Helicopter Sales Pty Ltd v Rotor-Work Pty Ltd
132 CLR 14 ALR 77
(Judgment by: STEPHEN J)
Between: HELICOPTER SALES PTY LTD
And: ROTOR-WORK PTY LTD
Judges:
Barwick CJ
Menzies J
Stephen JMason J
Jacobs J
Subject References:
Contract
Implied warranty
Repair
Whether warranties excluded
Practice and procedure
Third party
Leave to defend
Legislative References:
Rules of the Supreme Court (Qld) - O 17, r 4
Judgment date: 17 September 1974
ADELAIDE
Judgment by:
STEPHEN J
This appeal raises the question of the circumstances in which a contractor, engaged in the servicing of another's equipment, may be liable, despite the absence of any want of care, for the consequences of fitting to that equipment a replacement part vitiated by a latent manufacturing defect.
While flying over Circular Quay, Sydney, a bolt retaining in position the tail rotor blade of the plaintiff's helicopter failed; the helicopter was lost and its occupants killed. The failure was due to a machining defect in the bolt which had occurred in its manufacture. The defendant had, under contract to the plaintiff, undertaken the servicing of the helicopter and in the course of regular servicing had fitted the defective bolt.
In the Supreme Court of Queensland the learned trial judge (Matthews J.) found that in its servicing of the helicopter and in fitting the defective bolt the defendant had not been negligent but that the bolt was not reasonably fit for its purpose, was not of merchantable quality and did not, because of its machining defect, comply with the manufacturer's authorized drawings. No express warranties had been given by the defendant and his Honour concluded that no statutory implication of warranties arose, there having been no sale of goods. However the defendant was, he held, in breach of warranties as to quality and compliance with manufacturer's drawings, which were to be implied from the circumstances of the contract.
There was judgment for the plaintiff against the defendant and for the latter against the third party, an Australian distributor of helicopter parts from which the defendant had purchased the bolt. The third party had joined as fourth party the overseas manufacturer of the helicopter from which it had in turn purchased the bolt but we were told that jurisdictional difficulties, together with the existence of an exclusion clause in favour of the manufacturer in its contract with the Australian distributor, had resulted in a settlement of the third party's claims during the course of the trial.
The third party, which was given leave to defend and in fact defended the plaintiff's claim against the defendant, now appeals against the whole of the judgment, no appeal being brought by the defendant, which is a wholly owned subsidiary of the plaintiff.
No issue arises as to the defendant's judgment against the third party, it stands or falls with the plaintiff's judgment against the defendant, and it is accordingly against that latter judgment that this appeal is primarily directed. I shall later revert to the procedural oddity of the third party, in the role of appellant, seeking to set aside a judgment entered against another, the defendant. But for the present I turn to the question of the existence of the implied warranties upon which the plaintiff succeeded.
I restrict myself to the case of contracts in the nature of agreements for work and materials. There are many other situations in which goods may come to be supplied without there being any sale of those goods and each no doubt calls for individual consideration; the topic has been much canvassed of late in various common law jurisdictions, as Mr. Waddams' recent article in the Modern Law Review, vol. 37 (1974), p. 154 discloses, and any broad generalizations are, I think, better avoided.
In the case of contracts for work and materials the position has lately been examined in the speeches of their Lordships in Young & Marten Ltd v McManus Childs Ltd, [F6] where it was held that a contract to do work and supply materials will, in the absence of special circumstances, carry with it two implied warranties, that those materials are of good quality, this warranty extending to their freedom from latent defects, and that they are reasonably fit for their intended purpose. Their Lordships adopted as their own the enunciation of principle to this effect by du Parcq J. in G.H. Myers & Co v Brent Cross Service Co [F7] and in doing so suggested a number of reasons why such a rule accorded with good sense and was for the general commercial benefit of the community; it would usually, although it did not in fact in that case, permit of the ultimate liability being, by recourse to third party procedure, borne by the manufacturer whose responsibility it should properly be; it assimilated contracts for work and materials to contracts for the sale of goods, avoiding the anomaly of a supplier of goods who happens also to fit or install them for that reason escaping the imposition of these implied warranties; it recognized that before the codifying Sale of Goods Act 1893 (U.K.) the common law drew no presently relevant distinction between a sale of goods and a contract for work and materials.
That warranties of quality and of fitness for purpose may be implied in contracts for work and materials is not, in my view, open to any doubt. Very soon after their Lordships' decision in the Young & Marten Ltd Case , this Court, in Reg. Glass Pty Ltd v Rivers Locking Systems Pty Ltd, [F8] applied the principle of G. H. Myers & Co v Brent Cross Service Co [F9] in a case concerned with a contract for work and materials, the installation of a burglar-proof door, and found breach of an implied warranty of reasonable fitness for purpose. [F10] It had earlier implied such a warranty in the case of a hire-purchase agreement (Beaton v Moore Acceptance Corporation Pty Ltd [F11] ) and in a subsequent bailment case it also implied a like warranty (Derbyshire Building Co Pty Ltd v Becker [F12] ). The Canadian Supreme Court has also recognized the applicability of implied warranties to the case of contracts for work and the supply of materials (Laminated Structures & Holdings Ltd v Eastern Woodworkers Ltd [F13] ). holding that "the liability of a contractor for the supplying of material and the erection of a structure is no less than that of a vendor under the Sale of Goods Act". [F14]
The real issue in the present appeal is whether the implication of a warranty of merchantable quality ought to be held to have been excluded by the particular circumstances of the present contract between plaintiff and defendant. In Young & Marten's Case [F15] their Lordships accorded full recognition to the possibility that implied warranties might be excluded by particular circumstances and they in fact excluded from the contract in that case the implication of any warranty of fitness for purpose because the materials which there proved to be defective had been selected by the respondent by their trade name and the respondent had then required that particular brand to be supplied to it. That circumstance was not thought appropriate to exclude a warranty of quality; however in giving judgment later in the same day in another appeal concerned with implied warranties on the supply of materials, Gloucestershire County Council v Richardson, [F16] their Lordships held, Lord Pearson dissenting, that a warranty of quality was excluded by the particular circumstance of that case.
Young & Marten's Case [F17] concerned the supply and fixing of roofing tiles. In it, as in the Reg. Glass Case, [F18] the contract was one in the performance of which the supplying of goods no doubt played as prominent a part as did the work of fixing in place. It was recognized in some of their Lordships' speeches that the implication of warranties might the more readily be excluded where the nature of the contract was predominantly for the performance of services, the supply of goods being only incidental thereto: per Lord Reid [F19] and per Lord Wilberforce. [F20] The contract in the present case is such a contract, it is predominantly for the performance of engineering services in the maintenance and overhauling of the plaintiff's aircraft, the renewing of parts being but an incidental, albeit important, feature of the defendant's contractual obligations.
It is also a contract having quite special features associated with it which bear directly upon the question of the implication of warranties. The plaintiff owns and operates a fleet of Bell helicopters which 0must be maintained in an airworthy condition so as to comply with the quite rigorous standards of the Department of Civil Aviation; the defendant, its wholly-owned subsidiary, carries on the business of aeronautical engineer and has for some years carried out all the necessary maintenance and overhaul work on the plaintiff's aircraft. It has done so pursuant to an oral contract constituted by a conversation between the manager of the defendant and the managing director of the plaintiff, who happens also to be managing director of the defendant but was on this occasion representing the plaintiff. The terms of this contract reflect in some measure the requirements of the Department of Civil Aviation.
By Air Navigation Orders (A.N.O.) Pt 100 s. 100.5.0 the Department of Civil Aviation requires that materials used in the maintenance of an aircraft "shall have been procured under cover of a Release Note ... or an equivalent certification document" and that the requirements of the particular aircraft manufacturer's current maintenance overhaul and repair manuals shall be observed. Release notes complying with A.N.O. requirements bear a certificate "that the aircraft goods enumerated hereon have been inspected and tested and that each item complies with specification and/or design number quoted"; they may only be issued by a supplier duly authorized by the Department and who is in possession of a current approval. The third party, the Australian distributor of Bell helicopter parts, was so authorized and was the holder of such a current approval. The Bell helicopter here in question was, according to the manufacturer's manual, due for a major overhaul after 1200 hours of operation; this overhaul was undertaken, pursuant to this contract, by the defendant and it was in the course of that major overhaul that the defective bolt was installed. The bolt, a Bell product manufactured in the United States, was a numbered component part listed in the manufacturer's manual and was supplied to the defendant by the third party under cover of an appropriate release note on which was quoted the bolt's design number and its "incoming certification", identified as an invoice no. 4135, which proved to be an invoice received by the third party from Bell on the importation of the bolt into Australia and which was retained by the third party. This invoice stated that the parts to which it related, which included the bolt, had been manufactured in accordance with "applicable design and process specification requirements" and had been "found by inspection to be airworthy"; it was apparently by reliance upon the information in this invoice from the manufacturer that the third party was entitled, under Air Navigation Orders, to issue to the defendant a certified release note in respect of the bolt.
