Court of Appeal (WA)|2012-03-28|Before: Martin CJ

ATTORNEY-GENERAL OF BOTSWANA -v- AUSSIE DIAMOND PRODUCTS PTY LTD [No 2] [2012] WASCA 73 (28 March 2012)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : ATTORNEY-GENERAL OF BOTSWANA -v- AUSSIE DIAMOND PRODUCTS PTY LTD [No 2] [2012] WASCA 73

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : ATTORNEY-GENERAL OF BOTSWANA -v- AUSSIE DIAMOND PRODUCTS PTY LTD [No 3] [2010] WASC 141

Contract - General principles - Construction and interpretation - Nature of terms - Obligation to commission goods held to be distinct from obligation to supply goods suitable for purpose

Sale of goods - Remedies for breach of condition - Right of rejection - When buyer deemed to have accepted goods - Sale of Goods Act 1985 (WA), s 35

Practice and procedure - Appeal from interlocutory decision - Supreme Court Act 1935 (WA), s 60(1)(f)

Rules of the Supreme Court 1971 (WA), O 1 r 4A; O 1 r 4B; O 4A

Leave to appeal from interlocutory judgment refused

Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27

Attorney General of Botswana v Aussie Diamond Products Pty Ltd [No 2] [2009] WASC 301

Attorney-General of Botswana v Aussie Diamond Products Pty Ltd [No 3] [2010] WASC 141

Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361

Gerlach v Clifton Bricks Pty Ltd [2002] HCA 22; (2002) 209 CLR 478

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7; [1962] 2 QB 26

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115

The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40

Wilson v Metaxas [1989] WAR 285

1 In these proceedings, the appellant, who sues on behalf of the Department of Geological Survey of the Republic of Botswana (the Department), claims that it has effectively rescinded a contract with Aussie Diamond Products Pty Ltd (the vendor) for the purchase of a drilling rig, and seeks restitution of the parties to their original positions, including repayment of the purchase price, which was a little over $AUD1 million. The contract was entered into in 2003. The rig was manufactured in Australia and delivered to and assembled in Botswana in 2004. Various difficulties were encountered in the commissioning and operation of the rig, which necessitated repairs and modifications. Modifications and repairs to the rig were carried out by or at the expense of the vendor. In December 2007, the Department purported to rescind the contract for purchase of the rig and claimed repayment of the purchase money. In the proceedings which it commenced to enforce its claim, it asserts that it was entitled to rescind the contract by reason of the vendor's breach of a term of the contract which required the vendor to commission the rig. The Department does not assert that the rig was not of merchantable quality, or that it was not suitable for the purposes for which it was to be used, which had been made known to the vendor prior to entry into the contract. The only remedy sought is restitutionary in character (refund of the purchase price), and no claim has been made for damages.

2 The trial judge found that although the vendor had partially commissioned the rig, it had breached its contractual obligation to carry out diamond core drilling as part of the commissioning process. However, he held that this breach did not entitle the Department to rescind the contract, as the term which required the vendor to commission the rig was not an essential term of the contract, nor was the vendor's breach of a character which would entitle the Department to rescind. He also held that rescission was precluded because the Department had accepted the rig by the time the Department purported to rescind, with the result that any remedy was limited to damages (which were not sought).

3 The Department challenges the trial judge's conclusion that the vendor's breach did not give it the right to rescind the contract. It also challenges the trial judge's conclusion that its remedies were in any event limited to a claim in damages because of its acceptance of the rig. For the reasons which follow, the Department's contentions should be rejected and the decision of the trial judge upheld.

4 The Department also seeks leave to appeal from an interlocutory decision of the trial judge made prior to trial to the effect that it not be granted leave to adduce evidence from a witness whose statement of evidence had not been served in accordance with the timetable established by orders made by the trial judge - see Attorney General of Botswana v Aussie Diamond Products Pty Ltd [No 2] [2009] WASC 301. For the reasons which follow, leave to appeal from that decision should be refused.

5 It is necessary to analyse with some precision the way in which the Department presented its case at trial. As it has not been contended that the case presented at trial went beyond the Department's pleaded case, the statement of claim can be taken to define the ambit of the Department's case.

6 The Department pleaded that the contract for the purchase of the drilling rig was constituted by writing and by conduct. Particulars were provided of the documents said to comprise the written contract. The conduct said to be included within the contract was the payment of a deposit of approximately $AUD200,000 by the Government of Botswana in October 2003.

7 Express terms said to be included within the contract were set out in par 4 of the statement of claim. The express terms pleaded that are relevant to the issues in the appeal are:

4.1 the Drill Rig and Equipment was to be suitable for multi-purpose mineral exploration and water well drilling;

...

4.3 on delivery of the Drill Rig and Equipment, alternatively within a reasonable time thereafter, the defendant was to commission the Drill Rig at a site in Botswana nominated by the Department;

4.4 commissioning was to be undertaken by the defendant setting up and operating the Drill Rig and all of its operating parts over a period of not less than 3 weeks in such a manner as to demonstrate a reasonable and continuing functional capacity to conduct drilling for mineral exploration, geotechnical and water well purposes, by both down the hole and diamond core drilling;

4.5 upon completion of commissioning, the defendant was to provide operational and maintenance training to the plaintiff's staff;

4.6 upon satisfactory completion of commissioning and training there was to be a handover by the defendant to the Department of the Drill Rig and Equipment;

4.7 property in the Drill Rig and Equipment passed upon handover.

8 Subsequent paragraphs in the pleading asserted that payment of the purchase price was conditional upon, and subject to, successful commissioning and handover, with the consequence that any failure to successfully complete commissioning amounted to failure of a condition to which the contract was subject, with the result that the Department was entitled to the refund of all moneys paid. The trial judge's rejection of that proposition has not been challenged on appeal and the issue need not be considered.

9 The Department pleaded that it paid the total purchase price ($AUD1,072,788) progressively between October 2003 and August 2004. It further asserted that delivery of the rig to Botswana took place between July and October 2004.

10 It was asserted that the vendor commenced commissioning of the drill rig at a site near Lobatse, Botswana on or around 26 February 2006, but did not complete commissioning in that the vendor did not at any time conduct normal drilling operations in accordance with the express term which had been pleaded (in par 4.4). The Department asserted, in pars 10 and 11 of the statement of claim, that by reason of the vendor's failure to commission the rig, there was 'a total failure of consideration' or 'a fundamental breach of' the contract. Paragraph 11 of the statement of claim also contained an assertion to the effect that the vendor repudiated the contract by its failure to commission the rig. However, the Department's case was not run on the basis that the vendor had renounced the contract (using the taxonomy favoured by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115), in the sense that the vendor's failure to commission was conduct which evinced an intention to no longer be bound by the contract or to fulfil it in a manner substantially inconsistent with the vendor's obligations. During argument on appeal, counsel representing the Department accepted that its case had not been presented at trial on the basis of renunciation (appeal ts 80).

11 The Department further pleaded that by a letter from its solicitors to the vendor dated 3 December 2007, or alternatively by a further letter dated 6 February 2008, it had elected to terminate the contract and had thereby brought the contract to an end. The relief claimed was a declaration to the effect that the contract had been validly terminated, together with orders for repayment of the purchase price plus interest and costs.

12 Four observations are usefully drawn from this analysis of the Department's pleaded case. First, its entitlement to terminate was said to arise solely from the vendor's breach of the express term of the contract which required it to commission the drill rig by failing to demonstrate a reasonable and continuing capacity to conduct normal drilling operations.

13 Second, the pleading did not endeavour to classify the express term upon which reliance was placed as either an 'essential' or 'intermediate' term (using the contemporary taxonomy endorsed in Koompahtoo), or as either 'conditions' or 'warranties' (using the taxonomy of the Sale of Goods Act 1895 (WA) (the Act)). Accordingly, the pleading left it open to the Department to make out its entitlement to terminate and rescind either by establishing breach of an essential term, or by establishing breach of an intermediate term which went to the root of the contract by depriving the Department of a substantial part of the benefit to which it was entitled under the contract. Both at trial and on appeal, the Department sought to establish its entitlement to terminate and rescind by each route in the alternative.

14 Third, although the Department pleaded an express term to the effect that the rig would be suitable for multi-purpose mineral exploration and water well drilling, there was no allegation of breach of that term. Nor was there any allegation that the drill rig which was supplied was not of merchantable quality. Further, and as will be seen, significantly, although the Department alleged that the vendor had failed to demonstrate that the rig had a reasonable and continuing functional capacity to conduct drilling for mineral exploration, geotechnical and water well purposes, it did not plead, nor did the trial judge find that, as a matter of objective fact, the rig which had been supplied to the Department lacked that capacity. To the contrary, the trial judge found that at the time the Department purported to terminate the contract, the modifications and repairs to the rig were substantially complete and that there was no reason to suppose that the rig would have been incapable of performing drilling operations. Those findings have not been challenged.

