THE LAW REFORM COMMISSION

This consultation paper can be found on the Internet at: <http://www.info.gov.hk/hkreform>.

December 2000

This Consultation Paper has been prepared by the Supply of Goods Sub-committee of the Law Reform Commission. It does not represent the final views of either the Sub-committee or the Law Reform Commission, and is circulated for comment and criticism only.

The Sub-committee would be grateful for comments on this Consultation Paper by 28 February 2001. All correspondence should be addressed to:

It may be helpful for the Commission and the Sub-committee, either in discussion with others or in any subsequent report, to be able to refer to and attribute comments submitted in response to this Consultation Paper. Any request to treat all or part of a response in confidence will, of course, be respected, but if no such request is made, the Commission will assume that the response is not intended to be confidential.

Anyone who responds to this Consultation Paper will be acknowledged by name in the subsequent report. If an acknowledgement is not desired, please indicate so in your response.

	Page
Preface	1

Terms of reference	2
Layout of this Paper	3

1. Existing statutory provisions regulating implied terms in contracts for the sale of goods and for the supply of goods, and the need for further legislation	4

Overview	4
Existing statutory provisions regulating implied terms in contracts for the sale of goods and contracts for the supply of goods	4
The need for further legislation on implied terms for supply of goods	6


2. What are contracts for the supply of goods	11

Overview	11
Introduction	11
Contracts for the transfer of property in goods	13
Contracts of hire of goods	19
Hire purchase agreements	22
What are "goods"	31
Computer software	32


3. Implied terms to be included in the Recommended Legislation – implied terms about title, etc	38

Overview	38
Undertakings as to title under Cap 26	39
Contracts for the transfer of property in goods	40
Contracts of hire	51
Hire purchase agreements	55

4. Implied terms to be included in the Recommended Legislation – correspondence with description	64

Overview	64
Correspondence with description under Cap 26	64
Contracts for the transfer of property in goods	65
Contracts of hire	69
Hire purchase agreements	71


5. Implied terms to be included in the Recommended Legislation - implied terms about quality or fitness	74

Overview	74
Implied undertakings as to quality or fitness under Cap 26	75
Contracts for the transfer of property in goods	77
Contracts of hire	99
Hire Purchase Agreements	109


6. Implied terms to be included in the Recommended Legislation - supply by sample	117

Overview	117
Correspondence with sample under Cap 26	117
Contracts for the transfer of property in goods	118
Contracts of hire	123
Hire Purchase Agreements	126


7. Remedies for breaches of the implied terms	129

Overview	129
Remedies for breaches of implied terms in contracts of sale of goods in Hong Kong	129
Australia	133
New Zealand	135
England and Wales	140
Conclusion	144


8. Exclusion of liability	160

Overview	160
Exclusion of liability in contracts of sale of goods and other contracts for the supply of goods in Hong Kong	160
Australia	164
New Zealand	166
England and Wales	167
Conclusion	170


9. Miscellaneous amendments concerning contracts for the sale of goods	175

Overview	175
Sale of goods forming part of a bulk	176
Rights of partial rejection	203
Statutory exception to the nemo dat rule: sale in market overt	211
Remedies for delivery of wrong quantity	217
Acceptance of goods	220
A reasonable opportunity of comparing the bulk with the sample	223
Concluding observations	224


Annex 1	226

Comparison Table of Statutory Implied Terms in Contracts for the Sale and Supply of Goods	226

Annex 2	227

(1) Complaint Statistics on Hire of Goods	227
(2) Complaint Statistics on Hire Purchase of Goods	227
(3) Complaint Statistics on Contracts for Work and Materials	228

Annex 3	229

Complaint Statistics on Computer Software	229

under the contract, and whatever is the nature of the consideration for which the services are to be carried out.^³

"To review the law governing contracts for the supply of goods and to consider such reform as may be necessary".

Existing statutory provisions regulating implied terms in contracts for the sale of goods and contracts for the supply of goods

"[the] report was concerned with the practice of contracting out obligations, not with what those obligations should be. It now seems appropriate, at least so far as English law is concerned, that a thorough review of the scope and purpose of such terms should be made".^¹⁰

We recommend that the implied obligations of suppliers in contracts for the supply of goods should be put into a statute, the Recommended Legislation.

Chapter 2

What are contracts

for the supply of goods ?

