Implied Condition (Fitness for Purpose) PDF

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Commercial Law Written Assignment

Individual Assignment LAW 3248 Section 4 Commercial Law

Sara Jailany (1717276) Assoc Prof Zuraidah bt Haji Ali Semester 2 19/20

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Commercial Law Written Assignment

QUESTION 1 The agreement between Cooker’s Smelters Ltd (CSL) and Innowarm Sdn Bhd (ISB) pertained to the sale and supply of a melting furnace with a minimum temperature of 2600F by the former to the latter. However, the furnace which was supplied did not meet this specification. The issue here is whether CSL’s failure to supply furnace with a minimum temperature of 2600F amounts to a breach of an implied condition as to fitness for particular purpose? Section 16(1)(a) of the Sale of Goods Act1 is an exception to the caveat emptor rule, wherein it implies that in circumstances where the particular purpose intended for the use of a good has been expressly or impliedly disclosed to the seller, there exists a condition for said goods to be reasonably fit for the said purpose. The conditions for section 16(1)(a) was spelt out in Khong Seng v Ng Teong Kiat Biscuit Factory Ltd [1963] 1 MLJ 3882, which involved the supply of tallow unfit for the purpose of producing biscuits. These conditions are (i) the particular purpose for which the goods is to be used is made known to the seller, (ii) reliance on the seller’s skill and judgment as to the suitability of the goods for that purpose, and (iii) the goods are of a description which it is in the course of the seller’s business to supply. Firstly, it should be noted that the disclosure of purpose need not be expressly indicated if the goods’ description has only a sole purpose. In these kind of cases, an obvious purpose is inferred. In Priest v Last [1903] 2 KB 1483 it was held that the condition of ‘disclosure of purpose’ has been satisfied in a sale of “hot water bottle” despite the buyer having not expressly indicating his purpose for the use of hot water bottle to the seller. This is because it was inferred that the purpose of a “hot water bottle” is to withstand hot water without the bearer of the water bottle sustaining any burn injuries. Similarly, in Union Alloy (M) Sdn Bhd V Sykt Pembenaan Yeoh Tiong Lay Sdn Bhd [1993] 3 MLJ 1674 the disclosure of particular purpose of a hoist was implied as its sole purpose was for vertical transportation. Applying to the current case, a melting furnace has only a sole purpose that is to liquefy solid materials like gold, silver, or copper by way of overheating said material. The mechanism of a furnace is heavily structured based on the concept of melting points. Essentially, this requires said furnace to be capable of generating temperatures above that of a particular material’s melting point for the metal to begin melting 5. It is general knowledge that different types of metals have different melting points. Being a company which specializes in the manufacture of smelters and furnaces, CSL is reasonably expected to know the imperativeness of complying with the clients’ agreed temperatures when manufacturing furnaces. The failure to comply with the temperature results in the inability of the metal to melt. Because the sole purpose of a furnace is to melt metal, it is only reasonable for CSL to know that a furnace of 2600°F is to be used for the melting of metals like nickel and iron, their melting points of which are 2651°F and 2800°F respectively, as compared to metals 1 Section 16(1)(a), Sale of Goods Act 1957 (Malaysia), Act 382. 2 Khong Seng v Ng Teong Kiat Biscuit Factory Ltd [1963] 1 MLJ 388, 391. 3 Priest v Last [1903] 2 KB 148, 153. 4 Union Alloy (M) Sdn Bhd V Sykt Pembenaan Yeoh Tiong Lay Sdn Bhd [1993] 3 MLJ 167, 172. 5 S.T. Foo, Success Physics SPM, Oxford Fajar Sdn Bhd, Selangor, 2008, p. 208

