Hong Kong Law Reform Commission

Chapter 7 - Remedies for breaches of the implied terms

• Overview
• Remedies for breaches of implied terms in contracts of sale of goods in Hong Kong
• Australia
• New Zealand
• England and Wales
• Conclusion

Overview

7.1 In this chapter, we discuss the remedies for breaches of the implied terms in the Recommended Legislation. We first discuss the present position of the remedies for breaches of the implied conditions and warranties in contracts of sale of goods under Cap 26, followed by the case law developments on intermediate/innominate terms and the problems of the statutory distinction between conditions and warranties.

7.2 We also examine the position in Australia, New Zealand and England and Wales. After discussing the relevant issues and the responses to the Consultation Paper, we then make recommendations in respect of –

(a) the classification into "conditions" and "warranties" – Recommendation 18;

(b) the restriction on non-consumers' rights to reject goods – Recommendation 19; and

(c) the definition of "dealing as consumers" – Recommendation 20.

We also conclude that the definition of "dealing as consumer" in Cap 26 and various other ordinances can be better defined, and there should be an overall review of the definition.

Remedies for breaches of implied terms in contracts of sale of goods in Hong Kong

7.3 In the 19th century, contractual obligations were generally thought to fall into two main categories, namely conditions and warranties. The difference between conditions and warranties lies in the difference in remedies available for breaches of them. A breach of a condition entitles the innocent party, if he so chooses, to treat himself as discharged from further performance under the contract, and in any event to claim damages for the loss caused by the breach. A breach of warranty does not entitle the innocent party to treat himself as discharged, but to claim damages only.[313]

Conditions and warranties in contracts of sale of goods

7.4 Cap 26 reflects this distinction. The statutory implied obligations in Cap 26 are categorised into conditions and warranties. In Cap 26, the expression "warranty" is defined in section 2(1) as follows:

"'warranty' means an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and treat the contract as repudiated."

7.5 The expression "condition" is not directly defined in Cap 26. There is a definition by inference in section 13(2), which reads as follows:

"Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract."

7.6 The statutory implied terms as to title, quality, fitness for purpose and correspondence with description and sample are all classified as conditions in Cap 26.[314] The statutory implied terms as to freedom from encumbrances and quiet possession are classified as warranties.[315]

7.7 Whether a statutory implied term is a condition or a warranty has a significant effect on a buyer's remedy for its breach. If the term is a condition, a buyer can reject the goods, however unimportant the breach actually is. He can treat the contract as repudiated and recover the price if he has already paid (provided that he has not accepted the goods, or that he has not waived the condition or elected to treat it as a mere breach of warranty). If the term is a warranty, a buyer can only claim damages.

Intermediate/innominate terms – case law developments

7.8 The distinction between conditions and warranties stipulated in Cap 26 means that there is certainty as to the consequences of breaches of statutory implied terms. On the other hand, new principles on the remedies for breaches of contractual terms have arisen from case law concerning both contract laws in general and sale of goods law in particular. In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,[316] the English Court of Appeal held that the stipulation as to seaworthiness was neither a condition nor a warranty but an intermediate or innominate term. Diplock L J said:

"There are, however, many contractual undertakings of a more complex character which cannot be categorised as being 'conditions' or 'warranties' .... Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended he should obtain from the contract; and the legal consequences of a breach of such undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking, as a 'condition' or a 'warranty'."[317]

7.9 Such terms are called "intermediate" or "innominate" terms. The law has to give regard to the nature and gravity of the breach before it becomes possible to say whether the innocent party is entitled to repudiate a contract for a breach of a term of this character.[318] Repudiation is justified if the breach can be regarded as depriving a party of substantially the whole benefit of the contract.

7.10 The test is the same as that for frustration of contract and was applied to a sale of goods case in Cehave N V v Bremer Handelsgesellschaft m b H.[319] In that case, an express term that the goods were to be shipped in good condition was broken, but it was held that the circumstances were not sufficiently serious to justify rejection. The court held that the Sale of Goods Act did not exhaustively divide all terms into conditions and warranties and that section 62(2) of the 1893 Act (the equivalent of section 62(2) of Cap 26) preserved the effect of common law rules save insofar as they were inconsistent with the Act.

