Seminar 4 - PQ - DSOG - problem question PDF

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DSOG - problem question...

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Bluebottle is a merchant in business as a general supplier to ships docked at Southampton. Finn is a ship owner whose fleet, as Bluebottle knows, includes a passenger liner, the Helvetia. Finn visits Bluebottle’s warehouse to order various items for the ‘Helvetia’ now docked at Southampton. Finn asks Bluebottle whether he has supplies of Ruritanian fuel oil. Bluebottle indicates a 50,000 gallon tank which he states to be full. Finn says: “Please deliver 2,000 gallons to the main fuel tanks of the Helvetia next Friday”. Bluebottle agrees to do so, and a price is agreed. Ruritanian fuel oil is generally known to the trade, and to both Finn and Bluebottle, to be of a quality inferior to that of other fuel oils on the market, but also cheaper. On this visit Finn also sees a portable deck crane which Bluebottle states to be the only one in stock. Finn likes the look of the crane, and upon hearing that the price is only £2,000 - a low price for this kind of crane - says “I shall take that crane too. Please deliver it with the fuel”. Bluebottle indicates his agreement. The parties sign a written contract in respect of both sales which contains a term which states that “no warranty is given as to the condition, description, quality, fitness or otherwise of good supplied, and any warranty or condition provided or implied by law to the contrary is negative and excluded.” The fuel and the crane are duly delivered by a carrier and they are paid for by Finn on arrival. When the engines of the Helvetia are started three days later they come to a shuddering halt. The boilers are completely clogged by Ruritanian fuel oil. The oil is in fact of average quality for Ruritanian fuel oil, but is unsuitable for use in ships’ boilers, except those specially designed to use it. The main girder of the crane also breaks in half when it is first used because of a crack in the metal not apparent on examination. Finn tells Bluebottle that he is returning the crane, and wants his money back, both for the crane and the oil. He also tells Bluebottle that he intends to claim for the cost of cleaning the Helvetia’s tanks and for the loss of a valuable charter which he will lose because of the consequent delays. Bluebottle refuses to take back the crane or refund any money. Discuss the legal position of the parties.

Points to consider: The contract of sale The contract for the sale of the oil and the crane are made between parties acting in the course of a business and concern sales (defined s 2(1) SOGA) which would be covered by the Act. As a result, the SOGA applies to the agreements made, and implied terms stipulating that the goods correspond with their description (s 13); are of satisfactory quality (14(2)) and are reasonably fit for the buyer’s purposes (14(3) will be implied into the contract, unless varied or excluded by the express terms. The exclusion clause SOGA provides a set of default rules, that is, the provisions of SOGA will apply insofar as the parties have not stipulated for any alternative in the express terms. Bluebottle will claim that they have excluded their liability for breach of the implied terms (assuming they have been breached, which we consider below). The exemption clause in the contract is subject to section 6 UCTA 1977 and must satisfy the test of ‘reasonableness’. In assessing the reasonableness of the exclusion clause, the courts will take into account the factors set out in section 11 of UCTA (e.g., when reasonableness is assessed and burden of proof) and Schedule 2 – this includes matters such as the relative bargaining

position of the parties, whether there was an inducement to agree to the term (such as a cheaper price, which implies that more risk of quality defects, etc., is placed on the buyer), availability of alternatives, whether goods were made to special order, whether buyer should have known of the existence of the term. It is usually not problematic in B2B contracts for such excluding terms to be reasonable, particularly if the parties are of roughly equal bargaining power. Courts tend to adopt a freedom of contract approach rather than a paternalistic attitude, and so it is likely that the term is reasonable (Watford v Sanderson). This is particularly since UCTA was designed to protect consumers in situations of ‘inequality of bargaining power’ (now covered by the Consumer Rights Act 2015) or where one business deals on the standard contract terms of the other. There is no indication here that the parties are dealings on the seller’s terms. This may be a negotiated contract which also indicates the reasonableness of the terms. The fact that both types of good are offered at cheaper prices suggests that the risk assumed by Bluebottle for the quality of the goods is reduced, and the exclusion is reasonable. [NB – it doesn’t matter when you consider the UCTA reasonableness issue – you could deal with it first, or after you have considered whether the implied terms have been breached, but you should consider it at some point. Even if you consider that Bluebottle has successfully excluded the liability, you should still go on to consider whether there has been any breach and likely remedies]. Ruritanian fuel oil Main issue to consider here is if a breach of contract has occurred. F might claim there has been a breach of section 13 SOGA. This is a sale by description since F has identified a certain type of oil, B has confirmed that the oil in the tank is of that description and F has not inspected or examined the oil. Under s 13 where a sale is made by description, there is an implied condition that the goods must correspond with the description – which refers to an important commercial aspect of the goods (but not their quality). Did the goods correspond with the description? The buyer asked for ‘Ruritanian fuel oil’, and this is what was delivered as requested (Proton Energy could be used as the authority to support this point, or Ashington Piggeries which makes the distinction between product description and quality). This suggests there is no breach of s 13 of SOGA. Section 14(2) – Was the oil of ‘satisfactory quality? Refer to the definition in section 14(2A). The oil should be assessed according to the standard for that kind of oil, which both parties know is cheaper and inferior than other types of oil. The fact that the Helvetia cannot run on the oil (which is described as ‘average’ quality, not ‘unsatisfactory’, in the facts) does not necessarily indicate the oil is not of SQ, since the problem could lie with the Helvetia’s design. We are told in the facts that the oil is only suitable for use in vessels of a specific design. The oil could still be ‘fit for all the purposes for which goods of the kind in question are commonly supplied’ (s 14(2B)(a)) even if it is not fit for the Helvetia’s engines. Any ‘unusual purposes’ to which the oil is put (such as trying it out in the wrong type of engine) are not covered by the implied term of ‘satisfactory quality’: Balmoral v Borealis. This suggests there is no breach of the general quality standard in 14(2). However there may be a breach of the more specific quality standard in s 14(3) - fitness for the buyer’s purposes (Jewson v Boyhan). Was the oil ‘fit for purpose’ under 14(3)? Evidently the oil is not fit for Helvetia’s engines, but is fit for a specific type of engine. As a merchant in the trade, B is probably aware that only specific sorts of

