6. Terms of the Contract
There are few formalities in terms of the formation of simple contracts. A contract may be made under deed, in writing, The old requirement of a seal has been abolished. Land Law requires, for example, that leases for more than three years must be made by deed. S 52 Law of Property Act 1925. Company Law requires that contracts be in writing for the transfer of certain shares and the Consumer Credit lays down quite rigorous formalities for regulated credit agreements.
6.1 Express Terms of the Contract
The express terms of the contract, the obligations entered into by the parties, may be oral or set out in writing.
In addition, certain terms will be imposed upon the parties, most notably by statute under the Sale of Goods Act 1979 , The Sale of Goods (Implied Terms) Act 1973 and The Supply of Goods and Services Act 1982 The Sale and Supply of Goods to Consumers Regulations 2002 or by custom or by necessity. These terms are called ‘Implied Terms’.
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6.1.1 The Parol Evidence Rule
Oral evidence may not be adduced to add to, contradict or controvert a written document. The rule is part the law of evidence and applies not only to contracts but all kinds of documents. The rule grew up in the context of arguments about when parties would be allowed to place oral evidence before a jury. Much of the early case law involves wills.
Wikipedia note on Parol Evidence
Goss v Lord Nugent (1833) 5 B & Ad 58
“Verbal evidence is not allowed to be given…so as to add to or subtract from, or in any manner to vary or qualify the written contract.”
Rabin v Gerson Berger Association Ltd [1986] 1 WLR 526
The reasoning behind this is straightforward. Those who have bound themselves by a contract in writing should be bound by the written terms alone.
Hawkrish v Bank of Montreal (1969) 2 DLR (Rd) 600
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6.1.2 Exceptions to the Parol Evidence rule
Evidence extrinsic to the document is admitted in a number of situations.
Validity
Evidence may be adduced to prove that the contract is not enforceable for some invalidating cause. Roe v R.A. Naylor Ltd (1918) 87 LJKB 958 (Non est factum)
Operation of the contract
Pym v Campbell (1856) 6 E&B 370
In a case involving the sale of a patent, oral evidence was adduced to demonstrate that a contract should not become operative until a third party approved of the invention.
To show the capacity in which the parties contracted
Evidence was adduced in Newell v Radford (1867) LR 3 CP to show who was buyer and who was seller
To prove the existence of oral warranties
Evidence may be adduced to establish the existence of oral warranties.
Where the written agreement is not the whole agreement
Allen v Pink (1838) 4 M & W 140
In circumstances where the parties did not intend that the written document would encapsulate all the terms of the contract oral evidence may be given to prove the remainder of the contract.
To establish implied terms
The parol evidence rule does not prevent evidence being given to establish a right under an implied terms – to show reliance on the skill and judgment of the seller for example to establish a right under s.14(3) SOGA 1979.
Gillespie Bros v Cheney, Eggar & Co [1896] 2 QB 59
To prove custom
As a defence to an action for specific performance
To identify the subject matter
To establish the existence of a collateral contract
While extrinsic evidence may not be adduced to add to, vary or contradict a written document it may be possible to adduce the evidence to show that the parties had in fact entered into two related contracts one of which was written, the other, oral.
Mann v Nunn (1874) 30 LT 526
A written agreement failed to refer to the earlier oral promise. The oral promise was enforced.
“The parol agreement neither alters nor adds to the written one, but is an independent agreement.”
City of Westminster Properties v Mudd [1959] 129
A lease, containing a covenant, that the premises would be used for business purposes only did not reflect the point that the tenant only agreed to sign the lease by the oral assurance of the landlord that the tenant could continue to sleep on the premises
Harman J: There was a collateral contract that he could stay even if it contradicted the written agreement’s express terms. He said there was no need to look at the question of estoppel, because there was a clear assurance preceeding the contract.
| “ | The first question to be answered is that of construction. The words on which the plaintiffs rely are those at the beginning of clause 2 (9), “to use the demised premises as and for showrooms workrooms and offices only,” and it is argued that the plain meaning of these words is that no other use is to be made of the premises. It is said that this interpretation is affirmed by the rest of the clause which further cuts down the user by prohibiting a large number of trades or businesses. In my judgment, on the question of construction it is not permissible to look into the past history of the matter, nor to rely on the fact that the defendant had been living on the premises to the knowledge of the plaintiffs, nor even that he intended to continue to do so; nor, in my judgment, can the fact be called in aid that express words of prohibition as to residence had appeared in the draft and did not appear in the lease as executed. In commercial cases where printed forms are used, attention has been paid to words struck out. This method of construction had, I believe, the great authority of Scrutton L.J. There is an instance of it in Caffin v Aldridge That was a commercial cause where the court had to construe the word “cargo,” and they could see on the face of the document that before the word “cargo” there had been the words “full and complete” and these had been struck through. Lord Esher M.R. said this:”In order to see what it meant, one must look at the rest of the document. We find that the words ‘full and complete,’ which were originally in the printed form, had been struck out.” |
The oral evidence which was admitted was for a collateral contract which contradicted the written document. It is hard to distinguish this case from earlier authorities Angell v Duke (1875) 32 LT and Henderson v Arthur [1907] 1 KB 10 where the court took the view that the oral evidence, contradicting the written document, was inadmissible. If City of Westminster v Mudd is correct, it undermines the parol evidence rule.
To inform the court about the “factual matrix”
Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896
Lord Hoffmann summarised principles of construction of contracts, and suggested there had been a move away from the old cannons of construction. In particular he referred to the admissibility of evidence to show the court the “factual matrix” in which the contract was formed. The case builds on a ‘common sense’ approach to construction developed in Prenn v Simmonds [1971] 1 WLR 1381; Reardon Smith v Hanson-Tangen [1976] 1 WLR 989; and Mannai Investment Co v Eagle Star Life Assurance [1977] AC 749.
LORD Hoffman:
“….But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows:
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] 2 WLR 945
(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201:
“. . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”
If one applies these principles, it seems to me that the judge must be right and, as we are dealing with one badly drafted clause which is happily no longer in use, there is little advantage in my repeating his reasons at greater length. The only remark of his which I would respectfully question is when he said that he was “doing violence” to the natural meaning of the words. This is an over-energetic way to describe the process of interpretation. Many people, including politicians, celebrities and Mrs. Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listeners.
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6.1.3 The distinction between ‘mere puffs’, representations and terms
Statements made in the pre-contractual phase of negotiations fall into three categories – mere puffs, mere representations and contractual terms. Statements made after the conclusion of a contract have no contractual force unless supported by a separate and valid consideration. (They are not incorporated into the contract and – past consideration is no consideration.)
(a) Mere Puff
The licence the law permits a salesman without attracting contractual liability.
Simplex commendatio non obligat.
(b) Representation and terms – Distinguishing criterion
* The time the statement was made
* The intention behind the making of the statement
* Whether the statement induced a contract
* The status of the maker of the statement
* Whether the statement was reduced to writing
* The importance of the statement
A number of cases illustrate the point:
Routledge v McKay [1954] 1 All ER 855
A written contract signed a week after oral negotiations failed to note the date of the model (1942) The lapse of time between the making of the statement and the signing of the contract was a factor against construing the statement as a contractual.
Sir Raymond Evershed MR:
The classic exposition of the law in regard to warranties is to be found in the Speech of Lord. Moulton in the case of Heilbut, Symons & Co. -v- Buckleton, and the passage most often quoted la at page 47 of the report in 1913 Appeal Cases. Though it has been many times cited I may perhaps be forgiven for citing once again some of the language which the noble Lord used. “It is evident”, said he, “both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. ‘If you will make such and such a contract I will give you one hundred pounds’, is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract. But such collateral contracts must from their very nature be rare”. Than, after a sentence which I can pass ever, “Such (collateral contracts) …… must be proved strictly. Not only the terms of such contracts but the existence of an animus contrabendi on the part of all the parties to them must be clearly shown. Any laxity On these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary thorn by suggesting the existence of verbal collateral agreements relating to the same subject-matter.
Then, after dealing with the particular facts in the Hailbut, Symons case and after referring to certain cases on the Chancery side, Lord Moulton said, at page 49, “On the Common law side of the Court the attempts to make a person liable for an iinnocent misrepresentation have usually taken the form of attempts to extend the doctrine of warranty beyond its just limits and to find that a warranty existed in cases where there was nothing more than an innocent misrepresentation …. But in respect of the question of the existence of a warranty the Courts have had the advantage, of an admirable enunciation of the true principle of law which was made in very early days by Lord Chief Justice Holt with respect to the contract of sale. He says ‘An affirmation at the time of the sale is a warranty, provided it appear on evidence to be so intended'”. Then he says, a little later, “One often sees quoted the dictum of Mr Justice Bayley in Cave -v- Coleman where, in respect of a representation made verbally during the sale of a horse, he says that ‘being wade in the course of dealing, and before the bargain was complete* it amounted to a warranty’ – a proposition that la far too sweeping and cannot be supported”.
Finally, after reference to and disapproval of the language of this Court in De Lassalle -v- Guildford, Lord Moulton at page 51 says: “It is, my Lords, of the greatest importance, is my opinion, that this House should maintain in its full integrity the principle that a parson is not liable in damages for an innocent misrepresentation, no matter in what way or under what form the attack is made”.
Note that Innocent misrepresentation is now covered by s.2(2) Misrepresentation Act 1967 (Infra Chapter 10)
Bannerman v White (1861) 10 CB NS 844
The statement that sulphur had not been used in the growth of crops was contemporaneous and was held to be a condition of the contract. (The buyer would not have contracted if the assurance had not been given)
Couchman v Hill [1947] KB 554
B asked for and receive an assurance that a heifer had not been served. Despite the fact that the printed conditions stated that no warranties were given and the oral evidence controverted a written document the Court of Appeal held that the statement was a contract condition and, in the alternative, amounted to a collateral contract.
Often a contract will be concluded and further statements will be made regarding the goods. These latter statements are not incorporated into the contract and, in the absence of separate and valid supporting consideration, will not be enforced.
Roscorla v Thomas (1842) 3 QB 234
D agreed to sell a horse to P. D then warranted the soundness of the horse. P could not enforce this later promise, the consideration for it, entry into the original contract, was in the past.
Dick Bentley Productions Ltd v Harold Smith Motors Ltd [1965] 1 WLR 623
A statement by a dealer that a car had done 20,000 miles since being fitted with a replacement engine and gearbox was untrue. The court held that the dealer was in a position to know the true facts and that the statement amounted to a contractual term.
Compare : Oscar Chess v Williams [1957] 1 WLR 370 and consider especially the dissenting judgment of Morris LJ.
Schawel v Reade [1913] 1 Ir Rep 81
A statement that a horse was perfectly sound induced a contract three weeks later. It would appear that the status of the person making the statement – the owner, who had special knowledge – was a decisive factor in the case.
All the factors have to be considered, none on their own are conclusive
Heilbut Symons & Co v Buckleton [1913] AC 30
“They cannot be said to furnish decisive tests…the intention of the parties can only be decided from the totality of the evidence.”
per Lord Moulton
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6.1.4 Conditions
A condition, in the narrow and technical sense of the word, is the most important category of contractual term. The remedy for breach of condition at common law is repudiation (in the sense that the victim is allowed to treat the contract as having been repudiated) and damages.
Condition precedent and subsequent
Conditions must first be distinguished from conditions precedent and subsequent.
(a) Condition precedent
Pym v Campbell (1856) 6 E&B 370
In a case involving the sale of a patent, oral evidence was adduced to demonstrate that a contract should not become operative until a third party approved of the invention.
(b) Condition subsequent
Head v Tatersall (1871) LR 7 Ex 7
A horse was sold by description in circumstances allowing the buyer to return the horse if it did not meet the description. It did not. The buyer was allowed to return the horse on grounds that the contract had come to end on the fulfillment of the condition subsequent.
Vital promise: 19th Century
A promise requiring complete performance such that the other party may treat the contract as discharged if it is not performed.
(a) The modern view
A condition goes to the root of the contract.
The breach of a condition allows the innocent party to treat the contract as repudiated, treat the contract as at an end and treat himself as discharged from performance. If the parties to the contract agree that that shall be the effect of the term it will be classified as a condition.
Photo Production Ltd v Securicor Ltd [1980] AC 827
LORD Diplock:
Much has been written about the Suisse Atlantique. Each speech has been
subjected to various degrees of analysis and criticism, much of it constructive. Speaking for myself I am conscious of imperfections of terminology, though sometimes in good company. But I do not think that I should be conducing to the clarity of the law by adding to what was already too ample a discussion a further analysis which in turn would have to be interpreted. I have no second thoughts as to the main proposition that the question whether, and to what extent, an exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract. Many difficult questions arise and will continue to arise in the infinitely varied situations in which contracts come to be breached —by repudiatory breaches, accepted or not, anticipatory breaches, by breaches of conditions or of various terms and whether by negligent, or deliberate action or otherwise. But there are ample resources in the normal rules of contract Law
for dealing with these without the superimposition of a judicially invented rule of law. I am content to leave the matter there with some supplementary observations.1. The doctrine of “fundamental breach” in spite of its imperfections and
doubtful parentage has served a useful purpose. There was a large number of problems, productive of injustice, in which it was worse than unsatisfactory
to leave exception clauses to operate. Lord Reid referred to these in the Suisse Atlantique (p.406), pointing out at the same time that the doctrine of fundamental breach was a dubious specific. But since then Parliament has taken a hand: it has passed the Unfair Contract Terms Act 1977. This Act applies to consumer contracts and those based on standard terms and enables exception clauses to be applied with regard to what is just and reasonable. It is significant that Parliament refrained from legislating over the whole field of contract. After this Act, in commercial matters generally, when the parties are not of unequalbargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament’s intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions.At the stage of negotiation as to the consequences of a breach, there is everything to be said for allowing the parties to estimate their respective claims according to the contractual provisions they have themselves made, rather th for facing them with a legal complex so uncertain as the doctrine of fundamental breach must be. What, for example, would have been the position of the respondents’ factory if instead of being destroyed it had been damaged, slightly or moderately or severely? At what point does the doctrine (with what logical justification I have not understood) decide, ex post facto, that the breach was (factually) fundamental before going on to ask whether legally it is to be regarded as fundamental? How is the date of “termination” to be fixed? Is it the date of the incident causing the damage, or the date of the innocent party’s election, or some other date? All these difficulties arise from the doctrine and are left unsolved by it.
