Reel Action Sports Fishing Pty Ltd (ACN 092 732 888) v Marine Engineering Consultants Pty Ltd (in Liq) & Anor

This case concerned the ownership of an incomplete vessel being constructed by a company that was ordered to be wound up, and tortious claims of conversion and negligence arising. Justice Brown found that the incomplete vessel was owned by the plaintiff which had sought its construction, and that the plaintiff’s interest in it was not a “security interest” under the Personal Property Securities Act 2009 (Cth). The insolvent company and its liquidator were liable in conversion, for conduct repugnant to the plaintiff’s ownership. However, her Honour declined to find that the liquidator owed the plaintiff a duty of care, and so could not be liable for negligence.

Brown J

13 December 2022

Background

In 2017 the plaintiff entered into a contract with the first defendant to construct a 17-metre catamaran. [1]. In November 2020 the first defendant was ordered to be wound up, and the second defendant was appointed as liquidator. [1]. The vessel remained incomplete. [1]. Despite the plaintiff asserting ownership of the vessel and seeking possession of it, the vessel was sold by the liquidator, and the funds are now held on trust by solicitors pending the resolution of this dispute. [1].

This proceeding required the Court to determine which party was entitled to the proceeds of sale. [3]. This turned on who had been the owner of the vessel. Further, the plaintiff made a claim for damages for conversion of the boat, and for negligence (for damage caused to the boat while stored outside). [3].

In the result, the plaintiff was generally successful in its claims; the Court declared that it had been the owner of the vessel, was entitled to the sale proceeds, and that the defendants were liable to pay damages for conversion. However, it was unsuccessful on its negligence claim. [200]–[202].

Ownership of the vessel

The plaintiff contended that, pursuant to the initial Vessel Construction Agreement (“VCA”) entered in 2017, title in the vessel passed to it and it owned the vessel in whatever state of construction it was in. It further contended that its relationship with the first defendant, during the period of construction, was one of bailment, which is not subject to the Personal Property Securities Act 2009 (Cth) (“PPSA”) (s 8(1)(c)). Consequently, the plaintiff contended that ownership of the vessel did not vest in first defendant upon insolvency, and it was not subject to security interests of any other party. [32].

In contrast, the defendants contended that the plaintiff did not own the vessel during its construction and the plaintiff’s interest in the vessel was a “security interest” under the PPSA, the registration of which was alleged to be ineffective. Consequently, the vessel vested in the first defendant upon insolvency, such that the plaintiff had no interest in the vessel or sale proceeds. [33].

The resolution of the dispute required consideration of the VCA, but also determination of two other issues raised by the defendants: first, whether the VCA had been superseded by a latter settlement deed; second, whether the plaintiff’s interest was a “security interest” under the PPSA.

Whether the VCA was superseded by a later settlement deed

The defendants alleged that any interest the plaintiff may have had in the vessel under the VCA was extinguished when a Deed of Settlement was executed by the parties (“Deed”). [36]. The defendants contended that no rights in relation to the Vessel were provided to the plaintiff under the Deed (which contemplated payment following a planned sale), and that the Deed “superseded and replaced” the VCA. [36]. Justice Brown quoted from Balanced Securities Ltd v Dumayne Property Group Pty Ltd (2017) 53 VR 14, where it was said that whether a subsequent agreement amends an earlier agreement, or brings it to an end and replaces it, “is to be resolved by ascertaining the manifest intention of the parties” “ascertained objectively by the construction of the subsequent agreement”. [39].

In this case, her Honour considered that, on its proper construction, the Deed did not supersede or extinguish any ownership rights under the VCA unless the Deed “was relevantly performed”. [42]. As it turned out, the Deed had not been relevantly performed, and so any rights under the VCA were not lost by the plaintiff. [43]. In any event, the Deed only said it would supersede “any prior Deed”, but the VCA was “not a deed”. [47].

