Implied condition of satisfactory
quality
BOMINFLOT v PETROPLUS [2009]
In relation to international sales contracts, the High Court clarified when the ‘term’ that goods will be of satisfactory quality implied by the Sale of Goods Act 1979 (SAGA) will apply in a free on board (FOB) contract and what that term means. This term is also implied at common law, with an additional term that the goods should remain in accordance with any contractual specification after delivery for a reasonable period.
The case also highlighted the now largely historical distinction between lesser contractual provisions or ‘warranties’, breach of which only gives rise to a claim for damages, and ‘conditions’, which are more important provisions and whose breach gives rise to a claim for damages and a right to terminate the contract. This distinction is now much less important than it ever was because most contracts contain express provisions dealing with rights to terminate and these generally sidestep the distinction by simply referring to ‘material breaches’. However, as P learned to its cost, this distinction does retain some significance when excluding the operation of terms implied by statute.
decision:
- The Court held that unless there is an express provision stating otherwise, a term is implied into a FOB contract that goods will be of satisfactory quality not only when delivered on to the means of transportation but also for a reasonable time afterwards (under section 14(2) of SAGA). ‘Satisfactory quality’ here means that the goods must meet the standard that a reasonable person would regard as satisfactory taking into account factors such as description, price, appearance, safety, durability and fitness for all normal purposes.
- A term of satisfactory quality is also implied at common law, with the further requirement that the goods should also remain in line with any contractual specification for a reasonable time after delivery (again, unless otherwise stated).
- Considering the different types of international sales contracts, ‘a reasonable time’ for Cost, Insurance & Freight or Cost & Freight contracts (where a seller knows the destination of the goods), was considered to be the length of the normal journey and a ‘reasonable’ time thereafter. However, in a FOB contract (where the seller does not know the destination), what constitutes ‘a reasonable time’ would depend on the circumstances of the contract.
- Although P as seller had excluded implied and express “guarantees, warranties or representations” relating to satisfactory quality, they did not exclude implied conditions. The contract was governed by English law and as the implied terms of satisfactory quality under section 14(2) and under the common law are both regarded by the courts as conditions, the wording in the contract did not exclude the implied conditions and they therefore applied.
points to note:
- This case is worth noting by those involved with international sales contracts as it clarifies the scope of the implied term of satisfactory quality in FOB contracts regarding the test of reasonable time.
- It is also a pertinent reminder that having given express warranties in a contract, sellers should exclude conditions explicitly, using the word "condition" alongside warranties, terms, representations etc in any exclusion clause. To avoid any confusion, it may be advisable to expressly exclude the statutory implied conditions of satisfactory quality (and fitness for purpose). It is probably worthwhile checking that all standard contracts do this as a matter of course.
- In a very unscientific survey we came across a number of standard supplier contracts which state only that: ‘Except as expressly stated, Licensor makes no representations or warranties of any kind, either express or implied with respect to this Agreement or the Licensed Software provided by Licensor to Customer including, without limitation, any implied warranties of merchantability, fitness for a particular purpose … and Licensor expressly disclaims any such warranties.’
- This is typical of contracts originating from the US where there is, we believe, generally no distinction between ‘warranties’ and ‘conditions’. As made clear in the judgment, such wording will simply not be effective under English law in protecting the supplier/licensor as intended. This case may therefore also be of particular interest to US lawyers and those advising on contracts derived from the States but governed by English law.