Sale of goods and services

Contributed by Ian Macdonald and current to 1 September 2005

In some circumstances, the Code gives borrowers rights against both a supplier of goods or services, and a “linked credit provider”.

RIGHT TO DAMAGES AGAINST BOTH SUPPLIER AND LINKED CREDIT PROVIDER

Where a person purchases goods from a supplier and suffers loss as a result of the supplier’s breach of contract or misrepresentation or as a result of failure of consideration, the purchaser has an action against the supplier.

Where the purchaser has also entered into a credit contract with a linked credit provider in relation to the goods, the Code allows the purchaser to have an action against both the supplier and the linked credit provider.

For example, if a person purchases a car from a car dealer and the car is seriously defective, the purchaser may suffer loss and have an action for damages against the dealer. If the purchase has been financed by a linked credit provider, the purchaser will have an action for the amount of the loss and damage against both the dealer and the linked credit provider.

The linked credit provider’s liability is limited to the sum of the amount of credit, interest (if any, or damages in the nature of interest), and costs.

The Code allows a credit provider a defence to an action by the debtor if the credit provider establishes the matters set out in section 119(2). These matters are related to the financial standing of the supplier, and whether the linked credit provider had any reason to suspect that the debtor might be able to recover damages against the supplier before the particular linked credit contract was entered into.

The provisions relating to damages appear to be mainly aimed at protecting purchasers who suffer loss when a supplier becomes insolvent. However, in most cases the credit provider will have a defence if it can show that it made adequate inquiries about the financial standing of the supplier, and was not aware of the potential for any legal action by the purchaser against the supplier.

CANCELLING A CONTRACT WHERE CREDIT CANNOT BE OBTAINED

There is usually no “cooling-off period” on contracts to purchase goods or services. However, where a contract to purchase goods and services has been signed, the purchaser can still terminate the contract if he or she:

• made it known to the supplier of the goods or services that credit would be required to pay for the goods or services;
• makes reasonable endeavours to obtain credit;
• fails to obtain credit on reasonable terms.

A purchaser can terminate a sale contract in this way even though goods or services have already been supplied under the contract but, if practicable, goods supplied under the contract must be returned to the supplier (s.124).

The notice of termination must be in writing

If a sale contract is terminated, the supplier is entitled to reasonable compensation for damage to, or deterioration of, goods supplied under the sale contract (other than fair wear and tear) up to the date of their return to the supplier or, if they are not returned, the cash price of the goods.

In the case of services, the supplier of the services is entitled to the reasonable value of the services supplied under the sale contract up to the date of termination. The purchaser is entitled to the return of money paid under the sale contract (s.124(3)).

WHAT HAPPENS TO A TIED CREDIT CONTRACT IF A CONTRACT TO PURCHASE GOODS OR SERVICES IS CANCELLED?

In some circumstances, a contract of sale can be rescinded or discharged by the purchaser. For example, where a purchaser has entered into a contract to buy a car and that car is not of “merchantable quality”, the purchaser can “rescind” (cancel from the beginning) the contract under the Fair Trading Act 1987 (WA). In those circumstances the car would usually be returned to the supplier and the purchaser would get their money back.

However there is still a problem if a credit contract has been entered into in relation to the purchase of the vehicle. If the credit contract cannot be cancelled, the purchaser is still left with the credit contract even though the contract to purchase has been cancelled.

There may be mortgages or guarantees related to the credit contract. Section 125 of the Code says that if a sale contract is rescinded or discharged by the purchaser, the purchaser can terminate a tied loan contract. The credit provider can recover from the debtor (the purchaser) any part of the credit that has not been paid to the supplier. The debtor is entitled to recover from the credit provider any interest charges or other amounts paid by the debtor under the credit contract.

Where there is a tied continuing credit contract, the purchaser is entitled to be credited with the amount of credit in relation to the sale contract and the interest charges attributable to that amount (s.125(1)(b)).

The Code also contains provisions dealing with the termination of related mortgages and guarantees and the adjustment of rights between the supplier and credit provider (s.125(2)).

Note that these provisions do not apply if the credit is provided as a result of an approach by the debtor that was not induced by the supplier or credit provider. For example, if the purchaser uses a credit card to purchase goods and subsequently rescinds or cancels the contract to purchase the goods, the supplier or credit provider in most cases will have had no role in inducing the use of credit by the debtor (s.125(7)).