15 Fourth, the Department has never claimed damages arising from the vendor's alleged breach of contract. In particular, the Department has never sought compensation for delay in commissioning the rig, or arising from its inability to use the rig while modifications and repairs were carried out so as to bring it up to operational capacity. Perhaps surprisingly, its case has always been confined to a restitutionary claim for repayment of the purchase price arising from its rescission of the contract.

16 It is appropriate now to turn to the findings of the trial judge. Although the grounds of appeal challenge the process of reasoning utilised by the trial judge, and although some of the grounds of appeal are expressed as challenges to findings of fact, for the reasons I will develop, the findings of primary fact made by the trial judge and upon which he relied in order to arrive at his conclusions are not actually controverted by any ground of appeal.

17 The trial judge made the following findings of fact. (All references are to the numbered paragraphs in his reasons - Attorney-General of Botswana v Aussie Diamond Products Pty Ltd [No 3] [2010] WASC 141).

18 By an invitation to tender dated 28 April 2003 sent to the vendor in May 2003, the Department called for tenders for the supply of a multi-purpose drill rig and associated equipment [14]. The invitation to tender contained detailed specifications as to the rig and associated equipment which was required [14]. In relation to training and commissioning, the invitation to tender provided:

Training - The supplier will be responsible for training [in Botswana] Technicians (drillers) on how to operate the rig.
Commissioning - To be carried out in Botswana by applying all methods of drilling on a site to be decided by Geological Survey Department. (emphasis added) [15]

19 In response to the invitation, the vendor submitted a quotation dated 13 May 2003 for the supply of an Edson 6000W multi-purpose drill rig and other equipment [16]. The price quoted by the vendor was $AUD1,072,788, which was to include 'delivery to Lobatse/Gaborone, [c]ommissioning and [t]raining' [18].

20 After the vendor submitted its quote, representatives of the Department and the vendor spoke by telephone [20]. Following that conversation on 17 June 2003, the vendor sent a facsimile to the Department which included, among other things, a breakdown of the quote in the following terms:

Drill Rig A$593,877.00

Compressor A$106,803.00

Carrier/Truck A$265,450.00

Freight A$18,720.00

Commissioning/

Training A$10,600.00

SubTotal A$995,450.00

Spare Parts A$77,338.00

Total A$1,072,788.00

21 The facsimile also contained a statement that '[c]ommissioning of the drill rig and operator & maintenance training will take 3 weeks' [21]. The trial judge found this facsimile to be one of the documents which comprised the written contract [192] - [200].

22 I digress to observe that, in very general terms, the amount allocated by the vendor to commissioning and training in the breakdown of its quote was about 1% of the total price.

23 The trial judge made various findings in relation to communications between the parties with respect to the precise manner of payment and with respect to payment of the deposit, the detail of which is not material to the issues in the appeal.

24 The rig was shipped from Fremantle in Western Australia on around 25 May 2004 and arrived in Gaborone via Durban on 8 July 2004 [41]. Spare parts and various other items were despatched on or about 30 August 2004 [43].

25 During October 2004, the parties exchanged correspondence which resulted in an agreement that commissioning of the rig would be undertaken in two stages. The first stage would take place at the Department's premises in Gaborone in late October 2004. The second stage, which was to involve drilling, was to be undertaken at a test site near Lobatse at a time to be determined [45]. As it happened, a representative of the vendor did not arrive in Botswana until early November 2004, when he assembled and started up the rig which had been taken to the Department's yard in Lobatse [52]. Following assembly of the rig, the vendor's representative noted that there were some difficulties operating it, associated with the pilot pressure system [52].

26 After the vendor's representative returned to Australia, there were communications between the vendor and the Department as to the detailed works required in order to complete the commissioning of the rig [53] - [55].

27 In early March 2005, before any of the remaining works had been completed, while the Department was moving the rig in its yard in Lobatse, the mast broke [56]. In April 2005, the vendor's representative returned to Botswana to supervise repairs to the mast [61]. He advised representatives of the Department that commissioning could not be completed at that stage, and that the vendor would engage a local contractor to carry out the work required on the pilot pressure system of the rig [61]. In August 2005, the vendor engaged the local contractor to undertake the work on the hydraulic system of the drill rig [62]. However, by about October 2005 it had become evident that the two hydraulic cylinders used to lift the mast to its vertical position, known as tilt rams, had been damaged, and the vendor made arrangements for replacement rams to be shipped from Australia to Botswana and installed by a local contractor [64].

28 By letter dated 19 October 2005, the Department wrote to the vendor complaining of the delay in the commissioning and advising that the Department was:

[G]iving your Company up to Mid November 2005 to complete the commissioning and hand over of the rig, failing which we will demand our money back and request you to come and collect the rig because you did not fulfil the tender specifications ... [65]

29 The vendor replied on 31 October 2005, advising that the replacement tilt rams were expected imminently and would be shipped by air to Botswana, when they would be installed by the local contractor who would also be asked to carry out a full check of all operations on the rig to ensure that the unit was ready for the field. The vendor further advised that when the drill rig was taken to the field, either the local contractor or the vendor would provide commissioning supervision [66].

30 In December 2005, the tilt rams were replaced by a local contractor at the expense of the vendor [68].

31 In February 2006 the vendor's representative advised the Department that he and another representative of the vendor would visit for commissioning later that month [70]. They arrived on 27 February 2006, after which the rig was driven to a site approximately 90 km from Lobatse for on-site commissioning [71]. However, the rig became bogged en route with the result that it did not arrive on site until the following day, 1 March 2006, after which representatives of the vendor spent approximately three days on site working with the rig [71].

32 During that period (1 - 3 March 2006), down-the-hole drilling was undertaken, but diamond core drilling was not. The trial judge accepted the evidence of one of the vendor's representatives present to the effect that diamond core drilling operations are the same or similar to down-the-hole drilling operations, although diamond core drilling uses a diamond tip drill with a core barrel, occurs at a lower speed and involves different ancillary equipment [72].

33 Four principal problems were identified in the course of conducting drilling operations over the three days. They were compressor failure, failure of a water injection pump, bowing of the tilt rams, and continuing problems with the responsiveness of the hydraulic controls [73].

34 The compressor problem was fixed during the course of commissioning [74]. In relation to the water injection pump, test drilling was carried out using another pump, and the trial judge accepted that it was a simple operation to use that pump in place of the faulty pump [75].

35 In relation to the tilt rams, it was agreed that new cylinders were required and would be manufactured in Australia [77] - [78]. It was also agreed that further work was required to resolve the problems with the hydraulic controls [79].

36 The vendor's representatives left for Australia on 4 March 2006 [80]. By that time, down-the-hole drilling to a depth of approximately 80 m had been completed [81]. Before leaving, a representative of the vendor suggested to a representative of the Department that they continue down-the-hole drilling and then undertake some diamond core drilling, to see if any further problems emerged in connection with the operation of the rig [82].

37 Some training of local crew took place during the commissioning operation, but it was not extensive [83].

38 After the vendor's representatives left, employees of the Department continued down-the-hole drilling for a further 30 m without encountering any significant difficulties [84]. Once the mast was in place, the bowed tilt rams did not impede drilling. The bowing of those rams only caused problems when the mast needed to be lowered so that the rig could be moved to a new site, and when the mast needed to be raised again for drilling operations [85].

39 After the vendor's representatives left the site, employees of the Department commenced diamond core drilling for at least a day or so [86]. Two issues arose. The first concerned the continuing lack of responsiveness of the hydraulic controls arising from the problems with the pilot pressure system, and which had been experienced during the drilling undertaken while the vendor's representatives were present. The second issue concerned the operational failure of the wire winch line, the purpose of which was to haul the core generated by diamond core drilling to the surface [87] - [88]. After encountering these difficulties, the Department ceased drilling operations and left the rig in the field, with its mast upright, under guard [89].

40 The trial judge did not accept evidence given by a representative of the Department to the effect that the vendor's representatives had said that they would return to Botswana to complete commissioning within two weeks [93]. Rather, the trial judge found that at the time the vendor's representatives left Botswana, it was agreed that they would source the spare parts required, which it was estimated would take about two weeks, and then make arrangements for the identified problems to be rectified at the vendor's cost as soon as possible. It was also agreed that at least one representative of the vendor would return to Botswana to check the operation of the rig around the time of, or shortly after, the repair and modification work had been carried out [94].

41 On 23 March 2006, the Department's representative wrote to the vendor providing a list of 16 items of work which were 'picked up during the drilling to commission the rig on site' and which would 'have to be addressed in order to have the rig in good and operational condition' [99].

42 The new tilt rams were despatched from Australia on 10 May 2006, and had arrived in Durban by 11 July 2006 [104]. On 27 October 2006, the new water injection pump and accessories were air-freighted by the vendor to the Department in Botswana [106]. On or about 30 October 2006, the new tilt rams and water injector pump were received by the Department in Gaborone. Between March 2006 and late 2006, a representative of the Department telephoned the vendor about once a month to inquire in relation to the progress of the repair and modification work [106].