At the judicial stage there is still more to be said for leaving cases to be
decided straightforwardly on what the parties have bargained for rather than
upon analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable appeals. The learned judge was able to decide this case on normal principles of contractual law with minimal citation of authority. I am sure that most commercial judges have wished to be able to do the same (cf. Trade & Transport Inc. v. lino Kaiun Kaisha Ltd. [1973] 1 W.L.R. 210, 232 per Kerr J.). In my opinion they can and should.2. The case of Harbutt must clearly be overruled. It would be enough to
put that upon its radical inconsistency with the Suisse Atlantique. But even if
the matter were res Integra I would find the decision to be based upon un-
satisfactory reasoning as to the “termination” of the contract and the effect of “termination” on the plaintiffs’ claim for damage. I have, indeed, been unable to understand how the doctrine can be reconciled with the well accepted principle of law, stated by the highest modern authority, that when in the context of a breach of contract one speaks of “termination”, what is meant is no more than that the innocent party or, in some cases, both parties, are excused from further performance. Damages, in such cases, are then claimed under the contract, so what reason in principle can there be for disregarding what the contract itself says about damages—whether it “liquidates” them, or limits them, or excludes them? These difficulties arise in part from uncertain or inconsistent terminology. A vast number of expressions are used to describe situations where a breach has been committed by one party of such a character as to entitle the other party to refuse further performance: discharge, rescission, termination, the contract is at an end, or dead, or displaced; clauses cannot survive, or simply go. I have come to think that some of these difficulties can be avoided; in particular the use of “rescission”, even if distinguished from rescission ab initio, as an equivalent for discharge, though justifiable in some contexts (see Johnson v. Agnew [1979] 1 All E.P. 883) may lead to confusion in
others. To plead for complete uniformity may be to cry for the moon. But what can and ought to be avoided is to make use of these confusions in order to produce a concealed and unreasoned legal innovation: to pass, for example, from saying that a party, victim of a breach of contract, is entitled to refuse further performance, to saying that he may treat the contract as at an end, or as rescinded, and to draw from this the proposition, which is not analytical but one of policy, that all or (arbitrarily) some of the clauses of the contract lose, automatically, their force, regardless of intention.
Section 11(3) Sale of Goods Act 1979
“Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract.”
(b) Two older cases
Poussard v Spiers and Pond [1876] 1 QBD 410
An actress fell ill and was unable to appear in a play on a particular date. Her late arrival went to the root of the contract.
Bettini v Gye [1876] 1 QB 183
A singer contracted to perform from march to July was required to attend six days before performances were due to start for rehearsals. The missing of a few days of rehearsals was not a breach of condition. There was no right to treat the contract as having been repudiated. Damages were the only remedy available in this instance.
Distinguishing between terms and conditions
Traditionally the courts would examine the intention of the parties as evidenced in their oral and written statements and by their conduct.
Bannerman v White (1861) 10 CB NS 844
The assurance that sulphur had not been used in the cultivation of hops was a condition. It was clear that the parties regarded this as an important term. The seller would not have contracted if the assurance had not been given.
Practice Point: Defining rights by express provision
Precedent
It is clear the courts will give effect to precedent.
If previous case law classifies an obligation as a condition the courts will apply stare decisis – terms as to time of delivery, for example, are always treated as conditions.
Bowes v Shand (1877) 2 App Cas 455
Intention of the parties
The parties may avoid ambiguity by classifying obligations as conditions.
Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44
It is important to note that if in drafting the clause flexibility of performance is allowed or the drafting of the obligation itself is ambiguous the court may hold that the term has not been broken. The courts will give effect to the intention of the parties. Ina contract drafted by lawyers the use terms such as ‘condition’ and ‘warranty’ is usually decisive evidence of the intention of the parties.
Case Study:
Drafting contract terms as conditions
Lombard North Central PLC v Butterworth [1987] QB 527
Mustill LJ:
1. Where a breach goes to the root of the contract, the injured party may elect to put an end to the contract. Thereupon both sides are relieved from those obligations which remain unperformed.
2. If he does so elect, the injured party is entitled to compensation for (a) any breaches which occurred before the contract was terminated, and (b) the loss of his opportunity to receive performance of the promisor’s outstanding obligations.
3. Certain categories of obligation, often called conditions, have the property that any breach of them is treated as going to the root of the contract. Upon the occurrence of any breach of condition, the injured party can elect to terminate and claim damages, whatever the gravity of the breach.
4. It is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision.
5. A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.
6. It follows that where a promisor fails to give timely performance of an obligation in respect of which time is expressly stated to be of the essence, the injured party may elect to terminate and recover damages in respect of the promisor’s outstanding obligations, without regard to the magnitude of the breach.
7. A term of the contract prescribing what damages are to be recoverable when a contract is terminated for a breach of condition is open to being struck down as a penalty, if it is not a genuine covenanted pre-estimate of the damage, in the same way as a clause which prescribes the measure for any other type of breach. Ho doubt the position is the same where the clause is ranked as a condition by virtue of an express provision in the contract,
8. A clause expressly assigning a particular obligation to the category of condition is not a clause which purports to fix the damages for breaches of the obligation, and is not subject to the law governing penalty clauses.
9. Thus, although in the present case clause 6 is to be struck down as a penalty, clause 2(a)(i) remains enforceable. The plaintiffs were entitled to terminate the contract independently of clause 5, and to recover damages for loss of the future instalments. This loss was correctly computed by the Master.
These bare propositions call for comment. The first three are uncontroversial. The fourth was not, I believe, challenged before us, but I would in any event regard it as indisputable. That there exists a category of term, in respect of which any breach whether large or small entitles the promisee to treat himself as discharged, has never been doubted in modern times, and the fact that a term may be assigned to this category by express agreement has been taken for granted for at least a century: see, by way of example only, Bettini v. Gye (1876) 1 Queen’s Bench Division, 183, 187; Hong Kong Fir Shipping Company v. Kawasaki Kisen Kaisha (1962) 2 Queen’s Bench 26, 70; Financings v. Baldock (1963) 2 Queen’s Bench 104; Photo Productions v. Securicor (1980) AC 827, 84-9E; Bunge v. Tradax (1981) 1 WLR 711 , 715,719 (H.L); Cheshire & Fifoot, Law of Contracts, 10th Edition, 137.
The fifth proposition is a matter of terminology, and has been more taken for granted than discussed. That making time of the essence is the same as making timely performance a condition was, however, expressly stated by Megaw L.J and Browne L.J in Bunge Corporation v. Tradax Export at (1980) 1 Lloyd’s Reports, 294, at pages 305, 307, 309 and 310, and the same proposition is implicit in the leading speeches of Lords Wilberforce and Roskill in the House of Lords.
The sixth proposition is a combination of the first five. There appears to be no direct authority for it, and it is right to say that most of the cases on the significance of time being of the essence have been concerned with the right of the injured party to be discharged, rather than the principles upon which his damages are to be computed. Nevertheless, it is axiomatic that a person who establishes a breach of condition can terminate and claim damages for loss of the bargain, and I know of no authority which suggests that the position is any different where late performance is made into a breach of condition by a stipulation that time is of the essence.
In this connection, it is useful to refer to Bunge v. Tradax supra. An f.o.b contract for the sale of goods required the buyers to give notice of the probable readiness of the ships on which the goods were to be carried. The notice was given four days too late. The sellers declared the buyers in default and claimed damages for default on the basis that the term as to notice was a condition. The damages claimed were the difference between the contract price and the market price, the classical measure for wrongful non-acceptance, by which the seller recovers on the basis that the buyer’s repudiation has cost him the benefit of the buyer’s future obligation to pay the price. The sellers did not contend that, if the term was not a condition, the delay of four days amounted to a repudiation ( (1980) 1 Lloyd’s Reports, at page 303). Most of the attention given to the dispute, in its passage through two levels of arbitration and three hearings in the courts, was devoted to consideration of whether the term was a condition. There was, however, a subsidiary question whether the damages should be computed in accordance with a particular contractual term (which the House of Lords held that they should not), and if not, whether at common law they should be computed on the basis of the contract quantity. If the defendant’s argument in the present case is right, the whole of this discussion was misconceived. Yet it was never suggested by counsel or by any of the arbitrators and judges who heard the case that the comparative triviality of the breach made any difference to the seller’s right, if the term was properly to be regarded as a condition, to recover damages in respect of the buyer’s unperformed obligations. If they were right in making this assumption, in a case where time was of the essence by implication, how much more should this be so where the parties have made an express stipulation to this effect.
I return to the propositions stated above. The seventh is uncontroversial, and I would add only the rider that when deciding upon the penal nature of a clause which prescribes a measure of recovery for damages resulting from a termination founded upon a breach of condition, the comparison should be with the common law measure: namely, with the loss to the promisee resulting from the loss of his bargain. If the contract permits him to treat the contract as repudiated,, the fact that the breach is comparatively minor should in my view play no part in the equation.
I believe that the real controversy in the present case centres upon the eighth proposition. I will repeat it: A clause expressly assigning a particular obligation to the category of conditions is not a clause which purports to fix the damages for breach of the obligation, and is not subject to the law governing penalty clauses. I acknowledge, of course, that by promoting a term into the category where all breaches are ranked as breaches of condition, the parties indirectly bring about a situation where, for breaches which are relatively small, the injured party is enabled to recover damages as on the loss of the bargain, whereas without the stipulation his measure of recovery would be different. But I am unable to accept that this permits the court to strike down as a penalty the clause which brings about this promotion. To do so would be to reverse the current of more than one hundred years’ doctrine, which permits the parties to treat as a condition something which would not otherwise be so. I am not prepared to take this step.
It remains to mention two reported cases. The first is Steedman v. Dunkle (1916) AC 275. Land in Canada was purchased under an agreement, whereby the price was payable by one initial payment followed by annual instalments. The agreement stipulated that if the purchaser should make default in any of the payments, the vendor should be at liberty to cancel the agreement and to retain, as liquidated damages, the payments already made. It was also provided that time was to be considered as of the essence of the contract. The first deferred payment was not made on the due date. The vendor gave notice cancelling the agreement. Three weeks after the due date the purchaser tendered the amount due, which was refused. He thereupon brought an action claiming specific performance and relief from forfeiture of the amount already paid. The Judicial Committee of the Privy Council upheld the decision of the Canadian Court, that the stipulation as to the retention of the sums already paid was a penalty. But the Board declined to grant specific performance. Viscount Haldane said:
“Courts of Equity, which look at the substance as distinguished from the letter of agreements, no doubt exercise an extensive jurisdiction which enables them to decree specific performance where justice requires it, even though literal terms as to stipulation as to time have not been observed. But they never exercise this jurisdiction where the parties have expressly intimated in their agreement that it is not to apply by providing that time is to be of the essence of the bargain”.
This authority would, of course, have been decisive of the present case if the vendor had gone on to claim damages for loss of the contract. He did not do so. Nevertheless, it does, in my view, show quite clearly that a clause making time of the essence, and hence making prompt performance a condition, is not to be struck down merely because a breach of the obligation is not sufficient on its own to constitute a repudiation.
Secondly, there is Photo Production v.Securieor, supra. This case is of great importance, for giving the quietus to the doctrine of fundamental breach. Its significance in the present instance lies in a passage from the speech of Lord Diplock. In order to place this in context, I must first quote from that part of the speech in which Lord Diplock develops a system of primary and secondary obligations, foreshadowed in earlier pronouncements:
“Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach; but, with two exceptions, the primary obligations of both parties so far as they have not yet been fully performed remain unchanged. This secondary obligation to pay compensation (damages) for non-performance of primary obligations I will call the ‘general secondary obligation’. It applies in the cases of the two exceptions as well.
The exceptions are: (1) Where the event resulting from the failure by one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract, the party not in default may elect to put an end to all primary obligations of both parties remaining unperformed. (If the expression ‘fundamental breach’ is to be retained, it should, in the interests of clarity, be confined to this exception). (2) Where the contracting parties have agreed, whether by express words or by implication of law, that any failure by one party to perform a particular primary obligation (‘condition’ in the nomenclature of the Sale of Goods Act 1893), irrespective of the gravity of the event that has in fact resulted from the breach, shall entitle the other party to elect to put an end to all primary obligations of both parties remaining unperformed. (In the interests of clarity, the nomenclature of the Sale of Goods Act 1893, ‘breach of condition’, should be reserved for this exception).
Where such an election is made (a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their non-performance in the future and (b) the unperformed primary obligations of that other party are discharged. This secondary obligation is additional to the general secondary obligation; I will call it the anticipatory secondary obligation'”.
A little later comes the passage relied upon:
“Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract; and must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to he in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation”.
I do not read this passage as being concerned with anything other than penalty clauses in their ordinary sense; viz. clauses which purport to fix the damages recoverable for breach of a primary obligation in a manner which does not reflect those which would be recovered at common law. The reference is to clauses which, in the terminology established by Lord Diplock, fix the extent of the general secondary obligation (not, it may be noted, the ‘anticipatory secondary obligation’) to pay damages for breach of the primary obligation. I cannot see anything to suggest that Lord Diplock was putting in question the right of the parties to decide on the character of the primary obligation. Put in language perhaps more familiar, Lord Diplock was speaking of clauses which restrict the rights of the parties to recover the appropriate measure of damages; he was not concerned with the right of the parties to decide that all breaches of contract should be treated as breaches of condition. Nor am I able to accept that the learned Lord, who had been concerned for nearly twenty years with explaining the consequences of a breach of contract, should at this very late stage introduce the law of penalties so as to produce a result quite different from anything which he had said before.
In a contract where time of payment was expressed to be of the essence, the Court of Appeal held that the parties must be free to determine the status of the terms in their contracts.
“Where breaches go to the root of the contract the victim may elect to accept the repudiation and sue for damages.”
per Mustill LJ
6.1.5 Innominate Term
Where the parties fail to classify the status of the obligations in the contract the court will hold that they are ‘innominate’ and apply the ex post ‘consequences of the breach test’. The remedy given will depend on the gravity of the breach.
Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha [1962] 2 QB 26
Defendants chartered the ship ‘Hong Kong Fir’ for two years on terms that the ship be ‘fitted in every way for ordinary cargo service’. The vessel was unseaworthy, the crew incompetent. The defendants repudiated the charter party alleging that the seaworthiness provision was a condition. The charter party still had time to run its course and the question before the court was whether the seaworthiness provision was a condition or a warranty.
“There are….many contractual undertakings….which cannot be categorised as being “conditions” or “warranties”…Of such undertakings all that can be said 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 he should obtain from the contract; and the legal consequences of a breach of such 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 warranty.”
per Diplock LJ
Reardon Smith v Hansen-Tangen [1976] 1 WLR 989 HL
esp. Lord Wilberforce where he was critical that many decisions on Sale of Goods contracts were ‘excessively technical’
Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44
Lord Denning showed a reluctance to allow rejection under the Sale of Goods Act for what he considered to be a fairly minor breach in relation to damaged goods and held the goods merchantable under s.14 but not in good condition a breach of the express term to that effect – an intermediate stipulation for which breach damages was the appropriate remedy.
