Contracts for Sale of Goods (11:III): Difference between revisions

{{REVIEWED LSLAP | date= August 5, 2021}}

If a statement is a term of the contract, it can be a condition, warranty, or innominate term. A well-drafted contract will characterize particular terms as conditions or warranties, though the wording used in the contract will not always be determinative ([https://www.bailii.org/uk/cases/UKHL/1973/2.html ''Wickman Machine Tool Sales Ltd. v L. Schuler A.G.'', [1974<nowiki>]</nowiki> AC 235]). The three types of terms are as follows ([https://www.bailii.org/ew/cases/EWCA/Civ/1961/7.html ''Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd'', [1962<nowiki>]</nowiki> 2 QB 26, [1962<nowiki>]</nowiki> 1 All ER 474] at para 49):  

=== 3. Innominate Terms ===

The ''SGA'' applies to lease contracts if the goods are leased for personal, family, or household purposes.

The vital part of the ''SGA'' for the consumer is ss. 16 – 19, which '''may''' add statutory conditions and warranties to a contract for the sale of goods, subject to the possibility of exclusion (see [[{{PAGENAME}}#2. Exemption from Implied Contractual Terms | 2: Exemption from Implied Contractual Terms]] below).

* The buyer expressly or by implication makes known to the seller the particular <u>purpose</u> for which the goods are required, so as to show that they rely on the <u>seller’s skill and judgment</u>; and  

* The goods are of a description which it is in the course of the <u>seller’s business</u> to supply;  

To establish a claim under s 18(a) of the ''SGA'', three factors must be satisfied on a balance of probabilities ([https://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1412/2012bcsc1412.html?autocompleteStr=Nikka%20Traders%20&autocompletePos=1 ''Nikka Traders Inc v Gizella Pastry Ltd'', 2012 BCSC 1412] at para 65):  

The “Patent and Trade Name Exception” is of little effect since the courts have interpreted it narrowly. The issue remains one of reliance, and the trade names exception will apply only where the buyer’s use of the patent or trade name indicates a lack of reliance upon the seller. In other words, the exception only applies where a consumer decides to purchase goods solely because of the trade name of a product. See [https://www.canlii.org/en/bc/bcca/doc/2002/2002bcca78/2002bcca78.html#par38 ''Wharton v Tom Harris Chevrolet Oldsmobile Cadillac'', 2002 BCCA 78] at paras 38-39.

Under s 18(b), if: (1) goods are bought by description, and (2) from a seller who deals in goods of that description, the seller is bound by an implied condition that the goods are of merchantable quality, except to the extent that the buyer has examined them.  

===== (1) The Concept of Merchantable Quality =====  

The concept of merchantable quality is difficult to define. A commonly used test, the '''price abatement''' test, asks whether a reasonable buyer, informed of the actual quality of the goods, would buy the goods without a substantial abatement of price (''BS Brown & Son v Craiks Ltd'', [1970] 1 All ER 823 (HL)). If the informed reasonable buyer would not buy without a substantial abatement of price, unmerchantable quality is inferred, and repudiation may be available.  

Any damage to goods beyond the de minimus range, may be said to render the goods of unmerchantable quality (''[https://www.canlii.org/en/sk/skca/doc/1925/1925canlii154/1925canlii154.html?autocompleteStr=International%20Business%20Machines%20v%20Shcherban&autocompletePos=1 International Business Machines Co Ltd v Shcherban]'', [1925] 1 DLR 864 (Sask CA), [1925] 1 WWR 405).  

Section 18(b) applies to the sale of used goods as well. However, there is a lower standard here: the goods must be usable but not perfect. A minor defect does not necessarily render the goods unmerchantable. See ''Bartlett v Sidney Marcus Ltd'',[1965] 2 All ER 753 (Eng CA).  

 

In any case, where the buyer seeks recovery of the full purchase price based on the implied condition of merchantable quality, he or she should be cautioned that continued use of the goods in question seriously weakens the argument that the goods are not fit for a particular purpose, or are not of merchantable quality.

 

Section 18(b) only applies to a sale by description. This is usually not a problem since most sales are by description, except where the buyer is clearly buying a particular item on the basis of qualities known to him apart from any representations.  