43 In early 2007, the vendor's representative invited the Department to provide a list of local companies who could be engaged to carry out the work required [108]. One of the companies suggested by the Department was Fluid Systems. The vendor contacted that company, and on 30 March 2007, Mr Franken of Fluid Systems offered to undertake any work required by the vendor. Fluid Systems had done service and repair work for the Department on its drilling rigs over a number of years [110].

44 During June 2007, arrangements were made between Mr Franken and the vendor whereby Fluid Systems would attend the site where the rig was, and replace the rams so that the mast could be lowered and the rig moved to Gaborone, where the remaining work could be carried out by Fluid Systems [111] - [112].

45 In late June 2007, a representative of the vendor went to Botswana and accompanied an employee of Fluid Systems to the site where the rig was located. It was decided not to change the tilt rams on site, but the mast was lowered and the rig was returned to the workshop of Fluid Systems in Gaborone [114]. There the tilt rams were replaced and the mast appeared to work satisfactorily [115].

46 On 30 June 2007, in the course of a meeting between the representative of the vendor, representatives of the Department and an employee of Fluid Systems, a list of 12 items of work required to repair or modify the rig was prepared at the suggestion of all present [116] - [117].

47 In relation to the problems which had been identified during commissioning, the trial judge found that the compressor and tilt rams had been fixed, a replacement water pump had arrived and was to be installed at the vendor's cost by Fluid Systems, and that Fluid Systems were to rectify the winch line and attend to the work required on the hydraulic system [120]. Before returning to Australia on 2 July 2007, the vendor's representative confirmed to the Department that the work which had been identified would be paid for by the vendor [121], and that after the repairs and modifications were effected he would return to Botswana to check the rig [122].

48 The trial judge found that the work referred to in the list prepared on 30 June 2007, apart from the testing of the compressor, had been undertaken by about October 2007 [123]. That finding is not challenged.

49 The trial judge accepted the evidence of an officer of the Department to the effect that in November 2007, Mr Franken told him that certain work had been carried out for which he had not been paid, that he would not do further work until after he had been paid, and that once the additional work was completed, it would be necessary to test the rig. However, the trial judge did not accept evidence to the effect that Mr Franken had stated that extensive repairs remained to be done, and that they would take a month [132]. Viewed in context, the trial judge seems to have relied upon this evidence as going to the issue of the Department's knowledge. In that respect, he found that the Department knew in November 2007 that, in substance, the work set out in the list that had been prepared on 30 June 2007 had been undertaken [133].

50 On 3 December 2007, solicitors acting on behalf of the Department wrote to the vendor. In that letter it was asserted that:

By your failure and refusal to commission the drill rig, and despite the numerous requests from my client for you to complete commissioning without delay, you have repudiated the contract.

51 The letter demanded repayment of the purchase price in full within 14 days. As I have noted, despite the terminology used in the letter, the Department did not advance a case based on renunciation either at trial or on appeal.

52 The trial judge set out the terms of an email dated 7 December 2007 from Mr Franken to the vendor. The email contained details of the work that had been carried out on the rig. It seems clear that the trial judge relied upon the email as evidence of truth of its contents and found that the email confirmed that the bulk of the work referred to in the list of 30 June 2007 had been carried out [135] - [136]. The trial judge noted that the cost of the work undertaken by Fluid Systems up to date, and the testing and small items that remained to be done was not great - just over $AUD6,500 (including VAT). Although not the subject of an express finding by the trial judge, the terms of the email from Mr Franken reveal that the cost of the work remaining to be done was P4450, out of a total cost of P32050 (P35255 including VAT). Using the exchange rate apparently used by Mr Franken in his email, the estimated cost of the work remaining was in the vicinity of $AUD800.

53 Some time after 7 December 2007, a representative of the vendor told a representative of the Department that the rig was ready to be used back in the field [138].

54 On 6 February 2008, solicitors for the Department again wrote to the vendor requesting return of the purchase price [140]. On 15 February 2008, these proceedings were commenced [141]. In April 2008, the vendor paid Fluid Systems for the work that had been done on the rig, excluding the work that remained to be carried out [143].

55 The Department called expert evidence from a Mr Ewing who had been involved in the manufacture or operation of drilling equipment for more than 40 years. After carefully analysing the evidence given by Mr Ewing, in the form of a written report which was tendered and his oral evidence, the trial judge set out the various reasons which caused him to place very little weight upon that evidence [164] - [179]. The vendor called an expert, Mr Graham, who was experienced in the manufacture, supply and commissioning of drill rigs, and who had inspected the rig and observed it functioning over three or four hours in early July 2009 [181]. Although the trial judge did not accept the entirety of Mr Graham's evidence, he was impressed by him as a witness and by his apparent competence [188]. Based on that evidence, the trial judge found that when Mr Graham examined the rig in July 2009, it was capable of performing all modes of drilling [189]. I digress to observe that there was no evidence to suggest that any significant work had been carried out on the rig between Mr Graham's inspection in July 2009, and the Department's purported rescission of the contract in December 2007. It follows that on the unchallenged findings made by the trial judge, there is no reason to suppose that the rig was not capable of performing all modes of drilling at the time the Department purported to rescind in December 2007.

56 The trial judge carefully analysed the parties' pleadings and identified the issues arising from those pleadings [145] - [163]. He then turned to the identification of the documents comprising the written contract and made findings on that topic which are not challenged [192] - [203]. He then addressed the question of the proper law of the contract and concluded that the law of Western Australia was the proper law of the contract [207] and that the Act applied to it [207], [212]. Neither of those conclusions is challenged.

57 The trial judge then set out 16 propositions of law which provided a context for the proper construction of the contract [215] - [242]. As none of those propositions are challenged, it is unnecessary to repeat them. Similarly, the trial judge set out his views on the legal principles governing the right to terminate a contract in terms which have not been challenged [243] - [261].

58 Against that context, the trial judge set out his views with respect to the proper construction of the contract. He held that there was an express term to the effect that for the purpose of commissioning and training the vendor would make the rig ready for active service and carry out test drilling of both down-the-hole and diamond core drilling on a site in Botswana, the location of which would be decided upon by the Department [262]. The trial judge also found that there was an implied term to the effect that 'the goods would be suitable for multi-purpose mineral exploration and drilling' [263]. The trial judge expressed the view that because the Department had made known the purpose for which the rig was required, and because the contract was a sale by description, ordinarily terms as to merchantable quality and fitness for purpose would be implied. However, he noted that it was unnecessary for him to rule upon those questions as neither party had pleaded those terms. Nevertheless, he considered that the term which had been pleaded by the Department, and which he found, of suitability for drilling purposes was analogous to a condition of fitness for purpose [264]. Yet, as the trial judge noted, the Department never alleged, nor did the trial judge find breach of that term. In that context, the trial judge rejected any conflation of the term of the contract which the Department asserted had been breached (the obligation to commission), with the term which required the vendor to supply a rig which was suitable for multi-purpose drilling [265].

59 The trial judge considered that the word 'commissioning' when used by the parties in the documents which formed their contract, should be given its ordinary meaning - namely, to 'bring [a machine, equipment, etc] into operation' [267]. In his view, the parties to the contract would have contemplated that after a long sea voyage, the rig would require unpacking, the parts would have to be assembled and the rig mounted on the carrier vehicle, the operation of the parts checked and any necessary adjustments or calibrations made in order to prepare it for actual service [267]. Further, the trial judge considered that the reference in the contractual documents to commissioning being carried out 'by applying all methods of drilling' obliged the vendor to commission the rig by carrying out both diamond core drilling and down-the-hole drilling [268]. None of the views expressed by the trial judge with respect to the construction of the term of the contract which required the vendor to commission the drill rig have been challenged.

60 In the context of his consideration of the proper construction of the term requiring the vendor to commission the rig, the trial judge made the following observation with respect to the relationship between that term, and the term which required the vendor to supply a rig which was suitable for multi-operational drilling purposes. He observed:

The property in the goods could revest in the seller in this case at the election of the buyer if the goods were, in fact, not suitable within the meaning of the suitability condition. Whether or not the goods were suitable in the context of this contract, could be expected to be demonstrable in the process of commissioning and training on site in Botswana. Of course, if in the commissioning of the rig it was not shown to be suitable, the seller would be in breach of the suitability condition, not because it had failed to test drill so as to demonstrate compliance with the matters pleaded in the plaintiff's commissioning term, but because the rig was, objectively, not suitable within the meaning of the suitability condition [281] [emphasis in original].