It is interesting to note that under the Supply of Goods and Services Act 1982 the implied terms are ‘terms’ not ‘conditions’ as in the Sale of Goods Act 1979 .
Bunge Corporation v Tradax [1981] 1 WLR 711
There Lord Roskill said that there were “many cases…where terms the breaches of which do not deprive the innocent party of substantially the whole benefit which he was intended to receive from the contract were nonetheless held to be conditions any breach of which entitled the innocent party to rescind.”
The courts are concerned to restrict the right of rescission, rejection or repudiation to only serious breaches and save for situations where the parties or the law provides that a particular term will be a condition the right to reject or repudiate the contract will depend upon the gravity of the breach.
Tradax Internacional SA v Goldschmidt SA [1976] QB 44
“…in the absence of any clear agreement or prior decision that this was to be a condition, the court should lean in favour of construing this provision (“four per cent foreign matter’) as to impurities as an intermediate term, only a serious or substantial breach of which entitled rejection.”
per Slynn J
6.1.6 Remedy for breach of an innominate/intermediate stipulation
If the consequences are serious the breach will be treated as if it was a breach of condition and the victim will enjoy the election to affirm and claim damages or treat the contract as at an end and claim damages. If the breach is not serious, the victim will only obtain damages.
6.1.7 Warranty
The warranty has not been satisfactorily defined.
A less serious obligation, perhaps ancillary to the contract.
Remedy for breach of warranty: Damages only.
***
6.2 Implied Terms: Sale of Goods Act 1979
Terms may be implied in fact or by law.
Treitel treats terms implied by custom as a distinct third category.
A term implied in fact is usually a term which the court assumes the parties would have agreed, had they thought about it.
A term implied by law is not necessarily ‘implicit’ in the contract at all, but is imposed on the parties by the court, regardless of whether they would have agreed to it or not. Some terms are implied by common law, some by statute.
Every term implied by law belongs to a particular class of contracts, for example, consumer contract have their own set of implied terms; and employment contracts have their own implied terms.
English law uses terms implied by statute as one of the tools to enforce consumer protection. This is a particularly important subset of terms implied by law, and will be treated first.
6.2.1 Section 12 SOGA 1979 – Title
There is an implied condition that the seller has the right to sell the goods.
S.12 Sale of Goods Act 1979
(1) In a contract of sale, other than one to which subsection (3) below applies, there is an implied [ F1 term ] on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass.
As regards England and Wales and Northern Ireland, the term implied by subsection (1) above is a condition and the terms implied by subsections (2), (4) and (5) above are warranties. ]
“Right to sell” is wider than ownership.
Niblett v Confectioner’s Materials Co Ltd [1921] 3 KB 387
Rowland v Divall [1923] 2 KB 500
The seller sold a car to B1 who sold it on to B2. S did not own the goods. B2 rejected the car to B1 who then sued S. It was held “that the buyer had received no part of that which he contracted to receive namely ownership and possession (de jure) and that being so there had been a total failure of consideration”. The doctrine of acceptance (ss.11(4) was not applicable) and B1 was able to reject, get his money back and sue for damages.
The implied condition as to title can never be excluded, s.6 Unfair Contract Terms Act 1977.
6.2.2 S.13 SOGA 1979 – Description
S. 13 (1)
“Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description.“
S. 13 (2)
“If the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.”
S. 13 (3)
“A sale of goods is not prevented from being a sale by description by reason only that, being exposed for sale or hire, they are selected by the buyer.”
Application of S.13
To all contracts – business or private sales.
Varley v Whipp [1900] 1 QB 513
Cf. S.14 Sale of Goods Act 1979
Relationship between s.13 and the common law distinction between representations and contractual terms
Does a ‘description’ have to have contractual status?
(i) Beale v Taylor [1967] 1 WLR 1193
(ii) The Court of Appeal came very close to saying that a description did not need to be classified as a contractual term.
Atiyah – if a description had to be a contract term s. 13 ‘redundant’ for “there would be an implied term that the seller had to comply with the ‘express’ terms of the contract “
(ii) Taylor v Combined Buyers [1924] NZLR 627 per Salmond J
Reardon Smith Lines v Hansen Tangen [1976] 1 WLR 989
‘Description has to be a substantial ingredient in the identity of the thing sold.’
Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1990) 1 All ER 737
The meaning of ‘description’
Words of description
* Misrepresentation:
Oscar Chess v Williams [1957] 1 WLR 370
* Warranties:
Harrison v Knowles and Foster [1917] 2 KB 606
* Qualitative statements:
As a general rule ‘qualitative statements’ are not regarded as descriptions. Goods can clearly be of satisfactory quality yet not be compliant with description – and vice versa. Quality can however relate to composition and, thereby, form part of the description.
Toepfer v Warinco A.G. [1978] 2 Lloyd’s Rep 569
The words ‘fine ground’ were part of the description.
It is a question of degree, construction and precision.
* Identification:
Reardon Smith v Hansen-Tangen [1976] 1 WLR 989 HL
“The ‘description’ by which unascertained goods are sold is …… confined to those words in the contract which were intended by the parties to identify the goods which were to be supplied. …
…. Ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proferred to him on the ground that their failure to correspond with that part of what was said about them in the contract makes them goods of a different kind from those he had agreed to buy. The key to section 13 is identification.”
per Lord Diplock
The Constructional Analysis of S.13
Where the buyer receives goods which are not those he agreed to buy, because they do not comply with the description, he can reject them. The section applies to all situations where there has been a failure to comply with the specification given to the goods under the contract. The same is true where there is a complete failure to deliver the goods contracted for – for example, the seller delivers and iPod instead of a television.
Beale v Taylor [1967] 1 WLR 1193
Arcos v Ronaasen & Son [1933] AC 470 HL
Rapalli v KL Take [1958] 2 Lloyd’s Rep 469
Re Moore & Co Ltd v Landauer & Co Ltd [1921] 2 KB 519
Law Commission Working Paper No.85 – ‘Sale and Supply of Goods’
Sales by description
1. Sales of unascertained goods
2. Sales of most future goods
3. Sales of specific goods not seen at the time of contract
4. Sales of goods selected by the buyer – S.13 (3)
Sale not by description
Specific goods sold with no description ….buyer buys goods ‘as they are’ or ‘as seen’.
Trade Custom
Grenfell v Meyrowitz Ltd [1936] 1 All ER 1313
Peter Darlington v Gosho Ltd [1964] 1 Lloyd’s Rep 149
Trade Name
Lemy v Watson [1915] 3 KB 731
Purpose statements will generally not be considered as descriptions but will be covered under s.14(3).
Ashington Piggeries v Christopher Hill Ltd [1969] 3 All ER 1496
Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1990) 1 All ER 737
Sale by Description and Sample – S.13(2)
Nichol v Godts (1854) 10 Exch. 191
The status of description – condition or warranty
The older cases accepted the possibility of breaches of description being classified as breaches of warranty.
Harrison v and Foster [1918] 1 KB 608 (CA)
The modern view seems to be that if a description is a ‘substantial ingredient in the identity of the thing sold’ any breach will be a breach of condition.
Couchman v Hill [1947] KB 554
Reardon Smith v Hansen-Tangen [1976] 1 WLR 989
(Lord Wilberforce attempting to restrict the definition of condition.)
Breach of section 13
With the exception of microscopic deviation, the slightest deviation from contract specification will be viewed as a breach of description.
Arcos v Ronaasen & Son [1933] AC 470 HL
Re Moore & Co Ltd v v Landauer & Co Ltd [1921] 2 KB 519
Microscopic deviation:
Moralice (London) Ltd v E.D. & F. Man [1954] 2 Lloyd’s Rep 526 – 4997/5000 bags a breach. See also: s.30.
Remedies for Breach of section 13
The remedies of the buyer will be subject to acceptance under the doctrine of acceptance – ss.34. 35 and 11(4) (Infra)
If the buyer has not accepted
The buyer may be entitled to the following remedies depending on the circumstances. These matters are considered in greater detail later.
1. Rejection
2. Return of price
3. Damages for non-delivery
4. Damages for breach of warranty
5. Damages for special loss
If the buyer has accepted
The buyer may be entitled to the following remedies depending on the circumstances. These matters are considered in greater detail later.
1. Damages for breach of warranty
2. Damages for special loss
***
6.2.3 S.14 SOGA 1979 – Satisfactory Quality and Fitness
S.14 (1)
There are no implied terms as to Quality and Fitness for particular purpose save in so far as provided by ss. 14(2)(3)
S. 14 (2) (as amended)
“(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.
(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods:
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods unsatisfactory:
(a) which is specifically drawn to the buyer’s attention before the contract is made,
(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or
(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.”
Caveat Emptor: S.14(1)
While s.14(2)(3) goes on to provide that the goods must be satisfactory and fit for their particular purpose, s.14(1) does prevent the courts from imposing terms as to merchantability and fitness other than those set out in the subsections.
Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44
Since the requirement of merchantability has been replaced in s.14(2) by a requirement of satisfactory quality, the section now has the effect of rendering all the pre-Act case law on merchantability obsolete, except as a source of guidance about what might constitute satisfactory quality.
Course of a business
Christopher Hill v Ashington Piggeries [1972] AC 441, [1969] 3 All ER 1496
It would seem that the occasional sale of an item by one in business (but not in the business of selling those items) would not be caught by the section. (Benjamin, Sale of Goods, 6th Edition, 11-030.)
Examination of the goods
Thornett & Fehr v Beers & Son [1919] 1 KB 486
Satisfactory Quality
Before SOGA was amended in 1994, there was an implied term under s.14(2) requiring goods to be of merchantable quality. Merchantability was a common law concept which SOGA gave statutory authority. It was a difficult concept to define precisely. The courts consistently gave themselves flexibility in applying it, and the importance of that flexibility was recognized when the wording of the statute was amended by the Supply of Goods and Services Act 1994 to replace the requirement of merchantable quality in SOGA s.14(2) to a requirement of satisfactory quality.
Deciding what is satisfactory quality is a matter of common sense. The same is true when deciding whether there has been a breach of the implied term in Supply of Goods and Services Act 1982 s.13, which requires the supplier of a services acting in the course of business to supply the service with reasonable care and skill. However, the older cases on what amounted to merchantability still provide guidance, though not binding authority, about the way in which the courts will approach the question of deciding what is satisfactory quality.
Wikipedia note:
Satisfactory quality, s14(2) [ 9 ] The quality of the goods sold must be satisfactory (prior to 1994 , this provision required ‘merchantable’ quality; this requirement has been retained in most Commonwealth versions of the Act). The Act provides an objective test to determine satisfactory quality; the standard that a reasonable person would regard as satisfactory, taking into account the price, description and any other relevant factors. [ 10 ] The courts have identified certain factors that may raise or lower the expectation of satisfaction . Second hand goods , per Bernstien v. Pamsons Motors Ltd. [ 11 ] , will attract a lower expectation. On the other hand goods of a reputable brand may attract a higher expectation, the judge in Bernstien used the example of a small ping on a Rolls-Royce being unsatisfactory . ‘Other relevant factors’ may include advertising in the case of consumer contracts . [ 12 ]
(i) Acceptability test rejected
The acceptability test put forward by Farwell LJ in Bristol Tramways v Fiat Motors was rejected in favour of the ‘relevance of the price’ test tendered by Dixon J in
Australian Knitting Mills v Grant adopted by the House of Lords in Kendall v Lillico :
“The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist, and not being limited to their apparent condition would buy them without abatement in the price….and without special terms.”
(ii) The other formulations
Sumner Permain & Co v Webb & Co [1922] 1 KB 55
Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 – ‘abatement of price’ test
Grant v Australian Knitting Mills [1936] AC 100 – ‘fit for use’ test
Cammell Laird v Manganese Bronze [1934] AC 402 – ‘Of no use’ test
Bartlett v Sydney Marcus [1965] 1 WLR 1013
Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44 – Lord Denning MR – ‘Commercial Man’ Test
Aswan Engineering Ltd v Lupdine Ltd (Thurgar Bolle Ltd third party) [1987] 1 All ER 135
(iii) SOGA 1979: The statutory test
See s.14 2(b)
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods—
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
The old test: “Goods of any kind are of merchantable quality…if they are as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances.”
Keeley v Guy McD onald Ltd [1984] NLJ 134
A secondhand Rolls Royce (1969 Model) £7950 but had to make repairs costing £6460 after delivery. Claimed for repairs under s.14(2). Held [S] in breach. All bearings worn, crankshafts scored etc. Cars mechanical condition so bad as to make it unmerchantable. Damages awarded under s.53(3) SOGA 1979.
Rogers v Parish [1987] QB 933
Mustill LJ referred to the “appropriate degree of comfort, ease of handling, reliability and pride in the vehicle’s outward and interior appearance” as factors relevant in a new car.
6.2.4 s.14 (3) SOGA 1979 – Fitness for particular purpose
S. 14 (3)
“Where the seller sells goods in the course of a business and the buyer expressly or by implication makes known to the seller……any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract, are reasonably fit for that purpose whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill and judgment of the seller…….”
Grant v Australian Knitting Mills [1936] AC 100
Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31
Tehran – Europe Corporation v ST Belton Ltd [1968]
Dixon Kerby Ltd v Robinson, [1965] 2 Lloyd’s Rep 404
Griffiths v Peter Conway Ltd [1939] 1 All ER 685
Geddling v Marsh [1920] 1 KB 668
Wilson v Rickett Cockerell & Co Ltd [1954] 1 QB 598
Vacwell Engineering v BDH Chemicals [1969] 3 All ER 1681
Aswan Engineering Ltd v Lupdine Ltd (Thurgar Bolle Ltd third party) [1 987] 1 All ER 135
***
6.2.5 S.15 SOGA 1979 – Sale by Sample
S. 15 (1)
“A contract of sale is a contract for sale by sample where there is an express or implied term to that effect in the contract.”
Drummond v Van Ingen (1887) 12 App Cas 284 per Lord MacNaghten
S. 15(2)
“In the case of a contract for sale by sample there is an implied condition that:
(a) the bulk will correspond with the sample in quality:
(b) the buyer will have a reasonable opportunity of comparing the bulk with the sample.”
E & S Ruben Ltd v Faire Bros Ltd [1949] 1 KB 254
Hookway & Co v Alfred Isaacs [1954] 1 Lloyd’s Rep 491
6.3 SS 34, 35 & 11(4) SOGA 1979 – Acceptance
S. 34 (2) (as amended)
“Unless otherwise agreed, when the seller tenders delivery of the goods to the buyer, he is bound on request to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract and, in the case of a contract for sale by sample, of comparing the bulk with the sample.”
