ABE Principles of Business Law 2008
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The Sale of Goods 2: Terms and Conditions 225
S.14(2) defines "satisfactory quality" as follows:
"Goods are of a 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.
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."
You will have noted that S.14(2C) provides three exceptions to the implied condition that goods shall be of satisfactory quality. The first is if defects in the goods are specifically drawn to the buyer's attention before the contract is made. This is straightforward common sense. If you buy a second-hand car and the dealer first tells you it has a crack in the cylinder block, you can hardly complain when it duly seizes up.
The second exception is where the buyer examines the goods before contracting, as regards defects which that examination ought to reveal. This can be more difficult. If a defect is hidden, and no reasonable examination could have detected it, there is no problem. If, however, the prospective buyer examines the article in a cursory or slapdash manner, and fails to spot a defect, what then? The Act says "the" examination; taken literally, it means the examination which the buyer actually made. Therefore if it was made in a cursory fashion, then the goods would be of satisfactory quality except as regards defects which a cursory examination would reveal. There is no authority as yet to assist us on this question.
What does appear to be implied is that if a person makes an examination, but he/she is incompetent, he/she will be bound to the same extent as regards defects which that examination ought to have revealed, as a fully competent person.
Goods may be of satisfactory quality when bought, but for how long does the law require them to remain in that state? There is no clear indication in the Act on this point, and the solution must be found in common law.
The general rule is that they are required to be of satisfactory quality only at the time of sale. Any deterioration afterwards is no more than a possible indication that they were not in fact of satisfactory quality at the time of sale. For how long this indication will apply must depend entirely on the circumstances of the particular case, the type of goods, and so on (Rogers v. Parish (Scarborough) Ltd (1987)).
Fitness for the Purpose
S.14(3) of the 1979 Act provides:
"Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known:
(a)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 or judgement of the seller".
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Satisfactory quality and fitness for the purpose are related, though different. An article can be of adequate quality without being fit for a particular purpose, and vice versa.
(a)The first essential to bring the implied condition into play is the same as for S.14(2), i.e. that the seller must be in the course of a business. The meaning of the phrase is the same.
(b)The second is that the buyer must expressly, or by implication, make known to the seller the actual purpose for which she requires the goods, and that she is relying on the seller's knowledge and experience of the goods to provide something that will do the job.
Express notice of the purpose is obvious, but implied notice can take various forms. A propeller ordered for a specific ship under construction was held to be notice of the purpose (Cammell Laird & Co. Ltd v. Manganese Bronze & Brass Co. Ltd (1934)). The same result occurred when 500 tons of coal were ordered "for the steamship Manchester importers" (Manchester Linen Ltd v. Rea Ltd (1922)).
If the description of what is required points to one use only, then notice of that purpose is readily implied.
In Priest v. Last (1903) a customer in a shop asked for "a hot water bottle". When it burst it was held to be unfit for the purpose.
It often happens that goods can be suitable for a number of different purposes, in which case the buyer must indicate, expressly or by implication, which particular purpose he/she requires, in order for the seller to be liable.
(c)The Act does not require goods to be perfect; merely reasonably fit for the purpose.
In Bristol Tramways, etc. Carriage Co. Ltd v. Fiat Motors Ltd (1910) the bus company ordered buses for heavy passenger work in Bristol. Bristol is a hilly city, and they were not up to the job.
HELD: They were not reasonably fit for the purpose.
The seller is not required to warrant the goods absolutely fit, even when new. In the case of second-hand goods, the duty is even less onerous. A car was held to be reasonably fit, even though it was known to require repairs done when it was bought (Bartlett v. Sidney Marcus Ltd (1965)).
Nor will a seller be liable under S.14(3) because some undisclosed factor in the buyer's particular case necessitates goods of a special type being bought. In Griffiths v. Peter Conway Ltd (1939), a thread coat was bought by a lady with unusually sensitive skin. She subsequently got dermatitis from wearing it.
HELD: The coat would not have harmed a normal person, so the seller was not liable.
However, if the goods are not reasonably fit for the purpose, the seller will be liable for breach of the implied condition, even though he/she could not have detected the fault by using the utmost skill and care – e.g. faulty goods in a sealed tin (Bigge v.
Parkinson (1862)).
(d)It is not sufficient to defeat liability to show that goods sold are reasonably fit only for their usual purpose.
As you can see from the language of the section, it is about relying on the seller's skill or judgement, and provided the buyer indicates the actual purpose for which he/she requires the goods, they must be fit for that particular purpose, even though it is not one for which such goods are usually sold.
