build process that the vessel was significantly different to the specifications in the contract, but Mr Fury continued with the build.  When the boat was finished in early 2016, Mr Fury insisted that Mr Nasso pay an additional AUD45,000 for the boat.  Mr Nasso refused.  He asserted that Mr Fury’s conduct was repudiatory, terminated the contract, and sued for the AUD115,400 he had already paid.  

The District Court judge found that Mr Nasso was entitled to recover the repayment of the deposit and the first stage payment, because there had been a total failure of consideration.  He had contracted to purchase a boat that was not delivered.

The Appeal 

Mr Fury’s appeal was in three parts.

First, he submitted that there was not a total failure of consideration, because he had been paid the first stage payment to develop a design and commence the fabrication for the custom boat up to a certain point, which he had done.  He argued that Mr Nasso had received a substantial part of the benefit of the contract.

The Court of Appeal unanimously held that the proper construction of the contract did not support Mr Fury’s contention that Mr Nasso had received or retained any substantial part of the benefit expected under the contract. It was determined that the contract was objectively one for the purchase of a completed boat, rather than a contract for the construction of a boat.  As such, Mr Nasso had in fact received nothing in return for the money that he had paid.  It was irrelevant that Mr Nasso had participated in the design work, as Mr Fury retained all rights to the design. 

Secondly, he argued that his entitlement to retain the deposit and the first stage payment was not conditional on the completion of the entire contract.

The Appeal judges found that as the contract was for the delivery of the complete vessel, it could not be divided into several stages as contended by Mr Fury.  It was stated that “On no reasonable view has Mr Nasso received or retained any substantial part of the benefit expected under the contract.” Consequently, there had been a total failure of performance and restitution to Mr Nasso of the payments he made to Mr Fury was the “appropriate remedy”.

Lastly, Mr Fury appealed in respect of the respect of the deposit being non-refundable.

The Court of Appeal found that the reference to a “non-refundable deposit” was made in the context of the formation of the contract, during email exchanges .  The language was not carried through to the written agreement.  The reference to a deposit in the payment schedule in the agreement made no mention of it being non-refundable. In the circumstances, it was concluded the deposit was only non-refundable if Mr Nasso withdrew from the contract within the cooling off period.

Mr Fury lost on all three grounds.

How to avoid Mr Fury’s pitfalls

  1. If a deposit is to be non-refundable, ensure this is specifically stated in the contract (including when referenced in a schedule of payments).
  2. If an agreement is intended to be severable, make it clear in the agreement that the instalment payments are for payment for the performance of work at certain milestone stages.  Stating that payments are due upon the completion of the specified milestones will not necessarily be sufficient to create a divisible effect. If there is subsequently a failure to deliver what was contracted for, the full amount of payments made under the contact may be refundable to the buyer.
  3. Ensure the vessel is built to contractual specifications.  Any variations should be documented by change orders and contract pricing revised accordingly.

The Hesketh Henry Marine team is happy to review your boatbuild contracts to ensure they are watertight. Please get in touch with our Marine team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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