Hong Kong Law Reform Commission

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Chapter 10 - Summary of recommendations

Chapter 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

10.1 We recommend that the implied obligations of suppliers in contracts for the supply of goods should be put into a statute, which we will refer to as "the Recommended Legislation." (Recommendation 1)

Chapter 2 - What are contracts for the supply of goods?

10.2 We recommend that:

(a) a contract for the transfer of property in goods should be treated in the Recommended Legislation as a type of contract for the supply of goods;

(b) it should be defined to mean a contract under which a person transfers or agrees to transfer to another the property in goods;

(c) it may involve services as well and the type of consideration involved should be irrelevant (except where that is merely presumed by a deed); and

(d) the definition should exclude:

(i) contracts of sale;
(ii) hire purchase agreements;
(iii) contracts operating by way of mortgage, pledge, charge or other security; and
(iv) transfers or agreements to transfer by deed and for which there is no other consideration apart from that presumed by the deed. (Recommendation 2)

10.3 We recommend that:

(a) a contract of hire should be treated in the Recommended Legislation as a type of contract for the supply of goods;

(b) it should be defined to mean a contract under which a person bails or agrees to bail goods to another by way of hire; and

(c) the definition should include contracts involving services, and the type of consideration involved should be irrelevant. (Recommendation 3)

10.4 We recommend that:

(a) a hire purchase agreement should be treated in the Recommended Legislation as a type of contract for the supply of goods; and

(b) it should be defined to mean an agreement by which goods are supplied on hire and the hirer has the right but not an obligation to buy the goods. (Recommendation 4)

10.5 We recommend that the definition of "goods" in Cap 26 should be adopted in the Recommended Legislation. (Recommendation 5)

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

10.6 We recommend that implied terms about title should be provided for in consumer and non-consumer contracts for transfer of property in goods similar to those in section 14 of Cap 26, namely:

(a) an implied condition that a transferor has a right to transfer the property and, in the case of an agreement to transfer, that he will have such a right at the time when the property is to be transferred;

(b) implied warranties that the goods are free and will remain free from charges or encumbrance not disclosed or known to the transferee before the contract is made; and that the transferee will enjoy quiet possession, save as to encumbrances disclosed or known to the transferee; and

(c) in the case of a transfer of limited title, implied warranties of disclosure of encumbrance to the transferee and of quiet possession by the transferee. (Recommendation 6)

10.7 We recommend that implied terms as to a right to transfer possession should be provided for consumer and non-consumer contracts of hire, similar to those in section 14 of Cap 26, namely:

(a) an implied condition that a bailor has a right to hire out the goods for the period of hire and, in the case of an agreement to hire, he will have such a right at the time of hire;

(b) an implied warranty that the hirer will have quiet possession of the goods for the period of hire save as to charges or encumbrances disclosed or known to the hirer before the contract of hire is made; and

(c) the above implied terms should not affect the right of the bailor to repossess the goods under the terms of the contract of hire. (Recommendation 7)

10.8 We recommend that implied terms about title similar to those in section 14 of Cap 26 should be provided for consumer and non-consumer hire purchase agreements, namely:

(a) an implied condition that a bailor will have a right to sell the goods when the property is to pass;

(b) implied warranties that the goods are free and will remain free from charges or encumbrances not disclosed or known to the hirer before the agreement is made; and the hirer will enjoy quiet possession, save as to charges or encumbrances disclosed or known to the hirer; and

(c) in the case of a transfer of limited title, implied warranties of disclosure to the hirer of charges or encumbrances known to the bailor but not the hirer, and of quiet possession by the hirer. (Recommendation 8)

Chapter 4 - Implied terms to be included in the Recommended Legislation – correspondence with description

10.9 We recommend that provisions as to correspondence with description similar to those in section 15 of Cap 26 should be provided for consumer and non-consumer contracts for transfer of property in goods, namely:

(a) an implied condition that the goods correspond with the description if the transfer is by description;

