CIPS
Level 6
SUGGESTED SOLUTIONS TO
PRACTICE QUESTIONS
Legal Aspects in
Purchasing and Supply
CHAPTER 24
Suggested Solutions to
Practice Questions
Setters
This involves the familiar problem of the ‘battle of the forms’. As is often the case, the nub of the
problem is ‘who fired the last shot?’. Instead of being distracted by the confusing (though realistic)
early negotiations you should focus on the final stages of the process, on the ground that a counteroffer automatically causes an earlier offer to lapse.
Although the sequence of quotations, orders and acknowledgements is confusing, it is possible
to simplify matters by proceeding to the final stage of negotiations to determine when a valid
offer and acceptance came into existence.
In this case it is reasonably clear that Gregg’s ‘standard form of acknowledgement’ constitutes
a counter-offer which causes the offer in Setters Ltd’s order form to lapse. (The fact that
Gregg’s acknowledgement refers to ‘accepting’ the order should not obscure the real issue,
which is that Gregg is here making a new offer, not accepting the contract on Setter’s terms.)
This offer of Gregg’s appears to be accepted when Setters first of all signs for the
components and then proceeds to use them in his manufacturing process.
On the above analysis, clause 26 in Setters Ltd’s standard terms has no legal effect because it
has not been incorporated in the contract. Its attempt to invalidate the terms of any counteroffer has no legal effect. The situation was similar in the leading case of Butler Machine
Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd (1979). In that case too the
standard terms of one party (the seller) insisted on compliance with their own terms; but this
term was rejected by the buyer’s counter-offer and the seller was therefore held to have
waived it.
Conclusion: the contract has been concluded on Gregg’s terms.
Implied terms
You should illustrate your answer to the first part by reference to decided cases and appropriate
statutes.
(a)
(i)
There are two circumstances in which the courts will imply terms into a
contract.
•
•
To take account of the legal nature of the contract (‘terms implied in
law’)
To give business efficacy to the contract (‘terms implied in fact’)
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Legal Aspects in Purchasing and Supply
The distinction was made clearly in the case of Lister v Romford Ice and
Cold Storage Co Ltd (1957): ‘[an implied term] such as the nature of the
contract must call for, or as a legal incident of this kind of contract’ [ie a term
implied by law] and ‘an implied term such as might be necessary to give business
efficacy to the particular contract’ [ie a term implied in fact].
Terms implied in law
These terms are implied because they form a necessary part of the type of
contract concerned. They are implied as a matter of policy, and not just because
they are what the contracting parties intended.
A leading case in this category is that of Liverpool City Council v Irwin
(1977). Certain tenants in a block of council flats withheld their rent payments in
protest at the poor condition in which the block was maintained, even though
their rental agreements specified no obligation on the landlord in this respect. It
was held that the nature of the contract was such that a term of this kind must
be implied: the landlord must be obliged to maintain the common parts of the
block in reasonable condition.
In this category the term implied must be a reasonable one, as well as being
necessary in this type of contract. Reasonableness alone, however, is not
sufficient.
Other examples in this category might include an implied term that an employee
will render loyal service to his employer, and that he will use reasonable care and
skill when performing his duties: Lister v Romford Ice and Cold Storage
Ltd (1957). A final example is terms implied into a contract as arising out of
custom in the particular area or industry: Hutton v Warren (1836).
Terms implied in fact
Referring back to the earlier quotation from the Lister case, these are terms
implied into a contract in order to give it ‘business efficacy’. The leading case is
The Moorcock (1886). As was explained by Bowen LJ in that case:
‘An implied warranty… is in every instance founded on the presumed intention
of the parties and on reason. It is the implication which the law draws with the
object of giving efficacy to the transaction and preventing such a failure of
consideration as cannot have been within the contemplation of either of the
parties’.
In the case concerned, the defendants (wharf owners) allowed the claimants to
load and unload at their wharf. The claimant’s ship was grounded at low water
and damaged by settling on a ridge of hard ground. It was held that there was an
implied obligation upon the defendants to ensure that the mooring would be
reasonably safe.
(ii)
2
Terms are also implied into contracts by statute. This is done in some cases to
protect the weaker party (eg in contracts between consumers on the one hand
and traders on the other), and in others as a means of filling gaps in the
agreements between parties.
Suggested Solutions to Practice Questions
An example within the first purpose would be the implied rights of a buyer under
the Sale of Goods Act 1979. An example within the second purpose would be s
29 SGA 1979, which states that unless otherwise agreed the place of delivery
shall be the seller’s place of business.
(b)
The extent to which parties can exclude or vary implied terms depends on whether
they are implied by the courts or by statute.
In the former case, the implied terms are automatically excluded or varied whenever
the parties agree something different. This is because the courts will not in such a case
overrule an express term.
A statutory implied term (such as the example of s 29 SGA 1979 above) may also be
varied if it is only intended to fill a gap in the parties’ agreement. But it is usually not
possible to exclude or vary an implied term designed to give protection to a weaker
party, unless it results in improving the weaker party’s position. For example, an
employer is obviously allowed to grant a longer period of notice to his employees than
the minimum specified in the Employment Protection (Consolidation) Act 1978.
Eric
The issue of exclusion is of great importance in purchasing contexts. When tackling questions in this
area it is often useful to structure your answer in three parts:
•
whether the term has been incorporated into the contract.
•
if it has been incorporated, whether it in fact covers the events described (ie is not too narrowly
drawn)
•
whether the clause is valid under the Unfair Contract Terms Act 1977 (UCTA 1977).
If the exclusion clause is valid, Eric will not be able to succeed in a claim against Actonna Ltd.
To establish whether it is valid, we need to consider:
•
whether it has been incorporated into the contract
•
whether it covers the events in question
•
whether it is valid under UCTA 1977.
Has the term been incorporated?
The question states that the term appears in Actonna’s printed terms of business. However,
we are not told where these printed terms are evident – on a signed agreement, on an
invoice delivered later or in some other place.
If the term appears on an agreement signed by Eric he will have difficulty denying that he
knew of and accepted it: L’Estrange v F Graucob Ltd (1934). His only recourse would be
to claim a misrepresentation by Actonna and there is no suggestion of this in the question.
If the term did not appear until delivery of the machine or (even later) on submission of the
invoice, then this may be too late for Actonna to rely on it. The point is that it must be
incorporated at the time the contract is made, and this is likely to have been somewhat
earlier, when Eric’s order for the equipment was accepted.
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Legal Aspects in Purchasing and Supply
A point that may be relevant in this context concerns any previous dealings between the
parties. If Eric has hired a carpet cleaner from Actonna in the past, or at least if he has done
so regularly or frequently, a court might hold that he was or should have been aware of the
term: Hollier v Rambler Motors (AMC) Ltd (1972). Actual notice to Eric is apparently
not a requirement; such constructive notice would be sufficient.
Does the clause cover the events in question?
The wording of an exclusion clause must, to be effective, be sufficiently inclusive as to cover
the events which arose as a result of the alleged breach. In Andrews Brothers
(Bournemouth) Ltd v Singer & Co Ltd (1934) the claimants agreed to purchase ‘new
Singer cars’ from the defendants. A clause in the agreement excluded ‘all conditions,
warranties and liabilities implied by statute, common law or otherwise’. A car sold by the
defendants to the claimants was not new, but had covered 550 miles. The claimants claimed a
breach of contract, and it was held that the defendants could not rely on the exclusion clause:
its wording referred to implied terms only, and not to the express contractual term that the
cars would be new.
This case also illustrates a weapon used by the courts to discourage excessive reliance on
exclusion clauses, namely the contra proferentem rule: any ambiguity in such a clause is
resolved against the person who seeks to rely on it. This was another issue raised in the
Rambler Motors case: a clause exempting a garage from damage to cars caused by fire did not
specify whether this included fires arising from the garage owner’s own negligence. In view of
the ambiguity the clause was construed contra proferentem and held to apply only to nonnegligent damage. For another example, see Houghton v Trafalgar Insurance Ltd (1954).
In the present case it appears that Actonna’s clause clearly does cover the damage to carpets,
but arguably does not cover the personal injury suffered by Eric. In fact, though, any possible
ambiguity about this latter point is resolved by UCTA 1977: see below.
Is the clause valid under UCTA 1977?
The Act restricts the use of exemption and limitation clauses where contracts are made in
the course of business.
To begin with, the Act specifies that liability for death or personal injury caused by negligence
cannot be excluded; if Eric’s rash is indeed caused by the carpet cleaner he will have a claim
against Actonna.
Liability for other loss caused by negligence can only be excluded where it is reasonable, and
the burden of proving reasonableness lies with the person seeking to rely on the clause. To
be reasonable, the clause must be ‘a fair and reasonable one to be included having regard to
the circumstances which were, or ought reasonably to have been, known to or in the
contemplation of the parties when the contract was made’: s 11(1) UCTA 1977. It is doubtful
whether a court would hold Actonna’s clause to be a reasonable defence against what
appears to be gross negligence.
Conclusion: Eric should be advised that he has a claim against Actonna in respect of his
personal injury, but that his claim in respect of damage to the office carpets is uncertain.
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Suggested Solutions to Practice Questions
Chris
This question concerns the nature of misrepresentation and the effect of a misrepresentation on the
validity of a contract. As often, a sensible approach is to begin by outlining the general principles of
law in the relevant area, and to apply them to the specific facts of the question. The facts in this case
bear some resemblance to those of Bisset v Wilkinson (1927), but there are important differences.
The facts of the question suggest that a misrepresentation may have occurred. For this to
affect the validity of the contract it must be shown that a material fact was misrepresented,
and that the misrepresentation induced the innocent party to enter the contract.
The remedies, if these conditions are satisfied, may consist of repudiation and/or damages,
depending on whether the misrepresentation is fraudulent, negligent or innocent.
•
‘Fraudulent’ means that the representor knew that what he said was untrue, or was
reckless as to its truth or falsehood.
•
‘Negligent’ means that the representor, without deliberate intent to mislead, takes
insufficient care as to whether his statement is false.
•
‘Innocent’ means that the representor is not at fault in making the misrepresentation,
perhaps because he had good grounds for believing it to be true, or because he had
relied on professional advice.
In general, silence does not amount to a misrepresentation, but there are circumstances
where it can do.
•
In contracts ‘of utmost good faith’ (uberrimae fidei), such as insurance contracts
•
Where what is left unsaid distorts the truth of what is actually said: Dimmock v Hallett
(1866).
•
Where a change in circumstances means that a statement true at the time it was made
subsequently becomes untrue: With v O’Flanagan (1936).
To affect the validity of a contract the misstatement must be one of fact, and not just of
opinion: Bisset v Wilkinson (1927). However, where an incorrect opinion is so at variance
with the facts that no reasonable man could have held it, the misstatement can amount to a
misrepresentation. This applies especially in cases where one party has particular knowledge
of facts, or particular expertise, which is not held by the other party. See the cases of Smith
v Land and House Property Corporation (1994) and Esso Petroleum Co Ltd v
Mardon (1976).
How do these general principles apply in the case of Chris and Casper?
•
The statement about annual turnover appears to be a statement of fact. The situation
appears to differ from that in Bisset v Wilkinson in that Casper has presumably been
close to the family business for many years and might be expected to know, not just
guess, so basic a fact about it, and one which could be checked so easily.
•
The statement appears to be material. Obviously the amount of turnover is a key factor
from a purchaser’s point of view, and the difference between £600,000 and £450,000 is
certainly material.
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Legal Aspects in Purchasing and Supply
•
It is a reasonable inference that Casper was induced by the statement to enter into the
contract. The elements of a misrepresentation therefore appear to be present.
What type of misrepresentation is it? At the very least it appears negligent. We are told that
Chris did not check it, even though it was surely a matter very easy to check. It could even
amount to fraudulent misrepresentation if Chris had no basis for believing the figure of
£600,000, but merely plucked a figure out of the air. The element of fraud is certainly present
in the circumstances described in the rider to the question, because now we can be sure that
Chris knew the statement to be false, and knew it at a time before the contract was made.