In addition to requiring that the sale be by description, section 18(b) also requires that the seller must “deal in goods of that description.” In ''[[2011 BCSC 927|Hartmann v McKerness]]'', 2011 BCSC 927, a seller sold a watch by description over eBay and was sued for violating the implied condition of merchantability in section 18(b). In paragraphs 43-47, the BC Supreme Court held that the eBay seller was not a seller “who dealt in goods of that description” for the purpose of 18(b), as he did not specialize in watches, but rather sold a large variety of goods.

 

===== (4) Effect of Examination by the Buyer =====

If the buyer examines the goods, there is no condition of merchantable quality for defects that the examination ought to have revealed. However, if the average person would not have been able to spot the defect during the exam, the condition of merchantability remains. Hence, it must be determined: 1) whether the buyer examined the goods, and 2) whether the defects ought to have been revealed by the exam. There is no obligation on the buyer to make a reasonable examination, or even any examination.  

 

The goods must be durable for a reasonable period of time with regard to their normal use (s 18(c)).  

For a contract to be a sale by sample, there must be “an express or implied term in the contract to that effect” (s 19(1)).

Three implied conditions of a sale or lease by sample are set out in s 19(2):  

*i) the bulk must correspond with the sample in quality;  

*ii) the buyer or lessee must have a reasonable opportunity of comparing the bulk with the sample; and

*iii) the goods must be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the sample.  

The last condition can only be relied upon where the defect would not have been apparent on a hypothetical reasonable examination. Contrast this with the s 18(b) condition of merchantability for sales by description, where the buyer’s '''actual''' examination is considered.

Based on section 20, Private sellers or lessors, as opposed to retail sellers or lessors, can explicitly exempt themselves from ss 17, 18, and 19. A retail sale is defined as one in the “ordinary course of the seller or lessor’s business.” This is subject to the ''contra proferentum'' rule that such a clause, if ambiguous, is read strictly against the person relying on it.  

Under s 20 of the ''SGA'', retailers of '''new goods''' cannot exempt themselves from the implied terms in ss 16 – 19, and any clause that attempts to do so is void, subject to the exceptions listed below.

A seller who is making a retail sale in the ordinary course of business can only expressly waive ss 16 – 19 if:  

*i) the goods are used (except s 16, which also applies to used goods);  

*ii) the purchaser, even a private individual, intends to resell the goods;  

*iii) the lease is to a lessee for the purpose of subletting the goods;  

*iv) the purchaser intends to use the goods primarily for business;  

*v) the purchaser is a corporation or commercial enterprise; or  

*vi) the seller is a trustee in bankruptcy, a liquidator, or a sheriff.  

Where a commercial dealer includes a disclaimer clause exempting the transaction from the provisions in ss 16 – 19, the clause is void, unless one of the exceptions applies.

Amendments to the ''SGA'' in 1994 created the buyer’s lien, which gives priority to a consumer who has paid some or all of the purchase price of the goods, but has not taken possession, before the seller goes into receivership or bankruptcy.

A seller’s rights arise from a breach of the buyer’s obligations. The buyer has two main obligations: (1) to pay the price, and (2) to take delivery. A breach of either of these obligations does not necessarily give rise to all of the seller’s possible remedies as outlined below. One must consider the severity and consequences of a breach to determine the seller’s remedy. The seller has two classes of rights under the ''SGA'': (1) personal rights against the buyer for price or for damages, and (2) ''in rem'' rights to the goods.  

This action arises when the property in the goods has passed to the buyer, and the buyer neglects or refuses to pay; or where the price is payable on a certain day and the buyer neglects or refuses to pay. This remedy involves the seller seeking the price of the goods.  

This is an alternate remedy to action for the price. The prima facie rule for damages is set out in s 53(3). The seller is entitled to be paid an amount equal to the difference between the negotiated price and the market price for the goods. However, this rule may be displaced where there is either no available market, or the goods are unique, in which case the damages will be assessed based on the estimated loss incurred by the seller stemming from the breach (s 53(2)).  

==== b) Seller’s In Rem Rights ====

To get an unpaid seller’s possessory lien (the right to retain the goods until the whole of the price has been paid), the seller must be an “unpaid seller” as set out in s 42. An unpaid seller may retain the goods beyond the specified delivery date. Where goods are to be delivered in installments under a single contract, the seller may exercise a lien over any part of the goods if any part of the price is outstanding (s 45). If the goods are sold on credit, the seller is not entitled to a lien, except under ss 44(1)(b) and (c) where the term of credit has expired, or where the buyer is insolvent.  