61 The trial judge held that the obligation to commission was not an essential term, any breach of which would justify termination [285]. In his view, the essential obligations imposed by the contract were the obligations to supply a drilling rig which complied with the terms of the contract, and, on the purchaser's part, to pay the purchase price. As the trial judge pointed out, if the goods supplied by the vendor were in fact suitable for the purpose for which they were supplied, 'the absence of commissioning and training by the [vendor] would not diminish the attainment of the underlying object of the transaction' [286].

62 The trial judge held that on the proper construction of the contract, the commissioning and training terms were important but not essential features, and were collateral to the principal object of the transaction [287]. He was reinforced in that view by the observation that if the vendor had breached the term by not providing training and commissioning at all, that work could have been carried out by the Department itself, or by a contractor, and the cost of that work recovered from the vendor in damages. He therefore concluded that the commissioning term was a warranty only, and neither an essential nor an intermediate term, with the result that the only remedy for breach of that term was damages, which the Department had not claimed [288].

63 However, the trial judge went on to consider the position which would result if, contrary to his view, the commissioning term was considered to be an intermediate term such that a breach of that term going 'to the root of the contract' would give the Department the right to rescind. In that context, the trial judge found that the vendor had breached its obligation to commission the rig by failing to carry out any diamond core drilling during the commissioning process [291]. However, in his view that breach did not go to the root of the contract so as to deprive the Department of a substantial part of the benefit to which it was entitled under the contract. He was reinforced in that view by the observation that the consequences of the failure to carry out test diamond core drilling by the vendor were not great, in that the task was undertaken by the Department in the vendor's absence, and was the same or similar in operation to down-the-hole drilling [291].

64 The trial judge went on to consider whether, if, contrary to his view, the vendor's breach of the obligation to commission was of a kind which entitled the Department to rescind, reject the goods and recover the purchase price, that right had been lost by the time of its purported exercise in December 2007.

65 In that context, the trial judge referred to the Department's knowledge that when the vendor's representatives left Botswana on 3 March 2006, they did not propose to complete the commissioning process by undertaking diamond core drilling, but suggested that such drilling be undertaken by the Department. The trial judge reasoned that with knowledge of the breach, in the form of failing to undertake diamond core drilling, the Department did not purport to terminate the agreement, but carried out the diamond core drilling itself [293].

66 The trial judge also noted that prior to termination in December 2007, the last occasion upon which the Department had given any intimation that it was contemplating rejection of the drilling rig was in its letter of 19 October 2005 in which it called for the completion of commissioning by mid November 2005. However, the Department had not carried out its threat to reject the rig in or after mid November 2005, but had instead participated in commissioning operations in early March 2006. The trial judge concluded that the Department's retention and use of the rig for diamond core drilling after 3 March 2006, and its letter of 23 March 2006 requiring that the vendor carry out modification and repair work to the rig at its cost, signified retention of the goods after lapse of a reasonable time, and thus constituted acceptance of the goods [296].

67 The trial judge went on to express the view that even if acceptance was not complete by 23 March 2006, it was complete on or prior to November 2007 because of the Department's insistence upon the vendor's continued performance of the contract in circumstances where the drill remained out in the field for about 15 months and its retention of possession and/or control over the goods for the entire period up until purported rescission in December 2007.

68 Within that period, the trial judge expressed the view that acceptance would have been complete by at least July 2007 [301], or if not, by at least November 2007 by which time the various repairs and modifications identified in the list of 30 June 2007 had largely been carried out, to the knowledge of the Department [302].

The grounds of appeal Grounds 1 and 2 - termination for breach

69 The Department's challenges to the trial judge's conclusion that it was not entitled to rescind by reason of the vendor's breach of the obligation to commission the drilling rig are conveniently considered together. They are contained in grounds 1 and 2 in the following terms:

1.1 finding that on its proper construction, the contract did not contain a condition (Commissioning Condition) by which the Respondent (Defendant) was required to demonstrate that the rig had a reasonable and continuing functional capacity to conduct drilling for mineral exploration, geotechnical and water well purposes, by both down-the-hole and diamond core drilling.

1.2 finding, instead, that on its proper construction, the contract contained a different condition, namely that the rig was to be suitable for multi-purpose mineral exploration and water well drilling ...

1.3 finding that the commissioning obligation was a mere warranty.

The learned Trial Judge erred in fact and law in finding that even if the obligation to commission the rig was an intermediate term and not a warranty, the Respondent's breach of the obligation to commission by failing to carry out any test diamond drilling did not entitle the Appellant to terminate the contract, as the breach did not go to the root of the contract so as to deprive the Appellant of a substantial part of the benefit to which it was entitled under the contract.

70 The written submissions filed in support of these grounds are convoluted and difficult to follow. At points, they appear to suggest that the trial judge should have found that the term of the contract which obliged the vendor to commission the rig was an essential condition, any breach of which (other than a breach falling within the operation of the de minimis principle) entitled the Department to bring the contract to an end. That proposition is not evident in the grounds of appeal. However, we were told by counsel for the Department that although this proposition was not considered to be the Department's strongest argument, it was intended to be incorporated within the ground which challenged the trial judge's conclusion that the term was only a warranty. Counsel for the vendor did not object to the grounds of appeal being construed in this way.

71 The written submissions also contain a number of references to findings of primary fact which were not challenged in any ground of appeal. When this was drawn to the attention of counsel for the Department during argument, the court was advised that an amendment would be moved to the grounds of appeal, so as to identify all findings of primary fact that were challenged by the Department. In due course, an amendment was moved and allowed, by which particulars were added to grounds 3 and 4 of the appeal, which are concerned only with the issue of acceptance. In due course it will be seen that, as I have indicated, there is no substantive challenge to any finding of primary fact within those particulars.

72 Grounds 1 and 2 of the appeal were not amended. In those circumstances, it would be inappropriate and unfair to the vendor to give any consideration to the assertions of factual error which are made in the written submissions dealing with those grounds, but which are not the subject of any ground of appeal.

73 Because of the way in which the Department ran its case, it is unnecessary to consider the principles relating to the right of an innocent party to terminate a contract when the other party renounces its obligations by evincing an unwillingness or inability to render substantial performance of the contract (see Koompahtoo [44]). The legal principles relevant to this case are those which relate to the right of an innocent party to terminate a contract by reason of the other party's breach.

74 Contemporary principles of Australian law on that topic can be traced to the celebrated decision of the Court of Appeal of England and Wales in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7; [1962] 2 QB 26 and in particular to the principles enunciated by Lord Justice Diplock (as his Lordship then was). His Lordship referred to the historical classification of contractual terms into two separate categories; 'conditions', breach of which relieved the innocent party of the obligations of future performance, and 'warranties', breach of which does not relieve the innocent party of the obligation to perform in the future. Diplock LJ noted the tendency of lawyers to speak of this classification of contractual terms as if it was comprehensive; partly for historical reasons, and partly because the classification had been adopted in the English Sale of Goods Act 1893 (UK) (upon which the Act is based) in the classification of terms implied into contracts for the sale of goods (69). However, at common law it is not possible to exhaustively allocate all contractual terms to one or other category of 'condition' or 'warranty', such that the effect of all breaches on the future obligations of performance can be foretold. As his Lordship observed:

No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity ('It goes without saying') to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract. And such a stipulation, unless the parties have agreed that breach of it shall not entitle the non-defaulting party to treat the contract as repudiated, is a 'condition'. So too there may be other simple contractual undertakings of which it can be predicated that no breach can give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitle the non-defaulting party to treat the contract as repudiated, is a 'warranty'.

There are, however, many contractual undertakings of a more complex character which cannot be categorised as being 'conditions' or 'warranties', if the late nineteenth-century meaning adopted in the Sale of Goods Act, 1893 ... be given to those terms. Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a 'condition' or a 'warranty' (69 - 70). [emphasis in original]

75 In that case, the term which had been breached was the obligation of a ship owner to provide a seaworthy ship under a contract of charter. As Diplock LJ noted, because of the long history of decisions relating to 'unseaworthiness', a contractual obligation to tender a seaworthy vessel had become a complex undertaking, embracing obligations with respect to every part of the hull and machinery, stores and equipment, and even the crew of the vessel (71). The obligation to provide a seaworthy vessel could be breached by the presence of trivial defects which could be easily and rapidly remedied, as well as by defects which would inevitably result in the loss of the vessel. For that reason, the term was neither a condition nor a warranty but rather, what would now be described as an 'intermediate term'. The obligation of the court in a case where such a term had been breached was described by Diplock LJ in the following passage:

What the judge had to do in the present case, as in any other case where one party to a contract relies upon a breach by the other party as giving him a right to elect to rescind the contract, and the contract itself makes no express provision as to this, was to look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charterparty and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charterparty that the charterers should obtain from the further performance of their own contractual undertakings (72).

