WS5 – SALES OF GOODS - EXCLUSION OF LIABILITY

Summary of Checklist

ALWAYS GO THROUGH ALL SIX STEPS, OFTEN INCONCLUSIVE ON THE FACTS SO EXPLORE ALL OPTIONS

1.

What are the relevant contractual terms that IMPOSE LIABILITY, express (from contract) or implied (SGA and CL)?

NB – for express look for terms impose liability / also remember the agreed delivery date is an express term

2. Have the terms above been breached? Question of fact.

3.

What remedy does the innocent party want/ sought?(look in instruction of question)

What remedies are available?- Condition – reject / terminate / damages- Warranty – damages

What exclusion clauses apply to the breach that has occurred???

4.Are there any relevant exclusion clauses incorporated into the contract?(run through the different methods of incorporation eg signed / reasonable steps)

5. Construction: Do the exclusion clauses cover the specific breach and remedy?

6.Are exclusion clauses ‘reasonable’ according to the Unfair Contract Terms Act 1977?Which of S.3 or S.6 applies? And then S.11 test – state / explain / relate.

7. Conclude. On balance decide whether most probably that the clauses will be void or not.

STRUCTURE FOR EXCLUSION OF LIABILITY QUESTION:

1. What are the relevant contractual terms, express or implied?

EXPRESS TERMS:

ONLY if they impose liability (if exclusion unlikely to impose)

IMPLIED TERMS:

SALES OF GOODS ACT 1979Area covered Section Details (always mention bits in bold)

Title 12 (2) Implied term that seller has good title. The seller must pass good title to the goods:

(a) there is an implied term that the goods are free from an charge or encumbrance not already known to the buyer.

(b) that the buyer will enjoy quiet possession of the goods

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Look at these questions from the Buyers point of view

Look at these questions from the Sellers point of view.

For each question state which party is most likely to ‘win’

Description 13 Implied term goods correspond to description

Quality 14(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

Further : Where PURPOSE is an issue – under S.14(2B)(a):

“fitness for all the purposes for which goods of the kind in question are commonly supplied”

So… if item in question is still satisfactory quality for its common purpose then there will be no breach of S.14(2)

In Addition:

(2B) the quality of goods remains satisfactory in following cir’s: (b) appearance and finish,(c) freedom from minor defects,(d) safety, and(e) durability.

 (2C) goods remains satisfactory in following cir’s: (a) 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,

Fit for Purpose

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 term that the goods supplied under the contract are reasonably fit for that purpose, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller.

Needs RELIANCE – normally conclude with ‘it would probably be reasonable for the B to rely on S’… otherwise cannot continue question.

Classification of 14(2) + (3)

14(6) says that the terms implied by 14(2) and 14(3) are conditions of the contract

Sample 15 Implied term goods correspond to sample. The goods should also be free from any defect, not obvious by reasonable inspection.

SALES OF GOODS AND SERVICES ACT 1982Area covered Section Details (always mention bits in bold)

Care and Skill 13 In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.

The main contractor can be responsible for a sub-contractor not taking reasonable care and skill. This could bring about a claim in tort and contract.

Time 14 Where, under a contract for the supply of a service by a supplier acting in the course of a business, there is an implied term that the supplier will carry out the service within a reasonable time.

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Price 15 there is an implied term that the party contracting with the supplier will pay a reasonable charge.

2.Have the terms above been breached?

Question of fact. Evidential Issue.

Does the seller admit the breach?

3.What remedy does the innocent party want? What remedies are available?

Remedies available generally

Details

Reject the goods Primary right for breach of contract is to reject goods and repudiate contract of sale

Breach must be of a condition/go to the root of the contract. Section 14(6) says that 14(2) and 14(3) are conditions

Section 36 says if goods are rejected then the buyer is not obliged to return them.

UNLESS :

Section 15A says limits right to reject goods. Right to reject is lost if the sale is not a consumer sale and the breach is so slight that it is unreasonable for the buyer to reject the goods. (this only applies to s 13-15 sale of goods act)

Section 35 deals with when the buyer loses his right to reject the goods, i.e. accepts them or intimates acceptance.

N.B. can lose the right to reject the goods by delay. See Clegg and Jones v Gallagher cases.

Cannot reject goods for breach of a warranty per section 61 SGA 1979.

Damages The buyer can claim damages for breach of a warranty or for breach of a condition where he has elected not to reject the goods per section 53.

Calculating damages? Dealt with under principles of Hadley v Baxendale:

DISCUSS THE FOLLOWING BRIEFLY ONLY IF THE QUESTION SAYS THAT THE CLIENT WANTS DAMAGES / COMPENSATION.

Remoteness – if the loss is too far removed the buyer will not be able to claim:

1. 1st Limb – Direct Loss

Loss flowing naturally from the breach Knowledge assumed / imputed Eg.. B cannot use product to produce further products of his own

2. 2nd Limb – Indirect Loss

Must be within the reasonable contemplation of the parties They knew or should have known (actual knowledge) Eg.. B tells S of particularly lucrative contract that depends on S’s

supply of goods. Eg a premium that may be paid to get products early

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Specific Performance

Not always available.

Section 52 SGA 1979 limits the remedy to claims for breach of contract for a failure to deliver ‘specific or ascertained goods.’

Further, the remedy is discretionary, ‘if the court thinks fit.’

Rescission The buyer may rescind the contract if a pre-contractual statement has become a term of the contract or the contract has been performed (Section 1 Misrepresentation Act 1967).

Right to rescission may be lost by:

AffirmationLapse of timeThird party rightsImpossible to restore parties to original position

4.Are there any relevant exclusion clauses trying to exclude liability incorporation

OFTEN MISSED OUT IN EXAM

Look at contract. Must form part of the contract

If so, what do they exclude?