(b) a provision that if the transfer is both by description and by sample, the bulk of the goods should correspond with both the description and the sample; and

(c) a provision that it is still a supply by description even if the goods are exposed for supply and selected by a transferee. (Recommendation 9)

10.10 We recommend that provisions as to correspondence with description similar to those in section 15 of Cap 26 should be provided for consumer and non-consumer contracts of hire, namely:

(a) an imp’n that the goods correspond with the description if the hire is by description;

(b) a provision that if the hire is both by description and by sample, the bulk of the goods should correspond with both the description and the sample; and

(c) a provision that it is still a supply by description even if the goods are exposed for supply and selected by a hirer. ‘’(Recommendation 10)

10.11 We recommend that provisions as to correspondence with description similar to those in section 15 of Cap 26 should be provided for both consumer and non-consumer hire purchase agreements, namely:

(a) an implied condition that the goods correspond with the description if the bailment is by description;

(b) a provision that if the bailment is both by description and by sample, the bulk of the goods should correspond with both the description and the sample; and

(c) a provision that it is still a supply by description even if the goods are exposed for supply and selected by a bailee. (Recommendation 11)

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

10.12 We recommend that implied terms about quality and fitness similar to those in section 16 of Cap 26 be enacted for both consumer and non-consumer contracts for transfer of property in goods with some appropriate amendments, namely:

(a) (i) where a transferor transfers the property in goods in the course of a business, there should be an implied condition that the goods supplied are of satisfactory quality except:

- the defects which have been specifically drawn to the transferee's attention before the contract;
- where the transferee examines the goods before the contract, the defects which ought to have been revealed by that examination; or
- where the contract is one by reference to a sample, the defects which would have been apparent on a reasonable examination of the sample;
(ii) the test of "satisfactory quality" should be the standard of a reasonable person who regards the goods as satisfactory, taking account of their description, the consideration for the supply of goods and other relevant circumstances;
(iii) the inclusion of consideration of "state or condition" in assessing "quality" should be put together, in the same sub-section, with the list of aspects of "quality", which should be non-exhaustive;
(iv) in the list of aspects of "quality", goods are required to be fit for all their common purposes;

(b) (i) where a transferor transfers the property in goods in the course of a business, and the transferee expressly or impliedly makes known to the transferor (or any person who conducts any antecedent negotiations), any particular purpose for acquiring the goods, there should be an implied condition that the goods are reasonably fit for that purpose except where:

- the transferee does not rely; or
- it is unreasonable for him to rely,

on the skill or judgment of the transferor or the person who conducted the antecedent negotiations;

(ii) "antecedent negotiations" means any negotiations or arrangements with a transferee whereby he was induced to make the agreement or which otherwise promoted the transaction;

(c) the implied condition or warranty as to quality or fitness for a particular purpose may be annexed to a contract by usage;

(d) the foregoing provisions should apply to a transfer of goods by a person who in the course of a business is acting as agent for another in the same way that they apply to a transfer by a principal in the course of a business, except where:

- that other is not transferring goods in the course of a business; and
- the transferee knows this, or reasonable steps have been taken to let the transferee know this before the contract;

(e) the notion of "caveat emptor" should be preserved to the extent by limiting the application of the implied condition or warranty as to quality and fitness for a particular purpose to transfers "in the course of a business", transfers by sample and other situations provided in other enactments. (Recommendation 12)

10.13 We recommend that implied terms about quality and fitness similar to those in section 16 of Cap 26 be enacted for both consumer and non-consumer contracts of hire with some appropriate amendments, namely:

(a) (i) where a bailor hires out goods in the course of a business, there should be an implied condition that the goods supplied are of satisfactory quality except:

