'Invisible' Contractual Obligations – Appreciating The Importance Of Implied Terms

When it comes to quality disputes, we all know where to look to see who is right and who is wrong.

Or do we?

Much time is spent by parties agreeing contract terms - the seller determining the specification of the goods he is in a position to supply and the buyer considering carefully whether goods of that specification will, in fact, suit his purpose and are worth what he is being ask to pay. It is, therefore, not surprising that when complaints are made following delivery of the goods, the parties rush to examine the quality clauses, the sometimes lengthy schedules setting out the quality parameters and rejection limits, and that they will also carefully examine the assays.

A recent arbitration case was a salutary reminder that the seller is likely to have made promises as to quality that do not feature anywhere on the face of the contract. Such promises are incorporated into English law contracts as a result of the Sale of Goods Act 1979 (the "Act") and those who buy and sell goods need to be familiar with these "invisible" promises if they are to avoid lengthy and expensive litigation.

This article seeks to explain how they work, the difficulties that they can give rise to and how to deal with them effectively.

Implied terms at law

A sales contract is made up of both express terms (those which are specifically stated or expressed in the contract) and implied terms (those which are implied by the law, but not expressed in the contract). An important term implied into commercial contracts governed by English law is found at section 14(2) of the Act:

"Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality."

This term will apply to all commercial sale contracts, unless it is expressly excluded (discussed further below). The term is a condition of the contract, meaning that, if it is breached, the buyer will have a right to (i) reject the goods and terminate the contract and (ii) claim damages from the seller for any losses incurred.

The term "satisfactory quality" under s.14(2) of the Act is vague, and although sections 14(2A) and (2B) do provide some assistance as to its interpretation, these sections are also hard to pin down:

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if...