Whether the plaintiff had a “security interest” under the PPSA

The defendants also alleged that the plaintiff’s interest in the vessel under the VCA was properly characterised as a “security interest” under the PPSA, and therefore subject to the provisions of the PPSA (which included those relating to vesting of property and priorities between creditors). [53]. “Security interest” is defined in s 12(1) of the PPSA as an “interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation”. [56].

Justice Brown considered that the VCA did not, in substance, provide for a security interest in the vessel. [80]. That was because there was a “disconnect between future obligations under the VCA that were to be performed by the first defendant” and because the transfer of title contemplated by the VCA “did not secure the performance of obligations”. [78]. Her Honour also considered that the VCA should be characterised as giving the plaintiff ownership of the vessel, not a “security interest” in it (as discussed further below).

The proper construction of the VCA

Justice Brown accepted the plaintiff’s argument that the VCA was “in the nature of a sale agreement where ownership of a chattel passed upon initial payment”. [89]. Thereafter, the contract was in the nature of a contract for the supply of boatbuilding services, paid for in stages. [89]. In reaching this conclusion, her Honour had regard to numerous clauses in the contract, particularly cl 15, which provided that the vessel would “become the property of the Buyer upon the payment of the First Stage Payment” (which had been paid by the plaintiff). [82].

Justice Brown was also satisfied that the first defendant’s possession of the vessel during construction was pursuant to a bailment. [90]. A bailment is not a “security interest” to which the PPSA applies (per s 8(1)(c) PPSA). [93].

The conversion claim

As observed in Brybay Pty Ltd (in liq) v Esanda Finance Corp Ltd [2002] WASC 309, “[c]onversion involves dealing with goods or chattels in a manner repugnant to the immediate right of possession of the person who has the property”. [154].

Justice Brown considered that, given the plaintiff did have a right of ownership in the vessel, the denial by the second defendant of the plaintiff’s right to possession of it, “prima facie constitutes conversion”. [155]. Her Honour accepted that the second defendant needed a “reasonable time to review the claim” of the plaintiff, but after having had such an opportunity, the second defendant still “made clear assertions denying the plaintiff’s title”, which constituted conversion. [157].

The measure of damages for conversion in this case was “the value of the Vessel”. [185]. In this case the vessel had been sold for $530,000, but her Honour found that its value at the time of the conversion was $550,000. [196]. Accordingly, apart from being entitled to the sale proceeds held on trust, the plaintiff was also entitled to an additional $20,000. [197]. Because the actions of the second defendant were done “on behalf of the First Defendant”, her Honour ordered that the damages “be paid by both”. [158].

The negligence claim

The plaintiff alleged that the second defendant owed it a duty of care in relation to its dealings with the vessel, and that it had breached that duty by leaving the vessel exposed outside, resulting in damage. [160].

Justice Brown considered that whether a liquidator would owe a duty of care in circumstances such as this was “novel”. [170]. Although courts had been prepared to go “some of the way towards imposing a duty of care upon a liquidator”, the plaintiff’s contentions went beyond those cases, which did not support “the imposition of a duty to individual creditors or third parties”. [170].

Her Honour noted that whether a court should recognize a novel duty of care involves consideration of a range of “salient features”, some of which were summarised by Allsop P in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649. [171]. There were features favouring the imposition of a duty of care, including that loss of the kind suffered was “reasonably foreseeable” and that the plaintiff had put the second defendant on notice of its concerns about the vessel being exposed to the elements. [173]. However, factors which militated against recognition of a duty included that the liquidator had statutory duties under the Corporations Act 2001 (Cth), including to take into custody all property appearing to belong to the company, and that the plaintiff was “not in a position of vulnerability” because it “could have taken injunctive action to preserve the Vessel”. [174].

On balance, her Honour did not consider that the second defendant owed the plaintiff a duty of care to exercise reasonable care in the storage of the vessel to avoid damage to it from the elements. [175].

W Isdale