Do not be confused here by the case of With v O’Flanagan (1936). In that case a statement was
correct when made, but circumstances subsequently changed. Here, the statement has been untrue
from the outset, and all that has changed is Chris’s knowledge of its falsehood.
If the misrepresentation is negligent, then under the Misrepresentation Act Casper can
rescind (provided he acts quickly) or recover damages. Alternatively, he may sue in tort, but
then his remedy is limited to damages.
If the misrepresentation is fundamental, Casper can either sue in tort (for damages only) or in
contract (for rescission and for damages).
Conclusion: Casper should be advised that he has a strong claim for negligent misstatement,
and possibly fraudulent misstatement, against Chris.
Cockburn
This question deals with the important issue of economic duress as a vitiating factor in contract. You
should ensure that you are familiar with the leading cases in this area (all referred to in the solution
below) and try to grasp the rather subtle way in which this modern doctrine relates to, an dhas partly
supplanted, the older approach taken by the courts, which was based on the absence of new
consideration for extra amounts payable.
It is best to take these events in the order in which they occurred.
First, Cockburn’s announcement in January that it could not meet its contractual obligations
amounted to an anticipatory breach. Cockburn might argue, to the contrary, that the contract
was frustrated by reason of the strike, but this argument would probably fail: Davis
Contractors Ltd v Fareham Urban District Council (1956). In the Davis case it was
held that a shortage of labour might make a contract more onerous to perform, but that was
not sufficient to demonstrate frustration.
This being so, Brennan could have elected to sue Cockburn immediately the anticipatory
breach was announced, or could have waited until August 20X6 when the beach would have
been confirmed. It did neither, and as Cockburn has completed the work under the original
contract by the due date it is entitled to the original contract price agreed.
Next comes the question of the new agreement in January 20X6. Does this constitute a
binding contract? The answer will probably be ‘yes’ if Cockburn can show that additional
consideration was provided for the additional sum of £30,000. Certainly the promise to
complete the work by August 20X6 has economic value and may therefore potentially rank as
consideration for the new money. But in the case of Stilk v Myrick (1809) it was held that
the mere performance of a pre-existing contractual duty does not constitute valuable
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Suggested Solutions to Practice Questions
consideration, and this weakens Cockburn’s position: they were already bound under the
original agreement and have apparently offered nothing new.
However, Cockburn may argue that a new benefit has been conferred on Brennan, relying on
the somewhat similar circumstances of Williams v Roffey Brothers & Nicholls
(Contractors) Ltd (1990). In that case it was held that the defendants, in a similar position
to Brennan, obtained benefits from a promise of the type here made by Cockburn, namely:
•
avoiding a penalty for delay (as Brennan has avoided incurring liquidated damages to
Allenby)
•
avoiding the trouble and expense of engaging other people to complete the work.
This argument suggests that Cockburn may well succeed in a claim to obtain the £30,000, but
a further point to consider is that of economic duress. In the case of Atlas Express v Kafco
Ltd (1989) the claimants took advantage of the economic difficulties experienced by Kafco to
extort a higher price than the one originally agreed. The court held that this economic duress
vitiated the contract. A similar conclusion was reached in the case of North Ocean
Shipping Co Ltd v Hyundai Construction Ltd, the Atlantic Baron (1979).
The question therefore is whether the situation here is closer to the facts of the Williams
case or the economic duress cases.
•
A major factor in the Williams case was that the extra payments were proposed by
Roffey Brothers themselves. Although their motive was in part a feeling of economic
pressure, the solution proposed was their own and had not been imposed on them by
Williams. In the Atlas Express case, on the contrary, it was the claimant who
demanded extra payment from the reluctant defendants. In the present case the
question does not make it clear who proposed the extra £30,000, but there is as least
no positive suggestion that improper pressure was applied.
•
A further point is that Brennan apparently did not protest at the time and has not done
so until some months after the contract was completed. This delay may well be
construed as an affirmation of the contract by Brennan even if the court held that
economic duress did play a part. This was precisely the reasoning in the Atlantic
Baron case.
Conclusion: Cockburn should be advised that on the basis of the Williams case a claim for
the extra £30,000 is likely to succeed.
Aston
In part (a) you should explain the principle that, though restraint of trade clauses are prima facie
void, they will be upheld if they are reasonable and protect a legitimate interest. Reference to cases
such as Morris v Saxelby (1916) is then needed. In part (b) you should comment on the scope of
Aston’s proposed term (which seems unduly wide) in the light of your discussion in part (a).
(a)
The law takes an unfavourable view of efforts to restrict competition between
businesses, and regards agreements which have this effect with suspicion. Such
agreements are prima facie void as their effect is contrary to public policy.
Despite this, restraint of trade clauses are common in cases involving departing
employees or the purchase of a business. The courts recognise that there are legitimate
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Legal Aspects in Purchasing and Supply
interests which people are entitled to protect, and will uphold their efforts to do so,
provided they are reasonable. If a restraint of trade clause is held to be unreasonable,
the approach of the courts is to strike out the clause, but not the entire contract.
The legitimate interests recognised by the courts include, for example, the goodwill
attaching to a business purchased by a new owner. It is regarded as reasonable that a
purchaser should seek to retain the custom of those who have dealt with the business
in the past. This he will often attempt to do by means of a clause in the purchasing
agreement restricting the vendor’s ability to trade in competition.
Although this principle is regarded as reasonable, there are strict limits on how it may
be applied. A leading case in this area is Morris v Saxelby (1916), from which two
important principles emerged.
•
•
A restraint of trade clause ‘has never been upheld, if directed only to the
prevention of competition or against the use of the personal skill and knowledge
acquired by the employee in his employer’s business’. The implication of the
phrase ‘personal skill and knowledge’ is that it is not legitimate to prohibit a
person’s use of his general expertise; the restraint must be more specific, eg
forbidding the use of customer lists.
The clause must be reasonable in scope, ie both in geographical extent and in
timescale. In Morris v Saxelby a clause that applied to the whole of the UK was
held to be unreasonable; and in Esso Petroleum Co Ltd v Harper’s Garage
(Stourport) Ltd (1986) a clause extending for 21 years was held to be
unreasonable, while a period of four years and five months was held to be
reasonable.
Another area where care is needed in drafting a restraint of trade clause is the scope of
the clause in terms of the activities it prohibits. In Attwood v Lamont (1920) a tailor
was restricted, after leaving his employment, from trading as a tailor within 10 miles of
his former employer’s business. The clause was held to be void because it was so
drafted as to prohibit the ex-employee from doing other things besides tailoring. On
the other hand, in Home Counties Dairies Ltd v Skilton (1970) the court upheld a
clause prohibiting a milkman from selling ‘milk or dairy produce’; the milkman had
argued that the clause was invalid as it would have prevented him from serving dairy
produce in a grocer’s shop.
(b)
The clause in the question is a restraint of trade clause, and will therefore not be
enforceable unless it complies with the criteria described in part (a) above.
Legitimate interest. As the purchaser of Crompton’s business Aston has a legitimate
interest in protecting its goodwill. It is not unreasonable in principle to attempt this by
means of a restraint of trade clause.
Geographical area. The goodwill existing in the business presumably extends to a
significant area of Manchester (since a chain of shops is involved). However, it can
hardly apply to other towns where Aston owns retail outlets, and this part of the
clause should certainly be removed.
Time limit. Five years does not sound unreasonable in this context and derives
support from the Esso Petroleum case cited in part (a).
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Suggested Solutions to Practice Questions
Scope. The courts are likely to find it unreasonable if Crompton is prohibited not just
from working as a newsagent, but also from working in any ‘other retail trade’. The
decision in Attwood v Lamont suggests that this would be unenforceable and it is
advisable to remove it.
Discharge
There are three main circumstances in which a party to a contract may justifiably refuse to
perform his obligations.
(i)
The other party is in breach.
(ii)
The contract is frustrated.
(iii)
Both parties agree.
These are elaborated below.
The other party is in breach
Breach of contract occurs in various circumstances: a party may fail to complete his obligation
by the agreed time, or to the agreed standard and so on. Anticipatory breach is also possible:
this occurs where, before the due date for completion, one party indicates that he will not
perform his obligations.
Breach of contract does not automatically entitle the innocent party to retreat from his
obligations. For example, breach of a contract term which is merely a warranty (rather than a
condition) only entitles the innocent party to claim damages. A breach of a condition, on the
other hand, or an intention to abandon the contract altogether, will entitle the innocent party
to treat the contract as discharged.
The contract is frustrated
A contract is discharged by frustration where a frustrating event occurs (without fault on the
part of the contracting parties) after the contract has been formed. This only applies where
the parties have not foreseen and provided for what is to happen; if they have so provided by
a force majeure clause then this clause will govern.
Various situations have been held to constitute a frustrating event. In Taylor v Caldwell
(1863) a hall hired by the claimants was destroyed by fire (with no fault on either side) before
the date of a projected concert. In Krell v Henry (1903) a royal procession due to pass
through London was cancelled owing to the King’s illness; a contract to hire a room with a
view over the procession was held to be frustrated.
A contract is not frustrated simply because a change in circumstances makes it more onerous
to perform: Davis Contractors Ltd v Fareham Urban District Council (1956).
Both parties agree
Agreement to release a person from a contractual obligation is binding only if supported by
consideration. (Of course if both parties agree to abandon their obligations there is no
problem in this respect.)
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Legal Aspects in Purchasing and Supply
Jones and Taylor
This question concerns two situations in which a supplier claims to be unable to fulfil his contractual
obligations. In each case he makes this announcement before the due date for performance (which
raises the issue of anticipatory breach); and other issues involved are frustration and the importance
of ‘time is of the essence’.
Nothing in the question suggests that this is anything less than a binding contract between
Jones and Taylor, under which Taylor is required to perform his side of the bargain by 30
September.
The time of delivery does not automatically rank as a contractual condition, but it will do so if
either party specifies that time is of the essence. This is the situation in this case. (Indeed in
the case of Hartley v Hymans (1920) the court ruled that in ordinary commercial contracts
for the sale of goods, as this one appears to be, time is prima facie of the essence with
respect to delivery.)
With this as background, we can turn to consideration of the two specific situations.
(a)
The first question is whether the circumstances described amount to frustration of the
contract. The absence of a force majeure clause means that frustration is certainly a
possibility; it probably would not be if such a clause were present.
It is well established (Taylor v Caldwell (1836)) that certain extreme events, such as
destruction of the subject matter of the contract, enable a party to the contract to
claim frustration. However, the event in the question is not of such a dramatic nature,
unless (as is unlikely) Taylor can argue that this type of goods effectively no longer
exists – ie that no other supplier anywhere in the world produces this type of good.
Taylor may argue instead that sourcing from that particular supplier was an essential
element of the contract, agreed upon by both parties. He might rely in support of this
claim on such cases as Nickoll & Knight v Ashton, Edridge & Co (1901), in which
the parties agreed on the transport of a cargo by a steamship, the Orlando. When the
Orlando went aground and could not complete her journey, it was held that an implied
term of the contract specified carriage by this ship and no other; the contract was
therefore frustrated.
However, the message from cases like this appears to be that the parties must have
agreed on some exclusive method of performing the contract, and that performance by
any other method would be radically different from that which was envisaged. It is
difficult to see that this can be the case here. It may well be that performance of the
contract will now be more onerous for Taylor; but that is not sufficient to justify a
claim of frustration.
The most likely conclusion, therefore, is that Taylor is guilty of anticipatory breach of
contract. Jones then has the option of affirming the contract and waiting for the due
date of performance, or terminating the contract and claiming damages immediately.
The latter course appears to be advisable.
