The Sales of Goods Act, Advice to AOL on its Obligations - Essay Example

?Introduction Under Common Law, parties to commercial contracts are deemed to be competent and they are bound by the terms and conditions that they both gave in the formation of the contract1. In the strict sense, parties to the contract are bound by the terms and can therefore have an unlimited range of exclusion clauses which will prevent them from bearing certain liabilities in the contract. However, the introduction of numerous statutory instruments and the principles of Judicial Interpretation place restrictions on the use of exclusion clauses. Another aspect of legal disputes in commercial contracts involve the situation where there is damage to property that belongs to one of the parties in the contract after an order is placed. There is a question of which is liable for damage. This paper is in two parts based on the question in the scenario. The first part examines the effectiveness of a clause that AOL has integrated into the contract which excludes liability for several things and how this can be used to relieve AOL for misrepresentation. The second part examines the obligations that AOL owes to Shoeground Ltd in view of shoes that they ordered which have been damaged. PART 1 1.1 Issue The question requires that we examine the ability of Clause 3 to be used to exclude responsibility for misrepresentations. In doing this, there is the need to examine some important things: 1. The appropriateness of the use of Clause 3 as an Entire Agreement Clause and what intervening Statutes and Judicial practices can affect the use of the Clause to exclude liabilities for misrepresentations. 2. The ability of the Non-Reliance Clause in 3.2 to be used to prevent issues raised in relation to misrepresentation in pre-contractual negotiations. 3. The reasonableness of Clause 3 and how it can be used to prevent liabilities. 4. The role of fraudulent misrepresentation precedents and how it can limit Clause 3 in its application. 1.2 Rules As a general rule, terms and conditions written in official contracts are invokable in disputes2. Secondly, the exclusion clause must not be construed in a way as to defeat the main purpose of the contract3 Misrepresentation occurs when one party makes a declaration which is untrue, which becomes a term or condition of the contract4. The Misrepresentation Act of 19675, as amended by the Unfair Contract Terms Act 19776 restricts the possibility of using exclusion clauses to limit liability for misrepresentation. Section 3 of the Misrepresentation Act states that if a term in a contract excludes liability for misrepresentation, any remedy available to the other party by reason of such misrepresentation, that term shall have no effect unless it satisfies the requirements of reasonableness in Section 11 (1) of the Unfair Contract Terms Act 1977. This means that in an event of a misrepresentation by one party in a contract, that party cannot rely on any exclusion clause to prevent his liability for misrepresentation. In Overbrooke V Glencombe7 it was held that the need of a principal to disclose restraint of the authority of his agents were not enough to prevent him from the effects of Section 3 of the Misrepresentation Act. This is because the principal stated that he was not responsible for the representations of his agents. The court held that the agents were acting in his name as such, the inclusion of a clause limiting their involvement did not make him exempt from Section 3 of the Act. The principal was held liable. However, in some instances, an exclusion clause for liability for misrepresentation could be accepted by the court if it is reasonable. The reasonableness test is laid out in Section 11 (1) of the Unfair Contract Terms Act 1977. First of all, the exemption clause should have been reasonable enough to have intended the terms are the time of the contract8. This means that the term might have been in a way that a reasonable person could have inferred its impact and invested sufficient efforts to do diligent checks. Secondly, the exemption clause for misrepresentation will be valid where liability is limited if a specified sum of money in a case where there are resources to meet the liability and there is insurance9. From the nature of these pieces of legislature, there are three things of concern: 1. What will constitute a misrepresentation? 2. What is the scope of these non-exclusion clauses? 3. What is the role of non-reliance clauses? In Inntrepreneur Estates V Worth10 a lessee acknowledged no reliance on precontractual statements. In a dispute, the lessor argued that there were no pre-contractual statements on which the lessee relied. The judge stated that if there had been any such statements, they would have been struck out by the Misrepresentation Act. This means that entire agreement clauses set the scope of valid representations that led to the contract and not just to limit liabilities for false statements. Crendon V Nash11 was a case where Crendon purchased a property from Nash. Crendon relied on the representations of Nash's agents. After purchase, Crendon realised that the figures were extremely low and sought to rescind the contract on the grounds of misrepresentation. Nash showed that there was a footnote clause in the tender document which stated that “statements are believed to be correct, their accuracy is not annul sale and pre-contractual negotiations do not form part of offer”. It was held that the footnote was an exclusion clause and the judge stated that a representation is an assertion that is true and if a party does not state that a statement is true, then the statement is not a representation. This means that the exclusion clause was used to define what constituted a representation that Nash was sticking himself up for and what did not constitute a representation. In