Critical Assessment of the Operation of Rules in Business-to-Business Contracts

Example Contract Law Essay

Question

Critically assess the operation of the following rules in B2B contracts:

  1. the implied term as to description
  2. the implied term as to fitness for purpose
  3. the rules on exclusion of liability by the seller

Answer

In order to protect purchasers when purchasing goods and contracting services, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 imply certain terms, despite of whether the parties agreed on them or not. This piece will critically assess the operation of the following rules in B2B contracts:

Implied term as to description:

B2B contracts for the sale of goods are covered by the provisions of the Sale of Goods Act 1979, which states that goods are purchased by description, there is an the Act stipulates that the goods must correspond to the seller's description.1 This is not concerned with quality, only with description.2

An example of a sale by description is a mail order purchase, where the buyer does not see the goods and relies on their description by the seller. Or even a sale in a shop where the buyer buys packaged goods, so he is unable to see them. There is also a sale by description where the buyer has seen and examined the goods and has reasonably relied on the description.3 But if the buyer had the opportunity to inspect the goods before the transaction was made, he will not be protected by section 13 of the 1979 Act.

When the buyer is not a consumer, the term implied by section 13 of the 1979 Act is considered an innominate term, and liability for breach is strict, which means that if the goods do not correspond to the description, the seller is liable without the buyer having to prove that the seller is at fault.

In situations where the transaction includes the provision of services and the supply of goods, for example for the supply and fitting of a new kitchen, the Supply of Goods and Services Act 1982 applies. And in this case, the term implied will be that the goods must match the description if the transaction for the goods was by description;4 this provision is exclusive to transactions where the goods are supplied in the course of a business, and it is considered a condition.

Implied term as to fitness for purpose:

Section 14 of the Sales of Goods Act 1979 applies only to goods sold in the course of a business,5 and it is concerned with the quality and fitness of the goods. It implies a term that the goods supplied are of satisfactory quality.6 Here, the term "quality" includes appearance, as well as safety and durability,7 however, it does not cover any special characteristic of the goods which may have been drawn to the buyer's attention before the contract is made.8

Fitness for purpose falls within the definition of quality.9 If the intention of the buyer is to use the goods just for their normal purpose, then the buyer does not need to tell the seller what this is, it is automatically implied. However, if the intention of the buyer is to use the goods for an unusual or special purpose, this purpose needs to be clarified with the seller for the buyer to get protection under s.14(3).

When considering fitness for purpose, the courts will look at what the goods are usually used for. In B2B transactions, the usability test helps the court determine if the goods are of satisfactory quality. Here, the question is whether a reasonable purchaser would have used the goods for the purposes for which they are commonly supplied.10 Liability for breach of section 14(2) and (3) is strict, and the buyer does not have to prove that the seller is at fault, and in a non-consumer sale, it is considered as an innominate term.

Section 4 of the Supply of goods and services Act 1982 operates in a similar way, and regulates transactions which include th eprovision of goods and the performance of services, and a term that the goods will be of acceptable quality11 and reasonably fit for the purpose the buyer makes the seller aware of, is implied by the this provision..12

Remedies available to the innocent party for breaches of implied terms vary depending on the term which is broken. In B2B transactions, a breach of the terms implied in sections 13 and 14 of the Sale of Goods Act 1979 will not allow the buyer to refuse the goods if the damage to the goods or the breach of contracr are so trivial that it would be unreasonable for the buyer to do so.13 It will be up to the seller to show that the breach is so minor that rejecting the goods would be unreasonable.

Under these circumstances, the buyer is limited to claim damages for the cost of replacing or repairing the goods to a satisfactory standard of quality. Further, there is no right to terminate the contract or to reject the goods if he or she has accepted them.14 It will be considered that the buyer has accepted the goods15 if he keeps them beyond a reasonable time without objecting or indicating rejection. To assess whether the time is reasonable courts will look at the nature of the goods (for example, are they perishable) and whether the buyer had a reasonable opportunity to examine them before the contract was made.

For breach of terms implied by of the Supply of Goods and Services Act 1982, non-consumer will only have the traditional remedies as under the Sale of Goods Act 1979, and may not refuse the goods for breach of the terms implied by sections 3 and 4 if the breach or damage are so trivial that it would be unreasonable for him to do so.16

(iii) Rules on exclusion of liability by the seller:

An exclusion or limitation clause has the effect of excluding or limiting the seller's liability if a breach of contract occurs or a tort is committed. For example, a car parked at owner's risk, or a clause restricting remedies, such as the seller will be liable only if any defect in the goods is notified within a week of delivery.

The courts regard exemption clauses as a defence available to the seller in certain circumstances, but subject them to special rules.17 For an exemption clause to be valid at common law, it must have been incorporated into the contract and constructed so that it covers the breach and loss or damage which was committed.

The document containing the clause must be contractual in nature18 and signed by the claimant19. However, if a misrepresentation about the exemption clause has occurred, the innocent party may not be bound by it, even if he signed the contract.20 In the absence of a signature, incorporation is effective if the party seeking to rely on it has done everything in his power to bring the clause to the attention of the other party,21 this is particularly important in cases of onerous or unusual clauses22. Further, reasonable steps must be taken prior to the contract being finalised.23

If previous course of dealings exist between the parties, the clause will be regarded as incorporated.24 In Kendall (Henry) & Sons v. Lillico & Sons Ltd, the court held that the last transaction between the parties had the effect of incorporating the clause to the present transaction, as the parties dealt three or four times before. By contrast, in Hollier v Rambler Motors (AMC) Ltd,25 it was held that the clause was not incorporated despite of the parties having dealt with each other three or four times. Any previous course of dealings must be consistent for the clause to be effectively incorporated.26