- the defects which have been specifically drawn to the bailee's attention before the contract;
- where the bailee examines the goods before the contract, the defects which ought to have been revealed by that examination; or
- where the contract is one by reference to a sample, the defects which would have been apparent on a reasonable examination of the sample;
(ii) the test of "satisfactory quality" should be the standard of a reasonable person who regards the goods as satisfactory, taking account of their description, the consideration for the supply of goods and other relevant circumstances;
(iii) the inclusion of "state or condition" should be put together, in the same sub-section, with the list of aspects of "quality", which should be non-exhaustive;
(iv) in the list of aspects of "quality", goods are required to be fit for all their common purposes;

(b) (i) where a bailor hires out goods in the course of a business, and the bailee expressly or impliedly makes known to the bailor (or any person who conducts any antecedent negotiations), any particular purpose for acquiring the goods, there should be an implied condition that the goods are reasonably fit for that purpose except where:

- the bailee does not rely; or
- it is unreasonable for him to rely,
on the skill or judgment of the bailor or the person who conducted the antecedent negotiations;
(ii) "antecedent negotiations" means any negotiations or arrangements with a bailee whereby he was induced to make the agreement or which otherwise promoted the transaction;

(c) the implied condition or warranty as to quality or fitness for a particular purpose may be annexed to a contract by usage;

(d) the foregoing provisions should apply to a bailment of goods by a person who in the course of a business is acting as agent for another in the same way that they apply to a bailment by a principal in the course of a business, except where:

- that other is not bailing goods in the course of a business; and
- the bailee knows this, or reasonable steps have been taken to let the bailee know this before the contract;

(e) the notion of "caveat emptor" should be preserved to the extent by limiting the application of the implied condition or warranty as to quality and fitness for a particular purpose to bailments "in the course of a business", "bailments by sample" and other situations provided in other enactments. (Recommendation 13)

10.14 We recommend that implied terms about quality and fitness similar to those in section 16 of Cap 26 should be enacted for both consumer and non-consumer hire purchase agreements with some appropriate amendments, namely:

(a) (i) where a bailor hires out goods in the course of a business, there should be an implied condition that the goods supplied are of satisfactory quality except:

- the defects which have been specifically drawn to the bailee's attention before the agreement;
- where the bailee examines the goods before the agreement, the defects which ought to have been revealed by that examination; or
- where the agreement is one by reference to a sample, the defects which would have been apparent on a reasonable examination of the sample;
(ii) the test of "satisfactory quality" should be the standard of a reasonable person who regards the goods as satisfactory, taking account of their description, the consideration for the supply of goods and other relevant circumstances;
(iii) the inclusion of "state or condition" should be put together, in the same sub-section, with the list of aspects of "quality", which should be non-exhaustive;
(iv) in the list of aspects of "quality", the goods are required to be fit for all their common purposes;

(b) (i) where a bailor hires out goods in the course of a business, and the bailee expressly or by implication makes known to the bailor (or any person who conducts any antecedent negotiations), any particular purpose for acquiring the goods, there should be an implied condition that the goods are reasonably fit for that purpose except where:

- the bailee does not rely; or
- it is unreasonable for him to rely,
on the skill or judgment of the bailor or the person who conducted the antecedent negotiations;
(ii) "antecedent negotiations" means any negotiations or arrangements with a bailee whereby he was induced to make the agreement or which otherwise promoted the transaction;

(c) the implied condition or warranty as to quality or fitness for a particular purpose may be annexed to an agreement by usage;

- that other is not bailing goods in the course of a business;
- the bailee knows this, or reasonable steps have been taken to let the bailee know this before the agreement;

Chapter 6 - Implied terms to be included in the Recommended Legislation – supply by sample

10.15 We recommend that:

(a) a contract for transfer of the property in goods by sample is one where there is an express or implied term in the contract to that effect;

(b) in both consumer and non-consumer contracts for transfer of the property in goods by sample, implied conditions similar to those in section 17 of Cap 26 should be provided, namely:

(i) that the bulk shall correspond with the sample in quality;
(ii) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
(iii) that the goods shall be free from any defect, rendering them unsatisfactory, which is not apparent on reasonable examination of the sample. (Recommendation 15)