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Commercial Law Written Assignment with a lower melting point like gold and copper, both of which has a melting point of 1984°F6. Even if CSL is unaware of the melting points of different type of metals, CSL is still expected to know the basic principle that a particular type of metal will not melt unless the furnace reaches a temperature above the melting point of that particular metal. The fact that the client specifically ordered for a furnace with a temperature of 2600°F denotes that they intend to use it to melt metals with melting points of a minimum 2600°F. In short, it is concluded that a furnance of 2600°F has a sole purpose of melting metals with a minimum melting point of 2600°F. That being said, the condition of disclosure of purpose is satisfied as it is implied through the good’s sole purpose. Moving on, the second condition is reliance on the seller’s skill and judgment. The Malaysian courts have adopted the view that in cases where the seller is aware of the purpose for the goods, reliance is assumed. To quote Kamalanathan Ratnam J in Sunrise Bhd & Anor v L & M Agencies Sdn Bhd [1999] 3 MLJ 544 7, which concerns tower cranes for the purpose of vertical transportation of materials and equipment at an upper construction site: “If the defendant knows the purpose for which the plaintiff needs the particular goods then it is clear that the plaintiff is relying on the seller's skill and judgment to supply the suitable goods to cater for the particular purpose for which the goods were required…” Hence, it is evident that reliance on the seller’s skill and judgment can be satisfied if the first condition, i.e disclosure of purpose, is satisfied. Applying to the case at hand, as the disclosure of purpose for the furnace has been implied, it follows therefore that the reliance on the seller’s skill and judgment in manufacturing a melting furnace with a minimum melting point of 2600°F is assumed. Thus, the second condition is fulfilled. Lastly, the penultimate condition for implied condition as to fitness is that the goods are of a description which is in the course of the seller’s business to supply. Applying to the present case, being a company which is specialised in smelters, it is evident that CSL deals with furnaces in its course of business. This is because a furnace is essential for the purposes of smelting metal from its ore. Hence, since all conditions are proven, it is concluded that CSL’s failure to supply ISB with melting furnace with temperature lower than 2600°F amounts to a breach of implied condition as to fitness for particular purpose under section 16(1)(a)8. Now that it is established that CSL has breached an implied condition as to fitness for particular purpose, the question that arises is in regards to the remedies available to ISB. By virtue of section 13(1)9, the breach of an implied condition entitles the buyer to elect either to treat such breach as a breach of condition under section 12(1)10 or to treat it as a breach of warranty under section 5911 subject to section 13(2)12 and section 13(3)13. In this 6 Soi Tai. Ooi, PMR Science, 3rd ed., Oxford Fajar, Shah Alam, 2011, p. 156. 7 Sunrise Bhd & Anor V L & M Agencies Sdn Bhd [1999] 3 MLJ 544, 555. 8 Section 16(1)(a), Sale of Goods Act 1957 (Malaysia), Act 382. 9 Section 13(1), Sale of Goods Act 1957 (Malaysia), Act 382. 10 Section 12(1), Sale of Goods Act 1957 (Malaysia), Act 382. 11 Section 59, Sale of Goods Act 1957 (Malaysia), Act 382. 12 Section 13(2), Sale of Goods Act 1957 (Malaysia), Act 382. 13 Section 13(3), Sale of Goods Act 1957 (Malaysia), Act 382.

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Commercial Law Written Assignment case, seeing that the furnace supplied by CLS is of no use if it is unable to melt metals with melting points above 2600F as intended by ISB, it is advised for ISB to treat the breach as a breach of condition under section 12(1)14 so as to repudiate the contract and recover the purchase price of the furnace. This option is open to the plaintiff because it cannot be said that there is acceptance of goods (which would dictate the plaintiff to treat the breach as a breach of warranty) since the plaintiff did not conduct any of the acts as stated under section 1315. The recovered sums can thus be used to purchase a new melting furnace which complies with the specifications. Alternatively, it is also open for the plaintiffs to treat the breach as a breach of warranty under section 5916 and claim for damages if the plaintiff wishes to retain the furnace for the purpose of melting other types of metals with a lower melting point. To conclude, CSL’s failure to supply ISB with a furnace with a minimum melting point of 2600°F constitutes a breach of implied condition as to fitness for particular purpose. This is because the purpose is implied based on the fact that the melting furnace has only one sole purpose. As such, ISB may reject the furnace and recover the purchase price by treating the breach as a breach of condition under section 12(1)17 or ISB may also retain the furnace and claim for damages instead, under section 1318 by treating the breach as a breach of warranty.