It was a term of the contract between plaintiff and defendant that in maintaining the plaintiff's aircraft the defendant would conform to D.C.A. requirements and to the requirements of the manufacturer's manual and would, to the extent that the Bell manuals required use of replacement parts supplied by Bell, use only such parts, obtaining them from Bell's authorized distributor, the third party. In particular it was stipulated that the defendant should obtain a duly certified release note in respect of all such replacement parts.
No doubt because they had a common managing director, a Mr. Ferguson, and because of their intimate association the one with the other, the plaintiff was aware of many details of the circumstances under which the defendant obtained replacement parts which it was to fit to the helicopters which it maintained and, in particular, knew of the significance of release notes and of the certificates which they contained and knew that it was in fact the policy of the defendant to buy helicopter replacement parts exclusively from the third party and always to obtain appropriate release notes in respect of those parts.
All Bell replacement parts were imported by the third party from the U.S. manufacturer and many were supplied to it and passed on to the defendant in individual factory-sealed packs. The defendant would, to the plaintiff's knowledge, have found it quite impracticable to attempt to carry out as a regular procedure the quite complex scientific tests necessary to ensure absence of latent defects in the replacement parts which were supplied to it; it would in any event have been impossible for it to ensure their compliance with the manufacturer's design requirements since the manufacturer, Bell, treated its design drawings and specifications as confidential documents access to which by outsiders was restricted.
To treat the present contract as including an implied warranty of quality appears to me to be impermissible. The plaintiff, with knowledge of the limited technical capabilities of the defendant, of the provenance of the replacement parts in question and of the nature and significance of release notes, made a stipulation relating to quality of parts to be installed in its aircraft which it no doubt regarded, not without justification, as involving standards more exacting and a resultant assurance of quality of considerably greater weight than anything of which the defendant was capable; it required a release note, which necessarily involved certification by the manufacturer's authorized Australian distributor, duly approved of in that behalf by the Department of Civil Aviation and who held its current approval; the certification would attest to due inspection, testing and compliance with manufacturer's specification or design.
It was this that the plaintiff expressly bargained for and upon which it chose to rely and no occasion arises for the operation of an implied warranty as to quality. Lord Reid, in Young & Marten's Case, [F21] cites as guiding principle this passage from the judgment of the Exchequer Chamber in Readhead v Midland Railway Co: [F22]
"Warranties implied by law are for the most part founded on the presumed intention of the parties, and ought certainly to be founded on reason, and with a just regard to the interests of the party who is supposed to give the warranty, as well as of the party to whom it is supposed to be given."
If this passage be applied to the present case it becomes apparent that a court cannot infer that the presumed intention of the parties was that a warranty as to quality should be superimposed upon the express term as to release notes; moreover such a warranty would not be a reasonable one in view of the practical inability of the defendant to ensure compliance with such a warranty and the effect of its implication upon the liability of the defendant may well be said to amount to a disregard of its interests, especially in view of the defendant's known inability to ensure compliance with it.
A warrantor's inability to ensure compliance with quality standards will often, of itself, provide no ground for the exclusion of an implied warranty of quality; no disregard of the legitimate interests of the warrantor will thereby be involved. But the case will be different where, as here, both contracting parties know all the relevant facts, have agreed upon an exclusive source of supply and are treating a third party's certification as to quality as being critical.
A like conclusion follows if a somewhat different aspect of the matter be examined. The express term as to release notes is, because of the certification of replacement parts which it necessarily involves, a term concerned with the same subject matter, quality, as would be an implied warranty of merchantable quality. As Maule J. said in Dickson v Zizinia, [F23] "We should not, by inference, insert in a contract implied provisions with respect to a subject which the contract has expressly provided for". See also Moore v Winther & Co , per Hodges J. [F24] and Gemmell Power Farming Co Ltd v Nies , per Jordan C.J.. [F25] When the parties have chosen expressly to contract upon certain terms relating to quality the introduction into their contract of a further implied term as to quality is likely to do violence to their contractual intentions rather than to give effect to them.
