Commercial Law A Case Study of Machine

Introduction

Machine Co manufactures industrial tools used in the car manufacturing industry. The goods are either sold on a 30-day trade credit or through a retail store. The trade credit terms allow customers with a certain minimum value of products to have their goods delivered by Machine Co.’s delivery trucks, after which the delivery expenses are billed in the client’s invoice. Arnold has bought 5000 units of tools under 30-day trade credit terms and the goods are to be delivered to his warehouse in Leeds by Machine Co.’s delivery trucks.

When selling goods to trade customers, Machine Co uses a standard form contract part of whose clauses says that: “Please note that while we use our best endeavours to comply with customers’ specifications ... (a) The seller reserves the right to modify the specification or design of the goods in whole or in part without prior notification to the buyer. The buyer shall accept such modified goods in the performance of the contract. (b) The buyer shall be deemed to have accepted the goods unless within 14 days of delivery written notice is received by the seller to the contrary.”

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Issue

Machine Co has produced 8000 units and has notified Arnold that the goods are ready for delivery. However, while Arnold’s 5000 units were on way for delivery, 1000 units of the goods were stolen when the truck was packed at a motorway service station. Whereas the remaining 4000 units were safely delivered, Arnold’s inspection of the goods revealed that Machine Co had not fully complied with his specifications, with a variance of 3%, though the tools were still perfectly capable of performing the job they were intended for. Is Machine Co. justified to demand for full payments of 5000 units at the end of the 30-day trade credit period? Secondly, is Arnold justified to decline to pay for the goods on the basis that they did not arrive in full? Thirdly, Is Arnold justified rejecting the 4000 units on the basis that they did not meet the required specification?

Rule

Whether Arnold is justified to decline to pay for the goods because they did not arrive in full depends on whether Machine Co. fully performed its roles as a party to the contract. A contract is defined as an understanding or promise between two parties who agree to do something for each other. It can be in the form of a unilateral contract, a bilateral contract, a specialty contract, a simple contract, or a standard form contract. Machine Co and Arnold got into a standard form contract. It is a kind of contract where all the terms are pre-prepared by the seller. The parties to standard form contract have no option of negotiating the terms and the buyer is only given a ‘take it or leave it’ option. Nonetheless, standard form contracts are treated by common law as any other form of contract, and therefore all the essential elements of a contract must apply.

Analysis

Section 30 (1) of the Sale of Goods Act states that when the seller delivers goods of lesser quantities than contracted by the buyer, the buyer is justified to reject them, however, if the buyer accepts them, he must pay for them. Here, the defendant only delivered 4000 units instead of 5000 units. The plaintiff noticed the defendants within 14 days of delivery that he is not intending to pay for the goods because they did not arrive in full. Hence, the plaintiff sufficiently rejected the goods within the time (within 14 days) stipulated in the signed standard form contract. The plaintiff is therefore justified to decline paying for the full 5000 units because the defendant delivered a wrong quantity.

Whether Arnold is justified not to pay for the delivered 4000 units depends on specific clauses in the standard form contract he signed. Ideally, the contract stipulated clearly that the seller reserves the right to modify the design or specifications of the goods, partly or in full, without notifying the seller and the seller shall accept the alterations in the performance of the contract. The plaintiff is therefore bound by the contract to pay the 4000 units.

Conclusion

Ultimately, Arnold is justified to decline paying for the 1000 units that were not delivered. But, he is not justified to reject the 4000 units because he is bound by the standard form contract to accept them. On the other hand, Machine Co is only justified to invoice Arnold 4000 units and not the full 5000 units.

Issue

Beta Plc. also ordered for 1000 units of the products from Machine Co. to be collected from Machine Co.’s premises by end of October. The goods were paid for in advance. Beta plc. Was notified that the goods had been manufactured and were now ready for collection at Machine Co.’s loading bay. However, before Beta Plc. could collect the goods, a fire broke out and destroyed the goods. Beta Co informs Machine Co of their intention to source the goods elsewhere. Is Beta Co justified to demand a refund?

Rule

Whether Beta Co is justified to demand refund depends on whether each party performed their duties in the contract. The contract between Beta Co and Machine Co is a standard form contract, and in common law; it would be treated as any other form of contract. The contract is only fulfilled if both the buyer and the seller perform their duties. The buyer’s first duty is to pay for the goods unless specified otherwise by the terms of the agreement. Secondly, the buyer has a duty to inspect the goods upon delivery and ascertain whether they are of the right specifications or otherwise. Hence, the buyer has a right to reject the goods if they have any defects. Thirdly, the buyer has the obligation to accept the goods. Acceptance can be in various forms:

The buyer is considered to have accepted the goods if the seller provided a reasonable opportunity for buyer’s inspection of the goods or notifies the seller that the goods conform to their specifications or are acceptable regardless of nonconformity. ii The buyer is considered to have accepted the goods if they did not take the opportunity to inspect the goods and ascertain their conformity. On the other hand, it is the seller’s responsibility to deliver goods that conform to the buyer’s specifications or otherwise as stated in the contract. Hence, the seller is expected to keep the goods available for a reasonable period of time and notify the buyer within a reasonable time to collect them.

