Contracts for Sale of Goods (11:III)

From Clicklaw Wikibooks

Generally, consumers have no right to return goods or cancel a contract simply because they decide the goods are no longer wanted or needed. However, it is often only after the goods are purchased that damages or defects are discovered. In such cases, a purchaser may have a remedy if it can be shown that a term of the contract has been breached. It may also be the case that the business has a refund policy of which the consumer can take advantage.

This section outlines the protection that consumers have against the problems that may occur after a purchase has been made. To understand one’s legal rights, it is necessary to know the differences between terms, representations, and mere puffs.

A. Identifying and Classifying the Terms of a Contract

A term of the contract is a promise made by the manufacturer or seller regarding the character or quality of an article. It can be either written or oral. Written terms will generally be straightforward to identify. Whether an oral statement can be properly considered a term may be less obvious. Not everything said by the seller will be a term of the contract. To be a term, the statement must be a specific promise that makes up part of the contract.

If a statement is not a term, it will be either a representation or a puff. A representation is a material statement of fact made to induce the other party to enter the contract. A puff is vague sales talk not meant to have any legal effect. For example, a statement that, “This is a wonderful car,” would be a puff.

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. The difference between the three types of terms is as follows (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, [1962] 2 QB 26, [1962] 1 All ER 474 at para 49):

1. Condition

A condition is a term that is so essential to the agreement that its breach is considered to be a substantial failure to perform the contract. A breach of a condition is said to go to the root of the contract. In other words, the breach is such that it deprives the innocent party of “substantially the whole benefit” of the contract. Breach of condition entitles the buyer to terminate any further obligations under the contract and sue for damages. The aggrieved party, if aware of the impending breach, could accept the repudiation of the other party and terminate the contract, ending all future obligations except for the damages that stem from non-performance. Or, the aggrieved party could not accept the repudiation, and may wait for the future breach to occur before pursuing damages (e.g., if they think that there is still a chance that the contract will be performed).

2. Warranty

A warranty is a term of the contract that is not so essential. A warranty must be performed, but its breach is not considered to go to the root of the contract. This meaning of warranty should not be confused with other uses of the word such as in “one-year maintenance warranty”. When a warranty is breached, the innocent party must continue to perform its own obligations under the contract but can sue for damages.

3. Innominate Terms

Innominate terms arise out of the common law, but unlike conditions and warranties, they are not mentioned in the SGA. An innominate term is one that may be treated as either a condition or a warranty, depending on how severe the consequences of a breach turn out to be. Whether an innominate term is a condition or a warranty is for a judge to decide.

NOTE: for certain terms the SGA specifies whether they are conditions or warranties. The SGA also implies some terms as conditions or warranties even if they are not expressly included in the contract (see Section C. Provisions of the Sale of Goods Act below).

B. Determining if the Sale of Goods Act Governs the Contract

The SGA applies to transactions that can be characterized as contracts for the sale of goods. Any transaction that is not for the sale of goods does not receive the benefit of the SGA. Hence, the subject matter of the transaction must be goods and the essential elements of a contract must also be present.

1. Goods

Goods include all personal chattels, other than “things in action” (e.g. cheques, insurance policies, money). Things attached to real property, which the parties agree to sever before sale, or under the contract of sale, are included (s 1). Note that registration in the Land Title Office may be advisable to avoid possible characterization of the goods as real property or fixtures, so that the SGA may apply to the transaction.

According to ss 1 and 9, the SGA covers existing and future goods. Future goods are goods to be manufactured or acquired by the seller after the making of the contract of sale.

According to ss 1 and 6(1), general property or title in the goods must pass – not merely a special property or interest. Thus, for example, a contract of bailment is not covered.

Contracts for skill and labour alone are not contracts for the sale of goods, so the SGA does not apply to them. However, if a contract is for labour and materials, then the SGA could apply to the materials (e.g. a contract to paint a house with paint supplied by the contractor).

2. Contract of Sale

According to s 6(1), the SGA applies only where the purchaser agrees to buy goods with money as consideration. Hence gifts, barters, or exchanges are not subject to the SGA’s implied conditions and warranties. However, a court may avoid this result by finding two separate contracts rather than a barter, as long as the consideration, whether money or goods, has its value measured in monetary terms: see "Messenger v Green", [1937] 2 DLR 26 (NSSC). Thus, if a total price is attached, there will be a sale, even if payment is in goods.

According to s 6(3) of the SGA, a contract of sale may be absolute or conditional. If the contract is subject to some condition to be fulfilled later, it is called an agreement to sell.

Section 8 of the SGA provides that the contract may be either written or oral.

3. Lease Contracts

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

C. Provisions of the Sale of Goods Act

Sections 16 – 19 of the SGA imply many terms into contracts for the sale of new items. Section 20 governs when these implied terms can and cannot be expressly waived by the seller. The SGA also defines these terms as conditions or warranties, thus defining the remedies available if breached.