(b)
10
If delivery is late, as it will be in this case, the buyer is entitled to claim damages, but he
is not automatically entitled to refuse delivery and terminate the contract. However,
this additional right is available to the buyer if time is of the essence, because then
Suggested Solutions to Practice Questions
there is breach of a contract condition. As already argued, it appears clear in this case
that the time of delivery is a contract condition, and Jones is within his rights to
terminate.
One pitfall for the buyer in such a case is to continue pressing for delivery. By doing so,
he runs the risk that the court will regard him as having waived his original requirement
for prompt delivery. This was the case in Charles Rickards Ltd v Oppenheim
(1950), though that case also established the buyer’s right to re-assert that time is of
the essence by fixing a new date for delivery. In the present case, Jones should avoid
this complexity by stating immediately – as he apparently has done – that he is
terminating the contract. Taylor’s insistence on holding him to the contract will not be
upheld.
Denis
This is a fairly straightforward question on liquidated damages. Part (a) requires you to explain how
the courts distinguish between liquidated damages and penalty clauses; reference to decided cases,
particularly the Dunlop case, will give depth to your answer. In part (b) you need to decide whether
the clause in question really is a liquidated damages clause, and to explain the significance of your
decision to Denis.
(a)
Many contracts include a term providing that specified damages shall be payable in the
event of a particular type of breach. There are clear advantages in such a procedure,
particularly in avoiding uncertainty and in setting a known limit on the liabilities of the
parties. However, a distinction has been made by the courts between liquidated
damages clauses and penalty clauses. The significance of this distinction is that the
former are enforceable, while the latter are not. This principle is founded on the idea
that damages are compensation for loss; a threat designed to compel performance does
not qualify as ‘damages’.
The leading case in this area is Dunlop Pneumatic Tyre Co Ltd v New Garage &
Motor Co Ltd (1915). The following principles were laid down in this case.
•
•
•
The terminology used by the parties is not conclusive. It is a matter of
construction for the courts to decide whether a clause is for liquidated damages
or for penalty, regardless of how it is described in the contract itself.
A liquidated damages clause must be a genuine estimate in advance of the actual
loss that will be suffered in the event of the breach. The nature of a penalty
clause is quite different; it is intended to coerce performance from one of the
parties, and a sign of this would be if the amount stipulated is excessive
(‘extravagant and unconscionable in amount in comparison with the greatest loss
that could conceivably be proved to have followed from the breach’, as Lord
Dunedin resoundingly expressed it).
The burden of proof is on the party alleging that the clause is a penalty clause.
Apart from the criterion already mentioned (‘extravagant and unconscionable in
amount’), another indication that a clause is for penalty is when a single sum is fixed in
relation to any possible breach, even though some breaches would clearly cause more
loss than others.
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Legal Aspects in Purchasing and Supply
If a clause is construed as liquidated damages, then the amount specified in the clause is
what the injured party can recover, regardless of the amount of actual loss. If the clause
is construed as penalty, then it will not be enforceable and the injured party will have to
claim for damages. (Tricky legal questions might arise if the actual loss is assessed at a
higher amount than the penalty, but that would take us too far afield!)
(b)
Applying these general principles to the case of Denis, the reasoning would proceed
somewhat as follows.
Firstly, Denis is clearly in breach of contract and Irwin is entitled to claim damages. The
fact that the contract describes the sum payable as ‘liquidated damages’ is not
conclusive. Its true status can only be determined by looking at the relevant facts in the
case.
We are told nothing about the level of loss which Irwin has actually incurred, or might
have been expected to incur, so it is not clear whether the sum of £2,000 per day is
‘extravagant and unconscionable’. Nor can we assess whether such a sum could have
been regarded, when the contract was made, as a genuine pre-estimate of loss. All we
can say is that there is nothing in the question to suggest that the parties’ description of
the clause as ‘liquidated damages’ is unreasonable.
If, as is reasonable, we regard a two-day delay as a different and more serious breach
than a one-day delay, then the structure of the clause perhaps supports the claim that
the clause is for liquidated damages. On this reasoning, we do not have a single sum
fixed to cover every possible breach; that would be an indication of a penalty clause.
If Denis believes that the £14,000 was unfairly deducted, the onus is upon him to prove
that the clause is a penalty clause designed to coerce performance, rather than a
genuine pre-estimate of the loss that might be caused to Irwin Ltd. It will not be
sufficient to show that the actual loss caused was less than £14,000; the law recognises
the difficulty of forecasting such matters accurately, and provided that £14,000 was a
reasonable estimate of the loss that might arise, it will not matter that the actual loss
was somewhat less.
Conclusion: to recover the £14,000 Denis will need to show that the clause in
question was a penalty clause. The evidence of the question might suggest that he is
unlikely to succeed.
Arbitration
Although not a major part of your examination syllabus, arbitration is an area of relevance to
purchasing professionals, and you need an outline familiarity with the subject. This question first of all
tests your knowledge of the provisions of the Arbitration Act 1996 and then calls for a general
discussion of the advantages and disadvantages of arbitration compared with litigation. Note the
requirement to relate this specifically to contracts with overseas trading partners.
(a)
12
Arbitration is a method of settling legal disputes that has increasingly found favour in
comparison with the main alternative, litigation. It has been used very generally in the
settlement of international trading and maritime disputes, but its use is not confined to
such cases. Invariably, the terms of a contract incorporating arbitration will require that
disputes be referred for settlement to one of a number of institutions such as the
Suggested Solutions to Practice Questions
Court of Arbitration of the International Chamber of Commerce, or the London
International Arbitration Centre.
The courts are reluctant to intervene in cases where an arbitrator has been duly
appointed under the terms of a contract and has given his decision. However, in very
restricted circumstances such intervention is undertaken. Until the enactment of the
Arbitration Act 1996 (see below) the guidelines determining when an appeal to the
High Court would be allowed on a question of law were those laid down in the case of
Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema (1982). Unless all parties
were in agreement, the courts would only countenance such an appeal if the matter
was one which ‘could substantially affect the rights of one or more of the parties’: s 1
Arbitration Act 1979.
The Pioneer Shipping case established that this provision would be applied very
strictly, and this approach is now embodied in the Arbitration Act 1996. Under this
Act, before allowing an appeal on a point of law the court must be satisfied either that
the decision of the tribunal is obviously wrong, or that the question is one of general
public importance and the decision of the tribunal is at least open to serious doubt. In
addition, the court must be satisfied that it is just and proper in all the circumstances
for it to determine the matter.
(b)
A number of general advantages and disadvantages of arbitration can be identified,
compared with litigation. In addition, there may be particular issues relevant to
contracts of international trade.
General advantages of arbitration
•
•
•
•
•
The proceedings are held in private, avoiding publicity of issues which parties may
not wish to be broadcast.
The parties can choose the individual or organisation to resolve any dispute.
Arbitration is less confrontational than litigation. This is of importance if trading
partners wish to maintain relations after the dispute is resolved.
Arbitration is intended as a single ‘one-stop’ process, avoiding the endless appeals
that may protract litigation.
Arbitration should be speedier and less expensive than litigation.
General disadvantages of arbitration
•
•
Once the litigation procedure is complete, the outcome is final. Arbitration may
be subject to the intervention of the courts, though (as explained above) this will
happen only in exceptional cases.
The powers of arbitrators are less extensive than those of judges, which can
mean a greater possibility of delay in arbitral proceedings.
Issues particular to international trading
•
•
Arbitration clauses can specify the applicable law under which disputes will be
resolved, and can lay down the venue for hearings.
There may be procedural problems over the choice of jurisdiction, and
enforcement of the arbitrator’s decision may be complex because of
international law and conventions.
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Legal Aspects in Purchasing and Supply
Desmond
Part (a) is a straightforward ‘bookwork’ question, testing knowledge of the terms implied by SGA
1979. Part (b), as often happens in examination questions, is a case which turns out to depend for its
resolution on the general principles called for under part (a). This area is highly examinable.
(a)
Contracts for the sale of goods are regulated by the Sale of Goods Act 1979 (SGA
1979). All such contracts are deemed to include certain terms (‘implied terms’) defined
by the Act. Despite any other terms in the sale contract – whether expressly stated or
implied at common law – the implied terms have particular importance.
Firstly, the implied terms (with a minor exception) are defined as conditions, rather
than mere warranties. Breach by the seller therefore entitles the buyer to repudiate
the contract if he chooses, rather than merely claiming damages. Secondly, the implied
terms arise automatically which means that breach is relatively easy to prove. Thirdly,
exclusion or limitation of the implied terms is regulated by the Unfair Contract Terms
Act 1977 (UCTA 1977). This means in particular that they can never be excluded if the
buyer deals as a consumer. However, for purchasing professionals it is important to
note that this is not the case in commercial contracts, in which the implied terms are
often excluded or limited.
The implied term as to title is contained in s 12 SGA 1979, which states that ‘in the
case of a sale [the seller] has a right to sell and in the case of an agreement to sell he
will have such a right at the time when the property is to pass’. There is not necessarily
any breach if, at the time of contracting, the seller does not own the goods; it is enough
that he will have ownership when the time comes to transfer the goods to the buyer.
Section 12 also adds that the goods should be free from encumbrances, and that the
buyer should enjoy quiet possession of them.
The implied term as to satisfactory quality was originally enacted under the wording
‘merchantable quality’: s 14(2) SGA 1979. This has since been amended by the Sale and
Supply of Goods Act 1994 to incorporate the (apparently higher) standard of
satisfactory quality. The 1994 Act also includes a list of aspects of quality to be taken
into account when deciding whether this standard is satisfied.
This term enables a buyer to reject goods – not merely to claim damages – if they fail
to meet the appropriate standard. The force of this provision was weakened, until the
passing of the 1994 Act, by rather stringent rules on acceptance of the goods by the
buyer. In some cases, such as Bernstein v Pamsons Motors (Golders Green) Ltd
(1987) buyers were treated as having accepted obviously defective goods simply by
reason of having retained them for a short time. The 1994 Act gives buyers greater
opportunity to reject unsatisfactory goods.
The implied term as to description is contained in s 13 SGA 1979; the requirement is
that goods sold by means of description should comply with that description. If the
description is a detailed one, then the goods must comply in detail, and minor
variations (even if they are not material to the buyer’s purpose) will still entitle the
buyer to reject them: Arcos Ltd v Ronaassen (1933).
(b)
14
Relevant to Desmond’s case are the implied terms relating to description and
satisfactory quality.
Suggested Solutions to Practice Questions
With regard to the description, Baker has stated that the photocopier is ‘this year’s
latest model’, when in fact it is five years old. He has also stated that the copier is ‘as
new’ when in fact it has probably been used a great deal over a five-year life. In Beale v
Taylor (1967) a car was described as a ‘1961 model’. In fact it consisted of half a 1961
model joined to half of an earlier model, and it was held that this breached the s 13
condition.
As to satisfactory quality, the problems began ‘from the beginning’ of Desmond’s
ownership. The defects were therefore probably present at the time of sale, and this
condition too appears to have been breached.
Desmond’s remedy, as explained earlier, is to repudiate the contract – ie reject the
copier – and claim for damages. The only difficulty is the fact that he owned the copier
for three weeks before calling in the service engineer. If this is held to be evidence of
his having accepted the goods – and three weeks was the period in the Bernstein case
cited above – then the courts will not allow him to reject them. In the light of the more
favourable climate introduced by the 1994 Act, however, Desmond would probably
succeed in his claim.
Conclusion: Desmond should be advised that he has a strong claim to reject the
photocopier and claim damages.
David
This question raises a number of issues regarding delivery, acceptance and fitness for purpose under
SGA 1979. As usual, a suitable approach is to describe the relevant legal principles and then to apply
them to the facts of the case.
All statutory references below are to SGA 1979.
Under s 2(1) a contract for the sale of goods is ‘a contract by which the seller transfers or
agrees to transfer the property in goods to the buyer for a money consideration’. Clearly the
transactions described fall within this definition.