7.11 These new principles have been approved by the House of Lords in Reardon Smith Line Ltd v Hansen-Tangen[320] and in Bunge Corporation v Tradax Export S A.[321] Lord Scarman[322] has stated that the statutory classification of terms as conditions and warranties should not "be treated as an indication that the law knows no terms other than conditions and warranties". In construing a contract, a term can be classified as a condition, warranty or an innominate term depending on the intention of the parties. If the intention of the parties is clear, a term may be construed as a condition even if the parties do not expressly specify it as a condition.

7.12 It must be pointed out that the "developments described above have certainly not eliminated the legal type of term known as conditions".[323] Accordingly, the terms classified as conditions under Cap 26 remain as conditions.[324]

Problems of the statutory distinction between conditions and warranties

7.13 The dichotomy in Cap 26 between a condition (breach of which allows rejection) and a warranty (breach of which does not) provides for certainty as to a buyer's rights, and facilitates quick rejection of goods. However, such a sharp distinction is not without problems.

7.14 First, breaches of some of the statutory implied terms (for example, as to quality) may range from trivial to very serious breaches which render the goods worthless. Replacements or repairs can remedy some breaches easily and quickly. The sharp distinction between conditions and warranties can lead to easy and quick rejection of goods on purely technical grounds motivated by market factors especially in non-consumer transactions. This may in some cases be unfair to sellers whose losses far exceed the cost of remedying the breaches. Professor Hugh Beale also considers that where the market has changed suddenly, either party may use a slight breach of contract as an excuse to escape from the contract.

7.15 Secondly, because of this inflexibility, the easy availability of a right of rejection can sometimes work against the interests of a buyer. Since the remedy of rejection is so powerful, in the case of a trivial breach, the court may be very cautious in allowing rejection, and may simply hold that there is no breach of the statutory implied terms. In such a case, the buyer cannot even recover damages although what has been breached is a condition and the buyer ends up with no remedy at all. This is because the court cannot award damages and at the same time decide that the buyer has no right to reject the goods for a breach of a condition. For example, in Cehave N V v Bremer Handelsgesellschaft m b H,[325] Lord Denning M R stated that the implied condition in question was broken only if the defect was so serious that a commercial man would have thought that a buyer should be able to reject the goods. In Millars of Falkirk Ltd v Turpie,[326] the court held that there was no breach of the statutory implied condition even though the car delivered was admittedly defective and required repair.

7.16 In addition, Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen[327] criticised the inflexibility of the statutory condition as to compliance with description and characterised the cases on it as "excessively technical".

Australia

7.17 Section 75A(1) of the 1974 Act provides a consumer with a right to rescind a contract of supply when there is a breach of a condition implied by Part V Division 2 of the Act (discussed in Chapters 2-6 above). Sub-section (1)(c) & (d) provides for the manner by which a contract of supply may be rescinded. A consumer may rescind a contract by a written notice giving particulars of the breach, or by returning the goods to the supplier and giving particulars of the breach. Section 75A(1) reads as follows:

"Where:

(a) a corporation supplies goods to a consumer in the course of a business; and

(b) there is a breach of a condition that is, by virtue of a provision of Division 2, implied in the contract for the supply of the goods;

the consumer is, subject to this section, entitled to rescind the contract by:

(c) causing to be served on the corporation a notice in writing signed by him or her giving particulars of the breach; or

(d) causing the goods to be returned to the corporation and giving to the corporation, either orally or in writing, particulars of the breach."

7.18 Sub-section (2) provides that the right to rescind may be lost if, for example, the notice is not served or the goods are not returned within a reasonable time after the consumer has had a reasonable opportunity to inspect the goods. Where the right of rescission is lost, a consumer is restricted to a claim for damages.[328] Sub-section (2) provides as follows:

"Where a consumer purports to rescind under this section a contract for the supply of goods by a corporation, the purported rescission does not have any effect if:

(a) the notice is not served or the goods are not returned within a reasonable time after the consumer has had a reasonable opportunity of inspecting the goods;

(b) in the case of a rescission effected by service of a notice, after the delivery of the goods to the consumer but before the notice is served:

(i) the goods were disposed of by the consumer, were lost, or were destroyed otherwise than by reason of a defect in the goods;

(ii) the consumer caused the goods to become unmerchantable or failed to take reasonable steps to prevent the goods from becoming unmerchantable; or

(iii) the goods were damaged by abnormal use; or

(c) in the case of a rescission effected by return of the goods, while the goods were in the possession of the consumer:

(i) the consumer caused the goods to become unmerchantable or failed to take reasonable steps to prevent the goods from becoming unmerchantable; or

(ii) the goods were damaged by abnormal use."