In regards to the construction the clause must be clear; if ambiguous, it will be construed against the party invoking the clause under the contra proferentem rule27. Further, clear words are needed to exclude liability for Negligence, but if the wording is clear, the word negligence need not be used,28 although in commercial contracts the court will take a more relaxed approach.29 Further, a significantly serious or deliberate breach of contract can be covered by an exemption clause if the clause is clearly worded.30

Once incorporation and construction have been satisfied, the validity of an exemption or limitation clause will be determined by statute.31 In B2B transactions, the validity and therefore, reliance on clauses that aim at excluding or limiting liability for breach of terms implied by sections 13 and 14 of the Sale of Goods Act, or breach of terms implied by sections 3 and 4 of the Supply of Goods and Services Act 1982 will be only possible if the clause is "reasonable".32 That is if the clause has been a fair and reasonable one to include taking into consideration all the facts and circumstances which the parties knew or should have known or have considered when the contract was made.33 The burden of poof is on the party seeking to rely on the exemption clause to show that it is reasonable.34

In the absence of a definition of 'reasonable', the courts will consider the parties' relative bargaining power, if the buyer was able to negotiate, information available to the parties before the contract was made, if buyer was induced to accept the clause, and whether the buyer could have gone elsewhere.

In most B2B transactions, the bargaining power are levelled so the court will see most exemption clauses as reasonable, as the parties will often use these as a way to allocating risk between them.35

Footnotes

1 Sale of Goods Act 1979, s 13(1)

2 Arcos Ltd v EA Ronaasen & Son 1933 AC 470; (1933) 45 Ll L Rep 33

3 Harlingdon & Leinster Enterprises Ltd v. Christopher Hull Fine Art Ltd 1990 3 WLR 13; 1991 1 QB 564

4 Supply of Goods and Services Act 1982, s 3(2)

5 Stevenson v Rogers 1999 QB 1028; 1999 2 WLR 1064; 1999 1 All ER 613; (1999) 96(2) LSG. 29; (1999) 149 NLJ 16; (1999) 143 SJLB 21

6 Sale of Goods Act 1979, s 14(2)

7 ibid s 14(2)(a)(c)

8 ibid s 14(2C)(a); Bartlett v Sidney Marcus Ltd 1965 1 WLR 1013

9 ibid s 14(2B)(a)

10 M/S Aswan Engineering Establishment Co v Lupdine Ltd 1987 1 All ER 135; 1987 1 WLR 1

11 Supply of Goods and Services Act 1982, s 4(2)

12 ibid s 4(5)

13 Sale of Goods Act 1979, s 15A

14 ibid ss 11(4) and 35

15 ibid s 35

16 Supply of Goods and Services Act 1982, s 5A(b)

17 Approach developed by Brian Coote, Brian Coote: "Exception Clauses", Sweet & Maxwell, 1964

18 Chapelton v Barry Urban District Council 1940 1 KB 532; Grogan v Robin Meredith Plant Hire 1996 CLC 1127; 53 Con LR. 87; (1996) 15 Tr LR. 371; (1996) 140 SJLB 57; Times February 20 1996

19 L'Estrange v F Graucob Club Ltd 1934 2 KB 394

20 Curtis v Chemical Cleaning & Dyeing Co 1951 1 KB 805; 1951 1 All ER 631; 1951 1 TLR. 452; (1951) 95 SJ 253

21 Parker v South Eastern Railway (1877) 2 CPD 416

22 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd 1989 QB 433; 1988 2 WLR 615; 1988 1 All ER 348; (1988) 7 Tr LR 187; (1988) 85(9) LSG 45; (1987) 137 NLJ 1159; (1988) 132 SJ 460

23 Olley v Marlborough Court Ltd 1949 1 KB 532; 1949 1 All ER 127; 65 TLR 95; 9 ALR2d 806; 1949 LJR 360; (1949) 93 SJ 40

24 Kendall (Henry) & Sons v Lillico & Sons Ltd 1969 2 AC 31; 1968 3 WLR. 110; 1968 2 All ER 444; 1968 1 Lloyd's Rep 547

25 1972 2 QB 71; 1972 2 WLR 401; 1972 1 All ER 399; 1972 RTR. 190; (1972) 116 SJ 158

26 McCutcheon v MacBrayne Ltd 1964 1 WLR 125; 1964 1 All ER 430; 1964 1 Lloyd's Rep 16; 1964 SC (HL) 28; 1964 SLT 66; (1964) 108 SJ 93

27 Houghton v Trafalgar Insurance Co Ltd 1954 1 QB 247; 1953 3 WLR 985; 1953 2 All ER 1409; 1953 2 Lloyd's Rep 503; (1953) 97 SJ 831

28 Canada Steamship Lines Ltd v King, The 1952 AC 192; 1952 1 All ER 305; 1952 1 Lloyd's Rep 1; 1952 1 TLR 261; (1952) 96 SJ 72

29 Monarch Airlines Ltd v London Luton Airport Ltd 1998 1 Lloyd's Rep 403; 1997 CLC 698

30 Photo Production Ltd v Securicor Transport Ltd 1980 AC 827; 1980 2 WLR 283; 1980 1 All ER 556; 1980 1 Lloyd's Rep 545; (1980) 124 SJ 147

31 Unfair Contract Terms Act 1977

32 ibid ss 6(3) and 7(3)

33 ibid s 11(1)

34 ibid s 11(5)

35 Watford Electronics Ltd v Sanderson CFL LTD 2001 EWCA Civ 317; 2001 1 All ER (Comm) 696; 2001 BLR 143; (2001) 3 TCLR 14; 2002 FSR 19; 2001 Masons CLR. 57; (2001) 98(18) LSG 44; Times March 9 2001