It is for these reasons that I have concluded that any implied warranty of merchantable quality ought to be excluded in the present case; for like reasons I would not imply any warranty of compliance with manufacturer's drawings. The learned trial judge did not, as I read his reasons for judgment, find any implied warranty as to fitness for purpose; nor should he have, the requirement that the defendant should obtain replacement parts only from the third party, and that they should be of Bell manufacture and otherwise conform to the manufacturer's manual, leaves no room for such an implied warranty.
One consequence of the view which I have formed is that the plaintiff is here left to bear the consequences of latent defects in replacement parts which are, without negligence, installed in its aircraft by the defendant. What may be conceived to be the socially desirable result that liability for such defects is, by means of third party proceedings, passed down the chain of supply until it comes to rest upon the manufacturer miscarries; the manufacturer, the party who may be thought of as morally responsible and also, perhaps, as best able to bear, or insure against, such liability, escapes liability.
I do not deny the merits of such a concept, however imperfect may prove its execution in practice due to the existence of impediments along the line of liability such as unsuspected exemption clauses, jurisdictional obstacles and time bars. But it seems to me to be relevant only in two respects; first as providing argumentative support for the general rule, not here in doubt, that in contracts for work and materials warranties should be implied in the absence of special circumstances and, secondly, as going to the parties' presumed intentions at the time of contract. As to the latter, when only one of the two contracting parties, the supplier of the goods, possesses any contractual right of recourse against a third party and this fact is appreciated by the contracting parties it will influence a court against excluding an implied warranty by the supplier.
In the present case the express term as to release notes does not, as would an implied warranty, confer upon the plaintiff any right to damages for breach of contract should the certification prove to be incorrect. But the implication of terms into a contract is not designed to achieve a maximum of rights for one party whenever the other has corresponding rights over against a third party, although the existence of such a situation may in particular cases open the way to the making of an appropriate implication or prevent its exclusion. Moreover parties are not necessarily to be presumed to have contracted in the expectation of breach and with a concern for the rights which might or should then arise between them. Nor are terms to be implied in contracts merely so as to give effect to some policy thought likely to promote the attainment of desirable social ends. Terms are implied so as the better to give effect to the bargain arrived at between the parties, thus carrying out their presumed intention.
It is with these considerations in mind that I would, in the present case, exclude from the parties' contract the suggested implied warranties despite the consequence that the theoretical possibility of liability in contract being passed down the chain of supply to the guilty manufacturer is thus frustrated; I say "theoretical possibility" because this is apparently one of those not infrequent cases in which the intervention of an exemption clause would in any event have frustrated the working out of what might be thought to be a desirable pattern for the bearing of ultimate liability.
Since in my opinion warranties as to quality and compliance with manufacturer's drawings should be excluded in the contract between plaintiff and defendant and since it is solely on the ground of breach of such a warranty that the defendant has been held liable in damages to the plaintiff I consider that the defendant should have succeeded in its defence to the plaintiff's claim.
However the defendant has not appealed against the plaintiff's judgment against it; it is the third party alone which is an appellant and it seeks to appeal not only against the defendant's judgment against it but also against the plaintiff's judgment against the defendant. An order by way of third party directions was made before the trial of this action by which leave was given to the third party "to defend the plaintiff's action" but that order was silent concerning "the extent to which the third party is to be bound by any judgment or decision in this action" - Supreme Court Rules (Q.) O. 17, r. 4 (4). Those rules, unlike the rules of some other States, e.g. Supreme Court Rules (Vict.) O. 16A, r. 11 (b) (iii), do not provide that upon the third party entering an appearance he shall thereafter be bound by the result of the trial and in the absence of a court order it is at least doubtful whether the third party would be bound by or be competent to appeal against the judgment in favour of the plaintiff.
No attack was in fact made upon the competency of the third party's appeal against the judgment in favour of the plaintiff; the plaintiff's counsel took the leading role in presenting the respondents' arguments before us and it was only the third party's appeal against the judgment in favour of the plaintiff that was in fact argued, its outcome being treated as decisive of the fate of the other appeal.
In these circumstances, and despite the absence of any order such as might have been made under O. 17, r. 4 (4), the appropriate course appears to be to treat the matter as the parties have chosen to, to deal with both of the third party's appeals as if an order had been made binding it by the result of the trial of the issues between plaintiff and defendant - Asphalt and Public Works Ltd v Indemnity Guarantee Trust Ltd. [F26] To do otherwise, allowing only the appeal against the defendant's judgment and that only to the extent of the damages awarded, the defendant remaining entitled to nominal damages for breach of contract, appears to be a wholly unsatisfactory alternative.
I would accordingly allow each of the third party's appeals.