6.3.1 What is a reasonable time is a question of fact in the circumstances of the case
Castle v Sworder (1860) 5 H&N 281 per Bramwell J
Severable/Instalment sales:
Maple Flock Co Ltd v Universal Furniture Products [1934] 1 KB 148
Munro v Mayer [1930] 2 KB 312
Hardy & Co v Hillerns & Fowler [1923] 2 KB 490
S.4 Misrepresentation Act 1967 – s. 34 governing section.
6.3.2 Acts of acceptance
Important note: In JH Ritchie v Lloyds Ltd [2007] 1 WLR 670 the House of Lords held that a customer returning defective goods to be repaired enters into a fresh contract containing an implied term that the supplier will inform the customer of the nature of the defect.
s. 34 Buyer’s right of examining the goods
- Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound on request to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract [ F2 and, in the case of a contract for sale by sample, of comparing the bulk with the sample. ].
s.35 Acceptance
(1) The buyer is deemed to have accepted the goods [ F1 subject to subsection (2) below—
(a) when he intimates to the seller that he has accepted them, or
(b) 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.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the purpose—
(a) of ascertaining whether they are in conformity with the contract, and
(b) in the case of a contract for sale by sample, of comparing the bulk with the sample.
(3) Where the buyer deals as consumer or (in Scotland) the contract of sale is a consumer contract, the buyer cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.
(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.
(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2) above.
(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—
(a) he asks for, or agrees to, their repair by or under an arrangement with the seller, or
(b) the goods are delivered to another under a sub-sale or other disposition.
(7) Where the contract is for the sale of goods making one or more commercial units, a buyer accepting any goods included in a unit is deemed to have accepted all the goods making the unit; and in this subsection “commercial unit” means a unit division of which would materially impair the value of the goods or the character of the unit.
The case of J & H Ritchie v Lloyd Ltd [ 2007] UKHL 9
A buyer purchased defective machinery. The seller agreed to take them back for repair, stated they were repaired to factory gate standard but would not state what the defefcts were. The buyer himself discovered the nature of the defect and, concerned when he used the goods the defects would damage the machinery. He sought to reject the goods.
The question was whether rejecting the equipment was permissible under s 35(6)(a) of the Sale of Goods Act 1979 . This provides,
| “ | (6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—(a) he asks for, or agrees to, their repair by or under an arrangement with the seller… |
The House of Lords all agreed that Mr Ritchie was entitled to reject the equipment, even though it had in fact been repaired.
Lord Hope
| “ | 12 The issue which lies at the heart of this case, as Lord Philip observed, is the effect of section 35(6)(a) of the Sale of Goods Act 1979, as amended, on the buyer’s right to reject goods which, on delivery, are materially disconform to the contract… Prior to the introduction of that provision into the 1979 Act it was open to question whether asking the seller to have defects in the goods remedied might amount to an implied intimation of acceptance by the buyer or to an inconsistent act which would prevent him from rejecting the goods. This problem was considered by the Law Commission and the Scottish Law Commission. In a joint report on Sale and Supply of Goods (May 1987, Law Com No 160; Scot Law Com No 104) the Commissions said that they had decided not to recommend giving the seller a right to cure the goods: para 5.28. Instead they recommended that the 1979 Act should be amended so as to provide that if the buyer asks for or agrees to attempts being made to repair the goods (whether by the seller or under an arrangement with him), then this does not of itself amount to acceptance of the goods by the buyer: para 5.29: |
In essensce, because thseller failed to specify the nature of the defects he fixed, sdespite repeated requests from the buyer, the buyer cannot be said to have accepted the repaired goods, even after a lapse of time, because he was not fully informed and therefore could not accept the goods within the statute while not knowing of the nature of the defect repaired.
Buyer has had reasonable opportunity to examine goods
Perkins v Bell [1893] 1 QB 193
Buyer has not had reasonable opportunity of examining goods
Molling v Dean (1902) 18 TLR 217
Rules on place of delivery
Kwei Tek Chao v British Traders & Shippers [1954] 2 QB 459
Acceptance of part of the goods
Not unless contract severable.
cf. s.30 delivery of wrong quantity
S. 36 – Buyer not bound to return rejected goods
For seller to collect – Buyer only has to intimate rejection.
S.11 (4) If [B] accepts goods (ss.34/35) he loses right to reject can only claim damages. (s. 53 SOGA 1979)
6.4 Remedies for Breach of Implied Terms
The buyer’s remedies will depend on whether he has accepted the goods or not.
6.4.1 Buyer not lost right to reject
1. Rejection (s.36: seller to collect goods)
2. Recovery of Price (Action in quasi-contract/Restitution)
3. Damages for non-delivery (s.51)
4. Consequential loss recoverable as special loss (2nd Limb Hadley v Baxendale : s.54)
5. Possible claim in damages for Breach of warranty (s.53(4))
6.4.2 Buyer has lost right to reject
1. Damages only (s.53 SOGA 1979)
2. Special loss recoverable.
6.5 Outline Analyses of Statues Relevant to the Analysis of Terms
6.5.1 Misrepresentation Act 1967
Two criteria to plead misrepresentation:
(1) Must be a statement of existing fact – not opinion, law or future intention.
(2) The misrepresentation must induce the contract
Misrepresentation renders the contract voidable
Remedies for Misrepresentation
Fraudulent – Rescission and damages
Negligent (s.2(1)) – Rescission and damages
Innocent (s.2(2)) – Rescission OR damages
6.5.2 The Unfair Contract Terms Act 1977
Incorporation:
By notice, signature or course of dealing
Construction:
Photo Production Ltd v Securicor Ltd [1980] AC 827
Validity:
s.1(3) – Business Liability
s.2 – Negligence – contract, tort, occupier
Exclusion of death/ p.i. and property damage
s.3 – Exclusion of express terms
s.6 – Exclusion of implied terms
s.8 – Exclusion of misrepresentation
s.11 – Reasonableness test
s.12 – Definition of consumer/non-consumer
s.13 – Types of exclusion clause
Sched 2 Paras (a) – (e) Guidelines for reasonableness
6.5.3 Supply of Goods and Services Act 1982
s.13 – Reasonable care in performance of contract
6.5.4 The Consumer Protection Act 1987
This statute is considered in detail in Product Liability (Infra).
6.6 Implied Terms not dependent on statute
Terms may be implied by common law (i.e. not by statute) into contracts in two circumstances, first where the contract is silent but the parties must have intended the matter to be covered (terms implied in fact); and secondly where although the contract is silent the contract creates a relationship where such a term will be implied (terms implied at law).
However, when dealing with non-statutory implied terms, the dividing line between terms implied in fact and terms implied at law is sometimes blurred, particularly in older cases like The Moorcock (see below), decided before the distinction was fully developed.
6.6.1 Terms implied in fact
To decide whether the court will imply a term in fact, ask whether it satisfies the ‘officious bystander test’, and / or whether it satisfies the ‘business efficacy test’. The courts use both expressions, and they are probably just two ways of expressing the same idea.
6.6.1.1 The Doctrine of The Moorcock the officious bystander formulation
A ship was damaged when the water level at a wharf fell and grounded the ship. A term was implied that the wharf should be safe.
The test is called the ‘officious bystander’ test.
The concept being that if the parties to the contract were to be told by a third party that they should remember a particular term they would turn to the third party and ‘testily suppress him with a common “oh, of course”‘.
Shirlaw v Southern Foundries [1939] 2 KB 206 HL
“…an implied warranty, or as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded upon the presumed intention of the parties and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficiency to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe if one were to take all the cases, and there are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficiency as both parties must have intended that at all events it shall have.”
6.6.1.2 The business efficacy test
Luxor (Eastbourne) Ltd v Cooper [1941] AC 108
P, acting as agent, found buyers for two cinemas. The cinema owners refused to go through with the sale. Therefore the agent lost out on his commission. He argued that there was an implied term that if the vendor did something to prevent a sale, and thereby make him lose his commission, they would pay damages. The House of Lords held there was no such implied term.
At 137 Lord Wright said, “it is well recognized that there may be cases where obviously some term must be implied if the intention of the parties is not to be defeated, some term of which it can be predicated that “it goes without saying,” some term not expressed but necessary to give to the transaction such business efficacy as the parties must have intended”.
6.6.1.3 Reasonableness is not enough
The courts are more likely to accept an argument for an implied term if that term is reasonable, but will not imply terms into a contract simply because it would be reasonable to do so.
This can be important in practice. A party who has foolishly made a very disadvantageous contract will argue that there was some implied term which, if it existed, would make the contract fair. That is not a good enough reason to imply a term. A leading case where the court refused to do so was Scruttons v Midland Silicones [1962] AC 446.
6.6.2 Terms implied from the relationship of the parties: terms implied by law
Except where required by statute, the courts are very reluctant to imply terms into contracts and have tended to limit implication to established contractual relationships.
Liverpool City Council v Irwin [1977] AC 236 HL
The classic example involved the implication of a term for a landlord to take reasonable care in keeping the common parts to a building in a reasonable state of repair.
See also: Lister v Romford Ice and Cold Storage Co [1957] AC 555
Harvela Investments v Royal Trust Co of Canada Ltd [1986] 2 AC 207
Malik v BCCI [1998] AC 20
An employer-employee relationship is now recognized as entailing a duty that the employer and employee will not damage the relationship of trust and confidence between one another. The doctrine that there is an implied term imposing this duty on the employer received House of Lords authority in Malik.
There are several situations where legal duties can be analysed as depending on implied terms, but may also, and more clearly, analysed in other ways. These include the duty of utmost good faith in insurance contracts; and the fiduciary duties which solicitors and certain other professionals owe to their clients not to do anything which may conflict with the clients’ interests.
See: MEDITERRANEAN SALVAGE & TOWAGE LIMITED v SEAMAR TRADING & COMMERCE INC [2009] EWCA Civ 531
The Court of Appeal considered the modern law of implying terms into contracts: review the Insite Law casenote here.
6.6.3 Terms implied by Custom
To be implied under custom the custom must be invariable and certain.
British Crane Hire Corporations v Ipswich Plant Hire [1975] QB 303
Terms usual in the business were implied into a contract. The decision was hardly surprising for the hirers of the crane admitted that when they hired plant and machinery out they used the same provisions.
The Sale and Supply of Goods to Consumers Regulations 2002
The Sale and Supply of Goods to Consumers Regulations 2002
Department of Trade and Industry
Consumer and Competition Policy Directorate
The Sale and Supply of Goods to Consumers Regulations 2002
A Brief Introduction – Full Version
A minimum set of common consumer rights on faulty goods in each EU country is provided for by Directive 1999/44/EC on the Sale of Consumer Goods (“the Directive”). One aim of the Directive is to encourage people to shop across borders, knowing they have protection if anything is wrong with the products they buy. Existing UK law has been retained but slightly amended, mainly to give effect to specific remedies which, although they have been in use for many years, have not previously been part of the law. These amendments are contained in the Sale and Supply of Goods to Consumers Regulations (“the Regulations”), in force from 31 March 2003. This Guide is to explain the operation of the law in the UK.
The Regulations apply to a range of transactions between businesses and consumers, including the sale and supply of goods, hire and hire-purchase. “Consumers” are defined as people who are buying for purposes not related to their trade, business or profession. The Regulations do not apply to services in general (but see “installation” and “goods to be manufactured” below) nor do they apply to second hand goods sold at auctions that the consumer has the opportunity of attending in person.
When goods are faulty, a consumer can generally only obtain a legal remedy against the retailer. Consumers are generally not able to claim directly against the manufacturer. Consumers may have additional rights under any guarantees (see below) supplied with the goods or against a credit card company or finance house if the goods are purchased by means of credit and have a price of over £100.
A Simple Summary (see flow chart below)
Consumers are entitled to goods of satisfactory quality, taking account of any description, the price and other relevant circumstances. If an item has a fault that is present at the time of sale (sometimes referred to in this guidance as a “latent” or “inherent” fault), the consumer can complain once it is discovered.
Consumers cannot expect a legal remedy in respect of:
• fair wear and tear;
• misuse or accidental damage; or
• if they decide they no longer want the item.
Similarly, consumers cannot expect a legal remedy where goods have faults that they knew about before the sale or that should have been evident on reasonable inspection.
Remedies
If a product that was faulty at the time of sale is returned to the retailer, the consumer is legally entitled to:
• a full refund, if this is within a reasonable time of the sale (“reasonable time” is not defined in law but is often quite short); or
• a reasonable amount of compensation (or “damages”) for up to six years from the date of sale (five years after discovery of the problem in Scotland).
This does not mean all goods have to last six years! It is the limit for making a claim in respect of a fault that was present at the time of sale. It is not equivalent to a guarantee. These are long-established rights and they remain available to the consumer after the Regulations come into force on 31 March 2003.
Under the Regulations, consumers can choose to request instead:
• a repair or replacement.
The retailer can decline either of these if he can show that they are disproportionately costly in comparison with the alternative. However, any remedy must also be completed without significant inconvenience to the consumer. If neither repair nor replacement is realistically possible, consumers can request instead:
• a partial or full refund, depending on what is reasonable in the circumstances.
It may be the case that a full refund is not the reasonable option because the consumer will have enjoyed some benefit from the goods before the problem appeared. This needs to be taken into account before a reasonable partial refund can be assessed.
As illustrated in the flow chart on page 4, consumers can switch between certain remedies if they find they are getting nowhere down the route originally selected. However, they would have to give a retailer a reasonable time to honour a request before they tried to switch, and they could never pursue two remedies at the same time.
Proving the fault
Generally, the consumer needs to demonstrate the goods were faulty at the time of sale. This is so if the consumer chooses to request an immediate refund or compensation (damages). It is also the case for any product returned more than six months after the date of the sale.
There is one exception. This is when a consumer returns goods in the first six months from the date of the sale, and requests a repair or replacement or, thereafter, a partial or full refund. In that case, the consumer does not have to prove the goods were faulty at the time of the sale. It is assumed that they were. If the retailer does not agree, it is for him to prove that the goods were satisfactory at the time of sale.
Other situations covered
The remedies of repair, replacement, partial refund and full refund are also available to consumers:
• where installation by the retailer is not satisfactory;
• where installation instructions have serious shortcomings;
• generally where a good does not match the public statements made about it by the retailer, manufacturer, importer or producer; and
• where a specially commissioned product has relevant failings.
These are greatly simplified explanations and they are expanded on below.
Alternative dispute resolution
Although consumers do sometimes take court action, in day-to-day practice this is a rare event. In the vast majority of cases, the consumer and retailer are able to reach a satisfactory solution without any need to consider going to court. Where this is not possible, use of an alternative dispute resolution procedure or trade association scheme can be considered. Details may be sought from the retailer, the Community Legal Service or a Citizens Advice Bureau.