76 The principles enunciated by Diplock LJ were unequivocally adopted by a majority of the High Court of Australia in Koompahtoo, [49] - [51]. As the plurality (Gleeson CJ, Gummow, Heydon and Crennan JJ) observed, in Hong Kong Fir Shipping, Diplock LJ had enunciated a legal principle which encouraged contractual performance and favoured restriction of the right to terminate to cases where breach occasions serious prejudice, albeit at the expense of certainty of outcome which would flow from a rigid classification of contractual terms [50]. The plurality adopted the following passage from Treitel GH, The Law of Contract (11th ed, 2003) 797:

[T]he policy of leaning in favour of classifying stipulations as intermediate terms can be said to promote the interests of justice by preventing the injured party from rescinding on grounds that are technical or unmeritorious.

77 So, in the case of intermediate or innominate terms, the consequences of any particular breach, and in particular, the question of whether the breach entitles the innocent party to terminate, will depend upon an assessment of whether the breach goes to the root of the contract 'such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract' (Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, 380 (Buckley LJ), cited with approval by the plurality in Koompahtoo, [55]).

78 In Koompahtoo the plurality described a breach which goes to the root of the contract as

a conclusionary description that takes account of the nature of the contract and the relationship it creates; the nature of the term; the kind and degree of the breach; and the consequences of the breach for the other party. Since the corollary of the conclusion that there is no right of termination is likely to be that the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract [54].

79 The plurality emphasised that the characterisation of a particular breach of an intermediate term will rest primarily upon a construction of the contract. While they acknowledged the importance of the consequences of the breach and the fairness of holding an injured party to the contract and leaving that party to their remedy in damages, these are matters to be considered after construing the agreement the parties had made. In the view of the plurality, judgments as to the seriousness of the breach, and the adequacy of damages as a remedy are to be made after considering the benefit to which the injured party is entitled under the contract [55].

Conflation of the obligation to commission and the obligation to provide a suitable drilling rig - Ground 1.1

80 The first aspect of ground 1 of the appeal challenges the trial judge's rejection of the Department's attempt to conflate the contractual obligation to commission the drilling rig which the vendor had supplied, with the contractual obligation to supply a drilling rig which was suitable for the purposes for which it was required. The terms of the ground endeavour, in effect, to conflate those distinct obligations by ascribing a quality and character to the performance that had to be demonstrated as part of the obligation to commission. Implicit in the Department's submissions on this topic, both at trial and on appeal, is the proposition that a failure by the vendor to demonstrate the capacity of the rig to perform in the manner stipulated is to be equated with the vendor supplying a rig that was incapable of performing in that manner. That proposition must be rejected, essentially for the reasons given by the trial judge.

81 There is a fundamental difference between a contractual obligation to assemble and bring an item of equipment into operation, and a contractual obligation to supply an item of equipment which is suitable for a particular purpose. In some cases, the failure of a supplier of equipment to assemble and demonstrate the equipment's capacity to operate in a particular manner may come about because the equipment is, in fact, incapable of being operated in that manner. However, in such a case, the failure of the purchaser of the equipment to obtain a substantial part of the benefit for which he or she contracted flows from the inability of the equipment supplied to perform in the manner required, not from the supplier's failure to demonstrate that capacity.

82 It is easy to imagine circumstances in which the failure of a supplier of equipment to commission the equipment, in the sense of assembling it and bringing it into operation may not be the consequence of the inability of the equipment to perform in the manner specified. To take just one example, the equipment supplier may have become insolvent after supplying the goods and lack the wherewithal to commission the goods. Assuming that the equipment could be commissioned by a contractor other than its supplier (and in this case there was no evidence to the contrary), the engagement of such a contractor to bring the equipment into operation would leave the purchaser with the substantial benefit of its contract, and with a remedy in damages against the supplier for the cost of commissioning. Or in another case, the supplier of the goods may be unable to commission them because, for example, after their supply and delivery, hostilities have broken out between the country from which the goods were supplied, and the country in which they were received. Or to take yet another example, the supplier may have failed to bring the equipment into operation because of a minor technical matter of which it was unaware and which, when remedied by the acquirer, enabled the equipment to perform in the manner required. In none of these cases could it be said that the failure to demonstrate the capacity of the equipment has deprived the purchaser of a substantial part of the benefit it had contracted to receive. In each of the examples given, the purchaser has received the goods it contracted to receive, and can cause them to be commissioned and brought into operation, thereby deriving the substantial benefit of the contract.

83 No doubt it would be possible to think of many other examples which demonstrate the proposition that a failure to demonstrate performance is not to be equated to an irremediable inability to perform.

84 The distinction between the obligation to commission the goods supplied, and the obligation to supply goods that were suitable for the purpose required is reinforced by the provisions of the Act. Under s 14 of the Act, where the buyer makes known to the seller the purpose for which the goods are required, so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply, a condition that the goods shall be reasonably fit for that purpose is implied into the contract. Breach of that condition will entitle the purchaser to reject the goods unless they have been accepted (s 11). These provisions reflect a legislative view that in the circumstances in which a contractual term as to fitness for purpose is implied by law, performance of that term is of such importance to a purchaser that breach of the term should entitle the purchaser to reject the goods (unless and until they have been accepted). There is no equivalent or analogous provision implying terms relating to the commissioning of goods supplied, although there are specific provisions requiring (in the absence of agreement to the contrary) a seller to provide a buyer with a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract, and providing that a buyer is not deemed to have accepted goods unless and until he or she is given that opportunity (s 34). Thus, the scheme of the Act is to require the seller to provide the buyer with the opportunity to ascertain whether or not, as a matter of objective fact, the goods supplied are in conformity with the contract. The buyer's right to reject the goods will arise if, and only if, as a matter of objective fact, the goods supplied are not in conformity with the contract and not merely because the seller has failed to perform a contractual obligation to demonstrate their conformity.

85 It is significant that the Department did not plead or prove that the drilling rig was not suitable for the purposes for which it was required. The trial judge accepted the evidence of Mr Graham to the effect that the drilling rig was capable of performing satisfactorily when he observed it in operation in July 2009. There was no evidence to suggest, nor did the trial judge find, that the rig would have been in any different condition when the Department purported to rescind the contract in December 2007. To the contrary, the trial judge found that virtually all of the remedial work which had been identified during 2007 had been performed by October or November 2007 at the latest. None of these findings are challenged by the Department.

86 In these circumstances, there is considerable force in the vendor's proposition that if the Department were to be permitted to conflate the vendor's obligation to commission the drilling rig with its obligation to supply a rig which was suitable for the purposes specified, the practical effect would be to relieve the Department of any obligation to establish breach of the obligation of suitability and to cast the onus upon the vendor of proving that the rig was suitable for the purpose required, even though the Department did not assert that the rig which had been supplied was, as a matter of fact, unsuitable for the required purpose. Such a subversion of the conventional principles relating to the burden of proving a breach of contract if the Department's proposition is accepted provides further reason for its rejection.

87 For these various reasons, the trial judge was correct to reject the Department's attempt to conflate the vendor's obligation to commission the rig, with the vendor's obligation to supply a rig which was suitable for the required purposes, and the Department's contention to the contrary must be rejected.

88 Ground 1.2 is misconceived. It asserts that the trial judge found the suitability term 'instead' of the term which conflated commissioning with suitability. In fact, the trial judge found that the contract contained a suitability term in essentially the terms pleaded by the Department. What has always been missing from the Department's case is any allegation that the suitability term was breached.

89 The next issue to be addressed is the assertion that the trial judge erred by holding that the obligation to commission the drilling rig was a warranty, when he should have found it to be an essential term of the contract, such that any breach (other than a breach falling within the de minimis principle) gave the Department a right to rescind the contract.

90 The authorities to which I have referred reveal that it is possible for the parties to a contract to expressly agree that a term or terms will have the character of an essential term, such that any breach will entitle the innocent party to rescind. However, there is no suggestion that the parties to these proceedings have, in their contract, expressly agreed that the vendor's obligation to commission the drilling rig is to be of that character.

91 It follows that the vendor's obligation to commission the rig can only be characterised as an essential term if, after the contract has been construed, and the respective benefits and obligations of the parties under the contract assessed, it can be said that the obligation to commission the rig was of such a character that any breach, of whatever kind or character, would deprive the Department of the substantial benefit of the contract.

92 As the trial judge noted, the contract was essentially a contract for the sale of goods. Under its terms, the substantial benefit to be acquired by the Department was the supply of a drilling rig. One could go further and characterise the substantial benefit to be derived by the Department under the contract as the receipt of a drilling rig suitable for the purposes for which the Department required the rig.

93 However, even if the benefit to the Department is characterised in this way, it by no means follows that any breach of the obligation to commission the rig deprives the Department of the substantial benefit of its contract. The observations I have already made with respect to the fundamental distinction between the obligation to commission, and the obligation to supply a rig which was suitable for the purposes required, are relevant here. The term which has to be characterised is the term which required the vendor to commission the rig, not the term which required the vendor to supply a rig which was suitable for the purposes for which it was required.