7.19 Sub-section (3) provides for the effect of rescinding a contract according to this section. Property in the goods re-vests in the supplier and the consumer becomes entitled to recover from the supplier as a debt the amount of any consideration provided for the goods. It must be pointed out that pursuant to sub-section (4), the right of rescission conferred by this section is additional to any other rights a consumer may have. Sub-sections (3) and (4) read as follows:

"(3) Where a contract for the supply of goods by a corporation to a consumer has been rescinded in accordance with this section:

(a) if the property in the goods had passed to the consumer before the notice of rescission was served on, or the goods were returned to, the corporation - the property in the goods re-vests in the corporation upon the service of the notice or the return of the goods; and

(b) the consumer may recover from the corporation, as a debt, the amount or value of any consideration paid or provided by him or her for the goods.

(4) The right of rescission conferred by this section is in addition to, and not in derogation of, any other right or remedy under this Act or any other Act, any State Act, any law of a Territory or any rule of law."

7.20 A consumer has a right to rescission only when there is a breach of a condition implied in Part V Division 2. In other words, a consumer only has a claim for damages in respect of a breach of a warranty. A consumer's claim for damages is based on ordinary contract principles.

New Zealand

7.21 Section 16 of the 1993 Act provides a consumer with a right of redress against a supplier where there is a failure to comply with any guarantee in sections 5 to 10. Section 16 provides as follows:

"This Part of this Act gives a consumer a right of redress against a supplier of goods where the goods fail to comply with any guarantee set out in any of sections 5 to 10 of this Act."

Remedies available to consumers

7.22 Section 18 provides several remedial options which a consumer may exercise where there is a failure to comply with any guarantee set out in sections 5 to 10. Where the failure can be remedied, a consumer may require the supplier to remedy the failure within a reasonable time (sub-section(2)). If the supplier does not remedy the failure within a reasonable time, the consumer can have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred, or the consumer can reject the goods. Where the failure cannot be remedied or is of a "substantial character" as defined in section 21, a consumer can reject the goods or obtain damages for any reduction in value of the goods (sub-section (3)). In addition to the above remedies, a consumer may obtain from the supplier damages for any loss or damage resulting from the failure (sub-section (4)). Section 18 reads as follows:

"(1) Where a consumer has a right of redress against the supplier in accordance with this Part of this Act in respect of the failure of any goods to comply with a guarantee, the consumer may exercise the following remedies.

(2) Where the failure can be remedied, the consumer may –

(a) Require the supplier to remedy the failure within a reasonable time in accordance with section 19 of this Act:

(b) Where a supplier who has been required to remedy a failure refuses or neglects to do so, or does not succeed in doing so within a reasonable time, -

(i) Have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred in having the failure remedied; or

(ii) Subject to section 20 of this Act, reject the goods in accordance with section 22 of this Act.

(3) Where the failure cannot be remedied or is of a substantial character within the meaning of section 21 of this Act, the consumer may –

(a) Subject to section 20 of this Act, reject the goods in accordance with section 22 of this Act; or

(b) Obtain from the supplier damages in compensation for any reduction in value of the goods below the price paid or payable by the consumer for the goods.

(4) In addition to the remedies set out in subsection (2) and subsection (3) of this section, the consumer may obtain from the supplier damages for any loss or damage to the consumer resulting from the failure (other than loss or damage through reduction in value of the goods) which was reasonably foreseeable as liable to result from the failure."

