UK: "Invisible" Contractual Obligations – Appreciating The Importance Of Implied Terms

Last Updated: 17 November 2017
Article by Hatty Sumption and Peter Ward

When it comes to quality disputes, we all know where to look to see who is right and who is wrong.

Or do we?

Much time is spent by parties agreeing contract terms - the seller determining the specification of the goods he is in a position to supply and the buyer considering carefully whether goods of that specification will, in fact, suit his purpose and are worth what he is being ask to pay. It is, therefore, not surprising that when complaints are made following delivery of the goods, the parties rush to examine the quality clauses, the sometimes lengthy schedules setting out the quality parameters and rejection limits, and that they will also carefully examine the assays.

A recent arbitration case was a salutary reminder that the seller is likely to have made promises as to quality that do not feature anywhere on the face of the contract. Such promises are incorporated into English law contracts as a result of the Sale of Goods Act 1979 (the "Act") and those who buy and sell goods need to be familiar with these "invisible" promises if they are to avoid lengthy and expensive litigation.

This article seeks to explain how they work, the difficulties that they can give rise to and how to deal with them effectively.

Implied terms at law

A sales contract is made up of both express terms (those which are specifically stated or expressed in the contract) and implied terms (those which are implied by the law, but not expressed in the contract). An important term implied into commercial contracts governed by English law is found at section 14(2) of the Act:

"Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality."

This term will apply to all commercial sale contracts, unless it is expressly excluded (discussed further below). The term is a condition of the contract, meaning that, if it is breached, the buyer will have a right to (i) reject the goods and terminate the contract and (ii) claim damages from the seller for any losses incurred.

The term "satisfactory quality" under s.14(2) of the Act is vague, and although sections 14(2A) and (2B) do provide some assistance as to its interpretation, these sections are also hard to pin down:

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods—

  1. fitness for all the purposes for which goods of the kind in question are commonly supplied,
  2. appearance and finish,
  3. freedom from minor defects,
  4. safety, and
  5. durability.

It operates independently of any express clauses in the contract as to the quality or specification of the goods in question. Therefore, even where goods are apparently on spec, in that they fall within the contractual specifications or other similar clause set out in the contract, they can still be considered to be of unsatisfactory quality pursuant to s.14(2) of the Act, and the seller can still be held to be in breach as a result if, for some other reason, they are deemed to be sub- standard.

Implied terms in a commercial context

The question of whether an on-spec cargo is of satisfactory quality or not is often extremely difficult to determine. This is because, when it comes to certain quality parameters, while it is often possible to say what is acceptable, and what is unacceptable, there is often a significant grey area between these two points. That is, after all, why parties agree rejection limits and specifications which effectively identify a possibly arbitrary cut-off point – a hard line one side of which is good and the other side of which is bad. This has the considerable benefit of certainty. Implied terms, unfortunately, rarely provide such certainty.

Take the example of metal concentrates. Such concentrates undergo a natural oxidation process when exposed to air, and material which is too oxidised can be difficult to process. Perhaps because this is a natural process that evolves over time, the level of oxidation does not usually feature in the quality clauses for the sale of such concentrates. A court or tribunal would, therefore, have to establish what degree of oxidation would render the concentrates unsatisfactory and to do that, it has to determine how much oxidation is acceptable. This is not an easy question if there is no industry standard, which with such parameters, there usually isn't. The test, as set out above is "the standard that a reasonable person would regard as satisfactory" – hardly a helpful or precise formulation.

It may be possible to establish that goods which are, say, 2% oxidised pose no problem to the smelters, while, at the other end of the scale, a level of 20% undoubtedly does, but it is not clear at what point between these two figures the line has to be drawn. If your cargo is in that middle ground, you will be faced with potentially expensive legal proceedings as the Court or Tribunal looks for a basis upon which to make a finding as to the length of an unknown piece of string. For this reason, the outcomes of such cases can be very difficult to predict.

Excluding implied conditions under the Act

Given the above, a seller would always be advised to exclude the implied terms of the Act from their contracts. The good news for sellers is that the Act can be excluded by agreement. Very often such an exclusion clause will attempt to exclude all implied terms relating to the quality or fitness for purpose of the product, however, and not just those under the Act. Case law has established that comprehensive wording needs to be used in order to exclude these conditions, such as that relating to satisfactory quality, arising under the Act, so care must be taken when drafting such exclusions.

Buyers may be less happy to exclude the implied terms, and should, where possible, resist any attempt at exclusion of implied terms in the contract, in order to retain the widest possible assortment of rights against the seller. That said, even buyers would do better to think carefully about whether there is anything that is not in the specification for which they do, in fact, want to agree an express term. Relying on questions of "satisfactory quality" is an uncertain business.

Conclusion

Implied terms may be "invisible" in a contract, but they are no less important than express terms. However, it is usually very difficult to determine whether an on spec product is of satisfactory quality, and as such the result of any legal decision in this regard can be unpredictable.

A great deal of uncertainty can be removed if both buyers and sellers give greater consideration to those features of the goods in question which are not mentioned in the contract, but which could cause problems in unusually large (or small) quantities. Any such analysis should also encompass the list of aspects that are likely to be taken into account when assessing quality, as set out at section 14(2B) of the Act, above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions