Business law - Chapter 8: The sale of goods

Caveat emptor

A Latin term for “let the buyer beware." 

Caveat emptor (con’t)

The responsibility for discovering defects and exercising caution in a product or property before purchase is on the buyer rather than the seller; and any dissatisfaction with the transaction should be the buyer’s problem

Implied Conditions and Warranties

Sets out various implied conditions, terms and warranties that apply to the sale of goods to help protect buyers by ensuring that they receive goods that meet certain standards, and sellers are obligated to fulfill these requirements

Allocating Responsibility on the Seller

Places a responsibility on the seller to accurately describe the goods being sold and provide any relevant information that may affect the buyer’s decision

Allocating Responsibility on the Seller (con’t)

Provides buyers with recourse if the seller’s statements or descriptions result in a loss

Remedies for Buyers

Provides buyers with various remedies in case the goods they purchase don’t meet the required standards or are in breach of the implied conditions and warranties

e.g. The right to reject the goods or claim damages

When does the SGA apply?

For the transfer of ownership of goods (no services) with consideration involved (e.g. money)

What defines the sale of a contract under SGA?

The seller transfers or agrees to transfer the property in goods to the buyer for monetary consideration (price)

What type of goods does the SGA cover?

•  All chattels personal, other than things in action and money

• Growing crops, and things attached to or forming part of the land that are agreed to be severed before sale or under the contract of sale.

• Physical objects that can be touched, seen, and transferred

What type of goods aren’t covered by the SGA?

Transactions involving money, services, and real estate

Existing goods

Goods that are already in existence and are owned or possessed by the seller at the time of the sale

Existing goods (con’t)

May also be “specific” goods in that the goods are identifiable and agreed on at the time a contract of sale is made

Future goods

Goods that are yet to be produced or acquired by the seller but are intended to be sold under the contract

Implied terms

Contractual terms not explicitly stated in the contract but are automatically understood to be part of the agreement based on the SGA. The buyer will have legal rights against the seller in the same way as explicit terms 

Implied terms (con’t)

Are terms automatically included in a sales contract by the government

Implied conditions examples

• Bulk must match sample conditions

• Goods must match description

• Seller has the right to sell good(s)

Express terms

Terms agreed to by the parties

Some very important implied terms of the SGA

• Ensuring valid ownership of the goods being transferred 

• Those which deal with defects in the goods

Section 16 of the SGA (assurance of receiving)

Ensures that the buyer will receive a good and marketable title to the goods being sold

Section 16(a) of the SGA (Legal right to sell)

The seller needs to have the legal right to sell the good(s) they are selling. This implied term acts as a guarantee or assurance that the seller possesses valid ownership rights and has the legal authority to transfer those rights to the buyer

Section 16(a) of the SGA example

Someone who is selling a stolen bike has no legal title to it and, as a result, can’t sell it

Section 16(b) and 16(c) of the SGA (Encumbrances and enjoyment of goods)

Ensures that there are no undisclosed legal issues, liens, or claims that could affect the buyer’s ownership rights, and that the buyer is entitled to enjoy quiet possession of the purchased goods, without interference from any third party

Section 17 of the SGA (the description of the good(s) in question)

In a contract for the sale or lease of goods by description (written or oral), there is an implied condition that the goods must correspond with the description

Legal test for sale by description

1. Is this a sale by description?

2. What do the words used in the description mean?

3. Do the goods correspond to the description?

Sale by description breach example

A person purchases a smartphone online based on the description provided by the seller, which says the phone is the latest model. However, when the smartphone is delivered, it turns out to be an older model

Section 18(a) – Fitness for Intended Purpose

Requires the goods to be suitable for the specific purpose for which the buyer intends to use them; if these statements are wrong, then the seller should be held accountable

Legal Test for Breach of Fitness for Intended Purpose

• The buyer made known to the seller the purpose for which it required the goods;

• The buyer relied on the seller’s skill or judgment; 