Under s 61 ‘delivery’ is defined as ‘the voluntary transfer of possession from one person to
another’. In the absence of express agreement, the place of delivery is generally the seller’s
place of business, but the facts of the question suggest that David and May have agreed on
delivery to David’s office.
Nothing is said in the question about an agreed time for delivery. Where no time has been
fixed, then by s 29(3) the seller is bound to deliver within a reasonable time. By s 29(5)
delivery must be made at a reasonable hour.
Where the seller delivers less than the full amount of goods contracted for, the buyer may
either reject the goods or accept the short delivery: s 30. A buyer does not have to accept
delivery by instalments unless he agrees to do so.
SGA 1979 provides that, unless they are specifically excluded, certain terms will be implied
into all contracts for the sale of goods. The relevant terms in the present case are:
15
Legal Aspects in Purchasing and Supply
•
that the goods are of satisfactory quality: s 14(2)
•
that the goods are fit for their intended purpose: s 14(3).
‘Satisfactory quality’ is the standard that a reasonable person would expect to find in the type
of goods supplied. The requirement as to fitness for purpose applies when the buyer makes
known his purpose to the seller and relies on the seller’s skill and judgement. Both
requirements arise when the seller is selling in the course of a business.
A buyer is deemed to have accepted the goods when either he intimates that he has done so
to the seller, or he does any act to the goods which is inconsistent with the seller’s continuing
ownership, or he retains the goods after the lapse of a reasonable time without intimating to
the seller that he has rejected them. Under s 34 the seller must give the buyer a reasonable
opportunity to examine the goods and the buyer is not deemed to have accepted them until
he has had this opportunity.
These principles can now be applied to the three cases in hand.
(a)
This is clearly a contract for the sale of goods. Delivery appears to have taken place
within the parameters laid down. We are not told that anything was agreed about the
time of delivery, but a delay of only one week appears reasonable, as does delivery to
office premises at 11.30 am.
However, the fax machine is inoperable and this appears to be a clear breach of the
implied term as to satisfactory quality. Nothing in the question suggests that this
implied term was excluded by the parties.
Since the term as to satisfactory quality is a contractual condition (not just a warranty),
breach entitles David to repudiate the contract and reject the goods, unless the breach
is so slight that this would be unreasonable. Since the fax machine is inoperable, it
appears that David is well within his rights to reject it.
This analysis would only be disturbed if it could be argued that David has already
accepted the fax machine. But under s 34 it does not appear that David’s slight delay
will amount to acceptance; he has examined the goods and found them defective on the
first working day following delivery.
(b)
The situation as to delivery and acceptance is as in part (a) above. The issue here is
whether the computer equipment is fit for its purpose, a purpose which May was
obviously aware of. It seems clear that it is not, as it is not powerful enough to run the
software which David requires.
Once again, this is breach of a contractual condition which entitles David to repudiate
the contract and reject the goods.
(c)
16
Although only a first instalment of the desks has been delivered, it appears from the
question that David was aware of, and accepted, delivery on these terms. There is
nothing to suggest that he is not bound by this contract.
Suggested Solutions to Practice Questions
Macari
Although this is a question in the area of sale of goods, don’t forget that general principles of contract
law still apply. In particular, there is an issue here of possible frustration. As to the pure sale of goods
aspects, you should consider not just who bore the risk in the cotton at the time it was stolen, but
what the consequences would be for Macari (and Sartori) as a result of your decision.
All statutory references in the solution below are to the Sale of Goods Act 1979.
The first step is to establish who bore the risk of the goods at the time when the bales were
stolen. According to s 20(1), the risk passes at the same time that the property passes. (The
impact of s 20(2) on this general rule is considered later.) The rules on when the property
passes depend on whether the goods are specific or unascertained. In general, property in
unascertained goods cannot pass until they are ascertained.
In the present case, the analogy with Re Wait (1927) suggests that the bales of cotton sold
to Macari are unascertained goods. In that case W bought 1,000 tons of wheat about to be
loaded on ship, and re-sold 500 tons to P. When W became bankrupt it was held that P had
not acquired property in the 500 tons because they were still unascertained, forming part of
the 1,000 tons then on board the ship. This being so, the property in the 50 bales of cotton
had not yet passed to Macari, and neither therefore had the risk.
This analysis is subject to a caveat which arises from Macari’s delay in going to collect the
bales. Under s 20(2), where delivery is delayed through the fault of either party, ‘the goods
are at the risk of the party at fault as regards any loss which might not have occurred but for
such fault’. In other words, there are cases where the passing of risk does not depend on the
passing of property.
This principle is well illustrated in the case of Demby Hamilton & Co Ltd v Barden
(1949); when a buyer delayed and, as a result, the apple juice subject to the contract
deteriorated, it was held that even though property had not passed to the buyer, nevertheless
it was he who should bear the risk of deterioration resulting from his delay.
In Macari’s case there are two issues to decide.
•
Was six weeks a reasonable delay in all the circumstances? If it was, then s 20(2) would
not apply, the previous analysis would remain valid, and the risk would belong to
Sartori. If not, then s 20(2) might take effect to pass the risk to Macari.
•
When did the theft take place? If it occurred early in the proceedings – say the day
after the contract was made – then it would not have been avoided even by prompter
action on Macari’s part. Again, s 20(2) would not apply. But if it took place later – say
after five weeks – then s 20(2) would apply if the court decided that Macari should have
collected by then.
One final point relating to the passing of risk before the passing of property: in a particular
contract it may be possible to infer the parties’ intention to transfer risk at a particular time.
The case of Sterns Ltd v Vickers Ltd (1923) has points of similarity with the present
question. The seller agreed to sell 120,000 gallons of spirit, stored in a storage tank containing
200,000 gallons, and gave the buyer a delivery order for that quantity. The buyer postponed
collection for several months and the spirit deteriorated. Although the goods were
17
Legal Aspects in Purchasing and Supply
unascertained – and property could not therefore pass to the buyer – it was held that the
parties had intended the risk to pass when the delivery order was given.
That is as much as needs to be said on the question of who bears the risk, and it is clear that
there is insufficient detail in the question to permit a firm conclusion either way. The next
step is to examine the consequences under both possible assumptions.
Assumption 1: the goods were at Macari’s risk
Macari agreed to buy 80% of the total bales. According to the reasoning adopted in the Sterns
case, he therefore has to bear 80% of the loss of 50 bales, ie the loss of 40 basles. He is
therefore entitled to take delivery of 10 bales, but must pay for all 50, as he has done.
Assumption 2: the goods remained at Sartori’s risk
If the goods were stolen while the risk remained with the seller, then it is possible that the
principle of Taylor v Caldwell (1863) would apply, and the contract would be regarded as
frustrated. In that case, Sartori would not be liable for non-delivery and Macari would not be
liable for the price. Macari would have no entitlement to demand any of the remaining 50
bales, and the fact that he has been offered delivery of them could only mean that a new
contract is coming into being – which need not be on the same terms as the old one.
Conclusion: the case involves complex issues of law and it is highly uncertain what
conclusion a court would come to.
Instalments
This question relates to the position under SGA 1979 of goods delivered in instalments. Your answer
should cover both the statutory provisions in s 11(4) (non-severable contracts) and s 31(2) (defective
deliveries in one or more instalments), and also the relevant case law, particularly the case of Maple
Flock Co Ltd v Universal Furniture Products (Wembley) Ltd (1934).
All statutory references below are to SGA 1979.
(a)
Under s 11(4), a buyer loses the right to reject goods if ‘the contract of sale is not
severable and the buyer has accepted the goods or part of them’. In other words, when
a contract is not severable, the buyer accepts all the goods supplied if the accepts any
of them. Of course, this may be overridden by an express agreement to the contrary,
allowing the buyer a right of partial rejection.
The position is different if the contract is severable. In broad terms a severable
contract can be looked upon as a series of separate contracts, rather than as an
indivisible whole. If either party is in breach in relation to one of these ‘mini-contracts’
it will not entitle the other party to repudiate all of his obligations under the other
‘mini-contracts’.
The first problem therefore is to decide in any particular case whether one contract, or
a series of contracts, is in question. The distinction is often blurred, for example in
‘requirements’ contracts where the parties agree that the buyer will source all of his
requirements of a particular kind from the seller, and the seller agrees to meet these
requirements for a particular price.
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Suggested Solutions to Practice Questions
However, with instalment contracts the position is somewhat clearer, since s 31(2)
states that a contract will be severable if it provides for ‘the sale of goods to be
delivered by stated instalments, which are to be separately paid for’. Even this implies
that contracts may not be severable if separate payments are not envisaged, but in
practice the courts have been ready to uphold instalment contracts as severable, eg in
H Longbottom & Co v Bass Walker & Co Ltd (1922), where the payments were
on monthly account, rather than coinciding with the part deliveries.
Under s 31(2), if a contract is severable and the seller makes defective deliveries in
respect of one or more instalments, this may (but not necessarily must) entitle the
buyer to repudiate the whole contract. The section does not expressly state that a
buyer can reject an individual instalment, but it seems clear on general principles that
he can do so. Note also that the Sale and Supply of Goods Act 1994 strengthens the
buyer’s position in these circumstances by allowing a right of partial rejection where,
for example, only some goods in a consignment are faulty.
Case law suggests that a serious breach in one or more instalments will amount to a
repudiation of the whole contract. But this does not entitle the buyer to behave
unreasonably, as was demonstrated in the Maple Flock case: only the sixteenth out of
22 deliveries was defective and the buyer could not use this to justify repudiation of the
whole contract.
Conclusion: in answering the question, a distinction needs to be made between
severable and non-severable contracts. If the contract is non-severable – ie it consists
of a single whole – then s 11(4) applies and acceptance of part signifies acceptance of
the whole. But in severable contracts – including most instalment contracts – a breach
in one or more instalments can entitle the buyer to repudiate the contract.
(b)
(i)
A and B have a binding contract. The contract contains a term relating to time of
delivery which ranks as a contractual condition (because ‘time is of the essence’).
Delivery two days late is a breach of that condition and A Ltd is entitled to reject
the goods and claim damages, or accept the goods but still claim damages if there
is a proven loss.
(ii)
The contract envisaged delivery in a single instalment, so this is a non-severable
contract to which s 11(4) applies. By accepting the part delivery on 1 September
A Ltd has forfeited the right to repudiate the contract as a whole, though
damages can still be claimed in respect of the poorer quality in the second
delivery.
Sadler
This question concerns the rule nemo dat quod non habet, and the exceptions to that rule. The main
exception that is relevant – of key importance to purchasing professionals – is that relating to
mercantile agents and arising under s 2 Factors Act 1889. You should begin by examining the
question of title – who now owns the car? – and then look at the consequences.
The car originally belonged to Sadler and he has never agreed to sell it. Under the nemo dat
principle, someone who lacks title to goods – such as Herd in the present case – cannot
transfer title.
19
Legal Aspects in Purchasing and Supply
However, there are exceptions to the nemo dat principle. One of them is estoppel: the owner
of the goods may in some cases be precluded (estopped) from denying the seller’s authority
to sell. Herd’s customer Connelly might argue that Sadler is so estopped, but his claim would
probably not be upheld, because what Sadler has done does not amount to a representation
that Herd had his authority to sell: Central Newbury Car Auctions Ltd v Unity
Finance Ltd (1957).
Another exception to the nemo dat principle arises under s 2 Factors Act 1889, which gives
protection to bona fide purchasers acquiring goods from mercantile agents, provided certain
criteria are met.
•
First, is Herd a mercantile agent? If he is a car dealer, then he would have authority to
sell cars in the customary course of his business as an agent. On the other hand, if
Herd does not normally deal in cars, but only repairs them, he will not rank as a
mercantile agent for this purpose. The facts provided in the question do not permit a
firm conclusion.
•
Second, Herd must have been with the consent of the owner (Sadler) in possession of
the goods or documents of title at the time of the sale. This condition is clearly
satisfied.
