Implied terms relating to goods

Contributed by Ian Macdonald and Su Mahalingham and current to 1 September 2005

There are five (5) obligations implied into contracts for the sale (Sale of Goods Act) or supply (TPA/Fair Trading Acts) of goods. The TPA/Fair Trading legislation with respect to the obligations is modelled on the Sale of Goods Act. The wording is slightly different and, although minimal, can make some difference to the application of the obligation. The difference is beyond the scope of this text.

A PROMISE BY THE SELLER/SUPPLIER THAT THE CONSUMER WILL BECOME THE OWNER OF THE GOODS

A buyer acquiring goods usually presupposes that the supplier or seller will transfer the title of the goods (that is, the ownership of the goods) to the buyer. This implied obligation says the seller/supplier has the right to transfer title of the goods. If someone who is a true owner seeks to obtain the goods from the buyer after the sale, the consumer can bring a claim against the supplier/seller on the basis that this implied obligation has been broken (s.69 TPA, s.12 Sale of Goods Act, s.36 Fair Trading Act).

A PROMISE BY THE SUPPLIER THAT IF THE CONSUMER BUYS GOODS ON THE BASIS OF DESCRIPTION THE GOODS WILL CORRESPOND WITH THEIR DESCRIPTION

Section 13 of the Sale of Goods Act says that where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with that description. An example of a breach of the obligation would occur if a buyer purchased a lawnmower which was described as “reconditioned”, when in fact it was not reconditioned. This does not comply with the description of the item and therefore the seller would be in breach of the Act.

Section 70 of the TPA and section 37 of the Fair Trading Act provide that where there is, in the course of a business, a supply of goods by description, there is an implied condition that the goods will correspond to the description.

A sale by description can occur where the goods are described, for example, in a brochure or on a part of the packaging of a product. It can also occur where the goods are described by the seller in the course of negotiating leading up to the sale. An example of this occurred where shoes were described as “good walking shoes” by a seller, and, upon the basis of this description, the buyer purchased the shoes. The shoes in fact turned out not to be good walking shoes because the heel fell off. The buyer sought compensation on the basis of the failure of the shoes to correspond with the description of “walking shoes” and was successful in her claim.

A PROMISE BY THE SUPPLIER THAT THE GOODS WILL BE REASONABLY FIT FOR THEIR PURPOSE

Under the Sale of Goods Act (s.14(1)), where the buyer expressly or by implication makes known to the seller the particular purpose for which goods are required, so as to show that the buyer relies on the seller’s skill or judgement, and where the goods are of a description which is in the course of the seller’s business to supply, there is an implied condition that the goods shall be reasonably fit for such purpose.

What is reasonably fit will depend upon the circumstances of each case. It is necessary to note that in order for the buyer to be able to bring a claim against the seller on the basis that the goods are not fit for their purpose, it is necessary for the buyer to establish each of the elements which make up the definition of a breach of the obligation. In particular it must be shown that the goods are “of a description which it is in the course of the seller’s business to supply”. This has been interpreted to limit the responsibility of the seller for defective goods only if the goods are of a type which it is in the business of selling. The seller may well sell goods in addition to the goods that he or she is the business of selling, and if it was one those items that was not fit for its purpose, then the buyer would have no claim.

An example of this may be a situation where a garage (which is in the business of selling items for use with a car such as petrol, oil, etc.) decides to sell fish and chips. If the fish was rancid, it clearly would not be fit for its purpose. However, the buyer may not be able to bring a claim under the implied condition, as the item is not one which is of the description which is in the garage’s business to supply.

Section 71(2) of the TPA and section 38(2) of the Fair Trading Act provide that where goods are supplied to a consumer in the course of a business (note that this would cover the fish example referred to above) and the consumer either by express words or by implication makes known to the business the purpose for which the goods are required then there is an implied condition that the goods will be reasonably fit for the purpose.

A PROMISE BY THE SUPPLIER THAT THE GOODS WILL BE OF MERCHANTABLE QUALITY

Section 14(2) of the Sale of Goods Act says that where goods are bought by description from a seller who deals in goods of that description, there shall be an implied condition that the goods shall be of merchantable quality. However if the buyer has examined the goods prior to the purchase there is no implied condition with respect of defects which the examination ought to have revealed.

The TPA s.71(1)), and the Fair Trading Act (s.38(1)) say that where a business supplies goods to a consumer in the course of a business, there is an implied condition that the goods supplied are of a merchantable quality. These Acts have provided a definition of merchantable. Section 66 (2) (TPA) and section 33(2) (FTA) state that goods are merchantable if they are:

“as fit for the purpose or purposes which goods of that kind are commonly bought as is reasonable to expect having regard to the description, the price and all other relevant circumstances”.

For example, if a washing machine is supplied by a shop with a sign reading “scrap only”, and the price is $20 compared to $600 (being the normal price of that kind of washing machine), then merchantability would be the standard to be expected of a washing machine described as scrap sold for $20. Therefore, if it did not wash, it would probably be the case that the buyer could not successfully argue that the item was not merchantable. It is, in the circumstances, good value for money.

The notion of merchantability does not cover defects which were either specifically drawn to the consumer’s attention before the contract is made, or defects that ought to have been revealed when the consumer examined the goods. The Acts thus require that a buyer bear some responsibility for defects, and if the buyer takes it upon him or herself to examine the goods, then the buyer cannot complain about defects that the examination ought to have revealed.

Similarly, if a seller clearly points out the defects that exist, and the buyer goes ahead and purchases the item, it is hardly fair that the buyer can then turn around and claim compensation from the seller, the seller having clearly indicated that the goods were defective to start with.

What is merchantable quality?

The meaning of merchantability has not been defined in the Sale of Goods Act but has been judicially defined in several cases, the most significant of which is Grant v Australian Knitting Mills [1936] AC 85. In this case the buyer purchased a pair of underpants which were contaminated with sulphur. The consequences of wearing the sulphur contaminated underpants is pretty obvious. Needless to say the buyer brought a claim for breach of the obligation. The Court said that merchantability meant that the goods must be saleable. The claim was successful.

Sale by reference to sample

Where goods are purchased by reference to a sample, then the goods must correspond with the sample. This obligation is imposed by the Sale of Goods Act.

It must be noted that a sale by sample does not necessarily cover a situation where a sample is shown to a consumer in advance of a purchase, such as where one looks at carpet samples to help with a colour choice. In order for this particular condition to apply, it is necessary that the contract itself indicate quite clearly the contract is based upon the sample shown, and probably the best way of indicating this would be to state it clearly in written terms within the sale documentation.

However, if a sale by sample has happened (that is the contract has been pursuant to a sale by sample) then the goods must correspond with this sample.

The TPA and Fair Trading Acts provide that, where goods are supplied in the course of business expressly by reference to sample or it can be implied that the goods are supplied by reference to sample, the contract is subject to the following conditions:

• the bulk will correspond with the sample;
• the consumer will have a reasonable opportunity of comparing the bulk with the sample; and
• the goods will be free from any defects making them unmerchantable that would not be apparent on a reasonable examination of the sample.

EXCLUSION CLAUSES

Under the Sale of Goods Act, the seller can, within the contract of sale with the buyer, take away the buyer’s rights as outlined in the Sale of Goods Act. This cannot occur under the TPA and/or the Fair Trading Acts. They provide that a term of a contract that purports to exclude or restrict conditions and warranties implied in a contract with a consumer is void (FTA s.34 and TPA s.68).