94 Relevant also is the vendor's allocation of the purchase price in the correspondence which comprised part of the written contract between the parties and, in particular, the fact that only about 1% of the contract price was attributed to the obligation to commission and train Departmental personnel. While the relative value of the promise embodied within the particular term, compared to the value of the promises contained elsewhere in the contract, may not be determinative of the characterisation of a term as essential, intermediate or non-essential, it may nevertheless be relevant.

95 Relevant also is the adequacy of damages as a remedy for breach of the term. In a case such as this, where there was no suggestion or evidence to the effect that the rig could not be adequately commissioned by somebody other than the vendor, or that the cost of engaging a contractor to perform the obligation would be prohibitive, or beyond the capacity of the Department, it can readily be inferred that damages would be an adequate remedy for at least some, and perhaps all, breaches of the obligation to commission the rig.

96 For these reasons, the Department's assertion that the vendor's obligation to commission the rig was an essential term, such that any breach gave rise to a right to rescind must be rejected.

Breach of an intermediate term going to the root of the contract - Ground 2

97 By ground 2 the Department asserts that the trial judge should have concluded that the vendor's breach of its obligation to commission the rig was such as to go to the root of the contract, and to deprive the Department of a substantial part of the benefit to be derived under the contract, so as to give rise to a right of rescission.

98 It should first be noted that the only breach of the commissioning obligation found by the trial judge was a breach of the obligation to carry out diamond core drilling during the period over which the rig was tested. It is also to be remembered that the trial judge found that the Department itself carried out that aspect of the commissioning process after the vendor's representatives had departed. Neither of these findings is challenged by the Department.

99 In these circumstances, it is impossible to see how the vendor's partial breach of the commissioning obligation, which resulted in the Department undertaking that part of the commissioning obligation itself, could be said to go to the root of the contract, or to have deprived the Department of a substantial part of the benefit it was to receive under the contract. It is unnecessary to repeat the observations which I have already made as to the proper characterisation of the substantial benefit to be derived by the Department under the contract.

100 The only possible basis upon which it might be concluded that the breach of the commissioning obligation found by the trial judge had gone to the root of the contract would be if the obligation to commission was conflated with the obligation to supply, so as to lead to the conclusion that the rig supplied was incapable of carrying out diamond core drilling. However, that line of reasoning must be rejected for the reasons already given in relation to ground 1. Further, any conclusion to the effect that the rig was incapable of diamond core drilling would be entirely inconsistent with findings of fact made by the trial judge and which are not challenged.

101 For these reasons, ground 2 must also be rejected.

102 The grounds of appeal also challenge the trial judge's conclusion that the obligation to commission the rig was a warranty, such that the Department's only remedy for any breach of the term was in damages. However, as I have concluded that the vendor's obligation to commission the rig was not an essential term, and that, assuming it was an intermediate term, the breach of the term found by the trial judge was not of a kind which gave rise to a right to rescind, the question of whether the term was an intermediate term or a mere warranty is academic, and could have no effect upon the outcome of the appeal. It is therefore unnecessary to consider the issue.

103 For these reasons, the various ways in which the Department challenges the conclusion of the trial judge to the effect that there was no right to rescind the contract should all be rejected, and the conclusion of the trial judge upheld.

104 That conclusion is sufficient to dispose of the appeal. However, for the sake of completeness, it is desirable to shortly address the propositions advanced in that part of the appeal which seeks to overturn the trial judge's conclusion that even if there was a right to terminate and reject the goods, it had been lost by the time the Department purported to exercise that right, by reason of its acceptance of the drilling rig.

105 As I have noted, s 11 of the Act provides that if the buyer has accepted goods under a contract of sale, breach of a 'condition' can only be treated as a breach of warranty, and not as a ground to reject the goods and rescind the contract. Section 35 of the Act provides:

The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.

106 Section 34 provides that the buyer is not deemed to have accepted goods unless and until the seller has provided the buyer with a reasonable opportunity to examine the goods for the purpose of ascertaining whether they are in conformity with the contract. There can be no suggestion that the Department was not given that opportunity in this case - the rig was in its possession or under its control for three years before it purported to reject it.

107 The relevant grounds of appeal are to be viewed in that statutory context. They are in the following terms:

The learned Trial Judge erred in fact and law in finding that even if there was a right to terminate on the basis of the Respondent's breach of the Suitability condition or a sufficiently serious breach of an intermediate term, such right was lost either by 23 March 2006, or by July 2007, or by November 2007, and in any event prior to the sending of the Appellant's solicitor's letter of intention to terminate the contract dated 3 December 2007.

3.1 The finding [293] ... that the Department knew on 3 March 2006 that the Plaintiff did not intend to return to Botswana to commission the drill rig was not a finding open on the evidence ...

3.2 The learned Trial Judge's finding ... that on 23 March the Appellant's letter of reply required the respondent to carry out certain works at its cost constituted a deemed acceptance is an error in fact, the said letter ... being on its proper construction a requirement that the respondent complete commissioning.

3.3 The learned Trial Judge's finding that the matters identified in paragraph [300] were an appropriate basis to conclude that the Appellant's conduct properly characterised involved an acceptance within the meaning of s 35 of the Sale of Goods Act was wrong in fact, such conduct being expressly consistent with the Appellant calling on the respondent to complete commissioning.

3.4 The learned Trial Judge's conclusion ... that there was a deemed acceptance by at least November 2007 by which time repairs and modifications had been affected to the appellant's knowledge constituted an error in fact. The passage of the evidence of Mr Molatlhegi accepted by the trial judge (131) considered in the context of the evidence ... did not involve acceptance.

The learned Trial Judge erred in fact and law in finding ... that even if the contract contained the Commissioning Condition, any right to terminate for breach:

4.1 by failing to conduct test diamond core drilling was lost by 23 March 2006;

4.2 based on tilt rams requiring replacement, was lost at the latest by 30 June 2007;

4.3 based on the exacerbated problem of the lack of responsiveness of the hydraulic controls and the failure of the winch line, was lost at the latest by 30 June 2007.

Particulars to ground 4

4.3.1 The appellant repeats its particulars to ground 3.

4.3.2 In so far as the learned Trial Judge found ... that there was no pleaded case to the effect that after completion of works by November 2007 the drilling rig did not have reasonable and continuing functional capacity, the learned Trial Judge erred in failing to have regard to the appellant's particulars dated 5 October 2009 ...

108 These grounds must be considered upon the hypothesis (which I have rejected) that if the Department had not accepted the drilling rig, it would have had a right to reject it. For the purpose of assessing whether or not the Department had accepted the drilling rig before purporting to reject it, it is necessary to restate the source of the assumed right to reject the rig, and the time at which it arose (at the risk of some repetition).

109 The only breach found by the trial judge was the vendor's failure to complete commissioning of the rig by failing to test its capacity to undertake diamond core drilling before the vendor's representatives left Botswana in early March 2006. There is no ground of appeal which asserts that the trial judge should have found some other breach.

110 The trial judge found that the vendor's representatives suggested to employees of the Department that they should, in effect, complete the commissioning process by testing the capacity of the rig to undertake diamond core drilling after they had left. The trial judge found that the employees of the Department accepted this suggestion and used the rig for diamond core drilling for at least a day or so. There has been no challenge to these findings. The fact that the trial judge also found that some difficulties were encountered in the course of the diamond core drilling is not to the point, because of the distinction between the obligation to commission, and the obligation to supply a rig which was suitable for the purposes for which it was required.

111 It follows that the only breach found by the trial judge was remedied by the Department itself during the first week of March 2006. Thereafter the Department retained possession and control of the rig, notwithstanding that during 2007 the rig was moved to Fluid Systems as bailee. During that time, the Department was pressing the vendor to continue to perform the contract by carrying out modifications and repairs, or causing them to be carried out at the vendor's expense. As the trial judge found, that process was substantially complete by November 2007, with only some minor work and testing remaining to be done. At no time after October 2005 did the Department convey to the vendor any suggestion that it had rejected the goods, or had reserved the right to reject the goods, until the Department purported to rescind in December 2007.

112 Obviously the Department knew of the breach found by the trial judge at the time it occurred. Its representatives knew that the vendor's representatives were returning to Australia without completing commissioning by carrying out diamond core test drilling. It remedied that breach by doing the testing work itself. It then retained the rig for 21 months without intimating in any way to the vendor that it either had rejected the rig, or reserved the right to reject the rig by reason of the vendor's breach. Within the terminology of s 35 of the Act, and in the context of this case, the period of 21 months was plainly 'the lapse of a reasonable time' so as to give rise to acceptance under that section.

113 That process of reasoning is sufficient to dispose of grounds 3 and 4. However, when more detailed consideration is given to the grounds, and to the particulars which were introduced by amendment during the course of argument, it is clear that the submissions advanced in support of these grounds suffer from the fundamental flaw which defeated the submissions advanced in support of grounds 1 and 2 - namely, the failure to distinguish between the vendor's obligation to commission the rig, and the vendor's obligation to supply a rig that was suitable for the purposes required.