*a) the price is paid or tendered (s 44(1));  

*b) delivery is made to a carrier or bailee (not the seller’s agent) without reserving a right of disposal (s 46(1)(a));  

*c) the buyer or his or her agent lawfully obtains possession (s 46(1)(b)); or

*d) there is a waiver (s 46(1)(c)).  

This right can be exercised in accordance with s 47 when the seller is unpaid, the buyer is insolvent, and the goods are in the hands of a carrier.  

===== (3) The Right of Resale: ss 43(1) and 51 =====

*a) if the goods are perishable, or if notice of an intention to resell is given to the buyer by the unpaid seller, and the buyer does not pay within a reasonable time. In this case, the seller may resell the goods and recover damages from the original buyer for any loss from the breach of contract (s 51(3));

*b) if the seller has expressly reserved the right to resell in the contract (s 51(4));  

Note that if the buyer defaults, and the contract provides that the seller may resell the goods in that situation, the seller may still claim damages, (s 51(4)).

Section 14 states that, unless there is a different intention, stipulations as to time of payment do not go to the essence of a contract of sale (i.e. they are not conditions).  

Under s 34, if the seller delivers a quantity of goods either greater or lesser than that contracted for, the buyer may either reject the entire shipment, or accept the quantity delivered and pay accordingly, or, if the quantity is greater than ordered, reject the balance over that ordered. There is likely an exception when the difference in quantity is so slight as to be ''de minimis''.  

Under s 12, where a contract is silent as to price, the court will infer a reasonable price, but where the price would be too vague for the court to infer, there may be no consensus upon an essential term, and therefore no contract.  

Under s 35(1), a buyer need not accept delivery by installments unless that is agreed to. Where a contract is for separately paid installments, circumstances and construction of the contract determine whether a breach allows for repudiation of the entire contract, or only a right to sue for damages regarding the defective installment.

Sections 52 – 57 of the ''SGA'' cover actions for breach of contract. Common law and equitable remedies may exist as well.

Generally, the object of damages is to put the injured party in the same position he or she would have been in had the other party performed their contract obligations (“expectation damages”).  

At common law, to be awarded damages for breach of contract, those damages must be in the reasonable contemplation of both parties at the time the contract was formed. If the damages are too remote, they may not be recoverable under contract law. Both sides must be aware of the circumstances at the time of formation that would lead to damages if an obligation went un- or underperformed. This may encompass either implied circumstances, if reasonable, or special circumstances that were communicated at the time the contract was formed (''Hadley v Baxendale'' (1854), 156 ER 145 (Eng Ex Div)). Damages that were substantially likely and easily foreseeable at the time the contract was formed will be deemed to have been in the reasonable contemplation of the parties. Once the '''type''' of loss is found to have been foreseeable, the extent of damages can be recoverable even if the '''degree''' of damages is so extensive as to be unforeseeable.  

Parties have a common law '''duty to mitigate''' their damages from the date of the contractual breach. In a contract for the sale of goods, this means buying the goods elsewhere and suing the party who breached the contract for the additional amount paid for the goods over the contract price. In a contract for services, such as roof repair, this means hiring another party to do the repairs and suing the original party for the difference in price paid, if any. There is some jurisprudence that suggests when it is not feasible for a party to mitigate, they are excused from doing so. See ''[https://www.canlii.org/en/ca/scc/doc/2012/2012scc51/2012scc51.html?resultIndex=1 Southcott Estates Inc v Toronto Catholic District School Board]'', 2012 SCC 51.

In a contract for the sale of goods governed by the ''SGA'', the standard measure of damages is “the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach” (s 56(2)). Where the warranty pertained to quality of the goods, the loss will be calculated as the difference between the cost of obtaining the goods in the market and the contract price of the goods (s 56(3)). Thus a buyer who has negotiated a good deal can recover the difference between their expected savings and the market price. Section 57 states that s 56 does not affect recovery of special damages or interest, if otherwise available by law. The common law governs the recovery of special damages. For special damages to be recoverable, both parties must have been made aware of their possible incursion at the time of formation of the contract.

For a breach of condition, the aggrieved party can affirm the contract and, in the future, seek damages, or terminate the contract, discharging future obligations but still allowing recovery for damages. The offending party has “repudiated” the contract by acting in a way that expresses the intention to no longer be bound by the contract, and the party aggrieved can accept or reject that repudiation.  