effect, the entire agreement clause was to define the scope of the contract. This line of thinking is exhibited in McGarth V Shah12 where the clause stated that “this contract constitutes the entire contract between the parties and may be varied... only in writing under the hands of the parties or their solicitors”. It was held that the entire agreement clause was to prevent pre-contractual representations from becoming part of that contract. As such, such discussions made before the contract cannot be subjected to Section 3 of the Misrepresentation Act and are ineffective in taking action for misrepresentation13. Hence, a non-reliance clause can be seen to be some kind of statement that simply sets out the scope of the contract14. In the popular case of Peart Stevenson V Holland15, Holland purchased the franchise of Peart Stevenson based on the average figures of what franchisees often earn in the business. However, there was a non-reliance clause which made it impossible to hold Peart Stevenson liable for any venture that failed to earn profits similar to the average. Holland entered the contract but got very low profits. He stated that there was a misrepresentation on the part of Peart Stevenson and backed out of the contract. It was held that he had no right to back out because the non-reliance clause made it impossible for the franchisors to be held responsible for low performing franchises. 1.3 Advice to AOL 3.1 These Conditions form the whole agreement between the Seller and the Buyer. No variation to these Conditions shall be binding unless agreed in writing between the authorised representatives of the Buyer and Seller. 3.2 The Buyer accepts that it has not relied on any pre-contractual representations of the Seller or its agents. Clause 3.1 indicates the scope of the agreement. It hints that the customers entering a contract with AOL are relying solely on the representations made within the agreement that has been set out. This means that the terms and conditions that are in the written contract can be used. However, if any of the terms are unreasonable according to Section 11 (4) of the UCTA 1977, then the terms will not be valid. Hence, the contract needs to be scrutinised for reasonableness and Clause 3.1 will be valid and can set the scope of the contract. Clause 3.2 indicates that the customers accept that they have not relied on any pre-contractual representation of AOL or his Agents. This can be valid, as long as AOL or its agents does not make any statement that it purports to be (1) True and (2) Causes the customer to rely on it in entering the contract. Any such acts: of making a statement that is deemed as true or making an assertion that the customer relies upon can be construed by the courts as a representation. This will mean that AOL could be held liable if it is wrong. In order to be on the safer side, AOL must come up with non-reliance clauses for assertions which could be found to be wrong. This way, clause 3.2 can be invoked in a case where there is an allegation by a party for misrepresentation. PART 2 2.1 Issues The requirement of the question is to prepare an advice note setting out AOL's obligations to Children's Shoeground Ltd in relation to the goods that they sold which got damaged on their premises. The fundamental issues include: 1. Whether the property in the shoes damaged passed to Children Shoeground or not. 2. Whether the risk of damage or loss of the shoes that got damaged in the premises are on AOL or on Children's Shoeground Limited as a buyer. 3. The legal position of AOL in relation to the short delivery [the fact that they have 30 less shoes they can deliver to AOL. 2.2 Rules The Sales of Goods Act sets out the framework for the transfer of risks in commercial contracts16. Basically, the Act sates that “It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.”17. This means that the default position is that the seller has to deliver the goods and the buyer must accept it and pay for it in accordance with the contract of sale. In terms of the 'property' in the goods sold, it passes from the seller to the buyer. Determining this is very important because it plays a major role in ascertaining who bears the risk to the product and appropriation of the product. Section 17 of the Sale of Goods Act 1979 gives rules and procedures for determining the passing of property for specific goods. Subsection 1 states that “Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.”18. Subsection 2 also provides further explanations for intent, which states that in ascertaining intent, “...regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.”19. This means that the 'property' will pass at the time where the parties intend to let it pass. And this will be inferred by the terms of the contract. Where no specific time is stated in the contract, then the passing of the property is subject to Section 18. Section 18 has five main rules. The first rule is that “Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed.”