14 Section 12(1), Sale of Goods Act 1957 (Malaysia), Act 382. 15 Section 13, Sale of Goods Act 1957 (Malaysia), Act 382. 16 Section 59, Sale of Goods Act 1957 (Malaysia), Act 382. 17 Section 12(1), Sale of Goods Act 1957 (Malaysia), Act 382. 18 Section 13, Sale of Goods Act 1957 (Malaysia), Act 382.

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Commercial Law Written Assignment QUESTION 2 Four out of five sacks of tapioca flour supplied to ABC by Best Flour Sdn Bhd has been declared unfit for human consumption due to the discolouration of the flour from the red ink painted on its sacks. The issue that arises here is whether Best Flour Sdn Bhd had breached an implied condition as to merchantability when it supplied ABC with discoloured tapioca flour? Section 16(1)(b)19 implies a condition that goods shall be of merchantable quality unless the buyer has examined the goods. The conditions under this section is that (i) the goods is bought ‘by description from a seller who deals in goods of that description’, (ii) the goods must be of merchantable quality. A ‘good bought by description’ refers to either specific goods bought in reliance of the seller’s description or, any unascertained goods. For example, in Clariant Masterbatches (M) Sdn Bhd v Prestige Dynamics Industries Sdn Bhd [2019] 3 MLJ 70120 the court held that a masterbatch additive ordered by the plaintiff via a purchase order sent to the seller detailing the product information and based on samples, constitutes a sale by description. With regards to fungible items like wheat, sugar, rice, or as in the current case, flour, the goods will be classified as unascertained goods unless and until it is separated and appropriated. In Re Wait [1927] 1 Ch 606 21, the unseparated wheat bought by the buyer was considered to be unascertained goods. Flour is classified as an unascertained good as it is a fungible item, to be ascertained upon separation. Hence, it is submitted that the tapioca flour was indeed bought by description. Further, the flour must also be bought from ‘a seller who deals in goods of that description’ in order to fulfil section 16(1)(b)22. This means that the specific goods in question need not necessarily be previously sold by the seller. This condition is fulfilled so long as the goods is a kind in which the seller would normally sell in the course of his business. This is as per Ashton Piggeries Ltd v Cristopher Hill Ltd [1992] AC 44123 where it was held that mink food was indeed the kind of goods in the course of the seller’s business to supply, that is, ‘animal feed’. Applying to the current case, it is evident that this condition is fulfilled because the tapioca flour, being an unascertained good, is classified as a ‘good bought by description’. Further, the said tapioca flour was also bought from ‘from a seller who deals in goods of that description’ because Best Flour Sdn Bhd is a company that primarily sells flour. Hence, tapioca flour is indubitably a kind of good which the seller deals with. ‘Merchantable quality’ as described in Kendall (Henry) & Sons (a firm) v William Lillico & Sons Ltd [1968] 2 All ER 44424 means ‘commercially saleable’, that is, “the goods 19 Section 16(1)(b), Sale of Goods Act 1957 (Malaysia), Act 382. 20 Clariant Masterbatches (M) Sdn Bhd v Prestige Dynamics Industries Sdn Bhd [2019] 3 MLJ 701, 713. 21 Re Wait [1927] 1 Ch 606, 608. 22 Section 16(1)(b), Sale of Goods Act 1957 (Malaysia), Act 382. 23 Ashton Piggeries Ltd v Cristopher Hill Ltd [1992] AC 441, 504. 24 Kendall (Henry) & Sons (a firm) v William Lillico & Sons Ltd [1968] 2 All ER 444, 449.

