Introduction

On 20 July 2011 the Court of Appeal handed down its judgment in BSS Group plc v Makers (UK) Limited (t/a Allied Services) [2011] EWCA Civ 809 which considered when the implied term for goods to be fit for purpose applies, whether the goods were fit for that purpose and whether the buyer relied on the seller’s skill and judgment. This decision serves as an extremely important reminder to finance companies, particularly where dealers are arranging the finance of goods, of the impact of implied terms under the various statutory regimes.

Background

Makers were contracted to carry out plumbing work for a pub renovation. This included replacing old copper piping with a new plastic piping system called “Uponor”. In July 2007, Makers ordered various items from BSS, including Uponor piping, Uponor compression adaptors and valves. A month after the initial order, Makers asked BSS for a quote for more items, some of which were identified as “Uponor items”. Rather than providing Uponor valves, BSS quoted for (and supplied) its own manufactured brand of valves. These valves differed from the valves previously supplied by BSS.

The system was installed and Makers, through its sub-contractor, sealed one of the pipes with a Uponor compression adaptor (bought from BSS) and a BSS manufactured valve. Shortly after installation, the water pressure increased and the valve failed resulting in a substantial flood and damage to the pub. At trial, an expert gave evidence that the BSS valve was incompatible with the Uponor adaptor. Makers therefore argued that the BSS manufactured valves were unfit for purpose.

The Test

Under the various statutory provisions that apply to the supply of goods, if a seller supplies goods in the course of its business and the buyer, either expressly or by implication, makes known any particular purpose for those goods, there is an implied condition that the goods will be reasonably fit for that purpose. If the buyer needs finance and is dealing with a dealer or broker who intends to sell the goods on to a lender so they can be supplied on credit terms, the buyer only needs to make the dealer or broker aware of the particular purpose.

The Decision

After hearing submissions, Lord Justice Rimmer (delivering the leading and only judgment) decided that:

  • Following the Court of Appeal’s decision in Jewson Limited v Boyhan [2003] EWCA Civ 1030, the Court must decide:
    • whether the buyer, expressly or by implication, had made known to the seller (or a credit-broker who sells goods to a lender who, in turn, provides them on credit) the purpose for which the goods were being bought;
    • if so, whether they were reasonably fit for that purpose;
    • if they were not reasonably fit for that purpose, whether the seller had shown that the buyer had not relied upon its skill and judgement or, if it had, that it had been unreasonable to do so.
  • BSS had known that Makers was using an Uponor system. It had previously bought goods for a Uponor system. This meant there was an “irresistible inference” from Maker’s request for a further quote that it intended to use the valves for the same project. It had to be, at the very least, apparent to BSS that Makers was likely to use the valves for the project. Makers therefore made a particular purpose for the valves known to BSS.
  • The valves were not fit for purpose because “they were incompatible with the Uponor adaptors and would be likely to (and on 24 August 2007 did) fail when used in conjunction with them”.
  • If a buyer has made a particular purpose known, either expressly or impliedly, then there was a presumption that they would be fit for purpose. The seller could only overcome that presumption by proving that the buyer had not relied on, or that it had been unreasonable to rely on, the skill and judgement of the seller.
  • BSS did not discharge the burden of proof: its argument that Makers was content to buy any valve and was relying on the sub-contractor to do the tests necessary to ensure that it worked was “unreal”.
  • It was “obvious” that “Makers was relying upon BSS to quote for and sell it a valve that was compatible with that system”.

The Court of Appeal therefore dismissed the appeal.

Comment

The issues raised in the Court of Appeal’s judgment apply to all supply contracts where there is an implied term that goods will be fit for purpose. For example, if a debtor proposes to acquire goods from a dealer using finance from a third party lender (who buys those goods from the dealer) but makes the dealer aware, either expressly or by implication of a particular purpose, the goods supplied by the lender under the finance agreement must be fit for that purpose.

From our experience, it is often the case that debtors have had considerable discussions with dealers (particularly when buying commercial goods like plant and machinery) before eventually selecting goods. The lender that decides to buy the goods from the dealer and provide them to the debtor under a finance agreement like a hire purchase, conditional sale, credit sale or hire agreement must then ensure that the goods are fit for that purpose. If they are not, the debtor may be entitled to reject the goods or bring a claim for damages against the lender. While the lender may be entitled to an indemnity from the dealer, it is a far from perfect solution.

Given the Court of Appeal’s re-statement that if goods are unfit for purpose the burden is on the seller (ie the lender in our example) to show that the debtor relied on its own skill and judgment or it is unreasonable for the debtor to rely on the dealer’s skill and judgment, lenders should take steps to minimise the risk of such claims by ensuring that (a) any particular purpose is made known to it before the finance agreement is concluded or (b) the debtor relies on its own skill and judgment. For example, lenders could require the dealer to complete a separate document (which is signed by the debtor) stating whether the goods are needed for any purpose and/or include a prominent term in the agreement recording the fact that the debtor is acquiring the goods on its own assessment of their suitability. It is however unlikely that a standard term in the finance agreement will, on its own, be enough. If a lender ensures practical steps are taken, the risk of a successful claim should be significantly reduced.