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(e)Provided the purpose has been notified to the seller, she can escape liability under S.14(3) only if she, or the surrounding circumstances, can show that the buyer was not relying on the seller's skill and judgement, or that it was unreasonable that he should so rely. The implication is that the buyer does rely on the seller's skill and judgement, and the onus is on the seller to rebut this presumption (Wormwell v. R H M Agriculture (East) Ltd (1987)).
However, it is always open to the seller to intimate to the buyer that his/her skill should not be relied on, and such intimation can equally be implied. In this case, the section will be excluded. Where an implied condition in a particular section is excluded in this way, it simply means that the parties are regarded as having not intended the condition to be implied. This well illustrates the nature of these implied conditions. This will probably apply where the buyer selects goods for him-/herself. The section will also be excluded where it is unreasonable for the buyer to rely on the seller's skill. For example, if you want to buy some specialist tool from a large self-service DIY store it would be unreasonable to rely on the skill of a young girl on the checkout till. Look at these four cases.
Teheran-Europe Co. Ltd v. S T Belton (Tractors) Ltd (1968)
Air compressors were bought, and the seller had notice that they were for resale in Iran. They were unsuitable.
HELD: The buyers were deemed to have relied on their own skill and judgement as to what was suitable for use in Iran.
Henry Kendall & Sons v. William Lillico & Sons Ltd (1969)
An importer who wished to introduce Brazilian groundnut extract from a new source, was aware that the buyer, a wholesaler, intended to resell it in small quantities to be mixed with other substances in cattle and poultry food. The extract proved poisonous to poultry, although it was alright for cattle.
HELD: The knowledge of the importer as to the use to which the extract would be put was sufficient to bring S.14(3) into operation.
Baldry v. Marshall (1925)
A buyer asked a dealer to recommend a "comfortable car, suitable for touring". The dealer recommended an eight cylinder Bugatti (a fast sports car).
HELD: The car was not suitable for the stated purpose.
Slater v. Finning Ltd (1996)
The defendant company were in business as marine engine suppliers and contracted with the claimant, Mr Slater, to repair the engine of one of his fishing vessels. They fitted a new type of camshaft to the vessel's engine but this failed at sea, as did two later replacements of the same type. Mr Slater claimed damages for breach of the implied condition of reasonable fitness for purpose contained in Section 14(3) of the
Sale of Goods Act 1979.
The court found that the engine failure was not attributable to the camshafts themselves but to an external feature peculiar to the ship of which the defendant company were ignorant.
HELD: Mr Slater's claim could not succeed. The court stated: "Where a buyer purchases goods from a seller who deals in goods of that description there is no breach of the implied condition of fitness where the failure of the goods to meet the intended purpose arises from an abnormal feature ..., not made known to the seller, ...
in the circumstances of the use of the goods by the buyer .... In these circumstances,
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it would be totally unreasonable that the seller should be liable for breach of Section 14(3) Sale of Goods Act 1979".
Sale by Sample
Goods are, of course, frequently sold by sample. A small piece or quantity is brought by the seller for the buyer's inspection. The bulk is then sold on the strength of an examination of the sample. S.15 of the Act makes provision for this:
"(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.
(2)In the case of a contract for sale by sample there is an implied condition:
(a)that the bulk will correspond with the sample in quality;
(b)that the buyer will have a reasonable opportunity of comparing the bulk with the sample;
(c)that the goods will be free from any defect, rendering them unsatisfactory, which would not be apparent on reasonable examination of the sample".
(a)The first point to notice is that Sub-section (1) provides that a sale is by sample only if the contract says so, or it can be implied. The mere exhibition of a sample during negotiations does not of itself make the subsequent sale one by sample.
(b)The word "bulk" can include both unascertained and specific goods. It can also include future goods which have to be manufactured.
(c)The bulk must correspond with the sample in quality. The degree of correspondence is somewhat subjective, and depends to an extent on the type of goods and the intentions of the parties. For example, it is unlikely that the section would be breached if the buyer treated a sample to tests or analysis not usually employed in the trade, and then tried to claim that the bulk did not match up to such exhaustive testing.
On the other hand, if the bulk is not of the quality of the sample, there is a breach of the section even though the fault in the bulk could be put right at trivial cost (E and S Ruben Ltd v. Faire Bros & Co. Ltd (1949)).
(d)The buyer must have a reasonable opportunity of comparing the bulk with the sample.
Lorymer v. Smith (1822)
A buyer was refused an opportunity to examine goods prior to delivery.