________________________________

Overview

In this chapter, we explain the expression "contracts for the supply of goods". The first part examines "contracts for supply" while the expression "goods" will be discussed in the following part. In particular, we examine three types of contracts for supply, namely, contracts for transfer of property in goods, contracts of hire and contracts of hire purchase. For each of these three types of contracts, we discuss the elements involved, types of transactions not covered, and the legislative treatment of each type in other jurisdictions. We then propose definitions for each type of contract in Recommendations 2, 3 and 4 respectively.

We then turn to the element "goods" and examine the appropriateness of the definitions in the Sale of Goods Ordinance (Cap 26), and the legislation of other jurisdictions. We suggest that the definition of "goods" in Cap 26 should be followed in Recommendation 5.

As computers have now become so commonly used and influential in everyday life, we address the issue whether computer software is "goods". We examine relevant cases in various jurisdictions and conclude that it is preferable to await a more comprehensive study of this topic and make no recommendation accordingly. In this respect, our concern is limited to the implied terms for contracts for the supply of computer software only. Issues such as licensing and copyright are beyond the terms of reference of this Paper and may have to be separately dealt with.

Introduction

Contract of sale

A contract of sale is defined in section 3(1) of Cap 26 as:

"... a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. There may be a contract of sale between one part owner and another."

As a contract for the sale of goods is defined to require both the transfer of title and the provision of money consideration, where either element is missing, the contract is not a contract of sale but may be called a "contract for the supply of goods". A contract for the supply of goods may thus be generally understood as a contract whereby a supplier transfers either possession or ownership of goods to another person for a consideration which may or may not include money.

Other types of supply of goods

Where goods are supplied under a contract but the consideration for the contract is not wholly found in the price of the goods, the contract is not a sale. An example of this type of contract is a contract of barter. As discussed later, at common law, a contract of sale of goods is distinguished from a contract for work and materials.

Contracts which involve money consideration but do not involve the transfer of title in goods are not contracts for the sale of goods. Examples are contracts for the hire of goods and contracts of hire purchase. Under a contract for the hire of goods or a contract of hire purchase, title to goods does not pass. Only possession of the goods passes.

Contracts of barter, contracts for work and materials, contracts of hire and contracts of hire purchase are therefore outside the definition of contracts of sale. Cap 26 does not govern these contracts. In Hong Kong, they are governed by the common law so far as the implied obligations of the suppliers under these contracts are concerned.^²⁹

Where goods are transferred for no consideration, the transfer is a gift and not contractual in nature.

In referring to contracts for the supply of goods, we exclude non-contractual transactions (such as gifts) and contracts concerning things other than movable property (such as land and choses in action).

Three types of contracts for the supply of goods

In this Paper, we will consider three types of contracts for the supply of goods:

1. contracts for the transfer of property in goods – under which the supplier transfers property in goods to the person supplied in a manner which, for some reason, does not fall within Cap 26.

2. contracts of hire – under which the supplier transfers possession of the goods to the person supplied for the latter's use and enjoyment without transferring the property.

3. contracts of hire purchase – under which goods are bailed to the hirer in consideration for the payment by the hirer of hire-rent coupled with an option to purchase the goods.

Contracts for the transfer of property in goods

Elements of contracts for the transfer of property in goods

Elements involved

The term "contracts for the transfer of property in goods" by itself means any contract under which a person transfers or agrees to transfer to another the property in goods. This covers various types of contracts, for example, sale of goods, work and materials, barter, hire purchase, etc.

Contracts for the transfer of property in goods for the present discussion should cover contracts under which property in goods is transferred, whether or not services are also provided (for example, contract for work and materials). Since property in goods is transferred, there should be protection by the same statutory implied terms as in a sale of goods contract, even though services are also supplied. In addition, while consideration other than by the presumption by deed is a prerequisite, the nature of the consideration should not matter for a contract to be a contract for the transfer of property in goods. An example of such a contract is one to exchange goods for goods, ie barter.

Transactions not covered

As Cap 26 already regulates contracts for the sale of goods, the present discussion about contracts for the transfer of property in goods does not cover sale of goods. As hire purchase involves hire, with the possibility of later sale, it will be discussed under a separate heading.

In referring to contracts for the supply of goods, we are excluding non-contractual transactions such as gifts. A transaction which is made by a deed (and for which there is no consideration apart from that presumed by a deed) should also be excluded since it is more akin to a gift than to supply of goods, although strictly contractual.