Analysis

By notifying Beta Co that the goods were ready for collection, Machine Co. gave the buyer a reasonable opportunity to inspect the goods and confirm their conformity. The seller also gave the buyer a reasonable time to collect the goods. Yet, the buyer did not take the opportunity to either inspect or collect them.
Thus, regardless of whether they were destroyed by fire or not, the seller had fulfilled their duties of delivering and notifying the buyer of the same. This is in line with Section 27 of the Sale of Goods Act 1979 which stipulates that it is the seller’s duty to deliver the goods and the buyer’s duty to pay for the goods depending on the terms of the contract.
One could argue that since the goods were still within the seller’s premises, it was the seller’s responsibility to ensure the safety of the products. However, section (20) (1) of the Sale of Goods Act indicates that goods only remain at the seller’s risk before they are transferred to the buyer. This is based on the ‘risk prima facie passes with property’ principle, which also states that when the delivery is delayed through the sellers or buyer’s fault, the risk of loss is borne by the party holding the fault. Applying this principle to the case of Machine Co. v Beta Co, the seller had transferred the good’s ownership to the buyer upon delivery and notice, and therefore the seller was not responsible for any risk associated with the products. The facts of this case are comparable to those in the case of Pignatoro v Gilroy, where the seller informed the buyer that the goods (i.e. bags of rice) had been ready for collection but the buyer

The facts of this case are comparable to those in the case of Pignatoro v Gilroy, where the seller informed the buyer that the goods (i.e. bags of rice) had been ready for collection but the buyer delayed for three weeks. In the meantime, the goods were stolen. The court ruled that the goods had passed to the buyer.

Conclusion

Therefore, Bata Co is not justified to demand a refund because the goods’ title had been passed to them upon delivery at the leading bay, and from then, the goods were held at their own risk. Beta Co. could only be justified to demand for a refund if goods were not delivered.

Issue

Machine Co also entered into a contract of sale with Charles Ltd to manufacture 1000 units of tools and deliver tools on 30-day trade credit terms. The goods were to be delivered at the seller’s loading bay for picking by the buyer. Upon manufacturing the tools, the seller delivered the goods at the loading bay and notified the buyer of the same. However, before the buyer could collect the goods, a fire broke out and destroyed 500 units, leaving only 500 units to be picked by the buyer. Is the seller justified to invoice the seller full amount at the end of the 30-day credit? Can the buyer claim from their insurance policy for the destroyed goods?

Whether the seller is justified to claim the full amount of the credit depends on who was in possession of the goods at the time they were destroyed by fire. Section 20 (1) of the Sale of Goods Act indicates that unless agreed otherwise, the goods remain at the seller’s risks so long as they have not yet been transferred to the buyer. Secondly, Section 20 (2) of the Sale of Goods Act indicates that the goods are at the risk of the buyer or the seller if the delay of delivery was the fault of either of them. Therefore, if the seller was in ownership during the fire destruction, they are not justified to claim for the full amount. On the other hand, if the buyer was in ownership at the time of fire destruction, the seller would be justified to claim for the full amount.

Analysis

Upon manufacturing the goods, Machine Co notifies its buyers that the goods are ready for delivery either through road transit to the buyer’s destination of choice or at the seller’s loading bay for collection by the buyer. Therefore, Machine Co completes their duty of delivery upon delivering the goods at the loading bay for collection by Charles Ltd. Consequently, the ownership passed to the buyer upon being notified by the seller to collect goods – meaning that the goods were held at the loading bay at the buyer’s risk. Moreover, according to the contract signed by Charles Ltd, the goods are considered accepted by the buyer upon delivery unless a written notice is given stating otherwise. If Charles Ltd did not notify Machine Co about their rejection of the goods, the goods were not stored at Machine Co.’s risk.

The seller cannot be held liable on the count of fire breakout and destruction of goods because it did not cause the delay of delivery. Instead, the delay of delivery was caused by the buyer who did not collect the goods upon being given a sufficient opportunity by the seller to do so. This is in line with Section 20 (2) of the Sale of Goods Act which states that goods if the seller or the buyer caused a delay in delivery of goods, the risk is borne by the party whose fault caused the delay. Therefore, Machine Co is justified to claim for the full amount of 1000 units because it was not the risk holder when the goods were destroyed. The possession of the goods had passed on to the buyer.

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Conclusion

On would argue that the ownership of the goods was still with the seller because the 30-day credit term had not elapsed. But as opposed to the case of Aluminum Induststrie BV v Romalpa, the contract did not stipulate that the seller will be in ownership until the amount is fully paid. Thus, the goods’ tittle passed to Charles Ltd. once the contract was signed. Basically, in the case of Aluminum Induststrie BV v Romalpa, the contract stated categorically that the ownership of the goods was to be transferred on full payment of the materials by the buyer.

Having established the goods were on possession of the buyer during the fire destruction, the buyer can claim from their insurance policy an amount equal to 500. This claim would be guided by a principle in insurance law called ‘indemnity’. According to Lowe, the principle of indemnity stipulates that the insured is supposed to be placed back to the position they were in just before the loss occurred, especially when the loss can be measured in monetary terms. Hence, Charles will only be compensated the amount equal to 500 units that were destroyed by the fire. This way, the company would not benefit any profit from the loss.

However, the principle of indemnity will be applied alongside other principles of insurance such as subrogation. More importantly, if the insurance policy included other restrictive terms such as under-insurance, then Charles Ltd may not get the full value of the loss. Underinsurance is a situation where the sum assured is less than the actual loss incurred. However, even if the sum assured was more than the actual loss, Charles Ltd will not be entitled to get the whole amount of sum assured. The company will only be compensated for the 500 units lost on fire.

Bibliography

  • Business Law by Keenan and Riches, sixth edition published by Longman
  • The Sale of Goods by P S Atiyah, 9th edition published by Pitman Publishing
  • Business law by Abbot Pendlebury Wardman, 7th edition continuum
  • Marsh & Solsby, Outlines of English Law 3rd eidition
  • Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676
  • Commercial Law by Lowe 2nd edition
  • Commercial Law by R Bradgate & F White published by Balckstone press
  • Pignataro v gilroy 1919 g sold to p 140 bags of rice
  • Sale of Goods Act 1979 [England]

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