The examples given below to highlight points should not be considered legally authoritative and legal advice should always be sought.
Consumers can obtain free advice from their local Citizens Advice Bureau ; their local council’s Trading Standards Department ; the OFT’s Shoppers Guide publication ; the Community Legal Service ; the Which? Online/Which? Legal Service and solicitors (who may charge). The DTI is not able to intervene in individual disputes.
Sale of Consumer Goods Regulations (in force from 31 March 2003)
Conforming to Contract (The Implied Terms)
When consumers complain about goods they frequently say that they are “faulty”. What this means, in legal terms, is that the goods do not conform to contract, although this is not the language that the typical consumer uses.
Goods would not conform to contract (would be faulty) if they failed to work immediately from the time of sale. Indeed, goods might not conform to contract if they failed to work later, even after a number of years, due to an inherent fault – i.e. one that could be said to exist at the time of sale. Goods also do not conform to contract if they do not comply with any description given by the retailer prior to sale.
The Sale of Goods Act 1979
Conforming to contract
The Sale of Goods Act, which governs whether there is a lack of conformity with the contract, says that:
• Goods should match any description given to them.
• Goods should be of satisfactory quality i.e. they should meet the standard a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all other relevant circumstances.
• The quality of goods includes their state and condition and the following (among others) are, in appropriate cases, aspects of the quality of goods –
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
• Goods should be reasonably fit for any particular purpose that was made known to the retailer (unless the retailer disputed their appropriateness for that purpose at the time).
If a consumer was told that a record player could play 33, 45 and 78 rpm discs but it did this erratically because it was not manufactured properly, or because of poor design, then it would not conform to contract.
If a consumer was told that a dish was ovenproof but it was not and it shattered when used under the normal conditions for making a casserole it would be misdescribed and so would not conform to contract.
Satisfactory quality
To be of satisfactory quality, goods must be of a standard that a reasonable person would regard as satisfactory at the time of sale (having regard to any description applied to them, the price and all other relevant circumstances).
Someone buying a new pair of shoes would clearly not expect the soles to come away from the uppers after wearing them in normal conditions for a few days.
On the other hand, someone buying a 10-year-old car from a dealer could not reasonably expect it to perform like a new car, although he could expect it to give the kind of service that the average car of that mileage and model would give.
Particular purpose
If a customer says – or when it should be obvious to the retailer – that the goods are wanted for a particular purpose, even if that is a purpose for which those goods are not usually supplied, and the retailer agrees that the goods will meet the requirement, then they have to be reasonably fit for that purpose. If the retailer is not confident that the goods will meet the customer’s particular requirements, he should make this clear, perhaps on the receipt, to protect himself against future claims.
If a consumer was told that certain software generally used on Apple computers was compatible with a PC and it was not, it would not conform to contract. If no mention had been made about the PC and the software was bought on the assumption that it was compatible then the consumer would not be likely to have grounds for complaint.
The Sale and Supply of Goods to Consumers Regulations 2002
These Regulations, in force from 31 March 2003, have introduced some additional requirements for any consumer sales.
Public statements
The Regulations say that any public statements made by manufacturers, importers or producers (in addition to retailers) about the specific characteristics of the goods, particularly in advertising or on labelling, have to be factually correct – and form part of the retailer’s contract with the consumer. However, the retailer is not responsible for the statement, and the consumer is not entitled to redress, if the retailer shows:
• that for good reasons he was not aware of the statement;
• that it had been corrected in public before the conclusion of the sale; or
• that the consumer could not have been influenced by the statement.
If a manufacturer ran UK advertising that a particular jet ski could run on unleaded fuel but it could not, the consumer could require redress from the retailer.
However, if a retailer could show that he was, for good reason, ignorant of the manufacturer’s claims then the consumer would not be able to seek redress from the retailer over the specific characteristic. An example could be erroneous claims made in a manufacturer’s foreign, or regional, advertising campaign that the retailer could not reasonably be expected to have come across.
If the retailer argued that the claim had been corrected but the only evidence was a notice in an obscure trade magazine, then this would probably not prove convincing. More effective publicity would be needed to alert consumers.
Fair wear and tear
Goods cannot always be expected to work fault-free. They can break down through normal use. Consumers cannot, therefore, expect to hold the seller responsible for fair wear and tear. There needs to be a fault that was present on the day of sale even though it only became apparent later on, or a misdescription of the goods, or a lack of durability that suggests the goods were not of satisfactory quality to start with.
If a central heating system stopped working – because of its pump failing – four years after the sale, having had average usage, then it might not be due to an inherent fault (latently there on the day of the sale) but due to it expiring at the end of its normally accepted working life. This is especially so if the relevant trade association had advice that such pumps only worked for an average of four years. If, however, the pump had only lasted half the expected life, having been subject to average usage, then the consumer would, no doubt, wish to seek an opinion as to whether the item had contained a latent fault or been constructed with sub-standard raw materials that made it not durable enough to pass the satisfactory quality test of our Sale of Goods legislation.
Durability
Durability can be a difficult concept, but, as indicated in the Fair wear and tear example above it is something that can be considered when evaluating whether goods conform to contract. Everything has a finite life, and this needs to be borne in mind when considering durability. Factors that could be considered might include:
• the price (a £200 tyre might be expected to last longer than a £50 one);
• inappropriate use (a small engine mower used to service a 10-acre garden); or
• where an expensive product had been made with substituted inferior parts, as a crisis cost-cutting exercise, then it could well fail the durability test.
Remedies (see flow chart above)
The consumer now has a number of remedies. These comprise the two previous, long established, legal remedies and the four additional ones in the Regulations. All six are now outlined:
Rejection of Goods
Consumers can reject the goods and require their money back provided they complain within “a reasonable time” (usually a short period).
The Sale of Goods Act does not define what amounts to a “reasonable time” but consumers have to be given a reasonable time to examine the goods to see if they were satisfactory. In practice courts decide this case by case. A court is able to take into account all the relevant factors in coming to a fair view such as whether the consumer had been hospitalised immediately after the sale, so that he could not check the goods.
Where a consumer is entitled to reject the goods, he must tell the retailer immediately. He is not obliged to send them back but must make them available for collection. However, most consumers would return goods they had themselves taken away to assist them convince the retailer their claim was legitimate and so speed things up.
Claim for Compensation
The other long standing remedy provides that consumers can claim compensation known as “damages”, if they are not entitled to reject the goods or choose not to request this.
Compensation by way of damages is designed to compensate for actual losses and so normally amounts to the cost of repair or replacement (with goods of a similar age). Any direct and predictable expense arising as a result of being supplied with faulty goods can also be claimed by the customer (see Consequential Loss below). This could include the cost of returning the goods, for example. In some instances the customer could get the defect remedied by someone else and claim the cost from the retailer as compensation for breach of contract. However, this is not advised as it might make it difficult to prove the problem dated from the time of the sale. Of course, a claim on any guarantee given with the goods is often the easiest way forward.
For a broken four-year-old clock with an inherent fault, a consumer’s claim would typically be for the amount necessary to have it repaired or to purchase a similar four-year-old model (but in working order, of course).
Repair and Replacement
For many years retailers have voluntarily offered a repair or replacement of faulty goods. These remedies are given a legal status under the Regulations. In other words the consumer can cite the Regulations, in force from 31 March 2003, in specifically requesting a repair or a replacement for purchases that do not conform to contract.
Confronted with a five-year-old piano with an inherent fault, the consumer can request that it be repaired rather than pursuing compensation to pay for a repair that he then has to arrange himself. Alternatively, he could request a replacement five- year-old piano of the same/similar specification, assuming that finding one was practicable (perhaps only so for a dealer of both new and second-hand products).
“Reasonable time” and “significant inconvenience”
Repair and replacement have to be carried out within a reasonable time and without significant inconvenience for the consumer (if this is not possible the consumer should select an alternative remedy). The retailer has to bear any costs such as transporting the goods. Complaints have to be judged on a case-by-case basis and take account of all the circumstances including:
• the nature of the goods;
• the purpose for which they were bought; and
• their importance to that particular customer.
It is difficult to define “reasonable time” here just as it is to specify the “reasonable time” for rejecting a good. In the case of a wedding dress, there is clearly a crucial date in relation to which the number of days involved may become critical and that may be the main deciding factor. Repair might then not be feasible but a replacement might be appropriate.
In the case of an electric drill the number of days may be less critical than with a wedding dress. The possibility of using a hand drill needs to be considered.
With a fridge, the lack of an alternative would weigh heavily in the analysis of this crucial household item but the provision of a loaned item might prove part of a successful remedy and so avoid “significant inconvenience”.
“Disproportionate cost”
A retailer can decline the repair remedy if the cost would be disproportionately higher than the cost of replacement – or vice versa. A decision on the cost being disproportionate should take account of the value of the goods if they were to conform to contract; the significance of the lack of conformity and whether the alternative remedy could be completed without significant inconvenience to the consumer.
If a four-year-old table was only worth £50 and a repair would cost £75 then the retailer could decline such a request and offer a replacement, assuming he had a similar four-year-old model in stock or had prompt access to one. If he had neither of the latter, then he could refuse both repair and replacement and would move onto the partial refund remedy.
If the stitching had gone on a pair of trousers the customer would not be entitled to a replacement if the inherent fault could be repaired within a reasonable time and at little inconvenience.
Partial and Full Refund
If repair or replacement are not practicable options, the Regulations provide for the alternative remedies of partial, or full, reduction in the price (a refund, in other words). In considering whether a full, or partial, refund is to be given, account needs to be taken of the benefit provided by the good to the consumer, just as it is when determining compensation.
If a spin dryer had cost £99 four years before and was two thirds of the way through its average length of life – when an inherent fault showed itself – then the retailer might offer around £33 as an adequate reduction in price bearing in mind that the consumer was being deprived of one third of the typical period for which he should have enjoyed the good. Account might also need to be taken of the fact that goods tend to depreciate more quickly in the early years of their life-span.
If a consumer had had constant problems with a product, from the time of the sale, to such an extent that he had never enjoyed any normal benefit from the product then the retailer might be expected to offer him a full refund of his money.
Non-Consumer Claims
“Consumers” are “people who are buying for purposes not related to their trade, business or profession” and the four remedies in the Regulations (repair, replacement, partial and full refund) are not open to non-consumers.
If a stairlift was purchased for use in a business environment, such as a café or nursing home, it would not be possible for a repair or replacement claim to be made – citing the Regulations – by masquerading as a consumer when approaching the retailer. Such claims could immediately be rejected. They should be properly pursued as normal business-to-business sale of goods contract disputes and legal advice sought.
Suspending the Right to Reject
It is important to note that, within the reasonable period after the sale (see above), the consumer does not lose their right to reject the goods/require their money back merely by agreeing to let the retailer try to repair them. This is made clear by s.35(6) of the Sale of Goods Act.
If the consumer returns the goods, as not conforming to contract, and asks for his money back within a reasonable time, he may decide/be persuaded, to let the retailer make an attempt at repair. After he had given the retailer a reasonable time to complete this, with no success, he could fall back on requiring the return of the price paid. This might be because the repair was not carried out promptly enough or because it was not repaired to an adequate standard.
Sales Receipts
In providing redress to a consumer, a retailer is entitled to satisfy himself that the product was purchased at his store and on the date claimed. A sales receipt is a good way of providing such proof (as is a well detailed credit card statement). Although sales receipts are not a legal requirement, consumers are advised to request them where they might later be needed and to keep them safe.
Credit Notes
Consumers do not have to accept credit notes if goods do not conform to the contract. However, they may be offered where the consumer has no legal right to any redress but the retailer wishes to be helpful e.g when the consumer has a change of mind.
The essential point is that credit notes are voluntary items. Retailers do not have to offer them and consumers do not have to accept them but it is sometimes beneficial for both parties to use them. The particular Terms and Conditions will explain the detail of how they are to operate.
Time Limit – Six Years Maximum to Bring a Claim or Complaint
Complaints can be brought to court up to six years after a sale in England, Wales and Northern Ireland (and five years after the time of the discovery of the problem in Scotland). After that time, the Limitation Act 1980 generally prevents court cases being brought. This does not mean that goods have to last six years; it is not a durability requirement.
A consumer could bring a case against a retailer, alleging non-conformity of contract, for up to six years after the sale. However, he would find a court unsympathetic in the latter years for low cost items that it was reasonable to expect to last only a short period (a £5 watch might not last many years but a £500 one should) or for consumables like oil filters which have a specified limited lifespan. Similarly, when a watch stops because a battery has come to the end of its life – assuming it had lasted a reasonable time – there are no grounds for complaint that the watch is not conforming to contract.
The Two-Year Guarantee Myth (see also Free Guarantees below)
The Regulations do not provide a two-year guarantee. This was a myth that seemed to grow out of a mention in the Directive that Member States had to give their consumers a two-year limitation period.
The limitation periods in the UK are the periods within which this type of legal proceedings must be commenced: namely six years in England, Wales and Northern Ireland; and five years from discovery in Scotland. These are, therefore, already longer than the Directive’s two years and are quite different from a guarantee period.
This does mean that throughout the EU there is a requirement that all retailers will honour the four stages of remedy that have been outlined above (repair, replacement, partial refund or full refund) for at least two years. However, as this does not cover fair wear and tear, and since the consumer has to prove the lack of conformity for most of the period, this cannot be called a “guarantee”.
The Burden of Proof and the First Six Months
In any dispute, it is usually for the consumer to prove that the goods do not conform to contract. This is the case where consumers wish to pursue their long established right to reject goods, within a reasonable period, or seek compensation.
“Reversed burden of proof”
However, the Regulations, in force from 31 March 2003, say that when a consumer seeks the remedies of repair, replacement, partial refund or full refund, in the first six months after the sale, it is for the retailer to prove that the goods conformed with the contract in disputed cases. This has been called the “reversed burden of proof”. After six months, however, it is for the consumer to prove that the lack of conformity existed at the time of the sale.
In the first six months a consumer could claim that a fault was present at the time of the sale and hence argue that the good was not of satisfactory quality and so seek redress. If the retailer rejected this view, the consumer could take the matter to court where the judge would look to the retailer to refute the presumption of unsatisfactory quality with reasonable evidence. The retailer might attempt this by, for example, expertly analysing the good to show it was damaged by the consumer e.g. where leather shoes had not been cleaned, so causing the leather to crack.
For faults that become apparent after six months, it is for the consumer to provide evidence that the item did not conform to contract at the time of the sale. Often the consumer and retailer are able to negotiate an acceptable solution but, ultimately, if the retailer believed that the good had conformed to contract at the time of sale, then the consumer would need to present enough evidence in a court to substantiate his own claims. One way to do this, particularly in a high-value claim, might be to obtain the views of an expert that suggested the item was poorly manufactured or designed, such that it contained a fault that was likely or certain to make the product break down at some future date. Other factors would also need to be considered e.g. the price and nature of the goods.