HELD: He was entitled to refuse to take delivery.
(e)The goods must be free from any defect, rendering them unsatisfactory, which would not be apparent on reasonable examination.
The examination which the buyer makes need not thus be exhaustive. The extent of it depends on the nature of the goods, the requirements and practices of the trade, and other relevant circumstances.
Jurgensen v. F E Hookway & Co. Ltd (1951)
A retailer buying plastic catapults tested one of them by pulling back the elastic. Later, one of the catapults proved to be of unmerchantable quality (i.e. "unsatisfactory" quality under the Sale of Goods Act 1979, as amended).
HELD: The examination was reasonable, and the seller liable.
(f)Unlike in the case of S.14, S.15 is not confined to sales "in the course of a business". The condition applies to any sale by sample.
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(g)As we have already noted, by virtue of S.13(2), if a sale is by both sample and description, the bulk of goods must correspond with both sample and description. So, correspondence with the sample provided will not be enough if there was a description given in advance and the goods do not correspond with it.
F. EXEMPTION CLAUSES
Introduction
Human nature being what it is, few people want to incur liability for anything if they don't have to. Hence parties to contracts have always tried to insert clauses into their contracts exempting or restricting their liability for breach of contract or negligence. In the heyday of the Victorian theory of "freedom of contract", this licence probably did little harm.
Monopoly power in those days was rare, and contracts tended to be between people of roughly equal bargaining power (with the obvious exception of contracts of employment, with which we are not concerned in this study unit). Even nowadays, the Sale of Goods Act 1979 permits the practice. S.55(1) states:
"Where a right, duty or liability would arise under a contract of sale of goods by implication of law, it may (subject to the Unfair Contract Terms Act 1977) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract".
However, especially during the 20th century, the balance has altered. Large monolithic companies have arisen which by virtue of their size and power can, if unchecked, virtually dictate to their customers the terms under which they are prepared to trade – "Take it or leave it!" This applies whether the customer is a private individual buying for him-/herself, or a small commercial concern.
These abuses of power usually took the form of standard conditions of sale, excluding the seller's liability for virtually any breach of contract or any act of negligence. They were drafted in obscure legal language, and printed in small lettering on the backs of all relevant contractual documents. The result was that most people did not read them. If they did, they did not usually understand them. The rare individual who both read and understood the conditions could do nothing about them anyway! Heads I win, tails you lose!
These exception or exclusion clauses were perfectly lawful, but they created such injustice that the courts were forced to go to extreme lengths in their endeavours to ensure fair play. Lord Denning MR in George Mitchell v. Finney Lock Seeds Ltd (1983) had this to say on the subject of exclusion clauses prior to the 1977 Act:
"Faced with this abuse of power, by the strong against the weak, by the use of the small print of the conditions, the judges did what they could to put a curb on it. They still had before them the idol, 'freedom of contract'. They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called 'the true construction of the contract'. They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put on them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability, or that in the circumstances the big concern was not entitled to rely on the exemption clause.”
"We should no longer have to go through all kinds of gymnastic contortions to get round them (exemption clauses). We should no longer have to harass our students with the study of them. We should set about meeting a new challenge. It is presented by the test of reasonableness."
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Unfair Contract Terms Act 1977
This Act is designed to put a statutory curb on the use of unfair exemption clauses in all contracts, including those for the sale of goods. It introduces, firstly, a distinction between contracts where one of the parties "is in the course of a business" and the other is a "consumer" – a consumer being a person who in his/her capacity as a party to the contract in question is not acting in the course of a business. Secondly, there is a distinction between a party seeking to rely on its own standard written terms of business, and reliance on terms which have been separately negotiated. Thirdly, there is the concept that terms excluding or restricting liability should be enforceable only if they are reasonable in all the circumstances.
The Act applies to all contracts, and it extends to the use of contract terms to exclude or limit liability for negligence.
The relevant parts of the Unfair Contract Terms Act 1977 provide as follows:
(a)Section 1(1) defines "negligence" for the purposes of the Act as breach:
"1. of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract;
2.of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty)".
(b)Sub-section 1(3) ensures that the relevant provisions apply only to business liability, that is liability arising "from things done or to be done by a person in the course of a business (whether his own business or another's)". The exception to this is that in the case of contracts for the sale of goods, the relevant provisions of the Act apply to all such contracts, not merely where business liability is concerned, as follows:
The implied condition as to title (Sale of Goods Act 1979, S.12) cannot be excluded or restricted by any contract term.