•
Third, the sale must have been made by Herd ‘when acting in the ordinary course of
business of a mercantile agent’. This is not so clear. When Sadler handed over the car it
was for a service and repair, not in the hope of a sale. However, the subsequent
telephone conversation introduces the possibility that from that time on Herd held the
car also in the capacity of Sadler’s agent for a sale.
•
Fourth, Connelly must have acted bona fide. There is no reason to doubt that he did
unless the offer of £3,750 is ludicrously low, and it does not seem to be.
On balance, it seems that there are some doubts as to whether the mercantile agent
exception can apply in this case, and these doubts are strengthened by one further
consideration in relation to the car’s registration document. It was held in Pearson v Rose
and Young Ltd (1951) that for a car sale to be in the ordinary course of busines the seller
must be in possession of the registration document with the consent of the owner. It is
doubtful whether Sadler’s apparently inadvertent handing over of the registration document
satisfies this criterion. The balance of probabilities must be that the mercantile agent
exception does not apply; the nemo dat principle is upheld; and Connelly has not acquired
good title to the car.
If this analysis is upheld in the courts, then Sadler could succeed in an action for conversion
against Connelly. The outcome would be that Connelly would be required to pay damages
(though he might be given the option of simply returning the car).
Conclusion: Sadler should be advised that he has a good claim against Connelly for damages
in conversion.
If you reached the conclusion that good title had passed from Sadler to Connelly, you should then
have indicated that Sadler’s claim in conversion would lie against Herd. There would be no question
then of Herd returning the car – which on this analysis now belongs to Connelly – but Herd would be
liable in damages.
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Suggested Solutions to Practice Questions
SGSA 1982
The Supply of Goods and Services Act 1982 applies to certain contracts which do not fall
within the definition of a sale of goods even though they do involve a transfer of ownership.
The types of contracts covered by the SGSA can be classified as follows.
•
Contracts where the main purpose is the provision of skilled labour and an ancillary
purpose is the transfer of ownership of goods, for example a contract for an artist to
paint a portrait.
•
Contracts which are collateral to the sale of goods. For example, in a contract for the
sale of a car in which seat covers are included at no extra cost, the sale of the car is
governed by the SGA 1979 but the transfer of the seat covers, for which the
consideration is the purchasing of the car, is part of a collateral contract governed by
the SGSA 1982.
•
Contracts of exchange or barter (which are not contracts for the sale of goods since
no money consideration is involved).
•
Contracts of hire (which are not contracts for the sale of goods because there is no
provision for the transfer of ownership to the hirer).
•
Contracts of repair, where the substance of the contract is the provision of services.
Where the supply of goods is part of the transaction, SGSA 1982 implies certain terms
relating to the goods, similar to those implied by SGA 1979. Thus there is an implied
condition on the part of the seller that he has a right to sell the goods, that they are free from
any undisclosed encumbrance and that the buyer will enjoy quiet possession of them.
A further implied condition requires that where there is a sale of goods by description, the
goods will correspond with that description and that if the sale is by sample it is not sufficient
that the bulk of the goods correspond with the sample if the goods do not also correspond
with the description.
Further implied conditions are that the goods are of satisfactory quality and that they are
reasonably fit for any particular purpose made known to the seller, whether or not that
purpose is one for which the goods are commonly supplied (except where the circumstances
show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or
judgement of the seller).
Finally, in the case of a sale by sample there is also an implied condition that the bulk will
correspond with the sample, that the buyer will have a reasonable opportunity of comparing
the bulk with the sample, and that the goods shall be free from any defect rendering them
unsatisfactory which would not be apparent on reasonable examination of the sample.
Where a contract is wholly or substantially for the provision of services, a number of terms
are implied into the contract by the SGSA 1982.
•
The supplier of the services will perform them with reasonable care and skill.
•
The supplier will complete the services within a reasonable time.
•
Where the consideration is not determined by the contract the other party will pay a
reasonable sum for the services once they are supplied.
21
Legal Aspects in Purchasing and Supply
These terms are implied whether or not there is also a supply of goods. Any exclusion clause
must satisfy the reasonableness requirement contained in UCTA 1977 in order to be valid
and effective.
John
This question begins with a straightforward request for explanation of a key principle in English
contract law: privity. This very ancient doctrine has often in recent times been regarded as a
regrettable straitjacket, from which the courts have sought methods to extricate themselves. Part (a)
refers to such methods, and part (b) is a practical example based on the facts in Wells
(Merstham) Ltd v Buckland Sand & Silica Ltd (1964).
(a)
(i)
A basic principle of contract law is that of privity, under which only the parties to
a contract can enjoy its benefits (or be held liable for the obligations it imposes).
This has led to many anomalous cases in which aggrieved parties have been
unable to obtain redress because they had no contractual bond with the person
in default. A leading case in this area is Dunlop Pneumatic Tyre Co Ltd v
Selfridge & Co Ltd (1915).
A common situation in commercial contracts is that a buyer, B, pays a supplier, S,
to carry out a project of some sort; S then subcontracts some of the work to C.
If C’s performance is defective it is B that will suffer, and yet B has no contract
with C under which he can obtain redress.
Until 1999, there were two main avenues that B could explore in this situation.
One was to establish that C owed a duty of care to B and had breached that
duty. In that case B would have an action against C in tort and could seek to
recover damages covering damage to property or injury to persons. However,
B’s claim would not extend to damages for pure economic loss – ie loss of
profits – and this made the remedy unsatisfactory in most cases.
The second possibility for B was to rely on a collateral contract. If a court could
find evidence of a collateral contract between B and C then B could have gained
redress. The leading case was Shanklin Pier v Detel Products Ltd (1951).
The claimants appointed a contractor to perform painting work and specified the
use of certain paint manufactured by the defendants, relying on assurances from
the defendants as to its suitability. The contractors duly purchased and used
Detel’s paint, which turned out to last only three months. Since Shanklin held no
direct contract with Detel their position appeared poor. However, the court
held that, though the main contract was between the contractors and Detel, a
collateral contract existed between Shanklin and Detel. Consideration for the
collateral contract was Shanklin’s action in instructing the contractors to buy
Detel’s paint.
From 11 May 2000, when the Contracts (Rights of Third Parties) Act 1999 came
into force, it is possible for a party who is named in the contract as a beneficiary
(or who is intended as a beneficiary), but who is not actually party to the
contract, to sue under it. Hence, an end-user named in a contract with a
subcontractor would be able to sue.
22
Suggested Solutions to Practice Questions
(ii)
The possibilities mentioned in part (i) are not restricted to commercial contexts,
and in appropriate circumstances could be used by a consumer against a
manufacturer. However, a more direct remedy in this case comes through the
statutory protection afforded by the Consumer Protection Act 1987. Under the
Act, anyone injured by a defective product can sue the manufacturer, whether or
not the manufacturer was negligent.
This of course is in addition to the rights enjoyed by consumers under the Sale of
Goods Act 1979 and the Supply of Goods and Services Act 1982, especially as
regards implied contract conditions covering satisfactory quality etc.
(b)
The facts in this part of the question are based on those of Wells (Merstham) Ltd v
Buckland Sand & Silica Ltd (1964). It was held in that case that the defendants were
liable to the claimants in contract, even though no goods had been sold by one to the
other. The basis of the reasoning was that the defendants had given a ‘collateral
undertaking’ and the claimants had acquired the sand in reliance on it.
Conclusion: John should be advised that, on the strength of the Buckland Sand case,
he has a good claim against O’Kane for damages in contract.
Help!
Lennon has a contractual relationship with McCartney and will be able to claim damages if it
appears that McCartney has breached the contract. The difficulty is that McCartney seems to
have done exactly what he was required to do and it would not be easy to argue that the rain
damage has been caused by him.
To obtain redress, Lennon is more likely to consider action against Ringo. Of course there is
no direct contractual relationship between Lennon and Ringo; on the basis of Dunlop v
Selfridge this suggests that no action in contract is possible.
However, this difficulty could be overcome either by recourse to the Contract (Rights of
Third Parties) Act 1999, or by arguing that a collateral contract exists between Lennon and
Ringo. The facts of the case are somewhat similar to those of Shanklin Pier v Detel (where
it was held that the pier company had an enforceable collateral contract with the defendant,
even though no direct contract existed). If Lennon can show that the representations given by
Ringo are sufficient to establish a collateral contract then a claim for damages against Ringo is
likely to be successful.
Another possibility would be a claim in negligence against Ringo. To establish such a claim
Lennon would have to show three things.
•
That Ringo owed a duty of care. This seems reasonably straightforward, since Ringo has
benefited economically from the sale of his product, indirectly to Lennon.
•
That the duty of care was breached. Again, a strong argument can be made on this
point, since the fastenings appear clearly unsuitable.
•
That loss has been suffered as a result. This too seems clear, in that Lennon has to bear
the cost of replacement fastenings (presumably), and also the cost of relocating
employees.
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Legal Aspects in Purchasing and Supply
Although the case against Ringo appears strong, Lennon would have to consider the
likelihood of recovering costs. If a court held that only pure economic loss has occurred then
this would not be recoverable in a claim for negligence. This is illustrated in such cases as
Spartan Steel v Martin and Simaan v Pilkington. Because of this it is likely that Lennon
would prefer to rely on the claim of a collateral contract.
Food safety
This question is concerned with both civil and criminal aspects of liability in respect of the supply of
food. It is of particular relevance to purchasers specialising in food, both fresh and processed.
Potential liabilities arise under the Food Safety Act 1990, the Consumer Protection Act 1987, and
under common law negligence.
(a)
The Food Safety Act 1990 introduced a strict liability concept for food safety. Four key
offences are identified by the Act.
•
•
•
•
Section 7 – it is an offence to render food injurious to health.
Section 8 – it is an offence to supply food which fails to meet safety
requirements.
Section 14 – it is an offence to sell food that is not of the required quality.
Section 15 – it is an offence to falsely describe food.
The Act intends that liability should rest with wholesalers, manufacturers and retailers
alike.
Liability under the Act is stated to be strict: this means liability without fault. Normally,
the commission of a criminal offence requires two elements: first an actus reus or guilty
act, and second mens rea or guilty intent. However, for a strict liability offence, only the
guilty act needs to be proved – intention is irrelevant.
Nevertheless, the Act does provide a number of defences.
•
•
Section 20 applies where the offence is due to the act or default of some other
person.
Section 21 provides a wider defence on the grounds of due diligence or
reasonable precaution, under which it is a defence if a person charged can
establish that he took all reasonable precautions and exercised due diligence to
avoid the commission of the offence.
Applying these principles it is clear that the company has potential criminal liability in
these circumstances, although it may be possible for the company to raise one of the
defences referred to above – especially the ‘due diligence’ defence.
(b)
24
(i)
The company’s common law civil liability derives from the tort of negligence.
Under the ‘neighbour principle’ promulgated by Lord Atkin in Donoghue v
Stevenson, three elements are needed for a successful claim. These are the
existence of a duty of care, a breach of that duty, and consequential damage.
Lord Atkin considered that we are all under a duty not to cause injury to our
neighbours by our own acts or omissions. (By neighbours, he meant persons
who we should foresee as being likely to be affected.) Clearly, this would include
purchasers of the company’s products. However, the concept of strict liability
Suggested Solutions to Practice Questions
does not apply to common law negligence, therefore fault on the company’s part
would need to be proved. It is therefore very important that the company should
have effective quality controls and that it should be seen to be responding quickly
and effectively to any complaints.
(ii)
The relevant statutory provisions concerning civil liability are contained in part 1
of the Consumer Protection Act 1987. This introduced a strict liability regime
for personal injuries deriving from defective products.
The definition of ‘product’ in section 1 is very wide and includes processed food.
It does not, however, include unprocessed agricultural products. Under the Act,
a person claiming damages must prove that he has sustained damage, that the
product is defective and that the damage was caused by the defective product.