Definition of the expression "substantial character"

7.23 The expression "substantial character" is defined in section 21 to cover goods which would not have been acquired by a reasonable consumer who was acquainted with the nature of the failure or which depart in substantial respects from the description, sample and demonstration model. The definition also covers goods which are substantially unfit for a general or particular purpose or which are not of acceptable quality because they are unsafe. Section 21 provides as follows:

"For the purposes of section 18(3) of this Act, a failure to comply with a guarantee is of a substantial character in any case where –

(a) The goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or

(b) The goods depart in one or more significant respects from the description by which they were supplied or, where they were supplied by reference to a sample or demonstration model, from the sample or demonstration model; or

(c) The goods are substantially unfit for a purpose for which goods of the type in question are commonly supplied or, where section 8(1) of this Act applies, the goods are unfit for a particular purpose made known to the supplier or represented by the supplier to be a purpose for which the goods would be fit, and the goods cannot easily and within a reasonable time be remedied to make them fit for such purpose; or

(d) The goods are not of acceptable quality within the meaning of section 7 of this Act because they are unsafe."

Manner of exercising a right to reject the goods

7.24 A consumer can exercise a right to reject the goods by notifying the supplier of the decision and the grounds and (usually) also by returning the goods to the supplier (section 22(1) and (2)). The ownership in the goods re-vests in the supplier upon notification of rejection (section 22(3)). Section 22 reads as follows:

"(1) The consumer shall exercise the right to reject goods under this Act by notifying the supplier of the decision to reject the goods and of the ground or grounds for rejection.

(2) Where the consumer exercises the right to reject goods, the consumer shall return the rejected goods to the supplier –

(a) Unless -

(i) Because of the nature of the failure to comply with the guarantee in respect of which the consumer has the right to reject the goods; or

(ii) Because of the size or height or method of attachment -

the goods cannot be returned or removed or transported without significant cost to the consumer, in which case the supplier shall collect the goods at the expense of the supplier; or

(b) Unless the goods have already been returned to, or retrieved by, the supplier.

(3) Where the ownership in the goods has passed to the consumer before the consumer exercises the right of rejection, the ownership in the goods revests in the supplier upon notification of rejection."

Consequences of exercising a right to reject the goods

7.25 Where a consumer exercises a right to reject the goods, he may choose to have a refund of any consideration provided, or goods of the same type and of similar value as a replacement (section 23). Section 23 provides as follows:

"(1) Where the consumer exercises the right to reject goods, the consumer may choose to have either –

(a) A refund of any money paid or other consideration provided by the consumer in respect of the rejected goods; or

(b) Goods of the same type and of similar value to replace the rejected goods, where such goods are reasonably available to the supplier as part of the stock of the supplier -

and the supplier shall make provision accordingly.

(2) A refund referred to in subsection (1)(a) of this section means a refund in cash of the money paid or the value of any other consideration provided, or both, as the case may require.

(3) The obligation to refund cannot be satisfied by permitting the consumer to acquire goods from the supplier.

(4) Where a consumer obtains goods to replace rejected goods pursuant to subsection (1)(b) of this section, the replacement goods shall, for the purposes of this Act, be deemed to be supplied by the supplier, and the guarantees and obligations arising under this Act consequent upon a supply of goods to a consumer shall apply to the replacement goods."

Circumstances under which a right to reject is lost

7.26 A consumer may lose his right to reject goods for reasons mentioned in section 20(1). These include a failure to exercise his right of rejection within the "reasonable time" stipulated in section 20(2). Section 20 reads as follows:

"(1) The right to reject goods conferred by this Act shall not apply if –

(a) The right is not exercised within a reasonable time within the meaning of subsection (2) of this section; or

(b) The goods have been disposed of by the consumer, or have been lost or destroyed while in the possession of a person other than the supplier or an agent of the supplier; or

(c) The goods were damaged after delivery to the consumer for reasons not related to their state or condition at the time of supply; or

(d) The goods have been attached to or incorporated in any real or personal property and they cannot be detached or isolated without damaging them.

(2) In subsection (1)(a) of this section, the term 'reasonable time' means a period from the time of supply of the goods in which it would be reasonable to expect the defect to become apparent having regard to -

(a) The type of goods;

(b) The use to which a consumer is likely to put them;

(c) The length of time for which it is reasonable for them to be used;

(d) The amount of use to which it is reasonable for them to be put before the defect becomes apparent.

(3) This section applies notwithstanding section 37 of the Sale of Goods Act 1908."