Implied conditions as to description (S.13), satisfactory quality and fitness for the purpose (S.14) and sample (S.15) cannot be excluded or limited where the other party is a consumer, and where he/she is not, they can be excluded or restricted only to the extent that it is reasonable.
(c)S.2 deals specifically with attempts to exclude liability for negligence. It is subject to the proviso contained in S.1 that its terms apply only to things done in the course of a business.
A person cannot by means of any term of a contract, or by means of a notice given to people generally or any particular person, exclude or restrict his liability for death or personal injury resulting from negligence. In the case of other types of loss or damage, he can exclude or restrict his liability for negligence only in so far as it is reasonable. S.2 goes on to provide that a person's awareness of or agreement to such a term or notice is not of itself to be taken as showing his voluntary acceptance of any risk (i.e. the maxim "volenti non fit injuria" does not apply).
The clause is therefore not only controlling the use of terms, whether written or oral, of a negotiated contract, and written standard terms, but also notices of contractual terms which are displayed on public view or given to individual people. These include such notices as are posted up outside car parks, referred to on railway or bus tickets, or displayed in shops.
(d)S.3 applies to contract terms where the party seeking to impose them is either dealing with a consumer, or is dealing on her own written standard terms of business.
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In either event, that person can seek to exclude or restrict liability for her own breach of contract, or claim to be entitled to render a substantially different contractual performance from that reasonably expected of her, or render no performance at all in respect of all or any part of the contract, only to the extent that it is reasonable for her to do so.
In St Albans City and District Council v. International Computers Ltd (1994), the claimant local authority bore the responsibility of fixing and collecting the community charge rate for its administrative area and entered into a contract with the defendant company for the supply of computer software for the purpose.
The contract was contained within the defendant company's liability to £100,000. Because of a mistake in the software supplied, the claimant’s community charge was fixed too low, with the result that they sustained a total loss in excess of £1 million.
The claimant authority contended that the defendant company was liable for its total loss of over £1 million in view of Section 3 of the Unfair Contract Terms Act 1977 which states:
"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
(2)As against that party, the other cannot by reference to any contract term – when himself in breach of contract, exclude or restrict any liability of his in respect of the breach ... except in so far as ... the contract term satisfies the requirement of reasonableness".
The defendant company argued that their liability was limited to £100,000 as stated in the contract.
HELD: The defendant company had failed, on the facts, to establish that the exclusion clause was fair and reasonable and the claimant authority was accordingly entitled to recover its total loss in excess of £1 million.
A "consumer" is someone who is not acting in the course of business where the other party is. So, if you buy, for instance, a second-hand suite of furniture from a "private" individual, you are not dealing as a consumer, because the other party isn't dealing in the course of business. If you buy a suite of furniture from a furniture showroom, or if you sell your unwanted Victorian wardrobe to an antiques dealer, you would be dealing as a consumer. In addition, where the contract relates to the supply of goods, the goods must be of a type which it is usual to find supplied for private consumption. Excluded from the definition of consumer are buyers who buy at an auction or by competitive tender.
Small businesses can sometimes be treated as consumers where, though the goods concerned are being bought for the business, the fact that the firm's name was used is simply a convenience. Thus the courts have refused to draw a watertight distinction between the small business and its proprietors.
R & B Customs Brokers v. United Dominions Trust (1988)
A firm, consisting of a husband and wife, decided to buy a second-hand car using the business name. Though bought in the firm's name, it was the intention that the car should be intended for the proprietors' personal use. The car was later found to leak excessively. UDT argued that since the car had been bought in the firm's name, the exclusion of liability contained in the contract meant that there was no remedy (i.e. the restriction was valid).
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HELD: In reality the sale was a consumer sale so the exclusion clause contained in the contract was invalid.
(e)S.4 prevents a consumer from being made liable by any contract term to indemnify any other person, whether a party to the contract or not, in respect of liability for negligence or breach of contract incurred by that other person, unless, that is, the indemnity clause is reasonable.
(f)S.5 deals with the problem of "guarantees" given by the manufacturers of goods normally supplied for private use or consumption. Such "guarantees" cannot exclude or restrict the liability of the manufacturer or distributor of the goods for defects due to negligence.
(g)The Unfair Contract Terms Act also attempts to close any loopholes in its provisions by preventing evasion by means of secondary contracts, by outlawing restrictive or onerous conditions in contracts, and by preventing people avoiding its provisions or prejudicing the rights of people who seek to pursue remedies.