The particulars to ground 3 Particular 3.1

114 This challenges a finding said to have been made in [293] of the trial judge's reasons 'that the Department knew on 3 March 2006 that the Plaintiff [vendor] did not intend to return to Botswana to commission the drill rig'. However, that is not the finding made by the trial judge. The trial judge found that it was agreed between representatives of the Department and the vendor that at least one representative of the vendor would return to Botswana to check the operation of the rig either at the time of, or shortly after, the repair and modification work had been carried out [94].

The Department knew, on 3 March 2006, that the defendant did not intend to complete the second stage of commissioning in relation to test diamond core drilling.

116 That finding is quite different to the finding attacked in the particular, to the effect that the Department knew that the vendor did not intend to return to Botswana. The trial judge never made such a finding.

117 The misconstruction of the reasons given by the trial judge at [293] appears to be derived from a failure to appreciate the nature of the breach found by the trial judge, which was limited to the failure of the vendor's representatives to carry out diamond core drilling during the commissioning process in early March 2006. Plainly, the Department's representatives were aware of that fact, because they were present on site and participating in the drilling activities. Further, they accepted the vendor's suggestion that they should, themselves, carry out the diamond core drilling after the vendor's representatives had left.

118 Particular 3.1 is misconceived and must be rejected.

119 This particular asserts that the trial judge erred by failing to construe the Department's letter of 23 March 2006 as a requirement that the vendor complete commissioning. To recap, the Department's letter of 23 March is the letter which the contained the list of 16 items of work which the Department required the vendor to carry out, and which had been identified during the commissioning process. The assertion contained within this particular also derives from a failure to appreciate the distinction between the obligation to commission the rig in the manner in which that obligation was construed by the trial judge (and which has not been challenged), and the obligation to supply a rig which was suitable for the purposes for which it was required. The work stipulated by the Department in its letter of 23 March went to the latter obligation, not the former. The Department's requirement that the vendor continue to perform its obligations under the contract notwithstanding the Department's knowledge of the vendor's breach by failing to carry out diamond core drilling as part of the commissioning process was an affirmation of the continued existence of the contract after the right to reject had arisen, and was properly taken into account by the trial judge in assessing whether the Department had accepted the rig.

120 Particular 3.3 asserts that the trial judge erred by not characterising the Department's repeated demands upon the vendor to continue to perform its obligations under the contract as demands for the vendor to complete its obligation to commission. It suffers from the same misconception as particular 3.2.

121 This particular contains a non sequitur on its face. It purports to challenge the conclusion of the trial judge that there was a deemed acceptance, by reason of the operation of s 35 of the Act, by reference to evidence given by one of the Department's officers with respect to his state of mind in November 2007. However, the basis of the finding of the trial judge with respect to deemed acceptance was the lapse of a reasonable time following breach. The evidence of the Department's officer as to his state of mind after the time had elapsed is irrelevant to the process of reasoning adopted by the trial judge.

122 For these reasons, it can be seen that all the particulars to ground 3 are misconceived, reinforcing my conclusion that the ground must be rejected.

123 Ground 4 is similarly misconceived. Paragraphs 4.2 and 4.3 refer to rights to terminate for breach 'based on tilt rams requiring replacement', and 'based on the exacerbated problem of the lack of responsiveness of the hydraulic controls and the failure of the winch lines'. Plainly, neither of these are breaches of the obligation to commission, which was the only obligation which the Department alleged had been breached.

124 Paragraph 4.1 refers to the breach found by the trial judge by failing to conduct test diamond core drilling as part of the process of commissioning. However, any challenge to the conclusion of the trial judge that the right to reject by reason of that breach was lost by the lapse of a reasonable time, or by the affirmation of the continued existence of the contract by the Department who had knowledge of the breach, must be rejected for the reasons already given.

125 The first particular to ground 4 repeats the misconceived particulars to ground 3. The second particular challenges the observation by the trial judge to the effect that the Department had not pleaded a case that the rig was not suitable for its purpose after completion of the repairs and modifications in November 2007 (or indeed at all).

126 The basis for this erroneous assertion exemplifies the misconception which appears to have undermined the Department's case since its inception. Reliance is placed upon the further and better particulars given by the Department to par 8 of the statement of claim, and in particular Answer 1 to the Request for Particulars which asserts:

Since arrival of the Drill Rig in Botswana in or about April 2004 to the date of issue of the Writ, the defendant has not completed commissioning of the drill rig.

That assertion can only be construed as an allegation that the rig was not suitable for the purposes for which it was required if the obligation to commission, and the obligation to supply a suitable rig, are treated as one and the same obligation. For the reasons already given, that is an untenable proposition.

127 For these various reasons, the Department's appeal against the rejection of its claim for rescission must fail.

128 The Department seeks leave to appeal from the dismissal by the trial judge of an application for leave to extend the time for filing and serving a witness statement relating to the evidence which the Department sought to adduce from Mr Franken, of Fluid Systems. The effect of the decision of the trial judge was to prevent the Department from leading evidence from Mr Franken at the trial.

129 The circumstances which gave rise to the Department's application to extend the time for service of Mr Franken's witness statement were as follows. Orders were made for the exchange of witness statements which required the Department to file statements of the evidence it proposed to lead from non-expert witnesses by 5 May 2009. The vendor was ordered to file statements of the evidence to be adduced from non-expert witnesses by 3 July 2009, and the Department was directed to provide statements from witnesses which were purely responsive to the statements served by the vendor by 4 August 2009. There was some slippage from the timetable, and the parties agreed to defer some of the dates by some weeks. The trial was listed to commence on 12 October 2009, and in fact commenced on that date.

130 The Department served a statement of the evidence it proposed to adduce from Mr Franken on the vendor's solicitors on 29 August 2009, although it did not file that statement with the court. Although it was contended before the trial judge that Mr Franken's statement either was, or was genuinely and reasonably considered by the Department's solicitors to be 'purely responsive' to the witness statements served by the vendor, those propositions were rejected by the trial judge. Accordingly, on his view, service of the witness statement was approximately four months late in a context in which the matter was listed for trial commencing on 12 October 2009.

131 On 4 September 2009, the Department's solicitors provided the court with a minute of proposed consent orders which included a proposed direction that 'any admissible evidence of [Mr Franken] be taken by video-link from Botswana'. The trial judge declined to make an order of that kind on the papers because of his concern with respect to the state of preparation of the case. The matter was relisted for further directions on 11 September 2009.

132 At that directions hearings, orders were made by consent permitting any admissible evidence of Mr Franken to be taken by video-link. However, the court was not told, and had no way of knowing that Mr Franken's statement had been served well outside the timetable set for the exchange of such statements, as the statement had not been filed with the court. Communications between the solicitors for the parties prior to the directions hearings recorded the fact that the vendor had not determined whether or not to object to the evidence of Mr Franken in its entirety, but this was not disclosed to the court prior to or at the hearing on 11 September 2009.

133 On 16 September 2009, solicitors for the vendor served notice of their objections to the plaintiff's witness statements, including an objection to the whole of Mr Franken's evidence on the ground that it was not responsive to the statements of the vendor's witnesses and was therefore out of time. The parties conferred with respect to the objections but were unable to reach agreement. The matter came back before the trial judge for hearing on 7 October 2009, when the Department applied for an order extending the time for filing and serving Mr Franken's statement to enable evidence to be led from Mr Franken at trial.

134 Solicitors acting on behalf of the Department filed affidavit evidence relating to the steps that had been taken to obtain a statement from Mr Franken. It appears that Mr Franken was contacted in late March and early April 2008 and asked if he would be prepared to co-operate and provide evidence for use by the Department. He declined. The Department's solicitors said that he was asked again in the first half of 2009, and again declined. However, during August 2009, Mr Franken apparently relented and agreed to co-operate, with the result that his statement was obtained and served on 29 August 2009.

135 In a decision delivered on 8 October 2009, the trial judge rejected the application to extend the time for service of Mr Franken's statement and the matter proceeded to trial on 12 October 2009. Mr Franken was not called to give evidence as a result of the trial judge's ruling on 8 October 2009.

136 As I have noted, the trial judge rejected the Department's submission that Mr Franken's statement was 'purely responsive', and was therefore not required to be served by either 4 August 2009, or perhaps 28 August 2009 (having regard to variations agreed to by the parties with respect to the timetable for service of witness statements directed by the court). The trial judge also criticised the Department's solicitors for not drawing the attention of the court to the fact that Mr Franken's statement had not been served in accordance with the timetable directed by the court, and in that context, expressed the view that there were no proper grounds for a belief that Mr Franken's statement was 'purely responsive'. He was also critical of the vendor's solicitors for allowing the court to assume that any objections to Mr Franken's statement would be technical evidentiary objections, rather than a blanket objection to the whole of Mr Franken's evidence on the basis of late service. The trial judge was not satisfied that the affidavits served on behalf of the Department gave a complete and candid explanation for the delay in service of Mr Franken's statement.