10.16 We recommend that:

(a) a contract of hire by sample is one where there is an express or implied term in the contract to that effect;

(b) in both consumer and non-consumer contracts of hire by sample, implied conditions similar to those in section 17 of Cap 26 should be provided, namely:

(i) that the bulk shall correspond with the sample in quality;
(ii) that the bailee shall have a reasonable opportunity of comparing the bulk with the sample;
(iii) that the goods shall be free from any defect, rendering them unsatisfactory, which is not apparent on reasonable examination of the sample. (Recommendation 16)

10.17 We recommend that:

(a) a hire purchase by sample is one where there is an express or implied term in the agreement to that effect;

(b) in both consumer and non-consumer hire purchase by sample, implied conditions similar to those in section 17 of Cap 26 should be provided, namely:

(i) that the bulk shall correspond with the sample in quality;
(ii) that the bailee shall have a reasonable opportunity of comparing the bulk with the sample;
(iii) that the goods shall be free from any defect, rendering them unsatisfactory, which is not apparent on reasonable examination of the sample. (Recommendation 17)

Chapter 7 - Remedies for breaches of the implied terms

10.18 We recommend following the classification of terms in Cap 26 by using the expressions "condition" and "warranty" and defining them in the same way as in Cap 26. (Recommendation 18)

10.19 We recommend that the Recommended Legislation should include the following features:

(a) the rights of a consumer to treat a contract of supply as repudiated on a breach of the statutory implied terms in the Recommended Legislation should be unfettered;

(b) in the case of a non-consumer, if the breach is so slight that it would be unreasonable for him to repudiate the contract of supply, the breach will only be treated as a breach of warranty but not a condition; and

(i) the burden is on the supplier to show that the breach is so slight that it would be unreasonable for the other party to repudiate the contract, and that other party does not deal as a consumer;
(ii) this restriction on rejection does not apply where there is an express or implied contrary intention in the contract;
(iii) this restriction does not apply where the breach is a breach of :
- an implied condition as to a reasonable opportunity to compare the bulk with the sample;
- an implied condition as to a right to transfer the property in goods (in a contract for the transfer of property in goods);
- an implied condition as to a right to transfer possession of the goods by way of hire for the period of bailment (in a contract for the hire of goods); or
- an implied condition as to a right to sell the goods at the time when the property is to pass (in a hire purchase agreement). (Recommendation 19)

10.20 We recommend that the definition of "dealing as consumers" in the Recommended Legislation should follow that in section 2A of Cap 26. (Recommendation 20)

Chapter 8 - Exclusion of liability

10.21 We recommend that there should be a provision similar to section 57 of Cap 26 in the Recommended Legislation in order to allow contracting out of any right, duty or liability, subject to the control of Cap 71. (Recommendation 21)

10.22 We recommend that a new sub-section (3A) should be added to section 12 of Cap 71 to make any exemption clause relating to the implied terms as to title in contracts for the transfer of property in goods and hire purchase agreements void. There is no need for such a sub-section to apply to contracts of hire. (Recommendation 22)

10.23 We recommend that section 12 of Cap 71 should be amended to cover agreements to transfer property in goods and agreements to bail goods (in contracts of hire). (Recommendation 23)

Chapter 9 - Miscellaneous amendments concerning contracts for the sale of goods

10.24 We recommend that provisions on sales of a specified quantity of unascertained goods forming part of an identified bulk similar to those in section 18 rule 5(3) and (4) and sections 20A and B of the 1979 Act should be made in Cap 26, namely:

(a) where the goods or some of them form part of a bulk identified in the contract or by subsequent agreement between the parties or by subsequent conduct of the seller in accordance with the terms of the contract, and a buyer has paid for the goods or some of them, unless otherwise agreed, property in an undivided share in the bulk passes to the buyer who becomes an owner in common;