As will be apparent, in the majority of cases, especially where the contracting parties are both in the course of a business, the Act does not prohibit contract terms which exclude or restrict liability. What it does is to allow them provided that they are reasonable.
(h)Schedule 2 lays down the following guidelines for the application of the test of "reasonableness".
"The matters to which regard is to be had ... are any of the following which appear to be relevant:
a.the strength of the bargaining positions relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;
b.whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;
c.whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
d.where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
e.whether the goods were manufactured, processed or adapted to the special order of the customer."
Other criteria which the court will take into consideration in deciding on the reasonableness or otherwise of a contract term include:
Advertising methods and content;
Responsibility for insurance;
Choices available to the parties;
The resources of the respective contracting parties;
The price of the goods;
Any defined maintenance obligations;
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The terms of any relevant codes of practice in the trade or industry concerned;
The typeface used in contractual documents, and the relative prominence of the exclusion clause.
Unfair Terms in Consumer Contracts Regulations 1994
These Regulations implement the EU Directive on Unfair Terms in Consumer Contracts. They do not replace the Unfair Contract Terms Act 1977, and companies which do not supply goods or services to consumers are unaffected by the Regulations.
(a)Consumer Contracts
The Regulations cover consumer contracts. Regulation 2 defines a consumer as "a natural person who, in making a contract to which these Regulations apply, is acting for purposes which are outside his business". Contracts between two consumers are not governed by the Regulations.
(b)Pre-formulated Contracts
The UK Regulations apply to those consumer contracts for the supply of goods or services which include terms which have not been individually negotiated between seller and consumer. The Regulations provide that a contractual term will always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has not been able to influence "the substance of the term, particularly in the context of a pre-formulated standard contract". The burden of proving that a term has been individually negotiated falls on the supplier.
(c)Unfair Terms
The general principle is that any term will be unfair if it causes a significant imbalance in the rights and obligations arising under the contract to the detriment of the consumer. Contracts must be written in plain, intelligible language, and if there is any ambiguity or obscurity the interpretation more favourable to the consumer will apply.
In addition to these overall criteria, the Regulations contain a long list of specific terms which are unfair. These include:
Irrevocably binding the consumer to terms with which he had no chance to become familiar before the contract was entered into.
Requiring consumers to pay disproportionately high sums in compensation where the consumer terminates the contract.
Allowing the seller to terminate the contract at will where the consumer has no such right, or allowing sellers to retain sums paid for services not yet supplied at the time of termination.
Allowing the seller unilaterally to alter the characteristics of a product or service without a valid reason.
Determining the price at the time of delivery or increasing the price later without giving the consumer the right to reject the goods.
Giving the seller the right to decide if the goods conform to the contract or the exclusive right to interpret contract terms. (Clauses stipulating that allegedly defective goods must be returned to the seller who will assess whether these do constitute defects will be unenforceable under this provision.)
Interpretation of Exemption Clauses
The common law has evolved a variety of rules for interpreting the meaning of exemption clauses. Since the passing of the Unfair Contract Terms Act, such methods have been
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less necessary, and a more literal interpretation has often been possible. The object is therefore to give effect to the manifest intention of the parties.
The principal rules still in common use are:
(a)"Contra proferentem"
An exclusion clause will be construed strictly against the person who inserted it. In other words, the other party is given the benefit of any doubt.
(b)Negligence
If a party wishes to exclude liability for negligence in the performance of his/her contract, he/she must use very clear words. Any looseness or ambiguity will cause the term to be rejected.
(c)Particular Duties
If a clause exempts a party from complying with specific duties or matters, then all other duties or matters will remain in full force.
(d)General Words
The wording used must be clear, precise and unambiguous, otherwise it will be ineffective. General words used in an exemption clause will not normally absolve the person who tries to rely on them from liability.
The House of Lords had occasion to review the construction of exemption clauses in Ailsa Craig Fishing Co. Ltd v. Malvern Fishing Co. Ltd (1983). Here, Lord Wilberforce laid down the following rules:
"(1) Whether a condition limiting liability is effective or not is a question of construction of that condition in the context of the contract as a whole.
(2)If it is to exclude liability for negligence, it must be clearly and unambiguously expressed.
(3)It must be construed contra proferentum.
(4)One must not strive to create ambiguities by strained construction. The relevant words must be given, if possible, their natural plain meaning.
(5)Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion; this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure."
In short, therefore, clauses attempting totally to exclude liability are to be construed strictly. Clauses which merely limit the liability to an agreed amount are to be given their natural and intended meaning, and allowed to stand if reasonably possible.
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