137 The trial judge accepted that if Mr Franken's evidence was led at a trial, which was to commence in a few days, the vendor would be prejudiced in three respects - first, by being unable to adduce evidence, including possibly expert evidence, in response; secondly, as a result of being unable to pursue further discovery with respect to communications between the Department and Mr Franken; and thirdly, by being unable to undertake a further inspection of the drilling rig having regard to Mr Franken's evidence. The trial judge considered whether it would be appropriate to adjourn the trial to enable the vendor to ameliorate the unfair prejudice which it would otherwise suffer. Having regard to the objectives embodied in O 1 r 4A and r 4B of the Rules of the Supreme Court 1971 (WA) (the Rules), and the importance of case management principles acknowledged in the decision of the High Court in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27, the trial judge concluded that the interests of justice did not favour adjourning the trial so as to permit Mr Franken's evidence to be adduced without unfair prejudice to the vendor.

138 The statement served by the Department on 29 August 2009 disclosed that evidence would be led from Mr Franken generally in relation to the work carried out on the drilling rig by Fluid Systems. His evidence would have covered the engagement of Fluid Systems, the retrieval of the drilling rig from the site near Lobatse, its inspection by Mr Franken, and the preparation of the list of items of work required on the rig in late June 2007 (see [46] above). The statement then deals with the work done in relation to the items on that list in terms which, although not entirely clear, suggest that all the items of work on the list were carried out by Fluid Systems. That view of the evidence that would have been led is consistent with an assertion in Mr Franken's statement to the effect that '[b]y late June 2007, I had undertaken the majority of the repairs on the [l]ist. There was about one month's work needed to complete the remaining repairs and modifications'.

139 The statement does not explicitly state whether, or to what extent, the remaining work was carried out. However, the statement records receipt of a letter from the vendor in October 2007 requesting a detailed breakdown of the work carried out by Fluid Systems, which resulted in Mr Franken's reply of 7 December 2007 setting out the work that had been done and that testing and 'small various items' remained to be done (see [52] above). This was the email upon which the trial judge relied for his findings as to the work that had been done on the rig by Fluid Systems.

140 The witness statement also contains general observations with respect to the capacity of the drilling rig to function.

141 The decision of the trial judge to refuse to extend the time for service of Mr Franken's witness statement, and therefore effectively to exclude Mr Franken's evidence, was plainly an interlocutory decision. It follows that the Department must obtain leave to appeal from that decision (Supreme Court Act 1935 (WA), s 60(1)(f)). The Department does not contend otherwise. The principles governing the grant of leave to appeal from interlocutory decisions are well settled. Although leave may be granted wherever the interests of justice require it, generally the applicant for leave must show that the original decision was wrong, or at least attended by sufficient doubt to warrant the grant of leave, and that substantial injustice would be done if the decision was not reversed - see Wilson v Metaxas [1989] WAR 285, 294; The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40.

142 Where leave to appeal from an interlocutory decision is sought prior to the trial and determination of the case, the assessment of whether or not the decision would produce substantial injustice if not reversed will often require a hypothetical assessment of the impact of the decision on the likely future course of the proceedings. However, in a case such as this, where the application for leave is brought after the case has been heard and determined, in order to establish that the interlocutory decision would cause substantial injustice if not reversed, it will be necessary for the applicant for leave to establish that the interlocutory decision affected the outcome of the trial. Unless the impugned decision affected the outcome of the trial, it cannot be said that the trial miscarried or that there should be a retrial, or that the decision of the trial judge should be set aside and another decision made in its place, or that any substantial injustice was occasioned by the decision.

143 These general observations may not apply to the relatively rare circumstance in which an interlocutory decision might be treated as itself concluding an issue between the parties - see Gerlach v Clifton Bricks Pty Ltd [2002] HCA 22; (2002) 209 CLR 478, [8].

144 Accordingly, in the present case, in order to obtain the grant of leave, it is necessary for the Department to establish not only that the decision of the trial judge to refuse to extend the time for service of Mr Franken's statement was wrong, but also that it affected the outcome of the trial. Establishing the latter proposition was always going to be difficult in a context in which the basis upon which the Department claimed to be entitled to rescind the contract and reject the rig was always misconceived, as a result of its conflation of the obligation to commission the rig with the obligation to supply a rig which was suitable for the purposes for which it was required. However, the difficulty was compounded by the failure of the grounds of appeal to directly address the impact which the decision not to allow Mr Franken's evidence to be led actually had upon the final outcome of the case.

145 In many cases in which leave to appeal from an interlocutory decision is sought, it will be necessary to bear in mind the reasons of public policy which underpin the requirement for the grant of leave. Appeals from interlocutory decisions often delay the final disposition of the case, and invariably add to the cost of the proceedings. Unless an interlocutory appeal is justified so as to avert substantial injustice, it will be antithetical to the achievement of the overriding objectives specified in O 1 r 4A and r 4B of the Rules. Further, the case management regime established by O 4A of the Rules confers broad discretions upon a case manager to be exercised in the achievement of the overriding objectives specified in O 1. Those discretions will often be exercised by a case manager having regard to his or her particular knowledge of the pre-trial history of the proceedings and the conduct of the parties, and his or her assessment of the most appropriate way in which the overriding objectives can be achieved in that context. In that case management environment, it is appropriate for the Court of Appeal to exercise restraint, and to only intervene where error is clearly established (and in the case of discretionary judgments of the kind impugned in this case, having regard to the principles in House v The King [1936] HCA 40; (1936) 55 CLR 499) and where substantial injustice would result if the error is not corrected.

146 However, these general considerations are not particularly germane to the present case, as it will be seen that all four grounds of appeal lack substance.

147 The first ground of appeal challenges the findings of the trial judge to the effect that Mr Franken's evidence was not purely responsive, that there was no proper basis for a belief that the statement was purely responsive, and his conclusion that the interests of justice did not favour the extension of time sought. However, the latter proposition was not substantively addressed in the written or oral submissions advanced in support of this ground.

148 The short answer to this ground is that the trial judge was correct to conclude that Mr Franken's statement was not 'purely responsive' to the evidence identified in the witness statements served on behalf of the vendor. The evidence disclosed in Mr Franken's statement, to the extent that it was relevant at all, went to the Department's case rather than rebuttal of the vendor's case. No reference is made in the statement to any evidence to be given by any other witness. The proposition that the statement was 'purely responsive' to the vendor's statements is, and always has been, baseless.

149 As I have noted, no substantive argument has been directed on behalf of the Department to the findings made by the trial judge with respect to the prejudice that would have been suffered by the vendor if Mr Franken's evidence had been led at the trial, which was scheduled to start a few days after the interlocutory decision of the trial judge. Nor has any argument been directed to the proposition that it was not open to the trial judge to find, consistently with the principles acknowledge by the High Court in Aon, that the interests of justice militated against an adjournment of the trial. The findings made by the trial judge with respect to prejudice to the vendor were plainly open to him, and the decision not to adjourn the trial was within the scope of the exercise of a sound discretionary judgment. No basis for appellate intervention has been established.

150 This ground asserts that the trial judge erred by failing to place weight upon the consent order made on 11 September 2009, permitting the evidence of Mr Franken to be taken by video link from Botswana. However, the ground misconceives the nature of the order, which was directed to the manner in which Mr Franken's evidence was to be taken. As the trial judge noted, the parties consented to that order at a time when it was clearly understood between them that the vendor reserved the right to object to any or all of Mr Franken's evidence. That right was exercised.

151 This ground is without substance and must be rejected.

152 This ground asserts that the trial judge erred by taking into account matters which were irrelevant - namely, his finding that the Department had failed to give a complete and candid explanation for the delay in serving Mr Franken's statement, and his findings with respect to the prejudice that would be suffered by the vendor if Mr Franken's evidence was led at trial.

153 This ground is hopeless. Plainly, the failure to proffer an adequate explanation for the delay, and the prejudice likely to be suffered by the vendor were most material matters in the exercise of the discretion to extend time for service of the witness statement - see Aon [103].

154 This ground asserts that the trial judge erred by finding that Mr Franken's evidence was irrelevant. However, the trial judge made no such finding. To the contrary, he approached the exercise of his discretion on the basis that Mr Franken's evidence might be shown at trial to have importance, in which case the vendor would suffer prejudice of the kind he identified. Accordingly, as formulated, this ground is also misconceived and must be rejected.

ATTORNEY-GENERAL OF BOTSWANA -v- AUSSIE DIAMOND PRODUCTS PTY LTD [No 2] [2012] WASCA 73 (28 March 2012)

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ATTORNEY-GENERAL OF BOTSWANA -v- AUSSIE DIAMOND PRODUCTS PTY LTD [No 2] [2012] WASCA 73 (28 March 2012)

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