(b) the undivided share of a buyer in a bulk at any time shall be such share as the quantity paid for and due to the buyer bears to the quantity of bulk at that time, provided that where the aggregate of the undivided shares of all the buyers exceed the whole of the bulk, the undivided share of each buyer shall be reduced proportionately so that the aggregate is equal to the whole bulk;

(c) where a buyer has only paid for some of the goods out of a bulk, any delivery shall first be ascribed to the goods which has been paid for;

(d) part payment for any goods shall be regarded as payment for a corresponding part of the goods;

(e) a buyer shall be deemed to have paid for the goods or some of them if (a) he has accepted a bill of exchange under a documentary bill; or (b) the relevant bank has accepted a bill of exchange or has purchased the stipulated documents under a documentary credit, regardless of whether there is any default in payment subsequently;

(f) where the goods are in a deliverable state and the bulk is reduced to (or to less than) the quantity sold to a buyer, and the buyer is the only buyer to whom goods are due out of the bulk, (i) the remaining goods are taken as appropriated when the bulk is so reduced, and (ii) the property in those goods passes to the buyer;

(g) the above paragraph applies where a bulk is reduced to (or to less than) the aggregate quantities due to a buyer under separate contracts relating to that bulk and he is the only one to whom goods are due out of that bulk;

(h) anyone who has become an owner in common of a bulk shall be deemed to have consented to (i) any delivery to any other co-owner of goods due to him out of the bulk, and (ii) any dealing with or removal, delivery or disposal by any other co-owner of goods out of the bulk provided the goods are within his undivided share;

(i) no cause of action shall accrue to anyone against a person by reason that the latter has acted in reliance on the above consents in the above paragraph;

(j) nothing in above shall:

- require a buyer to compensate other buyers for any shortfall;
- affect any arrangement on adjustments among buyers themselves;
- affect any buyer's rights under his contract;

(k) a "bulk" means a mass or collection of goods of the same kind which (a) is contained in a defined space or area; and (b) is such that any goods in the bulk are interchangeable with any other goods therein of the same number or quantity. (Recommendation 24)

10.25 We recommend repealing section 32(3) of Cap 26, and that provisions on a right of partial rejection similar to those in section 35A of the 1979 Act should be made in Cap 26, namely:

(a) subject to (b) below, where a buyer has a right to reject because of a breach by the seller which affects some or all the goods, and has accepted some of the goods including all the goods unaffected by the breach, he can still reject the rest of the goods, and in the case of consumers, the application of this paragraph cannot be excluded or restricted by reference to any contract terms; and in case of non-consumers, such a right should be subject to a contrary intention made in or implied from the contract;

(b) a buyer accepting any goods in a commercial unit is deemed to have accepted all the goods making the unit; and "commercial unit" means such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use;

(c) where a buyer has a right to reject an instalment of goods, the principles in (a), (b) and (d) also apply as if references to the goods were references to the goods comprised in the instalment;

(d) goods are affected by a breach if they do not conform to the contract. (Recommendation 25)

10.26 We recommend repealing section 24 of Cap 26. (Recommendation 26)

10.27 We recommend that provisions should be made in section 32 of Cap 26 to restrict non-consumers' rights of rejection on delivery of a wrong quantity similar to those in section 30(2A) and (2B) of the 1979 Act, namely:

(a) a non-consumer cannot, in a case of shortfall under section 32(1), reject the goods delivered, or in a case of excess under section 32(2), reject the whole of the goods delivered, if the shortfall or excess is so slight that it would be unreasonable for him to do so;

(b) the burden is on the seller to show that the shortfall or excess is so slight that it would be unreasonable for the buyer to repudiate the contract, and that the buyer does not deal as a consumer. (Recommendation 27)

10.28 We recommend that section 37 of Cap 26 should clarify that a buyer shall not be deemed to have accepted the goods merely because he asks for, or agrees to their repair by or under an arrangement with the seller. (Recommendation 28)