If so, are the relevant exclusion clauses properly incorporated into the contract?

Methods of incorporation:

First think if they are part of the contract…

If offer and acceptance before T+C’s given then the terms are not part of the contract. Think in terms of offer / acceptance / counter offer – battle of forms / acceptance by conduct

a. The customer signed the document.Then, chances are, is incorporated.

b. Did customer have notice of exclusion clause? Take steps before contract is entered into

If yes and notice is sufficient term will be incorporated.

c. Is term incorporated by a regular and consistent course of dealing? If the parties have contracted on these terms before, then it is more likely that these terms will be binding.

What constitutes regular depends upon facts of case.

Commercial parties >Equal bargaining power > more likely to be impliedTerm customary in trade>

5.Construction: Do the exclusion clauses cover the breach?

Even if the clause is incorporated into the contract, it will only be effective only if it covers the breach, which actually occurs.

INSERT STRUCTURE FOR STANDARD CONDITIONS???????????????????????

Then:

The clause must explicitly exclude liability for the breach which actually occurs:

1. Does clause cover the breach specifically? AND2. Does it specifically exclude the remedy the Buyer is seeking?

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IF unclear:

NB – unclear wording can be fine for quality but not for purpose, purpose must have been specified expressly.

Excluding liability for negligence needs to be clear and unambiguous. I.e. must really use word ‘negligence,’ seller may resist this though.

Principles of construction used by the courts if words are ambiguous:

a. Contra proferentem

The clause is interpreted against the party seeking to rely in it.Effect of this is that any ambiguity in the exclusion clause is resolved against the party seeking to rely on it. Clear and unambiguous words are needed for the exclusion to be effective.

b. Expressio unius…

If not in list, not covered and therefore not effective.

c. Ejusdem generis

General words following specific words are limited to type of the specific words.More relevant for property documents.

6.Are exclusion clauses ‘reasonable’ according to the Unfair Contract Terms Act 1977?

What does UCTA 1977 do? - Makes certain terms void:

1. CHOOSE which UCTA term applies to the breaches that have occurred:

EXPRESS TERMS between parties.. eg delivery date

Section 3 requires terms limiting/excluding liability for breach of contract to meet the ‘reasonableness’ test if either:-one party deals on the other’s standard terms S.3(1)

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IMPLIED TERMS between parties… eg quality / purpose

Section 6(3) requires any attempt to limit liability for breach of sections 13- 15 SGA 1979 against a person who does not deal as a consumer meet the requirement of reasonableness.

s.2(2) requires clauses excluding liability for negligence meet the requirement for ‘reasonableness.’

2. What is the REASONABLENESS TEST?

State test found in S.11(1):

‘the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.’

N.B. Onus is on the seller claiming term is reasonable to prove (section 11(5)).

The courts apply the guidelines contained in Schedule 2 to the act when assessing whether a term is reasonable or not.

Schedule 2 guidelines:

CHOOSE IF THEY ARE REASONABLE / UNREASONABLE TO THE PARTY

a) Size of the companies - the strength of the bargaining positions

b) reasonable if buyer accepted an inducement eg discounts, or if he could have entered into a similar contract without such an exclusion.

c) did customer know/ought reasonably have known of existence and extent of term

d) if term excludes liability if term not complied with, is this condition reasonable?

e) were the goods manufactured or adapted to the special order of the customer?

Watford outlined following factors:

11(4)(a) court should take account of resources available to person seeking to enforce limitation on his liability

11(4)(b) court should have regard to how far it was open to that person to cover himself with insurance.

If clause is overall found to be reasonable then it is valid.

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Other types of contracts

Contracts of exchange and barter

- dealings of business in developing countries.

Hire purchase - buyer obtains immediate possession of goods in return for making regular payments- ownership can be obtained by paying the final instalment - the buyer buys the item from the financial house- OPTION to buy the goods

Conditional sale

- buyer obtains immediate possession and makes regular payments in return- buyer can obtain ownership by making the final payment- however, there is no option to purchase (ownership does not pass until the last payment is

made)- CONTRACTUALLY COMMITED TO PURCHASING the goods

Hire agreements - only possession passes (not ownership)- consumer credit act, 1974 regulates this.- The title does not pass, only the possession of them passes.

Contracts for services - service must be performed with reasonable care and skill- the service will be performed with reasonable care and skill- the work will be carried out within a reasonable time

contracts for work and material

- e.g contract for repair- overlap with sale of goods contract

leases of goods - hire of an asset- the leasor is the owner of the equipment and keeps the ownership- finance leases- equipment is supplied to one user only who retains possession for the whole

working life. It is possible to extend the lease beyond the time agreed. Leases can be agreed to include maintenance. There could be a lease of computer systems- the lessee has the right to use the equipment. The finance company gets the equipment from the supplier (therefore it can be difficult for the user to enforce against the supplier- can avoid this through- assignment of rights by finance company to the user; partial motivation- a new contract between the finance company and the supplied; a direct collateral- contract between the user and the supplier.

- operating leases- equipment is hired out to the user for a short period and then hired out to another individual.

Financing the sale of goods

Financing against stock

- e.g car manufacturers- few car owners can afford to buy the stock, therefore, lender tides them over until they have sold the cars on.

- There will be a close connection between the dealer and the lender- the lender may be able to offer the customer hire purchase.

Security over the stock

- finance house have some control over the legal ownership of the goods. - Dealer would get notification by the lender of the potential sale of the goods

Bailment - the dealer does not buy the goods from the supplier and then finance through the finance house. Instead the dealer acts through the finance house its self.

Financing against receivables

- finance is provided to the retailer by a finance house on the basis of what money is received by the retailer from its customers

- lending money to a business

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