The buyer’s primary right for a breach of a condition is to repudiate the contract and reject the goods. This can normally be exercised regardless of the actual quantum of loss or benefit to the parties. However, the right to repudiate may be lost under the ''SGA''.

In the case of a rightful repudiation, the buyer may refuse further payment, and in addition, seek either damages or restitution from the seller. The consequence of wrongful repudiation termination (the buyer repudiates when they did not have the right to do so; e.g. because the seller breached a warranty rather than a condition) is that the buyer is liable to the seller for their own breach of condition. So, it is important to determine whether or not repudiation is justified '''before''' taking any action, by determining the nature of the term the seller breached.  

Section 15(4) specifies two circumstances where, unless the parties contract otherwise, any breach of condition (including the implied statutory conditions in ss 16 – 19) must be treated as a breach of warranty: (1) in a contract for sale of specific goods when property has passed to the buyer; or (2) where the buyer has accepted the goods, or part of them.  

When s 15(4) is combined with ss 23(1) and (2), the result is that, for a sale of specific goods in a deliverable state, the buyer loses the right to repudiate as soon as the contract is made.  

However, courts may avoid this harsh result by: (1) implying a term allowing the buyer to accept the goods and later reject them: see ''[http://canlii.ca/t/g7bg3#par22 Polar Refrigeration Service Ltd v Moldenhauer]'' (1967), 61 DLR (2d) 462 (Sask QB) at para 22; (2) finding a total failure of consideration: see ''Rowland v Divall'', [1923] 2 KB 500; (3) finding the intent for property to not pass immediately (ss 22 and 23(1)); (4) finding that the goods are not specific; or (5) finding ss 23(3), (4) or (5) to be applicable.

For a sale of unascertained goods, the buyer loses the right to repudiate upon acceptance of the goods (s 15(4)).  

Under s 38, if the buyer has not previously examined the goods, there is no acceptance unless and until the buyer has had a reasonable opportunity to examine them. However, under s 39 a purchaser has accepted the goods once (1) the seller is notified by the buyer of acceptance, (2) the goods are used in a manner inconsistent with the seller’s ownership (e.g. reselling the goods to a third party), or (3) the goods are retained without being rejected within a “reasonable time”.  

The court determines a reasonable time for inspection and possible rejection by looking at all the circumstances surrounding the transaction.

As mentioned above, the innocent party has a choice in the face of a breach of condition. They may (1) accept the repudiation, terminate the contract, and sue for damages right away, or (2), if they have a legitimate interest in doing so, may affirm the contract, wait for the date of performance, and sue for damages for any defect in performance at that date. (In many cases involving one-time sales, the performance date will be contemporaneous with the date of the payment/delivery/breach, rendering this a moot point.)

In deciding whether or not to affirm a contract in order to assess damages at a later date, the client should consider the implications of their duty to mitigate the loss. In a sale of goods, purchasing the goods from someone else can often mitigate damages; generally no special interest exists in purchasing the particular goods from a particular vendor.

If an aggrieved party does decide to affirm the contract, specific performance may be available for a contract of sale for specific goods. Specific performance is a court order compelling performance of a contract in the specific form in which it was made (''SGA'', s 55). In certain circumstances, it may be available at common law for unascertained goods (''Sky Petroleum Ltd v VIP Petroleum Ltd'', [1974] 1 WLR 576, [1974] 1 All ER 954). Specific performance is a discretionary equitable remedy and will only be granted if damages are inadequate; for example where the goods are unique or otherwise unavailable. Section 3(1)(c) of the ''Small Claims Act'', RSBC 1996, c 430, provides that the Small Claims Division of the Provincial Court of British Columbia can grant specific performance in an agreement relating to personal property.

The remedy of rescission seeks to undo a contract. It is available for, among other things, misrepresentation. See section IV.G for a fuller discussion of what constitutes misrepresentation. Rescission is an equitable remedy that sets the contract aside and seeks to restore the parties to their original, pre-contractual positions. This usually means return of the goods and return of any payment made. Because it undoes the contract, no damages can be claimed beyond the restitution necessary to return the parties to their pre-contractual positions. Delay in bringing the action or acceptance of the goods may bar rescission.