. Rule 1 often applies in retail sales but it could be applied to commercial contracts provided the facts are parallel to the stipulations20. Section 20 also indicates that once the property is passed, the buyer bears the risk of loss or destruction of the goods except if the seller is at fault21. This will mean that the buyer can take action for negligence on the part of the seller when Rule 1 is invoked. This effectively means that where a buyer buys furniture from a shop and they agree that the furniture would be delivered in two weeks and the shop catches fire before the two weeks is up, the seller is not to be blame. This is because the property passed to the buyer. The Act goes on to state that “Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract the seller may maintain an action against him for the price of the goods.”22. This means that the buyer is liable to pay even if the goods get damaged in the seller's custody. Rule 2 of Section 18 states that where the seller still has an obligation to do something to the goods in order to put them to a 'deliverable state', then the property cannot pass until the final touches are made to the goods23. This means that in a situation where the goods are not in a deliverable state, the risks will be retained by the buyer until the final touches are done. Thus if there are repairs and alterations, the order is not deliverable and hence the property cannot pass until they are carried out. This means that when the buyer is given notice that the product is in a deliverable state, then the property passes to the buyer. The third rule of Section 18 states that “where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh, measure, test, or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until the act or thing is done and the buyer has notice that it has been done.”24. This rule relates to the seller. This implies that if the buyer is the one who needs to ascertain the price, then the property is deemed to have passed25. Rule 5 of Section 18 of the SOGA 1979 comes with several requirements. First of all “Where there is a contract for the sale of unascertained future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made.”26. Unconditional approriation means that the goods were appropriated in a way that the parties could have reasonably known that the contract was irrevocable27 Assent to appropriation was defined in the case of Pignataro V Gilroy28 where a sale was made for 140 bags of rice. No bags were identified for the sale. As such, a delivery of 125 bags was made to the buyer. He was informed that the remaining 15 bags were in another warehouse awaiting his collection. The buyer delayed collection for another month. Before he made attempts to collect them, the 15 bags had been stolen. It was held that the delay was a consent since the buyer was aware of the circumstances. The Sale of Goods Act also states that where a seller delivers a quantity of goods less than the contracted quantity to the buyer, the buyer has the right to reject them29. This means that in a situation where a seller delivers less than agreed, the buyer can reject and rescind the contract. 2.3 Advice to AOL on its Obligations The basic obligation of AOL was to deliver 120 pairs of shoes to Children's Shoeground as per the contract made. However, there is a question of whether the property in the shoes passed to Children's Shoeground before they were damaged or not. From the facts at hand, the Paris Collection forms a specific and ascertained class of goods. This is because the goods were of a type that could not be increased due to limited materials. Also, AOL did not receive any orders for shoes in the Paris Collection. Additionally, the shoes were in deliverable state because they belonged to a single class of goods in the Paris Collection and there was nothing else that was to be done to improve the state of the shoes30. And as such, the property in them was transferred when the intention was made clear3132. This is supported by Sections 17(1) and 18 Rule 1 of the SOGA. Also, Section 20 indicates that once property passed on the completion of the contract, Childrens Shoeground, the buyer bore the risk for any losses as well as the obligation to pay full price for the products33. Primarily, AOL has to deliver the 90 pairs of shoes that are in good shape to Children's Shoeground. In return, Children's Shoeground have to pay for the 120 shoes even though only 90 can be delivered. This is because the property in them passed from AOL to them upon completion of the contract. Any action by Children's Shoeground to reject the goods on the grounds of Section 30 for supplying a lower quantity will not work because the property passed to them. The only case that Children's Shoeground can raise is an issue of negligence on the part of AOL. The success of such an act will depend on the facts of the case. Bibliography Books Adams John &, Henry Macqueen, Atiyah’s Sale of Goods (12th edition Amsterdam: Kluwer Law 2010) Gabriel Moens, International Trade and Business Law (London: Taylor & Francis, 2001) Geraint Howells & Stephen Weatherill, Consumer Protection (3 Edn, Surrey: Ashgate Publishing, 2011) Martin Hunt, The Law of Contract (2nd Edn London: Sweet and Maxwell 2009) Michael Bridge, Benjamin’s Sale of Goods, (8th Edn London: Sweet & Maxwell 2010) Michael C'onnlly, Briefcase on Commercial Law (2Edn London: Taylor & Francis 1998) Morris Smith, Commercial Contracts (3rd Edn, Oxford: Oxford University Press, 2009) Ralph Lowe, Commercial Contracts (2Edn Oxford: Oxford University Press, 2012) Richard Stone, Modern Law of Contract ( Edn, London: Taylor & Francis, 2011) Journals Adam Kramer, 'Common Sense Principles of Contract Interpretation' (2003) Oxford Journal of Legal Studies Vol 23 No 2 Christopher Staughton, 'How Do the Courts Interpret Commercial Contracts' (1999) 58 (2) Cambridge Law Journal 303 Cases Carlos Pederspiel v Charles Twigg [1957] 1 Lloyds Rep 240. Crendon Property Ltd V Nash [1977] 244 EG 547 Glynn v. Margetson & Co. [1893] A.C. 351 Inntrepreneur Estates CPC Ltd V Worth [1996] EGLR 84 Inntrepreneur Pub Co (GL) V East Crown Ltd [2000] 2 Lloyd L. R. 611 McGarth V Shah [1987] 57 P ECR 452 Nanka Bruce v Commonwealth Trust Ltd. [1926] A.C. 77 Privy Council. Olley v Marlborough Court Hotel [1949] 1 KB 532 Overbrooke Estates Ltd V Glencombe Property Ltd [1974] 3 A11 ER 511 Peart Stevenson Associates Ltd V Holland [2008] EWHC 1868 Pignataro v Gilroy (1919) 1 K.B. 459 Pritchet V Currie [1916] 2 Ch. 515 Thomas Witter Ltd V TBP Industries Ltd [1996] A11 ER 573 Turley v Bates [1863] 2 H&C 200 Statutes Misrepresentation Act 1967 Sales of Goods Act 1979 Unfair Contract Terms Act 1977 Unfair Terms in Consumer Contracts Regulations 1999 Read More