If the consumer reported a fault after the first six months, the onus would be on them to prove that the fault exhibited itself within the six months if they wanted to enjoy the six months reversed burden of proof. Since proving the date of discovery of a fault is a difficult and unwanted hurdle for the consumer, the simple solution is to report faults as soon as they become known – indeed, consumers may lose out if they do not do so (see next section).
Minimising Losses
Consumers should act reasonably when seeking redress and not add unnecessary costs. This means they should:
(i) Report faults as soon as possible. If they do not:
• it becomes more difficult for them, as time goes by, to prove that the goods were inherently faulty at the time of sale; and
• it is possible that the goods can deteriorate more than otherwise, especially if attempts are made to repair or to continue using them. The retailer would not be responsible for correcting this aspect.
(ii) Make sure that they service the goods as appropriate, follow any user instructions and look after them, so as not to undermine their claim by contributing to any problem.
Consumers cannot expect retailers to provide redress where they have:
• accidentally damaged the goods;
• misused them and caused a fault, perhaps through the use of incompatible accessories; or
• tried their own repair, or had someone else attempt a repair, which has damaged the goods.
Consequential Loss
When a consumer suffers loss as a direct consequence of a faulty product, the consumer may be able to claim damages. In extreme cases, consumers might suffer injury or damage to other property which is directly attributable to the faulty product, and these losses might be recoverable as consequential losses. In less serious situations, the consumer might find that he incurs extra expense as a direct result of buying faulty goods. Claims for consequential loss do not normally cover distress, inconvenience or disappointment.
A specialist outdoor tank might be purchased to recycle spent water to help the environment and reduce metered water charges. If it began leaking or stopped working in some other way (because of a fault present at the time of sale), the higher water charges levied thereafter until repair could be claimed. Also, any phone costs involved in trying to fix the problem, e.g. via technical lines provided, could be claimed.
In claiming any consequential costs the consumer would be expected to have acted reasonably with regard to how they were accrued e.g. the retailer should be approached for substitutes, rather than merely hiring an alternative from elsewhere.
Free Guarantees/Warranties (see also Guarantees Myth above)
In addition to having their legal rights a consumer may be offered a guarantee (e.g. by a manufacturer or retailer) on a voluntary basis. Guarantees – sometimes called warranties – do not have to be offered but if they are, under the Regulations, in force from 31 March 2003, those given free of charge with the product:
• will be legally binding on the person offering the guarantee;
• will have to be written in English and in plain intelligible words;
• must be available for viewing by consumers before purchase, e.g. by advising where they may be seen such as on the internet for those with access; and
• state that they do not affect the consumer’s legal rights.
If a manufacturer reneged on a free guarantee then the consumer could enforce it in a small claims court. The retailer would not be involved.
If the consumer wishes to inspect a free guarantee, to help make a purchasing decision, then the person offering it has to make it available – if they cannot do so immediately, they should follow up promptly with a copy which is posted or sent via email etc.
Translation of free guarantees
Where those offering free guarantees do not translate them into English, or habitually refuse to make them available for viewing, the OFT and Trading Standards have the power to seek an injunction requiring them to comply.
Duration of free guarantees
It is up to the company offering free guarantees to decide on their duration. Many products come with a free one-year guarantee; some have two or three years while others have none. This is entirely legal.
Retailers and their “Returns” Policies
Some retailers offer “returns” policies (also known as “satisfaction” guarantees) such as promising the full money back for undamaged goods, for up to a set number of weeks, for whatever reason. These are useful additional rights to those the consumer has under the law. The terms and conditions would spell out exactly how these were to work.
Second-hand Goods
The consumer has exactly the same rights with second-hand goods as he does with new. However, with older goods, it is increasingly difficult for the consumer to prove that a fault was inherent at the time of the sale. The conformity criteria also allow second-hand goods to be judged less rigorously than new, where reasonable.
In judging whether a recently bought seven-year-old car conformed to contract it would be reasonable to take account of the price paid. This could be far less than for a new vehicle and so expectations should be lower. It would also be reasonable to assume that the performance might not be as good and the quality of the finish could fall far short of A1 condition. However, it would still need to conform to any express description given to it and should be judged in accordance with the standard/ performance that was reasonable to expect in a similar car of that age.
Auctions
It has long been the case that goods sold at auction can be exempted (subject to a reasonableness test) from the requirements (implied terms) in the Sale of Goods Act as to description, quality and fitness. Notices can be put up excluding these specified sale of goods rights, subject to any exclusions satisfying a reasonableness test. This is covered by the Unfair Contract Terms Act 1977.
This possibility continues for buyers other than consumers (business buyers, companies) but new goods bought at auction by consumers will now always be covered by the implied terms in the Sale of Goods Act. In addition the four remedies of repair, replacement, partial refund and full refund provided by the Regulations will be available for such goods. Second-hand goods will be covered by the four remedies when sold at auctions that consumers cannot attend in person. This will include internet auctions where consumers make purchases from trade sellers. It would also extend to auctions that barred consumers from attending but accepted their telephone bids.
However, the four remedies provided for by the Directive will not apply for second- hand goods sold at auctions where consumers “have the opportunity of attending in person”.
The remedies of repair, replacement, partial refund and full refund will not apply for second-hand items at auctions where consumers have the opportunity to attend in person. In this situation, unless the auction house put up clear signage indicating that these rights had been excluded, the buyer would enjoy the long established Sale of Goods Act rights to initially reject the goods or to request compensation.
If the auction house stopped consumers attending in person then the redress rights provided by the Regulations of repair, replacement, partial refund and full refund would be available to them. However, it is difficult for consumers to secure goods from auctions they cannot attend although this might be possible via a telephone bid or an internet auction.
Installation and Installation Instructions
The Regulations, in force from 31 March 2003, state that where the retailer agrees installation for a consumer by himself or his agent, as part of the sale contract, the consumer can call on the redress rights provided by the Regulations (repair, replacement, partial refund and full refund) where a lack of conformity arises. Any losses suffered as a result of the lack of conformity can be claimed as consequential losses. A consumer can alternatively seek a full refund of the money paid or adequate compensation and any consequential losses. Naturally, there are practical considerations as to what is possible in terms of repair and replacement with some installations.
If a new kitchen was installed and the cupboard doors all opened the wrong way (contrary to the agreed plans), it would be possible alternatively to seek a repair, replacement etc, rather than pursue cash compensation.
Retailers are liable for claims where they have been paid for both the goods and the installation regardless of whether their own workers or their sub-contractors installed the goods. They are not responsible for the installation aspect if a third party, arranged and paid for by the consumer, installed the goods.
If the purchase of a carpet included installation by the retailer (or his sub-contractors) then he would have to offer all the remedies (repair, replacement etc.) regardless of whether it was the product or the installation that was faulty. If, however, the consumer had paid a separate third party to install the carpet then the retailer would not have to offer any remedy for problems arising from the installation work. The consumer would pursue the installer for suitable redress.
It has always been open to purchasers of goods sold with inadequate self-installation/self-assembly instructions to pursue a claim that they had been sold in breach of section 14 of the Sale of Goods Act, which deals with conformity with quality and fitness. This right continues.
Where the installation or assembly instructions were written with shortcomings, that resulted in a consumer not being able to use them adequately, then he could point out that the goods sold were not fit for purpose and hence claim the full redress rights of the Regulations and the Sale of Goods Act.
Goods to be Manufactured or Produced
The Supply of Goods and Services Act 1982 has been amended as a result of Article 1(4) of the Directive that classifies as “contracts of sale” certain contracts for work and materials. Where such work results in a lack of conformity the consumer is able to call on the full redress rights (repair, replacement, partial refund and full refund) provided by the Regulations.
When an item of furniture is commissioned but turns out not to conform to contract then the consumer can claim the full redress rights of the Directive. However, if the lack of conformity is due to any materials, or designs, provided by the consumer then the redress sought would need to be curtailed suitably or declined outright.
Services
The Regulations do not extend to services in general but only to installation, in certain limited circumstances (see Installation), and in contracts for the supply of consumer goods to be manufactured or produced (immediately above).
The Supply of Goods and Services Act 1982 requires a service to be provided with reasonable care and skill, within a reasonable time and, where no price is agreed, cost no more than a reasonable charge in England, Wales and Northern Ireland. The Act does not apply to certain sectors which are governed by specific statutes (eg the carriage of passengers and goods). The Act does not extend to Scotland, but common law there has similar effect, and suppliers of services or their customers should obtain legal advice.
Attempts to Curtail Consumers’ Rights
Consumers cannot have their legal rights removed in sale of goods contracts. It is also illegal to mislead consumers about their legal rights and to try to exclude them. To do so could result in a criminal prosecution. Notices such as “We do not give refunds” are similarly illegal, and enforcement is undertaken by local Trading Standards Departments.
Exclusion Clauses in Service Contracts
Unfair Contract Terms Act 1977
In other areas, the Unfair Contract Terms Act 1977 says that a trader cannot exclude or limit his liability for death or personal injury arising from negligence. He can exclude or restrict his liability for other loss or damage resulting from negligence only if the exclusion clause meets the ‘test of reasonableness’ (see below).
A trader dealing with a consumer, or dealing on his own written standard terms of business, cannot exclude or restrict his liability for breach of contract or allow himself to provide an inadequate service unless he can show that the clause satisfies the ‘test of reasonableness’ (see below). Nor can he require a consumer to indemnify him against any loss the consumer may incur through negligence or breach of contract unless he can show that the clause satisfies the same test. ‘Negligence’ includes breach of any contractual or common law duty to take reasonable care or exercise reasonable skill.
These provisions generally extend to contracts for the supply of services as well as to contracts for the sale or other supply of goods. They are, however, subject to certain exceptions (for example, where the right to limit liability is given by statute, as in the case of innkeepers and carriers).
Test of reasonableness
The 1977 Act provides that an exclusion clause is valid only if the trader can show that it is fair and reasonable. This is called the ‘test of reasonableness’. In deciding whether a clause meets this test a court would consider:
• the circumstances that were (or ought reasonably to have been) known to the parties when the contract was made, paying particular attention to such matters as the relative bargaining strength of the parties;
• whether the customer received any special inducement to accept the exclusion clause (such as a special discount);
• whether the goods or suitable alternatives could be obtained elsewhere without the exclusion clause;
• whether the customer knew or ought reasonably to have known of the clause; and
• whether the goods were made to the customer’s specification.
Where a trader seeks to limit his liability, under an exclusion clause, to a specified sum of money, the courts are required to have regard to the resources which he could expect to be available to him to meet such liability and how far it was open to him to cover himself by insurance. The ‘test of reasonableness’ requires the trader to prove that the clause was reasonable; the customer is not required to prove that it was unreasonable.
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 also apply to most terms which have not been individually negotiated in contracts with consumers. Terms which create a significant imbalance in the rights and obligations of the parties to the detriment of the consumer are regarded as unfair. Unfair terms are not binding on the consumer.
Redress up the Supply Chain
The Directive says that any public statements made by manufacturers, importers or producers (in addition to retailers) on the specific characteristics of the goods, particularly in advertising or on labelling, have to be truthful. We have seen above that (i) if the retailer could show that he was reasonably not aware of the statement, or (ii) that it had been corrected by the conclusion of the sale, or (iii) that the consumer could not have been influenced by the statement then it can be disregarded.
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CASE STUDY ANALYSIS
Analyses in Contract & Sale of Goods
Implied Terms
Facts
Sam sold Bert an AC Mamba to the “Manufacturer specification” the specification covering engine capacity, power, weight, among other matters. The car delivered was heavier than the manufacturer specification. The car did not perform to the to the level Bert expected in weekend kit car racing meets. The power to weight ratio of the car delivered resulted in a loss of 2.5 seconds per lap at Brands Hatch.
Bert phoned Sam two weeks later after testing the car thoroughly to say that he was not happy with the car as delivered and that he was rejecting the car. Sam offered to take car back and reduce the weight to manufacturer specification, arguing that the weight specification in the manufacturerer specification was not part of the description and the car was of satisfactory quality and fit for the purpose. Bert rejected this idea as impractical.
Bert seeks your advice as to whether he may reject the car and claim damages for breach of contract, including a claim that he had a reasonable prospect of a podium finish in a race which he had to miss because the car delevered was not competitive as a result of the increased weight.
1. This is a contract for the sale of goods between Sam (“The Seller”) and Bert (“The Buyer”) with an express term that the AC Mamba (“The Car”) complied with the manufacturer specification. The contract is governed by the Sale of Goods Act 1979 and, in particular, the implied terms provision as to compliance with description (s. 13(1) and, satisfactory quality and fitness for purpose (s.14) The buyer’s remedy of rejection and a claim in damages will depend on whether he is held to have accepted the goods after three works under ss 34 and 25; the doctrine of acceptance.
The Express Term
2. The car was sold to “Manufacturer specifications” which included the weight provisions; a term which has clearly been broken in the car as delivered.There can be no doubt in the present case that the ‘manufacturer specification’ is incorporated as a term of the contract. It is not immediately apparent that such a term goes necessarily to the root of the contract, sufficient to be defined as a condition of the contract, breach entitling the buyer subject to affirmation to accept the repudiatory breach, terminate the contract and claim damages. (Photo Production Ltd v Securicor Ltd [1980] AC 827 ) It seems clear that the parties did not define such an obligation, as is their right in law, as a condition. (Lombard North Central PLC v Butterworth [1987] QB 527 ) It is likely, therefore, that the court will treat this term as innominate and assess the effect of the breach in determing remedy. If the court regards the breach as serious they will allow the buyer to repudiate subject to affirmation (below) and claim damages (Infra) . If the breach is regarded as minor the buyer will not be able to reject and will be limited to a claim in damges.
3. There is some risk here that a court would regard the weight specification breach as not going to the root of the contract, given compliance with the remaining parts of the manufacturer’s specification, and the buyer would be better advised to pursue remedy under the Sale of Goods Act 1979 rather than run this risk at common law with an unfavourable application of the law on innominate terms – the court classifying the breach as entitling the buyer only to a claim in damages. For that reason, I do not propose to consider this remedy further.
The Implied Terms
4. The first issue is whether the car as delivered complied with s.13 Sale of Goods Act 1979.
Sale by description
(1) Where there is a contract for the sale of goods by description, there is an implied that the goods will correspond with the description.
(1A) As regards England and Wales and Northern Ireland, the term implied by subsection (1) above is a condition.
