Implied terms
The question of whether or not you can imply any terms is of course another crucial question when it comes to considering contract formation. As James Mullen notes, cases concerning implied terms are like buses, you wait ages for one, and then four come along at once - a comment reinforced by the number of judgments issued by the courts during the month of July 2011. Terms can be implied into contracts by statute (Sale of Goods Act 1979, and the Supply of Goods and Services Act 1982) or by common law, particularly in relation to supplying goods that are fit for purpose and of satisfactory quality, and carrying out works with reasonable skill and care. The cases below consider all of these.
Lowe v W. Machell Joinery Ltd1
Mr and Mrs Lowe had decided to convert a barn for residential use and had ordered a bespoke staircase, which had to be paid for prior to delivery. Lowe rejected the staircase upon delivery. At trial, Lowe said that the staircase would not have complied with the building regulations. There was no written contract between the parties, only a simple handwritten quote. Therefore, Lowe used the Sale of Goods Act to say that the staircase should have been of satisfactory quality (14(2)), fit for its purpose (14(3)) and should have been constructed in such a way so as to satisfy the building regulations. The slightly odd position that transpired was that the staircase complied with Lowe’s requirements but its use would have been unlawful because it did not meet the building regulations. This was sufficient to entitle Lowe to reject the goods. It was appropriate for Lowe to rely on the skill and judgement of Machell, who was the seller of the goods in question. Even though the goods supplied were in exact conformity with the contract, Machell knew that the staircase when provided as specified in the contract would breach building regulations and should have warned the Lowes of this. It was therefore not reasonably fit for its purpose. Therefore, Lowe was entitled to be refunded the price paid.
Harrison and Others v Shepherd Homes Ltd and Others2
The Court of Appeal’s ink had barely dried on the Lowe judgment when three days later, the TCC issued this decision. Here, the claimants were the owners of a number of properties at a housing development in Hartlepool which had been built by Shepherd. Defects had subsequently become apparent in a number of the houses, which were covered by the NHBC Buildmark Scheme. The work itself had been supervised by NHBC Building Control Services. Eight of the ten claimants had entered into a contract for sale directly with Shepherd, and claimed under the law of contract. The remaining two claimants were subsequent purchasers of properties and therefore did not have a contractual claim against Shepherd under an original contract for sale. The trial covered a number of issues including Shepherd’s express or implied obligations under the sales contracts, the operation of exclusion clauses in the sales contracts, whether the contracts were impacted on by the Unfair Terms in Consumer Contracts Regulations 1999 or the Unfair Contract Terms Act 1977, and also the owners’ ability to claim under the Defective Premises Act 1972 and the NHBC Buildmark cover.
Mr Justice Ramsey held that Shepherd was liable to the eight claimants who had purchased their property directly under the sales contract on the basis that on its proper construction, the contract imposed an express obligation on Shepherd to design the houses with proper skill and care and provide houses that were fit for habitation and they had failed in this obligation. However, although it was not necessary for the Judge to do so, he proceded to consider the claimants’ argument concerning implied terms. Here, he held that even if the sales contracts did not include express obligations in respect of design and fitness for habitation, these obligations would have been implied under s.13 of the Supply of Goods and Services Act 1982 as well as at common law.
At trial, Shepherd had argued that clause 8 of the sales contract was an entire agreement clause which excluded any implied terms. The Judge rejected Shepherd’s argument and held that the entire agreement clause did not exclude the implied term relating to Shepherd’s standard of care because the clause was evidently aimed at precluding “terms, undertakings, promises or agreements” which were the subject of discussion or other consideration by the parties and which could have been but were not set out in the sales contract. Undertakings and promises evidently came within that category and the Judge considered that the word “terms” should not be construed consistently with the other words in the phrase as being of the same kind. If it had been intended that terms normally implied were to be excluded, then “clear and unequivocal” words would be required.
BSS Group Plc v Makers (UK) Ltd (t/a Allied Services) 3
A week later, the Court of Appeal issued another judgment. Here, the issue was whether BSS was in breach of the implied term to fitness for purpose imposed by s.14(3) of the Sale of Goods Act 1979. BSS had supplied Makers with an adapter and valve for use in connection with plumbing. The threads on the adapter and valve turned out to be incompatible so that the connection of the two components became insecure under pressure. The valve blew off and caused flooding to a pub. The key question here was whether Makers had made it known how the valves were going to be used. As the Lowe case made clear, under s.14(3) of the Sale of Goods Act, where the seller sells goods in the course of the business and the buyer, either expressly or by implication, makes known any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgement of the seller or credit-broker.
Here, the Court of Appeal agreed with the Judge at first instance that Makers had specified a particular purpose to BSS, namely that the valves were being bought for use with a particular type of plastic pipe. BSS had supplied components made by that manufacturer for the project. It knew that the valves were for use with the same system. Therefore, it could be inferred that BSS knew that Makers intended to use the valves in conjunction with the plastic pipe. The question of whether or not the valves were fit for their purpose was more simple. The valves were designed to be used with copper piping. The piping here was plastic. The valves were not reasonably fit for their purpose.