Under section 2, liability attaches to producers, importers into the European
Community, ‘own branders’ and retailers. Liability is stated to be strict, which
means liability without proof of fault.
Nevertheless, a number of defences are provided by section 4. Of these, the
most relevant is the so-called ‘state of the art’ defence: a person will not be liable
if he can show that he was using the best scientific and technological information
available.
Applying these principles, the company clearly has potential civil liability under
the act, since it appears to be an importer in to the European Community, as
well as being an ‘own brander’ and a retailer. It may, however, be able to
successfully plead the ‘state of the art’ defence if it can show that it has been
using the latest food-processing techniques.
Thomas
This is a familiar type of question in which part (a) requires a statement of legal principles, while in
part (b) the principles are to be applied to a particular case. In part (a) the usual distinction is
termination by act of the parties and termination by operation of law. This provides a useful
framework around which to construct an answer.
(a)
An agency relationship may be terminated either by act of the parties or, in some
circumstances, by operation of law.
Termination by the parties
Withdrawal of consent by either principal or agent will terminate the agency and with it
the agent’s actual authority to bind the principal. However, the agent’s apparent
authority may survive such termination and the principal must therefore be careful to
avoid incurring unwanted liabilities.
‘Withdrawal of consent’ may be a mutual act: both parties agree that the agency
relationship is to end. This can be agreed between the parties at any time, and may
occur in particular when their agreement has reached some natural finishing point. For
example, the agency may have been for a fixed period, or may have been intended to
accomplish a specific purpose. If the agency is a contractual relationship, this will
discharge the contract by agreement and no question of liability for breach will arise.
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Legal Aspects in Purchasing and Supply
In other cases, the withdrawal of consent may be unilateral. In general, either the agent
or the principal may terminate unilaterally, but if the agency is contractual this may give
rise to a claim for damages (and even perhaps compensation for unfair dismissal or for
a redundancy payment if the agent is an employee). If the principal dismisses the agent,
then the agent may claim damages to compensate for the commission he would
otherwise have earned.
In exceptional cases – where an agent has ‘authority coupled with an interest’ –
unilateral termination by the principal will not be effective to terminate the actual
authority of the agent. The phrase ‘authority coupled with an interest’ refers to cases
where, for example, the principal owes money to the agent and appoints the agent to
sell property so as to realise funds and discharge the debt.
Termination by operation of law
Death or insanity of either principal or agent terminates the relationship automatically.
If the principal dies the agent does not even retain apparent authority (and so cannot
bind the principal’s estate). Exceptionally, insanity of the principal will not terminate the
agency if the agent was appointed under the Enduring Powers of Attorney Act 1985.
Bankruptcy of the agent will terminate the contract if it makes him unfit to continue as
agent. Bankruptcy of the principal renders him incapable to deal with any property
affected by the bankruptcy and as a consequence terminates the agent’s authority to
deal with such property.
Frustration may apply to agency agreements in the same ways as it applies to contracts.
For example, performance of the agency may become illegal or impossible.
(b)
It appears that Potter Ltd has unilaterally revoked the agency of Albert. This is effective
to terminate Albert’s actual authority (though Albert may have a claim for damages
against Potter if the agency was contractual). It follows that Albert had no actual
authority to conclude the contract with Thomas.
However, Albert may still have apparent authority. This arises where a principal has
represented to a third party that an agent has authority to act on his behalf. In the
present case, if Thomas has had previous dealings with Albert as Potter’s agent, or had
begun negotiations with Albert as Potter’s agent before the agency was revoked, then
apparent authority may be present and this will be sufficient to bind Potter. Apparent
authority would cease to exist if Thomas knew of the withdrawal of Albert’s agency,
but this is ruled out by the terms of the question.
Conclusion: Thomas should be advised that if apparent authority existed, as described
above, then Potter is bound by the terms of the contract. If not, then Thomas may sue
Albert for breach of warranty of authority.
Pilkington
The area of tenders raises difficult issues in contract law, but is of great relevance to purchasing and
supply specialists. In part (a) of this question the facts are based partly on the case of Kier v
Whitehead Iron Co (1938); in part (b) the relevant case is Great Northern Railway v
Witham (1873).
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Suggested Solutions to Practice Questions
(a)
In general, a person who invites tenders undertakes to give due consideration to any
tenders received which comply with the conditions laid down in the invitation to
tender: Blackpool & Fylde Aero Club v Blackpool Borough Council (1990).
However, there is in general no obligation to accept the tender containing the most
favourable financial terms: Spencer v Harding (1870); or even to accept any of the
tenders.
The situation is different if the invitation to tender contains an express undertaking to
accept the highest (or lowest) bid. This was the case in Harvela Investments Ltd v
Royal Trust Company of Canada (CI) Ltd (1984). The finding in that case was
that the express undertaking itself constitutes a unilateral contract in which the person
inviting tenders binds himself to accept the lowest bid (or highest bid, as the case may
be). Once the tender process is complete, a bilateral contract immediately comes into
operation between the person inviting tenders and the person who made the lowest
(or highest) bid.
This appears to fit the circumstances of Branson Ltd in the question; Branson should be
advised that Pilkington is in breach of a unilateral contract.
The situation with Ames Ltd is similar to the facts in Kier v Whitehead Iron Co
(1938). Pilkington has agreed that, to the extent that he requires goods of the type
covered by the agreements, he will purchase such goods from Ames Ltd. Pilkington
would breach this contract if he does indeed need such goods and yet purchases them
from elsewhere. However, if it turns out that Pilkington does not after all require such
goods in his business, then Ames has no ground for compelling Pilkington to purchase;
for example, Pilkington is not required to purchase such goods for resale to other
businesses.
Conclusion: Branson can claim that Pilkington is in breach of contract, but Ames
cannot.
(b)
When a tender is accepted, the effect may be to convert it into a standing offer to
supply goods as and when (and if) required by the buyer. This was held to be the case
in Great Northern Railway v Witham (1873), on facts very similar to those in the
question.
It follows that Marat is bound to supply Danton’s requirements during the period
covered by the tender, and his refusal to do so places him in breach of contract.
Good news for the purchasing profession in this area is that the balance of obligations appears
to be somewhat tilted in favour of the buyer. The decision in Percival Ltd v London
County Council (1918) is a case in point. Percival’s tender to supply goods to the extent
ordered and in any quantity was accepted by the council. In the event, the council did not order
the estimated requirements. It was held that the council were not obliged to order any goods,
but that Percival was obliged to deliver goods as and when ordered.)
Conclusion: Danton should be advised that Marat is in breach of contract.
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Legal Aspects in Purchasing and Supply
Brigstock Ltd
This question is based on one from a past CIPS exam. Note the importance of the Blackpool &
Fylde Aero Club case, and the TUPE regulations in part (b). Parts (c) and (d) are fairly standard
exam questions on the rise of penalty and indemnity clauses.
(a)
To attempt this part of the question, you need to understand the importance of precontractual arrangements and liability for failing to adhere to them. The relevant case is
Blackpool & Fylde Aero Club v Blackpool Borough Council. You should
identify the case and therefore identify the potential liability of Brigstock for their
failure to consider the tender properly delivered.
(b)
This part of the question requires a brief outline of the TUPE regulations. Your answer
should include the rights of Brigstock’s staff to transfer to Betta Clean’s employment
with their employment protection rights and their rights and liabilities against Brigstock
transferred. They would also have protection in that their length of previous service
would be recognised. Clearly Betta Clean would have to assess the cost implications of
this, and adjust their tender accordingly. You should also mention the consultation
rights and the rights not to be dismissed on the transfer.
(c)
Betta Clean’s argument would be that the clause is a penalty clause, even though it may
be described as liquidated damages. The approach of the Court would be to review the
clause to ensure that it was a genuine pre-estimate of anticipated losses by Brigstock.
You should advise that Betta Clean could challenge the clause on this basis.
(d)
Brigstock should insert an indemnity clause to ensure that any liability they incur will be
passed to Betta Clean together with any legal costs they incur. Many liabilities in
relation to food and hygiene would be on Brigstock and any claim by an employee for
personal injury would be against Brigstock. Thus as Brigstock could not effectively
exclude or limit such liability they need to protect themselves by the insertion of an
indemnity clause.
(e)
You should explain the process of offer and acceptance in relation to a tendering
exercise and how it might differ from a standard contract situation. The battle of the
forms will only apply where a counter offer is made to the offer. As the tender bid is in
fact the offer here then acceptance is not on the basis of conflicting forms.
Competition
This question tests your knowledge of unfair competition; which has been the subject of questions in
past CIPS examinations, most recently in November 2002. You need to show understanding of the
statutory framework within the UK (Fair Trading Act 1973, Competition Acts 1980 and 1998, the
roles of the Competition Commission and the OFT), and of Articles 81 and 82 of the Treaty of Rome.
The UK legal framework controlling unfair competition is based on the Fair Trading Act 1973,
the Competition Act 1998 and the Enterprise Act 2002. A central supervisory, enforcement
and monitoring role is devolved to the Office of Fair Trading (OFT), supported by the
Competition Commission.
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Suggested Solutions to Practice Questions
The Fair Trading Act 1973
This Act lays down rules governing the position of organisations enjoying monopoly control
of their industry. Such a position arises when the organisation controls 25 per cent or more
of the trade within the United Kingdom, whether as buyer or as seller. In some cases, the
relevant percentage may be applied not to trade throughout the United Kingdom, but to a
particular local area.
There is no presumption that such a position is against the public interest, but clearly there is
potential for abuse and the Director General of Fair Trading is given wide powers to
investigate. If he is satisfied that a monopoly may be in existence he may refer the matter to
the Competition Commission to determine whether it is against the public interest. The
Commission reports on its findings and may make recommendations for corrective action,
which Ministers are empowered to enforce.
Proposed mergers between organisations which may give rise to a monopoly situation are
subject to a similar control regime. Enterprises intending to merge must give notice to the
Director General; unless he decides (within a strictly limited timetable) to investigate, the
merger may go ahead as planned.
The Competition Act 1998
This Act came into effect on 1 March 2000 and brings UK law into line with European
competition law, which is generally regarded as being more effective.
The Competition Act 1980 has been substantially amended. The Monolopies and Mergers
Commission has been replaced by the Competition Commission. However, the monopolies
and mergers provisions in the Fair Trading Act 1973 continue to apply.
Agreements which distort, restrict or prevent competition are illegal.
The powers of the Office of Fair Trading have been greatly increased. It now has the power
to carry out raids on premises, to seize documents and to order the cessation of restrictive
practices. It may fine companies up to 10 per cent of UK turnover for up to three years.
The Enterprise Act 2002
This Act further strengthens the role of the OFT.
It allows a maximum penalty of five years’ imprisonment for individuals dishonestly operating
‘hardcore cartels’. It gives the OFT power to ask the courts to disqualify directors from acting
as company directors for up to five years, for competition offences. It sets up a Competition
Appeals Tribunal to hear cases brought by third parties alleging that companies have infringed
competition law. And it allows consumer bodies to bring to the OFT ‘supercomplaints’ about
markets that are not working well for consumers.
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Legal Aspects in Purchasing and Supply
The EU framework
The UK controls on monopolies and anti-competitive agreements are bolstered by EU law
contained in Articles 81 and 82 of the EC Treaty. In very broad terms, Article 82 can be
regarded as an analogue of the Fair Trading Act 1973 (control over monopolies or ‘dominant
position’), while Article 81 aims to regulate the kind of practices dealt with under the
Competition Act 1980 – anti-competitive agreements.
Coleman
The question makes no reference to any effect on trading between EU member states, so reference
to Articles 81 and 82 of the EC Treaty is not needed. A good approach is to discuss the general
impact of the Fair Trading Act 1973 and, more specifically, the Competition Act 1998, and then to
relate general principles to the facts of the case.
