In October this year, HMCS Chicoutimi, a submarine sold by the Royal Navy, was handed over to the Canadian Forces. On its maiden voyage from Scotland to Nova Scotia, a fire started in an electrical panel that damaged the submarine’s power propulsion system.

The vessel drifted without power off the west coast of Ireland for two days before it was towed back to base for repairs. The incident caused the loss of one life and several injuries.

HMCS Chicoutimi was one of four submarines bought by the Canadian forces from the Royal Navy in 1998 after they had been decommissioned by Britain in 1994.

Buying used materials or equipment will usually lead to savings on initial capital costs and time compared with new equipment. However, there are other risks arising from revitalising ageing equipment as the submarine incident demonstrates.

Purchasers must be aware of the potential problems and take steps to minimise the associated risks. One way to manage the hazards is to ensure that the buyers’ rights are adequately protected in a supply contract.

Scope of supply

It is important for the buyer to check that the scope of the contract actually works in practice. This is usually achieved by incorporating within the contract detailed technical specifications including the principal plans and drawings.

When buying second-hand plant and equipment, the use of descriptive terms in the technical specifications may be difficult. In that case, specifications can be made by reference to functions. Performance targets can be set and defined.

In general, the use of functional specifications can also make it easier to manage these contracts by agreeing with the suppliers in advance any variations or changes to the scope of work.

Reject/accept

The buyer’s most significant right in relation to the technical condition of the materials or equipment will generally be their right to accept or reject the goods.

Section 35 of the Sale of Goods Act 1979 provides for acceptance of goods and is a good place to start in drafting acceptance clauses. It specifies acceptance in three ways: first, if the buyer tells the supplier that the goods are accepted; second, if the supplier performs an act that is inconsistent with the seller’s ownership; and third, if the buyer keeps the goods beyond a reasonable time without rejecting them (see Law, 21 August 2003).

The first and the second of these require the buyer to have had a reasonable opportunity to examine the goods before acceptance. What counts as “reasonable” for the third criterion varies from case to case.

Warranties

Buyers should seek a guarantee of quality and materials for a period after delivery. They should make it clear that any defects must be remedied by the supplier at its expense.

If the defects cannot be dealt with by the original supplier, the buyer shall have the rights to seek third parties to carry out the remedial works and charge the original supplier for them.

It should also be noted a supply contract is subject to implied terms as to “satisfactory quality” and “reasonable fitness for purpose” by virtue of the Sale of Good Act 1979. If not excluded by the provisions of the contract, these statutory terms should give buyer the ability to recover losses from suppliers for post-delivery defects.

Liquidated damages

These provisions in supply contracts are designed to provide both the buyer and the seller with certainty as to the level of compensation due to the buyer for various breaches of contract (see Features, 29 April). For example, they may apply for delays in delivery of the goods, non-compliance with the performance criteria defined, or both.

If liquidated damages provisions turn out to be penalties, they are not enforceable. The buyer has to prove the damages that it suffers as a result of the breach of the seller. When courts interpret liquidated damages clauses, the established position is that: