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Hong Kong Law Reform Commission |
1.1 In this chapter, we discuss the need for further legislation on
implied terms for supply of goods (other than sale). We first examine the
existing statutory provisions regulating the implied terms in contracts for the
sale of goods and then discuss the reasons for further legislation on implied
terms for supply of goods (other than sale) and the responses to the
Consultation Paper in respect of these issues.
1.2 We recommend putting
the implied terms for supply of goods (other than sale) into a statutory form
– Recommendation 1.
1.3 There is no comprehensive code regulating commercial transactions
in Hong Kong. Cap 26 regulates only sale of goods but not other kinds of the
supply of goods. On the other hand, Cap 71 controls exemption clauses in both
contracts for the sale of goods and contracts for the supply of goods (other
than sale).
1.4 In Hong Kong, contracts for the sale of goods are mainly governed
by Cap 26. Cap 26 is based on the Sale of Goods Act 1893 in England & Wales
which is a statement of the principles derived from decided cases relating to
sales of goods at that time. Cap 26 has been updated from time to time
following changes to the law in England. Cap 26 was last amended in 1994 when
the proposals of the Law Reform Commission in its report on Sale of Goods and
Supply of Services were
implemented.[4]
1.5 Under Cap
26, a number of terms are implied in contracts for the sale of goods. These
implied terms are classified either as conditions or warranties. Which category
a particular term falls into will determine the nature of the remedy available
for its breach.[5] The terms implied
by Cap 26 in contracts for the sale of goods are undertaking as to title,
correspondence with description and sample, and undertakings as to quality and
fitness.
1.6 There are many other provisions in Cap 26 which relate to
the obligations of sellers and buyers under contracts for the sale of goods,
such as provisions as to whether time is of essence and remedies of buyers and
sellers on breaches of contractual obligations. These are not the main concern
of this Report and they will only be discussed later where
necessary.
1.7 Cap 71 regulates the extent to which civil liability for breach of
contract, for negligence or for other breach of duty can be avoided by means of
contract terms. The provisions of Cap 71 follow closely the corresponding
provisions of the 1977 Act.
1.8 Section 11(1) provides that a seller's
implied undertaking as to title or quiet possession (under section 14 of Cap 26)
cannot be excluded or restricted by reference to any contract term. Section
11(2) provides that as against a person dealing as a consumer, a seller's
implied undertakings as to correspondence with description, supply by sample and
as to the quality or fitness of goods for a particular purpose (under sections
15, 16 and 17 of Cap 26) cannot be excluded or restricted by reference to
any contract term.
1.9 Section 12 regulates the exclusion or restriction
of liability for breaches of obligations arising by implication of law in
contracts under which the possession or ownership of goods passes but which are
not governed by Cap 26.[6] It is
provided that, as against a person dealing as a consumer, the liability in
respect of correspondence with description, supply by sample and the quality of
goods or their fitness for a particular purpose cannot be excluded or restricted
by any contract term. Neither can the undertaking as to title or quiet
possession be excluded under any contract term except in so far as the term
satisfies the requirement of reasonableness. Hence, the liability for breaches
of the terms implied at common law in contracts for the supply of goods (other
than sale) cannot, in most cases, be excluded.
1.10 The undertakings implied under Cap 26 only apply to contracts of
sale of goods but not other types of contracts for the supply of goods. In Hong
Kong, there are no such statutory implied undertakings for contracts for work
and materials, contracts of barter, contracts of hire, hire purchase agreements,
etc. These contracts are regulated by common law. As we will see in the
following chapters, academics support the idea of implying (and courts have been
willing to imply) those obligations into contracts for the supply of goods
(other than sale). Nonetheless, for the five reasons set out in the following
paragraphs, the Consultation Paper recommended that there was a need to put
those implied terms into a statutory form.
1.11 Contracts for the supply of goods are regulated by common law,
but exemption clauses in such contracts are governed by Cap 71. Cap 71
regulates exemption clauses occurring not only in contracts of
sale,[7] but also in other types of
contracts for the supply of goods. In this sense, some limited protection is
given under Cap 71, which restricts a supplier's ability to exclude or restrict
his liability for breaching his obligation. Section 12(1) of Cap 71 provides
that "where the possession or ownership of goods passes under or in pursuance
of a contract not governed by the law of sale of goods", the section has
effect in relation to any contract term excluding or restricting liability for
breach of obligation arising by implication of law from the nature of the
contract. These contracts not governed by the law of sale of goods include
contracts of barter, contracts for work and materials, contracts of hire and
hire purchase agreements.
1.12 The pre-requisite for such protection is
that the court holds that those obligations arise by implication of law.
Although courts have been willing to imply those obligations into contracts for
the supply of goods (other than sale), for the protection of customers supplied
with goods (consumer or not), there is a need to put those supplier's
obligations into concrete legislation. Indeed in the 70's, England was in a
similar position in this respect to the present situation in Hong Kong. The Law
Commission published a working paper on implied terms in contracts for the
supply of goods and recommended putting these implied terms into a
statute.[8] In reciting the fact that
the Law Commission had published a previous report on controlling exemption
clauses in contracts for the supply of
goods,[9] the Commission
stated:
"[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]
1.13 It
is of no use to a customer, consumer or not, supplied with goods if there is
only a statute restricting the supplier's ability to exclude or restrict his
liability for breaching his obligations, but the customer is not sure what those
obligations are. The Judiciary Administrator’s Office expressly supports
this argument.
1.14 Secondly, there is also a need to put the implied obligations of
suppliers into a statute for the sake of certainty and clarity of the law. The
following examples can illustrate such a need.
1.15 In the case of
contracts of barter, as discussed in the following chapters, there are
authorities that the terms implied should be the same as those of sellers in
contracts of sale of goods, but there are still uncertainties. Before the
enactment of the Sale of Goods Act 1893, it was generally supposed that at
common law the obligations of suppliers of goods under contracts of barter were
the same as those of sellers of
goods.[11] Accordingly, as the Sale
of Goods Act 1893 put the principles of law derived from the cases into a
statutory form,[12] the Act in its
original version should also reflect the legal position on contracts of barter.
As Cap 26 was modelled on the Sale of Goods Act 1893, Cap 26 in its original
version should also therefore reflect the legal position of contracts of barter
in Hong Kong. However, it must be pointed out that there is a view that
"[a]part from statute ... the rules of law relating to sales apply in general
to contracts of barter or exchange; but the question has been by no means fully
worked out."[13] Therefore, it
would seem sensible that the terms to be implied in such contracts should be
enumerated and made plain in legislation.
1.16 In the case of contracts
for work and materials, as discussed in the following chapters, the obligations
of suppliers at common law in respect of the materials supplied were generally
regarded as the same as those in contracts of
sale.[14] However, in
Gloucestershire County Council v
Richardson,[15] because of the
lack of a statutory formula, the House of Lords was divided as to whether a term
as to fitness ought to be implied.
1.17 In the case of a contract of
hire, terms may be implied that a bailor has the right to hire out the goods and
that the hirer is entitled to quiet possession during the period of
hire[16] and that the goods are free
from undisclosed encumbrances. But, since there is no authority, the law is
uncertain. In addition, as discussed in the following chapters, there is
uncertainty in the existing law as to the nature and extent of a bailor's
obligations regarding quality and fitness for purpose of goods hired out.
Although there are some decided cases concerning the implied obligations of a
bailor in relation to fitness for purpose of goods, the courts seemed to follow
three main lines of thought regarding
liability.[17] Furthermore, there
are few cases on the implied term as to hire by sample or description, though
there is some support for the proposition that there should be an implied term
as to hire by sample or
description.[18] The position is
unsatisfactorily uncertain.
1.18 In the case of hire purchase agreements,
as discussed in the following chapters, there is no authority on whether there
is an implied term as to quality. Sir Roy M
Goode[19] believes that there is
"no reason why such a term should not be implied" since a hirer's
position has been equated with that of a buyer in respect of other implied terms
namely, title, correspondence with description, quiet enjoyment, etc. Professor
Aubrey Diamond has also found it difficult to "see why there should not be
such a term at common law".[20]
Once again, the position is unsatisfactorily uncertain.
1.19 From the
above examples, it can be seen that most of the implied terms in contracts for
the supply of goods are far from certain or clear. The Judiciary
Administrator’s Office, the Chinese Manufacturers’ Association of
Hong Kong and the Director of Government Supplies echo the view expressed in the
Consultation Paper that it is important to ensure the certainty and clarity of
the law. To this end, there is a need to put the implied obligations of
suppliers into a statute.
1.20 Thirdly, for the sake of consistency of the law on supply of
goods (including sale of goods), the implied terms should be consistent for each
type of supply of goods as far as possible. The implied terms for contracts for
the sale of goods are in Cap 26 which makes those terms transparent and certain.
The terms for other types of supply are far from certain as illustrated by the
above examples. Lord Upjohn once stated that if the law treated implied terms
differently in contracts of sale from contracts for work and materials, it would
be "most unsatisfactory, illogical, and indeed a severe blow to any idea of a
coherent system of common law
...."[21] The same can be said
of the differences between contracts of sale and other types of supply of goods.
The Judiciary Administrator’s Office, the Chinese Manufacturers’
Association of Hong Kong, the Director of Government Supplies and the French
Chamber of Commerce and Industry in Hong Kong also agree that there is a need to
be consistent in respect of the implied undertakings for both the sale of goods
and the supply of goods. In order to ensure such consistency, the implied
obligations should be put into statutory form.
1.21 Fourthly, other kinds of contracts for the supply of goods such
as contracts of barter, contracts for work and materials and hire-purchase
agreements, are commonly used by customers, consumers or not. It is reasonable
for persons supplied with goods under such contracts to expect that they would
be protected by implied terms similar to those in contracts of sale. By the
same token, as the implied terms in contracts of sale are provided in Cap 26,
people acquiring goods through other types of contracts for the supply of goods
would also expect to find the implied terms in a statute. The Judiciary
Administrator’s Office and the Democratic Alliance for the Betterment of
Hong Kong observe that unequivocal legislation enables the public to know the
law that they can rely on. The fact that goods are now commonly supplied to
consumers through transactions other than sale adds to the desirability of clear
legislative provisions.
1.22 Last but not least, other jurisdictions have already put the
implied obligations of suppliers in statutes. A comparison table of the
statutory implied terms in contracts for the sale and supply of goods is at
Annex 3. In Australia, Part V Division 2 of the 1974 Act contains implied
conditions and warranties in contracts for the supply of goods by a corporation
to a consumer.[22] Most of the
consumer protection provisions of the 1974 Act are expressly limited to the
supply of goods by a corporation to a consumer. "Corporation" is defined in
section 4(1) and by virtue of section 6, references to a corporation are to be
read as including references to a person who is not a
corporation.[23] "Consumer" is
defined in section 4B.
1.23 In New Zealand, the 1993 Act implies
guarantees in the supply of goods in trade to consumers. The 1993 Act only
applies where goods are supplied in
trade[24] which is defined in
section 2(1),[25] and does not apply
to cases where goods are supplied by auction or competitive
tender.[26] A "consumer" is a
person who acquires the goods of a kind ordinarily acquired for personal,
domestic, or household use or
consumption.[27] The rights and
remedies provided in the 1993 Act are in addition to any other legal rights or
remedies, unless those other rights or remedies are expressly or impliedly
repealed or
modified.[28]
1.24 In England
and Wales, terms as to title, correspondence with description or sample,
merchantability, and fitness for purposes are implied into contracts of hire
purchase by the 1973 Act. These terms were further extended to contracts of
hire and contracts for the transfer of property in goods by Part I of the 1982
Act. Both the 1973 Act and the 1982 Act apply to consumer and non-consumer
supplies of goods.
1.25 The respondents overwhelmingly support the idea of putting the
implied obligations of suppliers of goods into legislation. Both the Director
of Government Supplies and the Chinese General Chamber of Commerce believe that
this is helpful to both suppliers and customers, since suppliers will know their
obligations and customers will know their rights. The Democratic Alliance for
Betterment of Hong Kong is of the opinion that the new legislation will bridge
the gaps of the existing law and consumers will be better protected. This view
is shared by the Chinese Manufacturers’ Association of Hong Kong which
welcomes the review of the law on supply of goods. The Consumer Council, the
French Chamber of Commerce and Industry in Hong Kong and the Judiciary
Administrator’s Office also endorse this recommendation.
1.26 For
the above reasons, we recommend that the implied obligations of suppliers in
contracts for the supply of goods (other than sale) should be put into a
statute.
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Recommendation 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."
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[4] See the Sale of Goods (Amendment) Ordinance 1994 (Ord No 85 of 1994).
[5] We will examine the difference between conditions and warranties in chapter 7.
[6] Examples of such contracts would be contracts for work and materials, contracts of exchange or barter, hire-purchase agreements and contracts of hire.
[7] Cap 71, s11.
[8] Law Commission, Implied Terms in Contracts for the Supply of Goods, WP No 71, 1977.
[9] Law Commission, Second Report on Exemption Clauses, Law Com No 69, 1975.
[10] Law Commission, Implied Terms in Contracts for the Supply of Goods, WP No 71, 1977, at para 9.
[11] Lord Blackburn, Blackburn's Contract of Sale, 2nd Ed, 1885, at ix.
[12] MacKenzie Chalmers, The Sale of Goods Act 1893, 1894, see the Introduction. Sir MacKenzie Chalmers was the draftsman of the Sale of Goods Act 1893.
[13] Michael Mark, Chalmers Sale of Goods, 18th Ed, 1981, at 82-83.
[14] Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Gloucestershire County Council v Richardson [1969] 1 AC 454.
[15] [1969] 1 AC 480. Lords Pearce and Wilberforce were of the view that the term, which might otherwise have been implied, had been excluded; Lord Upjohn concluded that the term was not implied; Lord Pearson concluded that the term was to be implied.
[16] Lee v Atkinson and Brooks (1609) Cro Jac 236; 79 ER 204.
[17] Approach A (strict liability for ensuring that goods are reasonably fit for their purposes); Approach B (as fit as reasonable skill and care can make); Approach C (negligence-based).
[18] See Astley Industrial
Trust Ltd v Grimley [1963] 1 WLR 584, a hire-purchase case, per Pearson L J
at 595, Upjohn L J at 597 and Ormerod L J at 600; Reardon Smith Line Ltd v
YngvarHansen-Tangen [1976] 1 WLR 989, per Viscount Dilhorne, at
1000.
[19] R M Goode, Hire
Purchase Law and Practice, 2nd Ed, 1970, at 241.
[20] A Diamond, Introduction to Hire-Purchase Law, 2nd Ed, 1971, at 57.
[21] Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Gloucestershire County Council v Richardson [1969] 1 AC 454.
[22] Some States may have similar statutory implied terms in their State legislation for certain types of contracts, for example, hire purchase. If these implied term provisions in the 1974 Act and the State legislation overlap, a contract may be subject to 2 or more sets of implied terms. In such a case, a consumer has the protection of both sets of statutory implied terms and he may claim relief if there is a breach of one but not the other.
[23] Since the provisions of the 1974 Act are primarily based, for constitutional reasons, on the Commonwealth's (federal) power to make laws with respect to corporations, the conditions and warranties implied by the Act are expressed to apply to contracts for the supply of goods and services by a corporation. They will not be implied in contracts for the supply of goods or services by a sole trader, partnership, or other unincorporated body operating within the limits of a particular State. However, by virtue of another provision of the Act (section 6) which extends the operation of the Act as a result of certain other heads of constitutional power, the conditions and warranties will apply to contracts for the supply of goods and services by traders where they are engaged in interstate or overseas trade or commerce, trade and commerce within or involving a Territory, or dealings with the Commonwealth government or any of its instrumentalities.
[24] Section 41(1). According to section 41(2), there is no right of redress against a charitable organisation where goods are supplied by the charitable organisation for the principal purpose of benefiting the person to whom the supply is made.
[25] "Trade" means any trade,
business, industry, profession, occupation, activity of commerce, or undertaking
relating to the supply or acquisition of goods or
services.
[26] Section
41(3).
[27] Section 2(1). A person is not a "consumer" if he acquires the goods, or gives the impression that he acquires the goods, for the purpose of resupplying them in trade; or consuming them in the course of production or manufacture; or repairing or treating in trade other goods or fixtures on land.
[28] Section 4(1). No provision of the 1993 Act is to be construed as repealing, invalidating, or modifying the provisions of any other Act, except where there is an express provision, or clear intention by necessary implication, to do so: section 4(2).