The activities of Coleman Ltd may fall foul of provisions both in the Fair Trading Act 1973 and
in the Competition Act 1998.
The definition of monopoly in the Fair Trading Act 1973 (FTA 1973) is based on the premise
that control of 25 per cent or more of the commercial activity (buying or selling) in a
particular sector constitutes a monopoly.
There is no presumption under the Act that mere existence of a monopoly position
constitutes an offence. But if the Director General of Fair Trading (DGFT) believes that such
a position may exist he can refer the matter to the Competition Commission (CC) for
investigation, particularly as to whether the monopoly is operating contrary to the public
interest.
In the question it is stated that Coleman ‘has a near monopoly in a particular type of rye
bread’. If this means that Coleman is the supplier of almost 100 per cent of that type of rye
bread in the UK then clearly the provisions of FTA 1973 are relevant. If on the other hand it
means that Coleman supplies almost 25 per cent of that type of rye bread, the company still
has reason to exercise caution.
As to the question of public interest, there are a number of factors which the CC must take
into account when assessing this. For example, they will be concerned with the maintenance
and promotion of effective competition, with any substantial lessening of competition, and
with promoting the interests of consumers with regard to prices charged. On both of these
counts Coleman appears to score badly: much of what the company is doing appears
calculated to distort and restrict competition, while we are told specifically that part of
Coleman’s objection to Whelan is the low prices offered to consumers.
If the CC concludes that a monopoly exists, and that it may be expected to operate against
the public interest, then appropriate recommendations may be made. Coleman may, for
example, be forbidden from withholding stocks of rye bread from retailers wishing to buy
them.
The purpose of the competition legislation is to act against practices which restrict, distort or
prevent competition. Guidance from the Office of Fair Trading suggests that such practices
can be divided into two main groups, relating respectively to pricing policy and distribution
policy.
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Suggested Solutions to Practice Questions
•
Anti-competitive pricing policies might include price discrimination (ie offering different
prices to different customers) and predatory pricing (selling at prices below cost). Both
of these are relevant to Coleman. Some retailers are allowed substantial discounts on
rye bread, in return for purchasing other products from Coleman, and this is a form of
price discrimination. Moreover, the substantial discounts could easily rank as a form of
predatory pricing, designed to attract retailers to Coleman’s products and eliminate the
profits of competitors.
•
Anti-competitive distribution policies might include tie-in sales (where retailers wishing
to purchase product X are required to purchase product Y also), full-line forcing
(where the purchaser must buy a whole product range rather than individual items),
exclusive supply and purchase arrangements, and selective distribution arrangements.
All of these appear to be relevant to Coleman’s case, particularly in relation to the
cartel-style arrangement Coleman has been seeking to mobilise against Whelan.
•
In addition, Coleman would appear to be seeking to put in place an anti-competitive
agreement here, which falls foul of Chapter 1 of the Competition Act 1998. It could
also be said that there is a straightforward abuse of dominant position, which is
covered by Chapter 2 of the 1998 Act.
It may also be relevant to refer to the old Resale Prices Act 1976, which in principle prohibits
the collective enforcement of price maintenance arrangements. Such an arrangement seems
to be exactly what Coleman has in mind in encouraging other health food suppliers to
combine against Whelan.
Morris
Part (a) of the question requires knowledge of the law surrounding trade marks. The legal
requirements specified in the question were conveniently summarised in the case of Warnick v
Townend (1980). In part (b) you should refer to the possibilities in respect of design right, patent and
trademark protection.
(a)
The owner of a trade mark has the exclusive right to use it in relation to the goods for
which it is registered. (The situation with a service mark is similar.) This right is
protected by statute (the Trade Marks Acts) but may also be the subject of a common
law action for the tort of passing off.
‘Passing off’ in this connection means creating in the mind of a potential purchaser the
notion that a good or service developed by a producer is in fact that of another (usually
much better known) producer. For example, if a manufacturer of a cola drink were to
bottle his wares in a way that resembled Pepsi Cola or Coca Cola this might have the
effect of leading consumers to believe that they were buying the more famous brands,
when in fact they were not.
The protection afforded by an action for passing off is distinct from that afforded by
statute. What is protected is goodwill and reputation, rather than the right to exclusive
use of a distinctive mark. It follows that a prerequisite for a successful passing off action
is that the injured trader must be able to show that he has built up a name or
reputation in the goods concerned.
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Legal Aspects in Purchasing and Supply
In greater detail, the requirements for a successful action have been identified by Lord
Diplock in the case of Warninck v Townend (1980). There must be:
(i)
(ii)
(iii)
(iv)
(v)
a misrepresentation
made by a trader in the course of trade
to prospective customers of his or ultimate consumers of goods or services
supplied by him
which is calculated to injure the business or goodwill of another trader
and which causes actual damage to business or goodwill, or will probably do so.
The requirement under (iv) does not mean that the passer off must have acted with
deliberate intent to mislead customers; it is enough that his actions have that effect or
are likely to do so.
If successful in his action, a claimant may be awarded an injunction against use of the
mark, and to damages or an account of profits.
(b)
The main possibilities for protecting intellectual property are copyright, design right,
patents and trademarks.
Copyright applies to literary, dramatic, musical and artistic works. Although these
terms are interpreted widely (so as to include computer programs for example), it
does not seem likely that a range of audio equipment can benefit from protection under
this head.
A more likely avenue for Morris Ltd is the system of unregistered design rights
operating under the Copyright, Designs and Patents Act 1988. ‘Design’ in this
connection means any aspect of the internal or external shape or configuration of the
whole or part of an article. (It does not apply to a method or principle of construction,
though this may be protected by patent – see below.) Design right in the present case
would belong to Morris Ltd (not, for example, to any of their employees who worked
on the design). It applies to original design (ie it must not be commonplace). The right
endures for the shorter of 15 years from first recording of the design and 10 years
from first marketing it. The right is infringed if the design is copied without permission,
or if a person sells or deals in copied articles.
Another possibility is protection by means of applying for a patent. This would give
Morris the exclusive right to exploit their ‘invention’ for a stated period of time. To
qualify under this head, Morris must have developed an invention which is new, which
involves an inventive step, and which is capable of industrial application. If the patent is
then breached, Morris will be entitled to an injunction, delivery up of infringing articles,
and damages or an account of profits.
Finally, Morris should consider registering a trade mark to protect any word or symbol
(or combination of the two) indicating a connection in the course of trade between the
goods and their owner (ie Morris). This might apply, for example, to a brand name or
logo. As described in part (a) above, the rights under this head are protected both by
the Trade Mark Acts and under common law.
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Suggested Solutions to Practice Questions
Trade secrets
Despite the rules on anti-competitive practices, it is recognised that employers have a right to
protect their trade secrets, and abuse of such secrets by employees (or former employees) is
controlled in two main ways: the employee’s duty of confidentiality, and restraint of trade
clauses in contracts.
The duty of an employee to protect his employer’s confidential information is recognised at
common law, and has been defined in decided cases such as Thomas Marshall (Exports)
Ltd v Guinle (1978) and Faccenda Chicken v Fowler (1986). An aggrieved employer will
need to show that the relevant information was confidential, that it was given to the
defendant in a situation suggesting confidentiality, and that disclosure has taken place or at
least been threatened.
The common law duty can be reinforced, particularly in the case of departing employees, by
restraint of trade clauses. These must be reasonable in relation to their scope or will be held
to be unenforceable. Moreover, it is not possible to prohibit a former employee from making
use of his expertise and general know-how built up in the service of his ex-employer.
If a disclosure of confidential information is threatened, the employer’s basic remedy is to
seek an injunction prohibiting disclosure.
Carey
The first part of the question is straightforward bookwork for which you should refer to a standard
text on commercial law; the answer below is based on Charlesworth’s Business Law by Dobson and
Schmitthoff. For the second part you should revise the duties of buyer and seller under an FOB
contract.
(a)
(i)
A bill of lading is described in Charlesworth’s Business Law as ‘a document signed
by the shipowner or by the master or other agent on behalf of the shipowner,
which states that certain goods have been shipped on a particular ship or have
been received for shipment. It sets out the terms on which those goods have
been delivered to and received by the shipowner. On being signed by or on
behalf of the carrier it is handed to the shipper’.
The three characteristics of a bill of lading are as follows: it is a receipt issued by
or on behalf of the carrier acknowledging receipt of the goods; it evidences the
terms of the contract of carriage; and it is a document of title.
This latter characteristic is the most important. A carrier need deliver the goods
only if an original bill of lading is presented to him.
(ii)
A charterparty is described in Charlesworth as a ‘contract whereby the charterer
hires the use of a ship from the shipowner. Three types of charterparty are in
use: voyage charters, time charters and charters by demise.’
A voyage charter relates to carriage of cargo on a specific ship for one or several
voyages. A time charter entitles the charterer to direct the use of the ship
(within agreed limits) during a specified period of time. Under both of these
methods the charterer merely has the use of the ship; the master and crew are
those provided by the shipowner.
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Legal Aspects in Purchasing and Supply
Under a charter by demise (much less common than the other two types) the
charterer may put in his own master and crew.
(b)
(iii)
The uncertainties of contractual agreements are greatly aggravated in contracts
for the sale of goods internationally. To avoid misunderstandings, the
International Chamber of Commerce has published a standard set of terms
known as ‘Incoterms’. These standard terms are often adopted by parties to
international transactions, but of course do not apply if the parties have not
incorporated them into their agreement. Incoterms also includes explanations of
special trade terms such as FOB, CIF etc.
(i)
The contract between Didier and Carey appears to be on ‘strict’ (or ‘classic’)
FOB terms. Under such agreements the duties of the buyer (Carey) are to
nominate an effective ship to carry the goods, to notify the seller of this
nomination in time for the seller to arrange loading of the goods, and to pay the
agreed price.
In this case it appears that Carey has failed in his duty to nominate an effective
ship. This does not preclude him from making another nomination if there is still
time to do so under the contract. If this is not possible, it will be open to Didier
to repudiate the contract and seek damages.
(The situation would be different if this were an FOB contract ‘with additional
services’, in which case the seller would be responsible, on behalf of the buyer,
for arranging shipment. However, although the question is not quite specific on
this point, the reference to nomination by the buyer suggests that ‘strict’ FOB
terms apply.)
(ii)
In this case the property in the cattle feed never passed to Carey.
It may be that the agreement between Carey and Didier contained a force
majeure clause determining the rights of the parties in a situation such as this one.
However, the question gives us no information on such a clause and the
assumption must be that the contract is silent on this point.
That being so, it is likely that a court would deem the contract to have been
frustrated; the subject matter of the contract has been destroyed in a manner
that seems to have been outside the contemplation of the parties.
The effect of frustration is that the contract is avoided from the point at which
the goods were destroyed, and both Carey and Didier are released from any
further obligations under the contract. It does not appear in this case that any
money or valuable benefit passed between the parties before the frustrating
event, so no issue of reimbursement arises.
Chilton
The first part of the question is pure bookwork. This kind of question has been common in past
examinations and shows the importance of carefully memorising the meaning of key terms used in
international agreements.
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Suggested Solutions to Practice Questions
The second part tests your knowledge of buyer’s and seller’s rights under CIF contracts. You should
recognise the importance of the statement that Rossi has sent the usual documentation to Chilton.
(a)
(i)
The term ‘FOB’ or ‘free on board’ is recognised in international trade. It denotes
a contract in which it is the seller’s duty to place the goods over the ship’s rail,
while the buyer’s duties include arrangement of shipment and bearing the cost of
freight and insurance. It is common to specify the port of departure, and that is
what is meant by ‘FOB Felixstowe’: the seller’s duty ends when he has loaded the
goods onto the ship nominated by the buyer at the port of departure, in this case
Felixstowe.