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Commercial Law Written Assignment sold are fit for the specific use to which they were sold”. The test for merchantability as stated in David Jones v Willis [1934] 52 CLR 110 25 is that ‘merchantable quality’ is to be examined with reference to the goods’ description. This means that, should the goods be that of a single purpose good, the goods will be declared unmerchantable if it is unfit for the use of that single purpose. However, if a good is multi-purpose, it is merchantable so long as it is fit for use for any one of these purposes. Here, the goods can only be considered unmerchantable if the buyer notifies the seller of the particular purpose intended for the use of the goods when the goods is unfit for that particular purpose but fit for other purposes. 26 Further, the Federal Court in Lau Hee Teah v Hargill Engineering Sdn Bhd & Anor [1980] 1 MLJ 14527 emphasized that in order for a good to be ‘unmerchantable’, the defects in said good must be so fundamental as to render the good dysfunctional beyond repair and thus useless for any of its purpose. The goods in this case pertained to a loader. This principle was also recently illustrated in Kian Hap Enterprise Sdn Bhd v Lee Man On [2017] MLJU 63828 wherein the learned judge refused to declare the tuning machine unmerchantable because although it is not working, it is still repairable. Similarly, in Asia Pacific Information Services Sdn Bhd v Cycle & Carriage Bintang Berhad & Anor Mercedes Benz Malaysia Sdn Bhd [2010] MLJU 233 29, the court opined that although the car encountered major problems, it cannot however be declared unmerchantable as it is still roadworthy after repairs have been done. In QQ Trading Sdn. Bhd. v Hong Cheng Seafood Supplies Sdn. Bhd. [2020] MLJU 40 , the learned judge found that the since the seller knew that the prawns ordered by the buyer was for the purpose of export, hence, an implied condition as to merchantability of the prawns is formed as the buyer relies on the seller’s skill and judgment. Applying to the current case, it is evident that the four sacks of tapioca flour supplied by Best Flour Sdn Bhd are not of merchantable quality. This is because the sole purpose of tapioca flour is for human consumption and the discolouration from the sacks is beyond repair and has rendered the flour unfit for human consumption, as declared so by the health regulations, thereby rendering it useless for its purpose and thus, unmerchantable. It is therefore obvious that the defect of goods in this case has gone to the root of the contract, thus entitling the plaintiff to reject said goods and to recover purchase price paid to the defendant, if any. On the other hand, a possible counter argument by Best Flour Sdn Bhd could be that by virtue of the proviso to section 16(1)(b)30, ABC has waived their right to sue for breach of implied condition by accepting the delivery of the goods earlier that week. For example, in the recent case of Kian Hap Enterprise Sdn Bhd v Lee Man On [2017] MLJU 63831, the court found that the proviso for section 16(1)(b) is triggered, in that the plaintiff is deemed to have unconditionally accepted the defendant’s faulty machine as they did not reject the machine until much later but instead had kept and dealt with the machine in a manner that asserts their right over the machine. However, in response to this possible counter argument, it is necessary to distinguish the aforementioned case with the current case. It cannot be said that ABC has unconditionally accepted the tapioca flour. This is because ABC has conveyed their intention to return the discoloured tapioca flour as soon as the discolouration was 25 David Jones v Willis [1934] 52 CLR 110, 55. 26 B. Vohrah & Wu Min Aun, The Commercial Law of Malaysia, 2nd ed., Pearson Malaysia, Selangor, 2007, 206. 27 Lau Hee Teah v Hargill Engineering Sdn Bhd & Anor [1980] 1 MLJ 145, 147. 28 Kian Hap Enterprise Sdn Bhd v Lee Man On [2017] MLJU 638, 16. 29 Asia Pacific Information Services Sdn Bhd v Cycle & Carriage Bintang Berhad & Anor Mercedes Benz Malaysia Sdn Bhd [2010] MLJU 233, 4. 30 Section 16(1)(b), Sale of Goods Act 1957 (Malaysia), Act 382. 31 Kian Hap Enterprise Sdn Bhd v Lee Man On [2017] MLJU 638, 14.

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Commercial Law Written Assignment discovered. This was also done within a reasonable time frame, that is, the same week of the delivery of said flour. It is also erroneous to say that ABC has dealt with the flour in a manner that asserts their right over it as the flour has not been used in any way nor sold to another. In short, it is submitted that the Best Flour Sdn Bhd has breached an implied condition as to merchantability when it supplied ABC with discoloured flour which has been declared unfit for human consumption. This is because the damage is irreparable. The remedy that can be relied on by ABC under section 1232 is to return the goods and recover the purchase price.

32 Section 12, Sale of Goods Act 1957 (Malaysia), Act 382

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