Means by which a supplier may remedy a failure

7.27 Section 19 provides for the means by which a supplier may comply with the requirement to remedy a failure including repairing, curing any defect in title, replacing with goods of identical type and refunding any consideration provided. Section 19 provides as follows:

"(1) A supplier may comply with a requirement to remedy a failure of any goods to comply with a guarantee –

(a) By -

(i) Repairing the goods (in any case where the failure does not relate to title); or

(ii) Curing any defect in title (in any case where the failure relates to title); or

(b) By replacing the goods with goods of identical type; or

(c) Where the supplier cannot reasonably be expected to repair the goods, by providing a refund of any money paid or other consideration provided by the consumer in respect of the goods.

(2) Where a consumer obtains goods to replace defective goods pursuant to subsection (1) of this section, the replacement goods shall, for the purposes of this Act, be deemed to be supplied by the supplier and the guarantees and obligations arising under this Act consequent upon a supply of goods to a consumer shall apply to the replacement goods.

(3) A refund referred to in subsection (1)(c) of this section means a refund in cash of the money paid or the value of any other consideration provided, or both, as the case may require."

England and Wales

Distinction between conditions and warranties

7.28 The statutory implied terms for hire purchase agreements stipulated in the 1973 Act, and those for contracts for the transfer of property in goods and contracts of hire stipulated in the 1982 Act are either specified as conditions or warranties. The expressions "condition" and "warranty" are not defined in either the 1973 Act or the 1982 Act. The Law Commission, which recommended adopting these two expressions but leaving them undefined, said that it was likely that the interpretation of these expressions applied under the 1979 Act would be applied to the 1973 and 1982 Acts.[329]

7.29 A customer in a contract for the supply of goods may seek to reject the goods supplied and terminate the contract on the grounds that the supplier has broken one or more of the terms implied by the 1973 Act or 1982 Act. In order to do so, he must, in the same way as a buyer under a contract of sale, show that there is a breach of an implied term that has been classified as a condition under either of these two Acts.

Recommendation of the Law Commission to restrict the rights of non-consumers to reject goods in the case of trivial breaches

7.30 In 1987, the Law Commission revisited the question of classification of statutory implied terms into "conditions" and "warranties".[330] The Commission was aware that the remedies available to a customer[331] for a breach of one of the statutory implied terms depended on whether the term was classified as a condition or warranty. After considering the development of the common law on classification of contract terms including the cases on intermediate/innominate terms, the Commission stated:

"It might be thought that any difficulty with the remedies for breach of the statutory implied terms could be overcome by removing from them the designation 'condition' and simply referring to them as 'terms'. We do not, however, think that this would by itself achieve the desired objective of improving and clarifying the rights of a buyer of defective goods. To do this would be to give no indication, either to the users of the Sale of Goods Act or to the courts, as to what remedies were to flow from breach of one of the terms. Non-lawyers at least must, in our view, have the remedies set out in the Act so that they are not faced with the difficult task of referring to text-books and legal authorities. In addition, if the Act did not set out the regime of remedies, the general law would provide an answer which would be the wrong one. In English law the buyer would only be able to reject the goods if the breach deprived him of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing his undertakings (ie if the contract was frustrated). This would mean that only in a very few cases would the buyer have the right to reject the goods; such a test would amount to something of a reversal of the present policy and, in particular, would place the consumer buyer in far too weak a position as regards rejection (though his right to damages would be improved) .... We think it is necessary for both English and Scots law that the consequences of breach of the implied terms should be expressly set out in the Act."[332] (emphasis added)

7.31 After consultation, the Law Commission of England and Wales concluded as follows:

"We have therefore decided to recommend the retention of the present law so far as concerns the consumer buyer's right to reject the goods and terminate the contract for breach of the statutory implied terms in sections 13 to 15 of the Sale of Goods Act. In English law this result can best be achieved by retaining the classification of these implied terms as 'conditions' of the contract .... It is important in this context, we think, to bear in mind that contracts for the supply of goods may well contain express terms and other implied terms and that the classification of the statutory implied terms should harmonise with the rest of the law in which they exist."[333]