1. Implied Conditions and Warranties

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 Section III.C.2: Exemption from Implied Contractual Terms).

a) Implied Condition of Title: s 16(a)

Section 16(a) provides that, subject to contrary intentions, there is an implied condition that the seller has the right to sell the goods. In an agreement to sell goods at a later date, there is an implied condition that the seller will have the right to sell the goods at the date the buyer takes possession.

b) Implied Warranty of Quiet Possession: ss 16(b) and (c)

Sections 16(b) and (c) provide implied warranties that in the future the buyer will enjoy undisturbed possession of the goods, free from any liens or other encumbrances in favour of third parties that are unknown to the buyer at the time the contract is made. If a secured creditor subsequently makes claims against the buyer, the buyer can sue the seller for damages resulting from breach of this implied warranty. The quantum of damages would likely be the amount of the liens outstanding so that the buyer could pay them off.

c) Implied Condition of Compliance with the Description: s 17

Under s 17, when goods are sold by description, there is an implied condition that they correspond to the description.

Most sales will be sales by description. The notable exception is where a buyer makes it clear that they are buying a particular item on the basis of its qualities known, independent of any representations by the seller. Generally, where a buyer purchases a product because of a vendor’s representations about its features (which may have been offered either gratuitously or in response to the buyer’s questions), this will be a sale by description, with the vendor’s representations forming part of the description. Catalogue purchases and purchases of products sealed in containers by the manufacturer are also sales by description.

NOTE: Specific (as opposed to unascertained) goods are goods that, at the time the contract is made, are agreed to be the only goods whose transfer will satisfy the contract. For example, in a sale of a new chair, if the parties agree that a specific chair is to be the subject matter of the contract, the sale has been of specific goods. So, if the seller attempts to deliver a different chair, which is identical in every way, except that it is not the actual chair agreed upon, the seller has breached the contract. Unascertained goods are goods that are agreed to be the subject matter of the contract at a point in time after the contract is made. For example, in the sale of a new chair, if the parties agree only on a specific type of chair, but do not specifically single out any individual chair, the sale has been of unascertained goods.

Although s 17 cannot be excluded in retail sales of new goods, it may be excluded in private or commercial sales, subject to the contra proferentum rule. The contra proferentum rule states that a contract, if ambiguous, is construed as against the party who wrote it. Where a standard form contract is used, it is construed as against the party who offered it.

A sale by description may also raise s 18(b) issues (see Section III.C.1.e: Implied Condition of Merchantable Quality).

d) Implied Condition of Fitness for Buyer’s Purpose: s 18(a)

Under s 18(a), if:

  • i) the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required, so as to show that they rely on the seller’s skill and judgment; and
  • ii) the goods are of a description which it is in the course of the seller’s business to supply;

then there is an implied condition that the goods are necessarily fit for such purpose. An exception occurs where the contract is for the sale of a specified article under its patent or trade name, in which case there is no implied condition as to its fitness for any particular purpose.

To establish a claim under s 18(a) of the SGA, three factors must be satisfied on a balance of probabilities (Nikka Traders Inc v Gizella Pastry Ltd, 2012 BCSC 1412, para 65):

  1. that the buyer has made known to the seller the purpose for which it requires the goods;
  2. the dissemination of that purpose shows that the buyer relies on the seller’s skill or judgment; and
  3. the goods are of a description that is in the course of the seller’s business to supply.

Furthermore, the courts have held that the seller need not know the specific purpose for which the buyer wishes to use the goods. Knowledge of a broad purpose is sufficient. For example, in Sugiyama v Pilsen, 2006 BCPC 265, para 71, the court held that section 18(a) provides a warranty that a car is “a reliable vehicle for use in driving in safety on the roads.” However, if the buyer wishes to use the goods for an unusual or peculiar purpose, this must be indicated to the seller.

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 without any reliance on representations by the seller. See Wharton v Tom Harris Chevrolet Oldsmobile Cadillac, 2002 BCCA 78, paras 38-39.

e) Implied Condition of Merchantable Quality: s 18(b)

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 (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.

(2) Sale by Description

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.

(3) Seller who Deals in Goods of that Description

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 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.

(5) Implied Condition of Reasonable Durability

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

f) Implied Conditions in Sales by Sample: s 19

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.

2. Exemption from Implied Contractual Terms

a) Private Seller

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.

b) Commercial Seller

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.

3. Buyer’s Lien

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.

4. Buyer’s Obligations and Seller’s Rights

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.

a) Seller’s Personal Rights

(1) Action for the Price: s 52

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.

(2) Damages for Non-Acceptance: s 53

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

(1) Unpaid Seller’s Lien: ss 43 - 45

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.

The right of lien may be lost if:

  • 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)).
(2) The Right of Stoppage in Transit: ss 47 - 49

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

The seller has the right to resell:

  • 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)).

5. Other Sale of Goods Act Provisions

a) Stipulations as to Time

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).

b) Stipulations as to Quantity

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.

c) Stipulations as to Price

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.

d) Installments

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.

D. Remedies for Breach of Contract

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

1. Damages Generally

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 Southcott Estates Inc v Toronto Catholic District School Board, 2012 SCC 51.

2. Breach of Warranty

For a breach of a term of the contract that is a warranty, the only available remedy will be damages. The innocent party must continue with the contract while seeking damages.

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.

3. Breach of Condition

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.

a) 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.

(1) When a Breach of Condition is Treated as a Breach of Warranty

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.

(2) Specific Goods: Upon Passage of Property

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 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.

(3) Unascertained Goods: Upon Acceptance

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.

b) Damages for Breach of Condition

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.

c) Specific Performance

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.

4. Rescission

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.

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by the Law Students' Legal Advice Program on August 15, 2019.
© Copyright 2020, The Greater Vancouver Law Students' Legal Advice Society.

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