When it comes to quality disputes, we all know where to look to see who is right and who is wrong.
Or do we?
Much time is spent by parties agreeing contract terms - the seller determining the specifi cation of the goods he is in a position to supply and the buyer considering carefully whether goods of that specifi cation will, in fact, suit his purpose and are worth what he is being ask to pay. It is, therefore, not surprising that when complaints are made following delivery of the goods, the parties rush to examine the quality clauses, the sometimes lengthy schedules setting out the quality parameters and rejection limits, and that they will also carefully examine the assays.
A recent arbitration case was a salutary reminder that the seller is likely to have made promises as to quality that do not feature anywhere on the face of the contract. Such promises are incorporated into English law contracts as a result of the Sale of Goods Act 1979 (the "Act") and those who buy and sell goods need to be familiar with these "invisible" promises if they are to avoid lengthy and expensive litigation.
This article seeks to explain how they work, the diffi culties that they can give rise to and how to deal with them effectively.
Implied terms at law
A sales contract is made up of both express terms (those which are specifi cally stated or expressed in the contract) and implied terms (those which are implied by the law, but not expressed in the contract). An important term implied into commercial contracts governed by English law is found at section 14(2) of the Act:
"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."
This term will apply to all commercial sale contracts, unless it is expressly excluded (discussed further below). The term is a condition of the contract, meaning that, if it is breached, the buyer will have a right to (i) reject the goods and terminate the contract and (ii) claim damages from the seller for any losses incurred.
The term "satisfactory quality" under s.14(2) of the Act is vague, and although sections 14(2A) and (2B) do provide some assistance as to its interpretation, these sections are also hard to pin down:
(2A) For the purposes of this Act, goods are of 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.
(2B) For the purposes of this Act, 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) fi tness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and fi nish,
(c) freedom from minor defects,
(d) safety, and
It operates independently of any express clauses in the contract as to the quality or specifi cation of the goods in question. Therefore, even where goods are apparently on spec, in that they fall within the contractual specifi cations or other similar clause set out in the contract, they can still be considered to be of unsatisfactory quality pursuant to s.14(2) of the Act, and the seller can still be held to be in breach as a result if, for some other reason, they are deemed to be sub- standard.
Implied terms in a commercial context
The question of whether an on-spec cargo is of satisfactory quality or not is often extremely diffi cult to determine. This is because, when it comes to certain quality parameters, while it is often possible to say what is acceptable, and what is unacceptable, there is often a signifi cant grey area between these two points. That is, after all, why parties agree rejection limits and specifi cations which effectively identify a possibly arbitrary cut-off point – a hard line one side of which is good and the other side of which is bad. This has the considerable benefi t of certainty. Implied terms, unfortunately, rarely provide such certainty.
Take the example of metal concentrates. Such concentrates undergo a natural oxidation process when exposed to air, and material which is too oxidised can be diffi cult to process. Perhaps because this is a natural process that evolves over time, the level of oxidation does not usually feature in the quality clauses for the sale of such concentrates. A court or tribunal would, therefore, have to establish what degree of oxidation would render the concentrates unsatisfactory and to do that, it has to determine how much oxidation is acceptable. This is not an easy question if there is no industry standard, which with such parameters, there usually isn’t. The test, as set out above is "the standard that a reasonable person would regard as satisfactory" – hardly a helpful or precise formulation.
It may be possible to establish that goods which are, say, 2% oxidised pose no problem to the smelters, while, at the other end of the scale, a level of 20% undoubtedly does, but it is not clear at what point between these two fi gures the line has to be drawn. If your cargo is in that middle ground, you will be faced with potentially expensive legal proceedings as the Court or Tribunal looks for a basis upon which to make a fi nding as to the length of an unknown piece of string. For this reason, the outcomes of such cases can be very diffi cult to predict.
Excluding implied conditions under the Act Given the above, a seller would always be advised to exclude the implied terms of the Act from their contracts. The good news for sellers is that the Act can be excluded by agreement. Very often such an exclusion clause will attempt to exclude all implied terms relating to the quality or fi tness for purpose of the product, however, and not just those under the Act. Case law has established that comprehensive wording needs to be used in order to exclude these conditions, such as that relating to satisfactory quality, arising under the Act, so care must be taken when drafting such exclusions.
Buyers may be less happy to exclude the implied terms, and should, where possible, resist any attempt at exclusion of implied terms in the contract, in order to retain the widest possible assortment of rights against the seller. That said, even buyers would do better to think carefully about whether there is anything that is not in the specifi cation for which they do, in fact, want to agree an express term. Relying on questions of "satisfactory quality" is an uncertain business.
Implied terms may be "invisible" in a contract, but they are no less important than express terms. However, it is usually very diffi cult to determine whether an on spec product is of satisfactory quality, and as such the result of any legal decision in this regard can be unpredictable.
A great deal of uncertainty can be removed if both buyers and sellers give greater consideration to those features of the goods in question which are not mentioned in the contract, but which could cause problems in unusually large (or small) quantities. Any such analysis should also encompass the list of aspects that are likely to be taken into account when assessing quality, as set out at section 14(2B) of the Act, above.