• The goods are of a description that is in the course of the seller’s business to supply

Section 18(b) – Merchantable Quality

When goods are purchased based on a description, either from the manufacturer or another seller who regularly deals with goods of that type, there is an implied condition that the goods will be of merchantable quality

Legal Test for Breach of Merchantable Quality

1. The goods must have been purchased based on a specific description provided by the seller.

2. the goods are of a description that is in the course of the seller’s business to supply; and

3. The buyer must demonstrate that the goods were not of merchantable quality (is determined by a judge)

Section 18(c) — Reasonable Durability

Goods sold must meet a basic standard of durability and should last for a reasonable period of time. Goods should be able to withstand the wear and tear associated with their normal use

Section 19 Sale by Sample

When the seller provides a sample of the goods to the buyer to inspect and assess the quality before completing the transaction, and serves as a representation or indication of the nature and quality of the entire bulk or batch of goods that will be supplied

Can involve transactions with bulk goods, fabric, and flooring

Section 19 Sale by Sample (con’t)

The buyer relies on the sample to make an informed decision about whether or not to proceed with the purchase or lease; there must be a discrepancy between the quality of the bulk goods and the quality represented by the sample

Section 20 of the SGA

Restricts the use of contractual terms which would limit or reduce the conditions or warranties implied by sections 17, 18, and 19 of the SGA.

The passing of property rules

• Risk allocation when the risk of loss or damage to the goods passes from the seller to the buyer

• Title and ownership transfer when the legal ownership or title to the goods transfers from the seller to the buyer

• Third-party claims that situations where a third-party claims a right or interest in the goods being sold and protects the buyer from potential disputes or encumbrances on the goods

Section 22 – Intention of the Parties and transfer of onwership

Ownership of the goods passes to the buyer according to the mutual understanding and agreement of the parties involved

Transfer of title rules

1. Sale of specific goods (Ascertainable) title transfers when the contract is made and it is immaterial whether the time of payment or time of delivery or both are postponed.

2. Sale of specific goods (Ascertainable), but seller must do something about the goods before passing them over, title does not transfer until that things is done and the buyer has notice it's done.

3. Sale of specific goods, but seller must weigh, measure or test it before price can be determined, title does not pass until this is done and buyer has notice.

4. Goods are delivered to the buyer, but on "sale or return”. Title transfers when buyer agrees to keep, or time expires for rejection (express or implied)

5. When goods are not yet manufactured or not identifiable as the goods in question (Unascertainable), unconditional appropriation (attachment to contract) and assent(agreement-express or implied) needed.

How the passing of property for an “on sale or return transaction” can occur

1. Once the buyer explicitly expresses their approval or acceptance of the goods to the seller, they become the owner of the goods.

2. If the buyer neither signifies approval nor acceptance to the seller nor rejects the goods by giving notice of rejection, but instead keeps the goods without taking any action

How to bypass passing property rules

If the parties do not wish to rely on the passing of property rules, they are always permitted to use clear contractual language to override them

Buyer’s remedies examples

• Damages (financial compensation)

• Specific performance where the seller fulfills their contractual obligations by delivering the goods as agreed

• Right to Reject Return of the Goods where the buyer generally has the right to reject the goods and seek a refund

Seller’s remedies

• Action for the price - the seller can initiate legal action to recover the amount owed if the buyer doesn’t pay

• Liens - the seller can retain possession of the goods until the buyer fulfills their obligations relating to that specific transaction

• Stoppage in transit - the seller can stop the goods while they are in transit and retain possession until payment is made or other arrangements are agreed upon

• Action for damages

• Retention in deposit

• Right of resale

Exclusion clause

Excludes liability

Rule 0 (transfer of title)

Whatever the parties agree to as an expressed term; is based on contract and very rare

Specific performance (con’t)

If the good isn’t unique and can be bought somewhere else, you can buy it from elsewhere where and sue the original seller for the additional cost(s) to buy