(ii)
The term CIF or ‘cost, insurance, freight’ is another internationally recognised
term. It denotes a contract under which the seller discharges his obligations by
delivery of the shipping documents (not the actual goods) to the buyer. These
documents comprise the bill of lading, the insurance policy or certificate, and the
invoice. As the term CIF suggests, the price charged by the seller includes the
cost of the goods, the cost of insurance and the cost of freight.
The duties of a buyer under a CIF contract are simply to pay the seller’s price
and other costs for which he is responsible (such as import duties). The duties of
the seller are:
•
•
•
•
•
(iii)
(b)
to ship the agreed goods
to arrange their carriage to the agreed destination
to arrange insurance for the goods
to make out an invoice for the goods
to tender the usual documents to the buyer so that he may obtain delivery
of the goods if they arrive, or recover their loss if they perish.
‘Ex works’ is another term which, like FOB and CIF, is explained in Incoterms,
the standard terms relating to international trade published by the International
Chamber of Commerce. Of the three types of contract, this is the one which
imposes least obligation on the seller. His duty is to supply goods complying with
the contract terms and make them available for collection at his own premises.
From that point on it is the buyer’s duty to take over responsibility.
The duties of the seller under a CIF contract were spelled out by Hamilton J in the case
of Biddel Bros v E Clement Horst Co (1911) and have been listed in part (a) (ii)
above. Hamilton J went on to say: ‘It follows that against tender of these documents –
the bill of lading, invoice and policy of insurance – the buyer must be ready and willing
to pay the price’. This covers the situation described in the question.
The general rule is that goods supplied under a CIF contract are at the buyer’s risk
from the time of shipment. In the present case it appears that the seller, Rossi, has
performed all the duties required of him and there are no grounds for disputing that
the risk of loss is borne by Chilton. Chilton will be required to pay for the goods and
will claim for the loss under the insurance policy.
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Legal Aspects in Purchasing and Supply
Greenhoff
In part (a) of the question the main issue is privity of contract and the possibl existence of a collateral
contract with Daly. There may also be an action in negligence. In part (b) the contract is governed by
the Supply of Goods and Services Act 1982 (SGSA 1982), and the implied terms contained in the Act
are relevant. In part (c) there is a breach of contract, but the measure of damages is hard to
establish.
(a)
Greenhoff has contracted with Sidebottom and Sidebottom has performed obligations
under the contract. There is no suggestion that Sidebottom’s performance has been
inadequate or in any way constitutes a breach, and yet Greenhoff has suffered. The fault
appears to lie with Daly Ltd, but Greenhoff has no contract with Daly and cannot
therefore sue in contract. On the analysis so far it appears that Greenhoff has no action
against Sidebottom (because no breach) and no action against Daly (because no
contract).
This situation arises from the principle of privity of contract: only the parties to a
contract can enforce obligations under it or be held liable for breach. This has led to
many anomalous cases, such as that of Greenhoff, in which aggrieved parties have been
unable to obtain redress because they had no contractual bond with the person in
default. A leading case in this area is Dunlop Pneumatic Tyre Co Ltd v Selfridge
& Co Ltd (1915). However, the law relating to privity has now undergone fundamental
reform as a result of the Contracts (Rights of Third Parties) Act 1999, which came into
effect on 11 May 2000. The Act is concerned with allowing third parties to enforce
their rights under contracts. However, it does not go so far as to allow a contract to
impose burdens upon a third party, and it is unlikely therefore that Greenhoff will be
able to rely on the Act in suing Daly.
There are two main avenues that Greenhoff can explore in this situation. One is to
establish that Daly owes him a duty of care and has breached that duty. In that case
Greenhoff will have an action against Daly in tort and may seek to recover damages
covering damage to property or injury to persons. However, Greenhoff’s claim will not
extend to damages for pure economic loss – ie loss of profits – and this makes the
remedy unsatisfactory in most cases. (The case of Junior Books Ltd v Veitchi (1982)
appeared to open up a possibility of recovering even for pure economic loss, but this
case has been criticised and more recent cases appear to have limited its scope.)
The second possibility for Greenhoff is to rely on a collateral contract. If a court can
find evidence of a collateral contract between Greenhoff and Daly then Greenhoff may
gain redress. The leading case is Shanklin Pier v Detel Products Ltd (1951). The
claimants appointed a contractor to perform painting work and specified the use of
certain paint manufactured by the defendants, relying on assurances from the
defendants as to its suitability. The contractor duly purchased and used Detel’s paint,
which turned out to last only three months. Since Shanklin held no direct contract with
Detel their position appeared poor. However, the court held that, though the main
contract was between the contractor and Detel, a collateral contract existed between
Shanklin and Detel. Consideration for the collateral contract was Shanklin’s action in
instructing the contractors to buy Detel’s paint.
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Suggested Solutions to Practice Questions
The case of Wells (Merstham) Ltd v Buckland Sand & Silica Ltd (1964) is also
relevant. It was held in that case that the defendants were liable to the claimants in
contract, even though no goods had been sold by one to the other. The basis of the
reasoning was that the defendants had given a ‘collateral undertaking’ and the claimants
had acquired a quantity of sand in reliance on it.
All this appears to fit the present case, but it will be difficult for Greenhoff to prove
loss other than pure economic loss, which is irrecoverable. It may be that the cost of
replacing the inadequate units will be the measure of damages.
(b)
This part of the question revolves around the implied terms in SGSA 1982 as to time
and price.
Time
Under s 14 SGSA 1982, if no time for the service to be carried out is fixed in the
contract, but is left to be fixed in a manner agreed by the contract or determined by
the course of dealing between the parties, then there is an implied term that the
supplier will carry out the service within a reasonable time.
Price
Under s 15, if no price is fixed, or can be determined by the course of dealing between
the parties, then there is an implied term that a reasonable price will be paid.
Clearly the agreement with Albiston is for the supply of a service by a supplier acting in
the course of a business, and these implied terms are therefore applicable. However,
the question gives little evidence as to what would constitute a reasonable time or a
reasonable price in the present circumstances. The only hint is that Greenhoff had
evidently formed certain expectations as to time for performance and price, and if
these had arisen in the course of their negotiations with Albiston then it might be
difficult for Albiston to argue that the expectations were unreasonable.
Both of the implied terms rank as contract conditions, and therefore if Greenhoff can
demonstrate a breach he will be entitled to repudiate the contract.
(c)
Greenhoff has a contract with Holton for the supply of a service and Holton appears to
be in clear breach of the agreement: the service is not being provided during certain
periods when it should be. It seems certain that Holton is not acting with the
‘reasonable care and skill’ demanded by SGSA 1982.
It may be that Greenhoff would wish to repudiate the contract, with a view to engaging
another security firm. However, the implied term as to reasonable care and skill is not
specifically named as a condition in SGSA 1982 so this remedy is not automatically
available.
Alternatively, Greenhoff may wish to sue for damages. The problem here, though, is to
demonstrate that any actual loss has occurred. There is nothing in the question to
suggest, for example, that the premises have ever been burgled on a Sunday morning.
We are not told either of any liquidated damages clause in the contract.
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Legal Aspects in Purchasing and Supply
Houston
This is another question modelled on a past CIPS examination. In part (a) the ‘battle of the forms’ is
relevant, but you must also consider when acceptance takes place. In part (b) you should note that
Houston does not appear to have protested against late delivery of the second consignment: the case
of Rickards (Charles) Ltd v Oppenheim (1950) is relevant. In part (c) you should consider
whether the force majeure clause, if it is incorporated in the contract, covers the events described.
Part (d) requires both a description of the principles of liquidated damages, and a list of the
advantages.
(a)
This is a typical example of the so-called ‘battle of the forms’, in which each party has
sought to incorporate its own standard terms as the basis of the contract. The courts
have usually approached these situations by analysing them in terms of offer and
counter-offer, each new step in the proceedings in effect being a counter-offer which
negates anything said previously. This approach is illustrated in cases such as Butler
Machine Tool Co Ltd v Ex-Cell-O Corporation (1979).
On this analysis it is sometimes said that the battle will be won by ‘the party that fires
the last shot’. In many cases it is the seller who is in the best position to do so, by
actual delivery of the goods in question accompanied by a delivery note repeating the
standard terms of supply. Buyers may then be deemed to have accepted those terms if
a storeman signs for them.
In the present case, Jordan’s quotation is an offer, but it is superseded by the counteroffer contained in Houston’s order. The position then becomes unclear, because in
response to the order Jordan returns both the copy order form (apparently accepting
on Houston’s terms) and its own ‘Acknowledgement of Order’ (apparently re-stating
its own offer). At this stage there are two possible analyses.
•
•
On very similar facts, the decision in the Ex-cell-O Corpn case was that the
sale had been concluded on the buyer’s terms. The seller was held to have
accepted them (by returning the equivalent of the copy order form in the
present question). The seller’s simultaneous re-statement of his own terms was
held to apply only to a specific term contained therein. On this analysis, the
contract has been concluded on Houston’s terms, and becomes binding when
Jordan returns the copy order form.
The alternative is to say that Jordan has repeated the offer on his terms, and
Houston’s offer therefore lapses. The sale is therefore concluded on Jordan’s
terms when Houston accepts the repeated offer.
The second analysis leaves open the question of when Houston accepts the offer. In
general, this question is governed by ss 34–35 of the Sale of Goods Act 1979. Mere
signature of Coppell’s documentation may not be sufficient to establish acceptance.
However, the question leaves us to infer that Houston proceeded to use the goods for
whatever purpose they were originally intended. This act, ‘inconsistent with the seller’s
ownership’, would amount to acceptance and the contract becomes binding.
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Suggested Solutions to Practice Questions
(b)
Assuming that the contract has been concluded on Houston’s terms, the time of
delivery is an essential part of the agreement, ie it is a contractual condition. (Even if
Jordan’s terms apply, this is likely to remain true, following the rule laid down in
Hartley v Hymans (1920): ‘In ordinary commercial contracts for the sale of goods
the rule clearly is that time is prima facie of the essence with respect to delivery’.) The
importance of this is that breach of condition entitles Houston not merely to claim
damages, but to repudiate the contract.
However, a party may by his conduct waive his right to insist on strict compliance with
such a condition. In the present case, Houston appears to have done exactly this by not
protesting over late delivery of the second consignment. The case of Rickards
(Charles) Ltd v Oppenheim (1950) establishes that in such cases the party may reassert his insistence on strict compliance by giving reasonable notice. In the present
case, Houston should be advised to reply immediately to the fax of 25 October to reassert time of delivery as a contractual condition. This will re-establish his right to
repudiate the contract if Jordan is again in breach.
(c)
The clause in Jordan’s terms is a force majeure clause.
The first question is whether the clause has been incorporated in the contract. This
depends on whether it is Houston’s or Jordan’s terms that bind the contract. As
described in part (a) above, no conclusive answer is possible to this question.
Assuming that Jordan’s terms apply, the next question is whether the clause covers the
events described. This question is not quite clear cut: the clause refers to ‘delays’ by
Jordan’s suppliers, while the fax refers to ‘supplier shortages’, which is not quite the
same thing. However, a more reasonable interpretation would be that the term does
indeed cover the problem described.
Finally, the usual tests of reasonableness under the Unfair Contract Terms Act 1977
would need to be satisfied, but prima facie the clause does not appear to be an
unreasonable one.
(d)
Many contracts include a term providing that specified damages shall be payable in the
event of a particular type of breach. The specified sum should be a genuine preestimate of the actual loss that will be suffered in the event of the breach taking place,
and not a penalty included to enforce performance. Evidence that the clause is for
penalty rather than liquidated damages might be if the sum were excessive in amount,
or if a single sum were stipulated in respect of many different types of breach.
The advantages of a liquidated damages clause are briefly:
•
•
•
certainty – both parties are aware of the consequences of breach
avoidance of costly proceedings – the measure of damages in the event of breach
does not need to be argued in court
a limit on the seller’s liability, as shown by such cases as Cellulose Acetate Silk
Company Ltd v Widnes Foundry (1925) Ltd (1933).
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