7.32 The Commission recommended making distinctions between consumer and non-consumer transactions. The distinction was made not by changing the classification of "conditions" and "warranties" but by introducing new provisions restricting the rights of non-consumers to reject goods in the case of trivial breaches. The Commission said:

"The Law Commission's recommendations apply to England and Wales. They are that for the non-consumer the statutory implied quality terms should remain as conditions but that the Act should provide that where the breach is so slight that it would be unreasonable for the buyer to reject the goods, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty. The effect of this will be that the buyer will not be able to reject the goods but will only be able to claim damages. Use of this technique should help to make it clear that the modification of the right to reject is not intended as a major alteration in the law but one which will apply only where the breach is slight and it is unreasonable for the buyer to reject the goods."[334]

7.33 The Commission recommended the same for other contracts for the supply of goods.[335]

Implementation of the Law Commission's recommendation in the 1973 Act and the 1982 Act

7.34 The above recommendation to distinguish between consumer and non-consumer transactions also applied to other types of contracts for the supply of goods.[336] The recommendations for other types of contracts for the supply of goods were implemented in section 11A of the 1973 Act and sections 5A and 10A of the 1982 Act which were similarly worded.[337] As a result of the restriction on the right of a non-consumer to reject goods for a breach of a statutory condition, the strictness of the classification has to some extent been reduced. Section 11A of the 1973 Act[338] provides as follows:

"(1) Where in the case of a hire-purchase agreement –

(a) the person to whom the goods are bailed would, apart from this subsection, have the right to reject them by reason of a breach on the part of the creditor of a term implied by section 9, 10 or 11(1)(a) or (c) above, but

(b) the breach is so slight that it would be unreasonable for him to reject them,

then, if the person to whom the goods are bailed does not deal as consumer, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty.

(2) This section applies unless a contrary intention appears in, or is to be implied from, the agreement.

(3) It is for the creditor to show -

(a) that a breach fell within subsection (1)(b) above, and

(b) that the person to whom the goods were bailed did not deal as consumer.

(4) The references in this section to dealing as consumer are to be construed in accordance with Part I of the Unfair Contract Terms Act 1977."

7.35 This new restriction is subject to the parties' contrary intentions. The parties could arrange to enhance a non-consumer's rights on rejection, in which case this new restriction would not apply.

Conclusion

7.36 The remedies available to a consumer under the 1974 Act are similar to those available to a buyer under Cap 26, in the sense that the remedies depend on whether the term is a condition or warranty. If the term is a condition, a consumer can reject the goods and treat the contract as repudiated. He can then recover the price if he has already paid. If the term is a warranty, a consumer can only claim damages.

7.37 In the 1993 Act, the statutory implied terms are not classified as conditions or warranties, but guarantees. According to section 18, the remedies available depend on whether the failure to comply with a guarantee can be remedied or not and whether the failure is of a "substantial character". When the failure can be remedied, a consumer has to ask the supplier to remedy the failure first. If the supplier refuses to remedy, neglects to remedy or does not succeed in remedying the failure, the consumer can then reject the goods, or have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred. When the failure cannot be remedied or is of a "substantial character", a consumer can reject the goods. The expression "substantial character" is defined in section 21.

"Cure" scheme not appropriate for Hong Kong

7.38 In New Zealand, the remedies available do not depend on the classification of the term, but whether the failure to comply with a guarantee can be remedied or not and whether the failure is of a "substantial character". However, it must be pointed that it is not always certain as to which failure can be remedied and which cannot. In addition, a supplier can argue that a failure can be remedied in most cases and a consumer will then be deprived of the right to reject. Furthermore, what amounts to a failure of a "substantial character" is uncertain. The expression "substantial character" is defined in section 21, but the elements of the definition leave room for uncertainty such as the elements of goods not acquired by a reasonable consumer, departures in significant respects from description or sample, and goods which are substantially unfit for a general or particular purpose.