According to section 62(4) of Cap 26, contracts operating by way of mortgage, pledge, charge or other security are specifically excluded from the protection of Cap 26. For example, under a legal mortgage of goods, the property in goods is transferred to secure a debt, but the mortgagor often retains possession of the goods subject to the mortgagee's power to take possession of the goods if the mortgagor defaults on repayment. The mortgagee is not protected under Cap 26. By the same token, contracts for the transfer of property in goods for the present discussion should exclude contracts operating by way of mortgage, pledge, charge or other security.

Two major types of contracts for the transfer of property in goods

There are two major types of contracts for the transfer of property in goods:

barter, and
contracts for work and materials (a table containing the complaint statistics is at Annex 2).

Barter

Under section 3 of Cap 26, the consideration for the transfer of property in contracts of sale must be money, the price. Barter is usually understood to mean the trading of goods for other goods without fixing the price. Barter can also refer to the supply of goods in return for services, or for both goods and services. Barter arises when goods (or services or other equivalent^³⁰) are specifically traded for goods of another. The parties themselves can agree that the transaction (what might have been barter) takes the form of reciprocal sales, with a mutual set-off of prices and a cash adjustment (if necessary). For instance, goods "for a price to be satisfied by" other goods would be regarded as reciprocal sales, while goods passed "in consideration of" other goods would be regarded as barter.^³¹

Goods are sometimes supplied under a transaction loosely known as "trading in" or "part exchange". This mode of supply of goods is well established and quite common in the motor trade. Goods are supplied in return for some other, usually less valuable, goods, together with the payment of a sum of money. A price is usually fixed for the more valuable goods. A value is then put on the goods to be traded-in. The sum of money represents the difference in value of the exchanged goods. The nature of "trading in" depends on how the facts of each case are interpreted.^³²

Contracts for work and materials

At common law, a contract of sale of goods is distinguished from a contract for work and materials. The general rule deducible from the cases in which the distinctions were drawn seems to be that if the main object of the contract is the transfer from A to B, for a price, of the property in a thing in which B has no previous property, then the contract is a contract of sale. But if the real substance of the contract is the performance of work by A for B, it is a contract for work and materials even though the performance of the work necessitates the use of certain materials and the property in those materials passes from A to B under the contract.^³³ In the latter case, the passing of goods is only ancillary to the supply of the services contracted for.

As a result of the distinction, certain contracts of supply^³⁴ have been held to be contracts of sale; whereas other contracts of supply^³⁵ have been held to be contracts for work and materials. Other examples of contracts for work and materials include contracts to repair a car,^³⁶ apply a hair-dye^³⁷ and roof a house.^³⁸

Other types of contracts for the transfer of property in goods

Some retailers, such as supermarkets, give stamps, coupons or vouchers upon purchase of goods by customers to promote sales or particular products. Sometimes goods are offered in return for the stamps or coupons without the payment of money, and on other occasions goods are offered for a reduced price on surrender of the stamps or coupons which the customer is allowed to trade in as part of the consideration.^³⁹ Goods may also be supplied as a bonus to which a customer becomes entitled on purchasing a certain quantity of the products which are being promoted and in some circumstances the transaction merely involves a free gift.^⁴⁰

Sometimes there is a contract for the supply of goods in return for the coupons or labels with or without payment in addition; the contract is either a sale or barter but the distinction is not always clear. For example, in Chappell & Co Ltd v Nestle Co Ltd,^⁴¹ the defendants offered a gramophone record to members of the public for a sum of money together with the tender of three of their chocolate wrappers. The nature of the transaction was not in issue in the case but one of the law lords thought that the transaction was not a sale.^⁴²

The case of Esso Petroleum Co Ltd v Commissioners of Customs and Excise^⁴³ illustrates the difficulties of distinguishing whether a transaction is a gift, a sale or barter. Esso had a petrol sales promotion scheme. Under the scheme, coins were distributed to petrol stations. The petrol station proprietor offered to give away a coin for every four gallons of Esso petrol bought. The issue was whether the coins were being "sold" and were accordingly chargeable to purchase tax. The House of Lords was divided^⁴⁴ as to whether the scheme was a gift, collateral contract or sale.

The importance of distinguishing a gift from a sale or barter is that a person who receives a gift is not protected by the statutory implied terms in the sale of goods legislation. As discussed in the following chapters, the position of barter is uncertain, although terms implied in contracts of sale may be followed.