The first issue is whether s. 13 has any effect on the traditional common law distinction between representations and terms. Atiyah notes (Sale of Goods 11th edition at p149) that ‘at first blush it might seem that s.13 does away with this distinction in the case of sale by description since the section states that there is an implied term (s.13 (1A) a condition) that the goods shall correspond with the decsription. Aityah continues by observing that if the section applied only to those parts of the description which amounted to contractual terms in any event, it would seem to be performing the somewhat odd (and redundant) function of declaring that it is an implied term that the seller must comply with the express terms of the contract.
5. The seller will seek to argue that ‘manufacturer specification’ does not form part of the description of the goods – for an AC Mamba is, in practical terms, defined by the specification. It is unlikely, therefore, in the present case that the court would regard ‘manufacturer specification’ as a representation and therefore the ‘manufacturer specification’ will be part of the description of the car in that it goes to the identity of the car sold. In a sports car the power to weight ratio will be a significant factor in the very nature of the car being sold and not peripheral to the identity or nature of the goods sold. For that reason Oscar Chess v Williams [1957] and Harlingdon & Leinster Enterprises v Christopher Hull Fine Art Ltd [1991] are unlikely to persuade a court here that the weight issue was merely a representation. In any event, the case of Beale v Taylor [1967] indicates the preparedness of courts to come very close ignoring the distinction between representations and contractual terms and if this argument holds it is likely that ‘manufactuer specification’will be a description and failure to comply will be a breach of s.13, as here.
6. While Lord Diplock and Lord Wilberforce expressed dissatisfaction with the ‘excessive technicality’ of of some of the cases under s.13 such as Re Moore & Co v Landauer [1921] it is clear from Arcos v Ronaasen & Son [1933] AC 470 and now s. 13(1A) of The Sale of Goods Act 1979, defining the implied term as a condition, that compliance with description is strict.
Lord Atkin observed in Arcos:
” It was contended that in all commercial contracts the question was whether there was a ‘substantial’ compliance with the contract: there must always be some margin: and it is for the tribunal of fact to determine whether the margin is exceeded or not. I cannot agree. If the written contract specifies conditions of weight, measurement and the like, those conditions must be complied with. A ton does not mean about a ton, a yard about a yard. Still less when you descend to minute measurements does half an inch mean about half an inch. If the seller wants a margin he must and in my experience does stipulate for it…”
7. It is likely that the court will permit rejection of the goods, subject to acceptance (infra) and a claim in damges. I take some comfort for this view from the recent judgment of Lady Justice Hale in Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 32 where she said, expressing some criticism of the way the case was argued, “I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant purchaser should have taken up one of the options which they advised. If it is established that the seller is in breach of a condition of the contract, however, the choice does not lie with him.” In the light of the seller’s argument that he offered to reduce the weight of the car, this statement will lend support for what follows in relation to acceptance and remedy.
8. Turning to the issue of breach of S.14 of The Sale of Goods Act 1979: the claim that the goods are not of satisfactory quality or fit for the purpose, which may not need to be argued if the claim under s.13 is sustained, the law is as complex and problematic in application.
s. 14 Satisfactory quality
Implied terms about quality or fitness
(1) Except as provided by this section and section 15 below and subject to any other enactment, there is no implied [ F1 term ] about the quality or fitness for any particular purpose of goods supplied under a contract of sale.
(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.
(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods—
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods unsatisfactory—
(a) which is specifically drawn to the buyer’s attention before the contract is made,
(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or
(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.
It is clear from Arcos v Ronaasen & Son [1933] AC 470 that goods may be of satisfactory quality and fit for their purpose, yet not correspond with the description.
9. Atiyah expresses the view ‘that the implied term that goods be of satisfactory quality …is in many respects the most important part of the law of sale of goods. It is here that the seller’s obligations as to the quality of the goods supplied must be found, and this is the very heart of the law of sale. So it is not surprising that there has been a great deal of caselaw on this subject, and that there have been several attempt to reform the law culminating in the 1994 act.’
10. The original ‘merchantable quality’ provision in the 1893 act and carried through to the 1979 act comntained no definition of ‘merchantable quality’ – now ‘satisfactory quality’ Atiyah notes that concepts of merchantability were probably well know to the judges of the time – a rather wry remark given the very substantial caselaw which developed and, for reasons of the sheer scale of types of goods within sale, no single judicial definition developed. Despite calls for a definition – which many believe to be a hopeless quest – we are unlikely ever to get a single definition of satisfactory quality and must work within ther ‘zone of uncertainty’ as best we can by having regard to the factors to determine satisfactory quality in the section. (Supra) The Court of Appeal in Aswan Engineering Establishment Co v Lupdine Ltd [1987] 1 WLR 1 analysed the cases at length and then proceed to the statutory definition and, as Atiyah notes, clearly thought this was the apprpriate procedure.
11. In Rogers v Parish (Scarborough) Ltd [1987] QB 933 another panel of the Court of Appeal insisted that the then recent definition of merchantability set out in s.14(6) of the Sale of Goods Act 1979 was in “simple language which could easi;y be applied to a variety of cirumstances without difficulty… they deprecated the practice of looking at the old caselaw, and insisted that the new definition should be applied without reference to the prior law” (Atiyah). The 1994 act reflects the Law Commission view that it was possible to lay down a statutory test of ‘acceptable’ quality (changed to ‘satisfactory’ quality in the act) and Atiyah argues that some recourse to old caselaw will still be necessary and notes the relaxation of the rule prohibiting the courts from referring to parliamentary material ‘as an aid to statutory construction which is the result of the House of Lords decision in Pepper (Inspector of Taxes) v Hart [119] 1 All ER 42.
12. Examing the facts in the present case, delivering a car which is significantly heavier than contracted for in the manufacturer specification is, clearly unacceptable to the buyer but will it fall within s.14 (2) of The Sale of Goods Act to provide him with a remedy for breach? It would appear that thre buyer is likely to persuade the court that there has been a breach of s.14(2) in delivering a car significantly heavier than contracted for, especially given the standard that a reasonable person would expect having regard to desceription, freedom from minor defects, foitness for the purpose which goods of this type are commonly supplied and there may well (we have no evidence on the facts) be an issue as to safety. A car significantly heavier than manufacturer spcifications and tolerances may well render the care defective and if this is proved it will put the matter beyond doubt. On the bare facts there is a reasonably strong case to be put that the car is defective and not of satisfactory quality by being heavier than specified and on that premise I am of the view that there is a good prospect of a claim under s.14(2) being sustained.
13. S.14 (3) where the buyer expressly or impliedly makes known to the seller the purtpose for which the goods are being bought may be more difficult to sustain. One could argue that by buying an AC Mamba to manufacturer specification that the buyer is impliedly making known his particular prupose in buying a high performance car and the seller in deleivering a car substantially heavier than the manufacturer specification for an AC Mamaba is not delivering goods fit for the buyer’s particular prupose. Whether this argument could be sustained to the further issue that the buyer impliedly made known (for there appears to be no express notice) that he wanted to buy a car fit for the particular prupose of racing is more problematic on the facts. If the arguments above in relation to s.13 and s. 14(2) are right then s.14(3) will not need to be in issue at trial.
The doctrine of Acceptance
14. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound on request to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract – s. 34 Sale of Goods Act 1979 The buyer has the right to examine the car on delivery to ascertain whether it is in conformity with the contract.
15. Given the breaches of s.13 and s. 14(2) (Supra) the issue of remedy turns on whether he has or has not lost the right to reject. The buyer will, in any event, have a right to claim damages in contract for loss sustained, provided that it is not too remote.
s. 35 Sale of Goods Act
Acceptance
(1) The buyer is deemed to have accepted the goods [ F1 subject to subsection (2) below—
(a) when he intimates to the seller that he has accepted them, or
(b) 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.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the purpose—
(a) of ascertaining whether they are in conformity with the contract, and
(b) in the case of a contract for sale by sample, of comparing the bulk with the sample.
(3) Where the buyer deals as consumer or (in Scotland) the contract of sale is a consumer contract, the buyer cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.
(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.
(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2) above.
(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—
(a) he asks for, or agrees to, their repair by or under an arrangement with the seller, or
(b) the goods are delivered to another under a sub-sale or other disposition.
16. Where, as here, the buyer has not previously examined the goods he must enjoy a reasonable opportunity of examining them for the purpose of ascertaining whether they arein conformity with the contract. A reasonable time is a question of fact in the circumstances of the case.
17. The seller may seek to argue that he offered to repair the car and, thereby, the buyer cannot reject, but we have seen from Lady Justice Arden’s judgment in Hale in Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 32 that a buyer cannot be compelled to accept repair. Lady Justice Hale stated:
“I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant purchaser should have taken up one of the options which they advised. If it is established that the seller is in breach of a condition of the contract, however, the choice does not lie with him.”
18. The issue is whether the buyer has performed any act of acceptance within s.35 of the Sale of Goods Act 1979. The buyer has not intimated that he will accept the goods; quite the opposite, he told the seller that he wished to reject the goods. s. 35(4) provides that “The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.” The issue of reasonable time will depend on the nature of the goods but in the present case it will be necessary for the buyer to drive the car and get the feel of it. It could be argued, not unreasonably, that the buyer would not immediately become aware of the power and handling being less than anticipated and that two weeks to discover that the car was significantly heavier than manufacturer specification connotes that some specialised inspection was needed. it is doubtful that a court, in the circumstances, would regard two weeks as being excessive and if that is th case the buyer will not lose his right to reject the goods.
s. 36 Buyer not bound to return rejected goods
Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right to do so, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them.
19. Where, as here, the buyer rejects the goods and repudiates the contract, having the right to do so for breach, he can of course refuse to pay the price or, if he has paid it, he can recover it. In adddition he may maintain an action for damages, for if the buyer acts within his rights in rejecting the foods tendered, he can normally hold the sller lianle in non-delivery under s.51 Sale of Goods Act 1979 (Atiyah) (Millar’s Machiner Co Ltd v David Way & Son 91934) 40 Com Cas 204)
20. Damages fall to be assessed under s.51 Sale of Goods Act 1979
Damages for non-delivery
(1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.
(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.
(3) Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.
21. As to the issue of the loss of an opportunity to get a podium finish, this may be too remote as not being within the contemplation of both parties as likely to arise in the event of breach.
See Hadley v Baxendale (1854) 9 Exch 341 at 354 | Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528. | The Heron II [1969] 1 AC 350, et al
Aliter, if the buyer told the seller that he was buying the car with a view to racing and had a good prospect of success.
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Analyses in Contract & Sale of Goods
Express & Implied Terms
Drafted 16th August 2009
Mike Semple Piggot
Comfybo Ltd manufacture portable gas radiators. Part of their advertising literature describes the radiators as ‘Summer all the year round – let our warmth burst upon you.’ Acrid Ltd, dealers in household goods, order 10 of these radiators from Comfybo Ltd at £90 each.
When the radiators are delivered, the manager of Acrid Ltd signs the invoice which states that Comfybo “accept no responsibility for any loss or damage which may result from our radiators – all conditions, warranties, express and otherwise are hereby excluded. The radiators are placed on display by Acrid Ltd along with the original advertising literature.
Mildred sees the radiators and, having read the description, purchases one for £120. The same day another radiator is purchased by Cyril. When Mildred finally gets her radiator to work, it bursts and she is badly scalded. As a result Mildred spends two weeks in hospital and is unable to take part in a beauty contest, which she stood a fair chance of winning. The first prize was £1000.
Cyril, a sales representative and also something of a miser, lives in one large room whose measurements he fully described to the manager of Acrid Ltd who assured Cyril that the radiator would be perfect for his requirements and was designed to cope with temperatures reaching –40ºC. Due to a heavy fall of snow and very cold weather, Cyril finds that the radiator will not heat his room sufficiently.
[An independent heating engineer’s report has revealed that the radiator was designed to cope with temperatures in the range –2ºC to 30ºC and was not suitable for fitting in a room the size of Cyril’s.] Due to this Cyril catches a bad cold and is off work for three weeks, losing some £700 in Commission.
Both Mildred and Cyril are demanding damages. Acrid Ltd, in a poor way financially, would like to be able to return all the radiators to Comfybo Ltd.
You are asked to advise Comfybo Ltd as to their legal position.
1. Comfybo Ltd has entered into a contract for the sale of goods governed by common law and the Sale of Goods Act 1979 as amended: (1) With Acrid Ltd for the sale of 10 radiators raising issues of satisfactory quality and exclusion and the right of Acrid Ltd to reject. Comybo Ltd’s liability will turn on on Acrid Ltd’s liability for the contracts they made with (a) Mildred and (b) Cyril, so I will deal with the issues raised in those contracts first.
Mildred v Acrid Ltd
2. This is a contract for the sale of a radiator (‘The Goods) raising issues as to express terms of the contract at common law and the implied condition as to satisfactory quality under s.14(2) Sale of Goods Act 1979 and the The Sale and Supply of Goods to Consumers Regulations 2002 . In addition, there may be liability issues under The Consumer Protection Act 1987.
Liability in relation to the advertising literature accompanying the radiator.
3. The radiator was sold to Mildred with the accompanying literature: ‘Summer all the year round – let our warmth burst upon you.’ It is important, first, to distinguish between mere puffs and contractual terms. There is no specificity explicit or implicit in the statement, nothing upon which to hang an obligation and subsequent liability. The statement is an advertising or ‘mere’ puff – the licence the law permits a salesman without attracting contractual liability. Simplex commendatio non obligat. There is no liability in contract arising from the advertising statement.
s. 14(2) sale of Goods Act 1979
4. In the absence of any express terms, liability falls to be determined for breach of s.14(2) Sale of Goods Act 1979 which provides that all goods sold must be of a satisfactory quality. On the assumption that Midlred installed it correctly in accordance with the instructions, she will have a claim under s.14(2)
S.14 (1)
There are no implied terms as to Quality and Fitness for particular purpose save in so far as provided by ss. 14(2)(3)
S. 14 (2) (as amended)
“(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.
(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods:
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.
(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods unsatisfactory:
(a) which is specifically drawn to the buyer’s attention before the contract is made,
(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or
(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.”
Caveat Emptor: S.14(1)
5. While s.14(2)(3) goes on to provide that the goods must be satisfactory and fit for their particular purpose, s.14(1) does prevent the courts from imposing terms as to merchantability and fitness other than those set out in the subsections. Before SOGA was amended in 1994, there was an implied term under s.14(2) requiring goods to be of merchantable quality. Merchantability was a common law concept which SOGA gave statutory authority. It was a difficult concept to define precisely. The courts consistently gave themselves flexibility in applying it, and the importance of that flexibility was recognized when the wording of the statute was amended by the Supply of Goods and Services Act 1994 to replace the requirement of merchantable quality in SOGA s.14(2) to a requirement of satisfactory quality.