7.39 A "cure" scheme of a similar nature to that established in the 1993 Act was considered and rejected by the Law Commission of England and Wales[339] in the following terms:

"It was suggested that although the scheme sounded superficially attractive, when it was exposed to the merciless test of being put into practice, it was likely to prove a breeding ground for dispute and uncertainty, ultimately leading to a more unsatisfactory situation than exists at present and almost certainly being to the detriment of consumers. ... We are, in short, not sufficiently confident that such a scheme would be more beneficial to buyers and sellers generally than is the present law."[340]

7.40 The Law Commission was of the view that a "cure" scheme was generally adverse to consumers' interests since it gave suppliers reasons to argue that consumers were not entitled to return the defective goods. Furthermore, even with a "cure" scheme, there are still many unanswered questions:

"For example, did the seller have to redeliver the 'cured' goods to the buyer or did the buyer have to collect them? What if by this time the buyer had moved far away? How promptly should the cure be effected? At whose risk were the goods while the cure was in progress? At whose risk were they to be while being redelivered to the buyer? These were but a few of the many practical problems which, it was pointed out, would be likely to arise under this entirely new scheme of remedies, which would probably have to apply to a very great many transactions."[341]

7.41 "Cure" schemes may sound attractive preliminarily. But the scheme itself has its own inherent problems and also problems in its implementation as discussed above. Because of the reasons mentioned above, we do not think that a "cure" scheme similar to that established in the 1993 Act is appropriate for Hong Kong. Professor Hugh Beale agrees with this view, especially as far as consumers are concerned.

Classification into "condition" and "warranty"

General considerations

7.42 As to whether the statutory implied terms recommended in the previous chapters for inclusion in the Recommended Legislation should be classified as "conditions" and "warranties", there are three options:

(a) to follow the rigid classification of Cap 26 by using the expressions "condition" and "warranty" and to define them so as to prescribe the remedy for their breaches;

(b) to continue using the expressions "condition" and "warranty" but leave them undefined; or

(c) to abandon the use of the expressions "condition" and "warranty" and to use a neutral word such as "term" to describe the recommended statutory implied terms.

The Consultation Paper recommended that option (a) was the most appropriate choice. Apart from Professor Hugh Beale, no other respondent has commented on this. Professor Beale prefers the condition or warranty approach and considers it would be better to define the two terms.

7.43 There are some advantages to choosing (a). The expressions are defined in the same way as they are defined in Cap 26. The Recommended Legislation on supply of goods will be in line with Cap 26 on sale of goods. The definitions of "condition" and "warranty" will be set out and be transparent to all. There are also disadvantages to option (a). It would perpetuate a rigid distinction between "condition" and "warranty" which determines the remedies available upon breaches of the statutory implied terms.

7.44 Option (b) is a convenient and easy method. Since the 1973 Act, the 1982 Act and the 1974 Act all adopted this option, Hong Kong would have the benefit of the cases decided in England and Australia in this respect. But there would be similar criticisms regarding the rigidity of classification into "condition" and "warranty". Since these two expressions would not be defined, there would be a lack of transparency and certainty of the meaning as to their precise ambit.

7.45 The advantage of option (c) is that there would be no rigidity of classification. As there is no rigid classification into "condition" and "warranty", courts would be free to interpret the terms as conditions, warranties, or innominate terms. There are also disadvantages to option (c). The Recommended Legislation on contracts for supply of goods will not be in line with Cap 26. If the opportunity were taken to revise the law on sale of goods with regard to the classification, it would be necessary to undertake a thorough review to assess the implications of such a change. In addition, the law of Hong Kong on supply of goods would be out of line with that in England and Australia, whether the law on sale of goods is revised or not. If the law on sale of goods is also revised, the law on sale and supply of goods in Hong Kong will be out of line in this respect with that of England and Australia. In either case, Hong Kong will not have the benefit of the case law in England and Australia.

7.46 On balance, we do not recommend option (c) since this would put the Recommended Legislation on a different footing from Cap 26. There would also be a risk in abandoning overnight the cases decided on remedies for breaches of the statutory implied terms in Cap 26. A decision to abolish the classification of the terms should therefore not be taken lightly. The difference between options (a) and (b) is that in option (b) the two expressions, "condition" and "warranty", are not defined. Nonetheless, the Law Commission, which recommended adopting these two expressions but leaving them undefined, said that it was likely that a similar interpretation applied in the 1979 Act would be adopted in the 1973 Act and 1982 Act.[342] If that is the case, the definitions of these two expressions should be made express for the sake of transparency and certainty. We therefore recommend adopting option (a).