engine can run on Ruritanian oil. Arguably F impliedly makes his purpose known (‘deliver the oil to the Helvetia’) so that B must ensure the oil is fit for that particular purpose under the provisions of s 14(3) SOGA. However, the operation of the section also requires F to rely on Bluebottle. Arguably, F is in a better position to know than B whether the Helvetia is a vessel that can run on Ruritanian oil. Since F has asked for the oil by name, Bluebottle could probably have assumed (reasonably) that the Helvetia’s engines were altered to use that kind of oil. There is no indication that F has informed B of Helvetia’s particular requirements and no indication that F has relied on B at all regarding the suitability of the oil for the Helvetia (Slater v Finning; Wren v Holt). F may have relied on his own judgment in buying the oil, essentially taking the risk that it may not work. Even if B is aware of F’s mistake about the suitability of the oil, under the authority of Smith v Hughes, caveat emptor applies and B does not have to correct F’s misapprehension. To conclude, there does not appear to be a breach of any of the implied terms. If you want to argue the implied term(s) have been breached, explain your reasoning and consider the likely remedies. The provisions of section 14 SOGA are conditions, and breach ordinarily confers on the buyer the right to reject the goods, return them to the seller and recover money paid. However, if F has used the oil and it cannot be returned to Bluebottle, F may have lost the right to reject. This is because of the rules around ‘acceptance’ of the oil under s 11(4) SOGA and s 35. Even if the goods have not been examined, F’s consumption of the goods most likely renders them ‘accepted’ under s 35(1)(b), that is, F has done an act in relation to the goods which inconsistent with the ownership of the seller. This would convert any condition about the goods being of satisfactory quality or reasonably fit for purpose into a warranty (s11(4) SOGA). The remedy for breach of warranty is damages only. Damages would be assessed on a ‘breach of warranty of quality’ basis, that is, the difference in value between oil supplied and that suitable for use in the Helvetia (s 53(3) SOGA). These damages may be nominal, but there may also be a claim for any consequential losses provided they are not too remote under the application of normal contract law principles of remoteness of damage (Hadley v Baxendale). Cleaning the tanks is probably foreseeable as a loss caused ‘naturally’ by the breach. Bluebottle could likely anticipate this kind of damage and it is caused directly by the unsuitable oil. Damages for the loss of the lucrative charter are not recoverable unless this has been brought to the attention of Bluebottle as a likely loss, and he has accepted responsibility for it (Victoria Laundries v Newman; The Achilleas). There is no indication on the facts that this loss is in the contemplation of Bluebottle, although B is aware that the Helvetia is a passenger liner (and hence may be chartered) and the loss is not directly excluded by the limitation clause. On balance, given this appears to be an arm’s length commercial contract, it is highly unlikely that the courts would take the view that responsibility for this loss would be assumed by B impliedly, as it is an unquantifiable risk. The courts would probably expect some express indication that B takes responsibility for this loss. The crane with the cracked girder This appears to be a breach of sections 14(2) and (3). The crane is not of satisfactory quality and may not be fit for F’s purposes. The crack in the girder was not apparent on examination s 14(2). There is no breach of s 13 since it is not the case that the descriptor ‘crane’ means a crane of satisfactory quality (Ashington Piggeries).

However, satisfactory quality is on a variable scale depending on price etc., and whether the goods are new or second hand (if the latter, goods are not expected to reach the same quality as new Thain v Anniesland Trade Centre - and may have a very short shelf-life indeed). The best definition of satisfactory quality is that used by Hale LJ in Clegg v Andersson [2003] 1 All ER (Comm) 721. The Test is NOT ‘Whether a reasonable person would find the goods acceptable’, but instead ‘an objective comparison of the state of the goods with the standard which a reasonable person would find acceptable’. A cheap crane is probably good for some ‘normal purposes’ but not others, which may affect any judgment of satisfactory quality (SQ includes ‘fitness for all the purposes for which goods of the kind in question are commonly supplied’ – s 14(2B)(a), but also factors such as durability and safety, which may be relevant here). If the crane is new and the crack makes it useless for all purposes then it is not of SQ, despite its cheap price. Even cheap goods are expected to have some functionality under SOGA. We need to know if the crane is new or not, and for what purposes F intended to use the crane. If the crane was simply being sold as scrap at extremely low price of £2000 then it is not expected to do any heavy lifting and the price and quality was fair, so it is arguable that there is no breach. However, if it was new, or if F made any special purposes known, and relied on B to supply goods to meet those purposes, there may be a breach of 14(2) or s 14(3). If there is a breach of the provisions of section 14, since these implied terms are treated as ‘conditions’ then F would be entitled to reject the crane and get his money back, provided he is not judged to have accepted the crane under section 35 SOGA (you can go through the possibilities). If acceptance has occurred then any right to reject the goods is lost. If acceptance has taken place then F’s remedy is damages for breach of warranty of quality only. Damages will be assessed on the difference in value between a crane of satisfactory quality and that supplied – section 53(3). Alternatively, there could be a price reduction (53(1)(a)), but F has already paid a low price. Note the ‘reasonableness’ of the exclusion clause would also be relevant here....