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

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.  

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).  

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 ''Hartman 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.  

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)).  

*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:  

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.  

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.  

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.  

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.

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 his or her 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.

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 he or she 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 his or her 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.  

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.

As mentioned above, the innocent party has a choice in the face of a breach of condition. He or she may (1) accept the repudiation, terminate the contract, and sue for damages right away, or (2), if he or she has 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 his or her 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.