Promotion tactics such as those referred to in the previous paragraphs are common in retail trade in Hong Kong. In these transactions there is a transfer of property in goods. It is the substance of the transaction which determines its nature, ie whether it is a gift, a sale, a collateral contract or barter. In this Paper, these promotion tactics are included as contracts for the transfer of property in goods if they are not regarded as sales or gifts.

Australia

In Australia, the Trade Practices Act 1974 (the 1974 Act), which stipulates implied terms for contracts for the supply of goods, does not define the scope of contracts for the transfer of property in goods. Instead, it provides in section 4 that:

"supply … includes … in relation to goods - supply (including re-supply) by way of sale, exchange, lease, hire or hire purchase"

Even though it is an inclusive definition, it is not clear whether some types of contract for the transfer of property in goods (for example, the promotion tactics used in retail trade) are covered by the 1974 Act. Contracts for work and materials are covered by section 74 which provides separately some implied warranties for this type of contract. As contracts for work and materials and other types of contract for the transfer of property in goods are common in Hong Kong, it would be sensible for the Recommended Legislation to cover them expressly.

New Zealand

In New Zealand, the Consumer Guarantees Act 1993 (the 1993 Act), which regulates implied terms for contracts for the supply of goods, does not define the scope of contracts for the transfer of property in goods. Instead, it provides in section 2 that:

"supply … in relation to goods, means supply (or resupply) by way of gift, sale, exchange, lease, hire or hire purchase"

Unlike its Australian counterpart, this is an exhaustive definition and includes supply by way of gift. Section 15 of the 1993 Act provides that the guarantees in the Act apply whether or not the goods are supplied in connection with a service, and contracts for work and materials are therefore also covered.

England and Wales

In the Supply of Goods and Services Act 1982 (the 1982 Act), the scope of contracts for the transfer of property in goods is defined in section 1 as follows:

"(1) In this Act in its application to England and Wales and Northern Ireland a 'contract for the transfer of goods' means a contract under which one person transfers or agrees to transfer to another the property in goods, other than an excepted contract.

(2) For the purposes of this section an excepted contract means any of the following –

a contract of sale of goods;

a hire-purchase agreement;

a contract under which the property in goods is (or is to be) transferred in exchange for trading stamps on their redemption;

a transfer or agreement to transfer which is made by deed and for which there is no consideration other than the presumed consideration imported by the deed;

a contract intended to operate by way of mortgage, pledge, charge or other security.

For the purposes of this Act in its application to England and Wales and Northern Ireland a contract is a contract for the transfer of goods whether or not services are also provided or to be provided under the contract, and (subject to subsection (2) above) whatever is the nature of the consideration for the transfer or agreement to transfer."

The definition in section 1 is wide. Professor N E Palmer makes the following comments about the scope of the definition:^⁴⁵

"Sections 1 to 5 affect many different transactions, ranging from contracts of work and materials and exchange to the numerous innominate contracts whereunder a party transfers (or agrees to transfer) his property in goods to another. An obvious example of this residual category is the supply of 'free gifts' or 'bargain offers' which are obtainable by some prescribed act on the part of the prospective transferee, such as the despatch of a coupon or label or the entry into an associated contract with the supplier or a trading acquaintance."

Conclusion

The expression "contracts for the transfer of goods" is widely defined in the 1982 Act and means a contract under which there is a transfer of property in goods. This includes barter and contracts for work and ma

Hon Mr Justice Bokhary PJ (Chairman)	Court of Final Appeal
Mr Eric Cheung	Assistant Professor Department of Professional Legal Education University of Hong Kong
Mr Joseph Fok	Senior Counsel
Mr Paul Kent	Assistant Professor Department of Building & Real Estate Hong Kong Polytechnic University
Mr K M Li	Deputy Chief Executive Consumer Council
Mr Richard Luk	Principal Assistant Secretary Economic Services Bureau
Mr David Murray	Group Legal Manager The Dairy Farm Group
Mr Steve Page	Deputy Managing Director Wayfoong Finance Limited
Mr Adrian Wong	Consultant Messrs Chao & Chung
Mr Byron Leung	Secretary to the Sub-committee

The Law Reform Commission

of Hong Kong

Consultation Paper

Contracts for the Supply of Goods

December 2000