The sale of goods and services is an everyday occurrence for all of us and because it is so common we all too often take the transaction for granted. We give no thought to what is occurring legally and, if we do, we assume we understand the terms and conditions which regulate our transactions. Sound a little like you? If so, be warned, you are playing with fire. There are pitfalls which can prove to be a death trap for the unwary supplier, pitfalls that with a little care can often be avoided.
What are the terms of a contract for sale of goods or services? Do we really know?
Originally contracts were regulated wholly by the terms of the agreement between the parties. If the agreement was written the terms were easily identifiable. If not written the terms were (and remain) difficult to identify – some are expressly agreed whilst others may be implied by the circumstances or the courts.
Today in Australia however legislation implies many warranties and conditions into contracts for the sale of goods and services. Warranties and conditions concerning defects, fitness for purposes and merchantable quality, being amongst the most common, but far from the full story. Every supplier must familiarise itself with the implied terms and conditions as they impose obligations. Obligations which, if not satisfied, can give rise to serious consequences. If you don’t know what terms and conditions are implied, and when they apply, it’s unlikely you are in a position to comply with your obligations and thus you are at high risk.
Can we avoid the implied terms?
Some can be expressly excluded by your supply contract. Others are mandatory and can’t be excluded. These obligations bind you no matter what, and you must wear the consequences of failing to comply with the obligations.
What is my liability?
If you fail to satisfy the implied obligations you may be liable.
Liable for what?
In many instances you are liable to replace or make good defective goods/services or refund the price. If defective goods or services supplied by you result in the purchaser or a third party suffering loss or damage you may be liable for the loss and damage, be it loss of income or injury to person or property (often called consequential loss).
Can I limit my liability?
Even though you can’t avoid many of the implied obligations, in some cases you can limit your liability if it turns out your goods or services were defective. In particular, you may be able to limit your liability to replacing, repairing or refunding the price, and expressly exclude liability for consequential loss and damage.
What should my contract include?
First it should be in writing.
- it should expressly exclude all implied statutory warranties that can be lawfully excluded; and
- to the extent that you can’t exclude implied terms, it should expressly limit your liability to the fullest extent permitted by law – particularly exclusion from liability for consequential loss and damage.
Review your supply contract regularly. Don’t fall into the trap of simply relying on someone else’s’. Familiarise yourself with the issues and satisfy yourself that your contract adequately addresses the issues.
Consider the following when doing so:
- Nature and value of the goods: consumer protection legislation implies warranties in all contracts for the sale of goods. For example: the New South Wales Sale of Goods legislation which applies to transactions relating to goods of less than $20,000 in value. The Trade Practices Act also implies warranties which can only be limited by agreement if the goods concerned are beneath a certain value and not ordinarily acquired for personal, domestic or household use or consumption.
- Relative bargaining power: the Contracts Review Act (New South Wales) 1980 and the unconscionable conduct provisions of the Trade Practices Act (s51A) and the various state Fair Trading Acts allow the courts to review and when necessary alter the terms of contracts between parties in circumstances where there was an inequality of bargaining power between the parties, the contract operates unfairly against the weaker party and other circumstances exist which warrant court intervention;
- Pre-contract conduct of the parties: the conduct of the parties prior to the time when the contract for sale of goods is entered into is also relevant. Sections 52 and 53 of the Trade Practices Act and the corresponding provisions of the Fair Trading Acts in each state for example, empower the court to review and when necessary alter the terms of a contract or order damages be paid where a party is induced to entered a contract based on false or misleading conduct of the other party, regardless of the terms of the contract itself.
- A party’s relationship to the goods: of critical importance is Division 2A of Part V of the Trade Practices Act, which deals with the liability of manufacturers and importers. The Act provides for a regime of strict liability. The Act provides that a person who is injured, or whose property is damaged by a defective product, will have a right to compensation against the manufacturer of the product. For the purpose of this legislation, goods are ‘defective’ if they do not have the degree of safety which persons generally are entitled to expect in all the circumstances. The manufacturer/importer can escape liability where it can prove one of a number of defences, the most important being that the goods were not defective when supplied by the manufacturer/importer or that the goods represented the ‘state of the art’.