What Price Selling Goods “As Is”?
The risks associated with buying and selling goods “as is” are thrown sharply into focus in a recent landmark case concerning Section 14(2) of the UK Sale of Goods Act 1979 (“SOGA”), with practical ramifications for the day-to-day activities of commodity traders, says Marko Kraljevic, a partner in the trade & commodities group at Clyde & Co, who successfully represented the buyers in this case.
THE RISKS ASSOCIATED with buying and selling goods “as is” were thrown sharply into focus in a recent landmark case concerning the sale of the vessel, Union Power, for US$7 million in 2009 under a contract based on the well known NSF 93 form, containing the clause 11 which provides that the vessel “shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted” subject to the proviso that she shall be delivered “with her class maintained … without condition/recommendation”. The vessel and her records had been inspected by
the buyers in the usual way and the buyers’ surveyor found nothing of significance and the vessel was delivered to the buyers, apparently in class without any condition/recommendation. She sailed on a ballast voyage and, after about 30 hours, the main engine broke down. The vessel was towed to Greece for investigation and repairs and it was found that the crankpin was significantly undersize and oval. The buyers claimed against the sellers for damages on the basis that there had been a breach of the implied term as to satisfactory quality under Section.14 (2) of SOGA, regardless of whether there was compliance with clause 11 in NSF 93. This argument was upheld both in arbitration and in the UK High Court when the sellers’ appeal was rejected (see Box for more detail on the legal reasoning). Although the case concerned the sale and
purchase of a vessel, this decision, and the reasoning behind it, has potentially important ramifications for any activity that involves the sale
phrase to mean, this recent Commercial Court decision illustrates that it is dangerous to assume that this understanding is necessarily shared by a counterparty, and it is even more dangerous to assume that English Court will accept one party’s assertions about the meaning of any given phrase. All of this means that traders need to be more specific in the words they use when closing a deal if they want to be sure that the implied term as to satisfactory quality is excluded.
Clarity is King Contractual terms that are implied by SOGA apply
to all English law contracts for the sale of goods unless they are excluded. The Union Power decision illustrates that very clear and unambiguous words must be used in order to successfully exclude the implied term as to reasonable quality. This can be achieved in one of two ways:- (1) Ensuring that the contract contains express words that specifically exclude the SOGA implied term or,
(2) Establishing an alternative quality standard in the contract that is inconsistent with the SOGA implied term.
The Devil is in the Detail Generally, most commodities are sold by
this decision ... has potentially important ramifications for any activity that involves the sale and purchase of goods – including commodity trading
and purchase of goods – including commodity trading, much of which is typically executed over the phone, at speed, and frequently involves the use of short hand phrases by traders such as “as is”. Although individual traders may have strong views about what that they understand that
42 March 2013
reference to contractually defined specifications. Many traders will assume that this will, on its own, be sufficient to exclude the SOGA implied term on the basis that the goods are being sold to a contractually defined standard rather than a satisfactory quality standard. Whilst this may be correct in most cases, it will not necessarily be so in all cases. Indeed, in the Union Power case itself, it was argued that the vessel had
been sold to a class standard and that, because she was in class, arguments about satisfactory quality could not arise. This argument was rejected by the Court on the basis that a requirement that a vessel be delivered in class was not necessarily inconsistent with an additional requirement that
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