Trebor Bassett Holdings Ltd & Anr v ADT Fire and Security plc 4
This Decision of Mr Justice Coulson followed just two days later. The case arose out of a fire at a popcorn-making facility. There were two key questions.
(i) Was there an implied term that the CO2 system (i.e. fire suppression) would be of satisfactory quality?
(ii) Was there an implied term that the CO2 system would be fit for its purpose?
There was no dispute that the contract included an implied term that ADT would exercise reasonable skill and care in the provision of its services. Services included the design of the CO2 suppression system. The term was of course implied by s.13 of the Supply of Goods and Services Act 1982. As Mr Justice Coulson said, this was an obligation to take reasonable skill and care, not a guarantee of success. However, ADT had to do “rather more than just provide a CO2 system, as requested”. Just because ADT was providing design services, that did not mean the defendant did not owe a high obligation and the duty to use reasonable skill and care in the absence of special circumstances.
There was no need to consider the question of an implication of a term as to satisfactory quality, as referred to in s.4 of the Supply of Goods and Services Act. This was because the argument was redundant as Trebor’s terms and conditions included an express term that the goods supplied would be of “good quality”. Note, of course, that good quality is more onerous than satisfactory quality.
Finally, there was the question of fitness for purpose. The fitness for purpose duty is stricter than the ordinary responsibility of a consultant carrying out design where the implied obligation is one of reasonable competence to “exercise due care, skill and diligence”. In Greaves v Baynham Meikle,5 Lord Denning had said this:
“Now, as between the building owners and the Contractors, it is plain that the owners made known to the Contractors the purpose for which the building was required, so as to show that they relied on the Contractors’ skill and judgement. It was therefore the duty of the Contractors to see that the finished work was reasonably fit for the purpose for which they knew it was required. It was not merely an obligation to use reasonable care, the Contractors were obliged to ensure that the finished work was reasonably fit for the purpose.”
The duty is, therefore, absolute. In Viking Grain Storage v T.H. White Installations Ltd,6 Judge John Davies said:
“The virtue of an implied term of fitness for purpose is that it prescribes a relatively simple and certain standard of liability based on the ‘reasonable’ fitness of the finished product, irrespective of considerations of fault and of whether its unfitness derived from the quality of work or materials or design.”
Whilst s.4(4) of the Supply of Goods and Services Act potentially provided for the implication of a fitness for purpose obligation, the difficulty for Trebor was that there was no evidence that they had made known to ADT any particular purpose for which the goods were being acquired, a specific requirement of s.4(4). Whilst the CO2 system was being acquired to suppress fire, that was not a particular purpose - it was merely the condition which the system was then being designed to deal with. For there to be a particular purpose, some sort of specific request was required. In the circumstances here, it would be along the lines of a request that the system ensured that no single piece of burning popcorn ever escaped from the popper. Indeed, Trebor, when they approached ADT for the first time, had already decided they were going to replicate the existing fire suppression system. They were simply interested in making sure that the same system that operated in another facility could operate here. In the absence of anything other than general reliance, the implied terms of fitness for purpose could not be incorporated.
Conclusion
The decisions in Lowe, Shepherd, BSS and Trebor demonstrate the “hidden” obligations imposed on sellers and building contractors when it comes to supplying goods that are fit for purpose or carrying out works to a satisfactory standard. If the contract is silent on the quality of the goods to be supplied or the works to be carried out, terms will be implied by the courts under statute and common law. In order for the fit for purpose term to be implied into a contract, the intended purpose must have been made known to the seller, either expressly or by implication. In Lowe, it was obvious (or at least it should have been) to the seller that the intended purpose of the stairs was for use in a residential home. Likewise, in BSS, it was obvious that the intended purpose of the valves was for use with the plastic piping system. Conversely in Trebor the purpose of the particular goods was not made known to the seller.
Where the intended purpose is made known to the seller, and assuming that a conclusion has been reached that the goods are not fit for that purpose, the seller’s only real “out” is if they can show that the buyer did not rely on their skill and judgement as a supplier. This burden will be particularly hard to discharge where the seller is someone who specialises in the area within which they carry out business, while the buyer does not hold such similar expertise in the area. For example, in Lowe the seller was an experienced joinery company while the buyer was a lay person. Likewise, in BSS the seller was a specialist dealer whose expertise the buyer was entitled to rely upon. Contrast this with Trebor where there was only a general reliance by the buyer and so no fitness for purpose obligation could be implied. Likewise, for building contractors, if a contract does not expressly contain provisions concerning the standard to which the works are to be carried out, this will be implied. Therefore, just because a contract does not expressly state that the works are to be carried out in a good and workmanlike manner does not mean that the contractor is off the hook if they fail to do so.