6. Deciding what is satisfactory quality is a matter of common sense. The same is true when deciding whether there has been a breach of the implied term in Supply of Goods and Services Act 1982 s.13, which requires the supplier of a services acting in the course of business to supply the service with reasonable care and skill. However, the older cases on what amounted to merchantability still provide guidance, though not binding authority, about the way in which the courts will approach the question of deciding what is satisfactory quality.
7. It is unlikely the court would need to refer to the old cases on merchantability in this instance. Mildred did not examine the goods fully installed and working before the contract was made, nor was she told the radiator was defective. She is therefore entiteld to the protection of s.14(2) and liability will be determined by the court under the statutory test guidelines set out in s.14(2B). The radiator is, clearly, not free from minor defects, nor is the radiator safe. There has been a breach of s.14(2) as to satisfactory quality.
8. Mildred has not accepted the goods within the meaning of ss 34 and 35. Acrid will not be able to argue that time has lapsed because Mildred was hospitalised by the accident caused by the radiator being faulty. Mildred will therefore be entitled to reject the goods, claim damages for non-delivery under s.51 Sale of Goods Act 1979 – being the difference between the contract price and the parket price, assuming an available market and claim damages for breach of warranty under s.53 for her injuries and loss of an opportunity to appear in a beauty contest. (See Hadley v Baxendale (1854) 9 Exch 341 at 354, Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528., The Heron II [1969] 1 AC 350 and, more recently: Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48
The House of Lords reviewed the law relating to remoteness of damage in Contract, narrowing the approach to be taken in connection with the recovery off damages. Professor McKendrick notes in his Contract Law 3ed Chapter 23, 889 ‘although the precise ambit of the decision is unclear’ and goes on to state:
“It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim has been brought. The expectation of the market would also appear to be an important factor to take into account when deciding whether the defendant should be held responsible for the loss which has been suffered.”
9. I can see no difficulty in holding Acrid Ltd liable in damages (a) for her injuries nor for the loss of a chance to compete in the beauty contest. Subject to Mildred’s duty to mitigate her loss ( ) the court will assess her damages on the basis of putting her in the position she would have been in had the contract been performed. In Hayes v Dodd [1990] 2 All ER 815, at 825, Purchas LJ said:
“The measure of damages is that figure which, so far as is practical in the circumstances, achieves the maximum restitutio in integrum.”
10. Detailed discussion of damages is not included in this analysis as this will be covered in detail in later analyses. Briefly: Mildred will be able to claim damages for her injuries, claiming in tort (Negligence: Donoghue v Stevenson et al) and contract to compensate her, the injuries being entirely foreseeable. In respect of the loss of the opportunity to compete in the beauty contest – these may not have been in the contemplation of the parties as likely to result (Heron II, Victoria Laundry v newman Industries et al) and are unlikely to be recoverable unless Mildred made it clear that she was planning to enter a beauty contest – in which case sthe measure will be assessed under the Chaplin v Hicks principle (See Chapter 9 Remedies) There may also be a product Liability issue but this is not considered here. Mildred will also be able to reject the radiator, given that she has not accepted within s34, 35 Sale of Goods Act 1979 – her time in hospital unlikely to count for the purpose of determing lapse of a reasonable time.
Cyril v Acrid Ltd
11. Cyril has entered into a contract for the sale of goods with Acrid Ltd on terms that the specification of the radiator could meet his particular needs; the measurements of his room and, moreover the salesman stated clearly that the radiator was designed to cope with temepreatures down to -40C.
12. The measurements and the temperature specification are terms of the contract, the temperature specification clearly going to the root of the contract and the measurements of the room also – making both these statement conditions of the contract and are clearly incorporated into the contract. A condition goes to the root of the contract. The breach of a condition allows the innocent party to treat the contract as repudiated, treat the contract as at an end and treat himself as discharged from performance. If the parties to the contract agree that that shall be the effect of the term it will be classified as a condition. Photo Production Ltd v Securicor Ltd [1980] AC 827.
13. It may be argued that as neither party classified the statements as conditions the appropriate test is the innominate term test. The court is more likely than not going to regard the breaches here as going to the root of the contract and entitle Cyril, subject to affirmation to accept the repudiatory breach, treat himself as discharged from further performance, reject the radiator and claim damages for loss sustained.
14. Where the parties fail to classify the status of the obligations in the contract the court will hold that they are ‘innominate’ and apply the ex post ‘consequences of the breach test’. The remedy given will depend on the gravity of the breach.
Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha [1962] 2 QB 26
Defendants chartered the ship ‘Hong Kong Fir’ for two years on terms that the ship be ‘fitted in every way for ordinary cargo service’. The vessel was unseaworthy, the crew incompetent. The defendants repudiated the charter party alleging that the seaworthiness provision was a condition. The charter party still had time to run its course and the question before the court was whether the seaworthiness provision was a condition or a warranty.
“There are….many contractual undertakings….which cannot be categorised as being “conditions” or “warranties”…Of such undertakings all that can be said 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 he should obtain from the contract; and the legal consequences of a breach of such 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 warranty.”
per Diplock LJ
Sale of Goods Act 1979
15. Cyril will also be able to bring a claim under s. 14(3) of the Sale of Goods Act 1979. While goods can be of satisfactory quality they may not be fit for the particular prupose under s.14(3) (The radiator is clearly satisfactory as a radiator in terms of being a radiator – although there is an arguable case for saying it is not under s.14(2) having regard to the description applied to it of being able to cope with temperatures down to -40C and clearly did not heat the room ) it would be more appropriate to bring a claim under s. 14(3) sale of Goods Act 1979.
16. S. 14 (3) Sale of Goods Act 1979
“Where the seller sells goods in the course of a business and the buyer expressly or by implication makes known to the seller……any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract, are reasonably fit for that purpose whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill and judgment of the seller…….”
Grant v Australian Knitting Mills [1936] AC 100; Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 et al
An independent heating engineer’s report has revealed that the radiator was designed to cope with temperatures in the range –2ºC to 30ºC and was not suitable for fitting in a room the size of Cyril’s.
The radiator is clearly not fit for Cyril’s particular prupose and there is a breach of s.14(3)
17. I do not propose to deal with the damages issue in detail here as this is fully discussed in Chapter 9 Remedies and there will be case analyses on the remedy of damages. briefly, the issue is as to whether the loss is too remote or not. Cyril caught a cold. This would seem to be an event arising in the ordinary course, provided there can be proven a causal link between the failure of the radiator and Cyril catching a cold: medical evidence will need to be adduced to support this claim. As to the lost commission, this may not be too remote, falling within the second limb of Hadley v baxendale.
16. The rule in Hadley v Baxendale
The rule governing remoteness of damage, as stated in: Hadley v Baxendale (1854) 9 Exch 341 at 354: This case involved a claim for loss of profit for failure to deliver a mill shaft on time. The loss of profit was held to have been too remote for the plaintiffs to recover. Loss of profit did not arise naturally from the failure to deliver on time, since the plaintiffs might have had a spare shaft available. As to the second part of the rule in Hadley v Baxendale , the plaintiffs could not recover lost profit under this rule since they had not made it clear that loss of profit would result from any delay.
“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, according to the usual course of things from such breach of contract, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”
per Alderson B.
There are therefore two limbs of recovery under Hadley v Baxendale :
1. Damages which may ‘fairly and reasonably be considered either arising naturally according to the usual course of things…
2. Damages which ‘may reasonably be supposed to have been in the contemplation of both parties, at the time of the contract, as the probable result of the breach.
Victoria Laundry v Newman Industries
Damages were awarded for loss of profit in:
Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528.
It was clear to D, who were to sell and deliver to P a boiler, that it was needed for immediate use, and that profits would be lost if it was not delivered on time.
However, although the claim for the normal profits which the plaintiffs would have earned was allowed, the claim which the plaintiffs made for loss of exceptional profits which would have been earned in special dyeing contracts was disallowed, and profits at the normal rate were awarded for these contracts. This may be seen as an application of the second part of the rule in Hadley v Baxendale .
Asquith LJ re-stated the principles
(1) “It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights have been observed. This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto arising from a particular breach, however improbable, however unpredictable. This in contract at least is recognised as too harsh a rule, hence:
(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was, at the time of the contract, reasonably foreseeable as liable to result from the breach.
(3) What was at the time reasonably foreseeable, depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.
(4) For this purpose knowledge “possessed” is of two kinds – one imputed, the other actual. Everyone, as a reasonable person, is taken to know “the ordinary course of things” and consequently what loss is liable to result from a breach of that ordinary course. This is the subject matter of the “first rule” in Hadley v Baxendale , but to this knowledge, which the contract breaker is assumed to possess, whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside “the ordinary course of things”, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the “second rule” so as to make the additional loss recoverable.
(5) In order to make the contract breaker liable under either rule it is not necessary that he should actually have asked himself, “What loss is liable to result from the breach?” As has often been pointed out, parties at the time of contracting contemplate, not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man, have concluded that the loss in question was liable to result.
(6) Nor, finally, to make a particular loss recoverable, need it be proved that on a given state of knowledge, the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee that it was likely to so result.
Refinement of the rule: The Heron II
The Heron II [1969] 1 AC 350,
Damages were awarded for loss of profits, on the basis that although the appellant, a ship owner, did not know that the respondent intended to sell a cargo of sugar immediately on its arrival, nevertheless the appellant knew that the respondent was a sugar merchant, and should have contemplated some financial loss as a result of a shipment of sugar arriving nine days later. This is an example of the first part of the rule in Hadley v Baxendale .
See also: H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.
The members of the Judicial Committee of the House of Lords in this case came to no general consensus on remoteness, indicating a reticence to use the word ‘foreseeable’ but forward a number of formulations.
“It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach of contract; nor on the other hand must the loser establish that the loss was a near certainty or odds-on probability. I am content to adopt as the test a ‘real danger’ or a ‘serious possibility’. There may be a shade of difference between these two phrases, but the assessment of damages is not an exact science and what to one judge or jury will appear a real danger may appear to another judge or jury as a serious possibility.”
per Lord Upjohn.
Lord Morris ‘Not unlikely to occur’ or ‘liable to result’, Lord Hodson ‘liable to result’, Lord Reid ‘not unlikely’
Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48
House of Lords
The House of Lords reviewed the law relating to remoteness of damage in Contract, narrowing the approach to be taken in connection with the recovery off damages. Professor McKendrick notes in his Contract Law 3ed Chapter 23, 889 ‘although the precise ambit of the decision is unclear’ and goes on to state:
“It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim has been brought. The expectation of the market would also appear to be an important factor to take into account when deciding whether the defendant should be held responsible for the loss which has been suffered.”
The facts are relatively straightforward: A charted vessel was redelivered late, resulting in the owners having to reduce the hire rate for the follow-on time charter. The claimed a daily loss rate of $8800 for 191 – a claim of $1,364,584 in damages. The House of Lords held that liability was confined to $158,301 – the difference between the market and the charter rates of hire for the nine days during which the owners were deprived of the use of their ship.
Professor Mckendrick notes : “While they agreed in the result, the reasoning of their Lordships differed in significant respects so that it is no easy task to identify the ratio of the case.”
Analysis: Lord Hoffman focuses on the issue of whether the defenadant has assumed responsibility, objectively judged, for the loss in question and was attracted by importing the South Australia Asset Management Corp principles into the law of contract. For Lord Hoffman the key question is …. is the loss for which damages can be given of a type or kind which the person breaking the contract ought to be taken to have accepted responsibility? He held that contracting parties in this market would not have considered the losses arising out of a follow on fixture to be of a type or kind which the charter was taking responsibility for.
Lord Hope also focused on the assumption of responsibility issue. Lord Rodger was not troubled by the South Australia Assett Management issue and McKendrick notes ” In his view, the loss suffered by the owners was not the ‘ordinary consequence’ of the breach of contract. The loss arose as a result of the ‘extremely volatile market conditions’ which could not have been reasonably foreseen as being likely to arise out of the delay. The difficulty with this approach is that what was not foreseen was the extent of the loss, rather than its nature”
Baroness Hale was not attracted by the idea of importing South Australia Assett Management principles into contract and decided the case on the decided the case the basis that the ‘parties would not have had this particular type of loss within their contemplation.’ In her judgment, the parties would have expected that the owner would be able to find a use for the ship even if it was returned late and that ‘it was only because of the unusual volatility of the market at that particular time that this particular loss was suffered.’
17. Subject to Cyril’s duty to mitigate his loss, it is likely, in the light of the foregoing, that he will be able to claim damages for his lost commission and reject the radiator.
Acrid Ltd v Comfybo Ltd
18. Acrid into a contract for the sale of goods with Comfybo for 10 radiators priced at £90 each and on delivery of the radiators signed an invoice which stated: (Comfybo) “accept no responsibility for any loss or damage which may result from our radiators – all conditions, warranties, express and otherwise are hereby excluded.
The Exclusion Clause
19. If the exclusion clause was not drawn to Acrid Ltd’s attention before the contract for the radiators was concluded, as seems apparent on the facts, it will not be binding on Arid because it is not incorporated into the contract and there can be no suggestion of a new contract, including the exclusion clause supported by fresh consideration arising here. No statements, oral or written, including exclusion clauses, may become a term of the contract unless made before the contract was concluded. Any statement made after the conclusion of a valid contract will not be a part of it, will not be supported by valid consideration and will not be binding or enforceable. Roscorla v Thomas (1842) 3 QB 234;Olley v Marlborough Court Hotel [1949] 1 KB 532A notice on the back of the room door disclaiming liability was not enforceable. The disclaimer or exclusion clause should have been drawn to the attention of the husband and wife when they checked in and before the contract for the hire of the room had thereby been concluded.
20. Briefly, to consider the alternative factual possibility that an exclusion cluase was drawn to Acrid’s attention before the contract was concluded – and, thereby, is incorporated in the contract, the exclusion clause would be governed by The Unfair Contract terms Act 19977 and be subject to the test of reasonableness. Acrid Ltd is not a consumer, so any exclusion of liability for breach of description (s.13 SOGA 1979) or s. 14(2) satisfactory would be subject to the test of reasonableness set out in s. 11 and the Schedule guidelines. It is unlikely that a blanket exclusion clause of this nature would find favour with the court and be enforceable.
Contractual liability and rigghts
21. While Cyril’s claim against Acrid will be successful, the radiator is of satisfactory quality and the only matter to be determined is the radiator rejected by Mildred which is clearly not of satisfactory quality, assuming that Mildred installed it correctly in accordance with the instructions.
2. Acrid will not be able to reject the radiators because he had accepted them within the meaning of s.35 Sale of Goods Acxt by selling towo radiators on and through lapse of time. He will, therefore, be limited to a claim in damages for breach of warranty under s.53 and be able to claim damages for all foresseable loss, including the injuries sustained by Midlred which he will be able to pass through to Comfybo Ltd.