Special considerations for contracts for work and materials

7.47 The terms implied by the Supply of Services (Implied Terms) Ordinance (Cap 457), which applies to the "work/services" part of contracts for work and materials, are labeled as "implied terms". Should the statutory implied terms recommended for the "materials" part of contracts for work and materials in the Recommended Legislation be classified as "conditions/warranties" as recommended above, or as "implied terms" to be in line with Cap 457? If the former option is adopted, for contracts for work and materials alone, some of the statutory terms will be classified as "conditions/warranties"[343] while others will be labeled as "implied terms".[344] The significance is that the mechanisms for determining the remedies available will be different accordingly.[345]

7.48 Cap 457 was modelled on Part II of the 1982 Act. The statutory implied terms recommended for contracts for work and materials in the Recommended Legislation are similar to those in Part I of the 1982 Act. Therefore, the discussion below about the 1982 Act is also relevant to Hong Kong.

7.49 The terms implied by Part I of the 1982 Act are classified as "conditions/warranties" while those implied by Part II are labeled as "terms". The adoption of "conditions/warranties" in Part I is in line with the common law position in respect of the "materials" part of contracts for work and materials.[346] The adoption of the expression "implied terms" in Part II was deliberate in order to preserve the common law position in respect of contracts for services (and the "work/services" part of contracts for work and materials). In reviewing Part II, the Law Commission of England and Wales has said:

"By contrast with the sale of goods legislation, the terms which before the 1982 Act were implied at common law into contracts for services were not categorised as either conditions (breach of which entitles the customer to terminate the contract) or warranties. The 1982 Act preserves the common law in relation to the terms implied under sections 13-15 by using the neutral expression 'term'. It would seem therefore that in accordance with common law principles, the question whether or not in a particular case the statutory implied term has the remedial consequences of a condition would be resolved by construction of the contract."[347]

7.50 In effect, for contracts for work and materials alone, the remedy for a breach of a term implied by Part I depends on whether the term is classified as a condition or warranty. On the other hand, the remedy for a breach of a term implied by Part II depends on how serious the breach is.

7.51 Even though the Law Commission of England and Wales was aware of this difference, the Commission did not address it in their relevant reports.[348] There is little literature which addresses this issue.[349] In this connection, the opinions of some leading academics have been sought and are discussed in the following paragraphs.

7.52 There are three options to deal with the difference between the terms implied by Cap 457 and those by the Recommended Legislation for contracts for work and materials:

(a) the terms implied for the "materials" part could be labeled as "implied terms" instead of "conditions/warranties";

(b) the terms implied under Cap 457 could be amended to be labeled as "conditions/warranties" instead of "implied terms"; and

(c) no change to Cap 457, and the terms implied for the "materials" part could continue to be labeled as "conditions/warranties".

Option (c) was recommended in the Consultation Paper, and no respondent commented on it.

(a) option (a)

7.53 The advantage of option (a) is that the terms implied for contracts for work and materials in the Recommended Legislation will be the same as those in Cap 457 (ie implied terms). However, this will bring contracts for work and materials out of line with other types of contracts for the supply of goods. This is undesirable since different types of contracts for the supply of goods should be consistent with each other as far as possible. This was also the basis of the recommendations of the Law Commission of England and Wales on the same subject.[350]

7.54 In addition, the Law Commission of England and Wales concluded that any difficulty with the remedies for breaches of the statutory implied terms could not be overcome merely by removing from them the designation "condition" and simply referring to them as "terms".[351] Furthermore, this would make the terms implied by the Recommended Legislation deviate from the existing common law position. It appears that option (a) is not appropriate.

(b) option (b)

7.55 The advantage of option (b) is the same as that of option (a). For the following reasons, option (b) is also not appropriate. First, amending the labels of the terms implied under Cap 457 from "implied terms" to "conditions/warranties" will open the debate concerning designations of the terms implied for contracts for services, which was settled upon the enactment of Cap 457. This proposal to amend Cap 457 is made solely to remove the differences between the terms implied by Cap 457 and those by the Recommended Legislation, rather than on the basis of what is appropriate for contracts for services.

7.56 It is difficult to justify the proposed amendment to Cap 457 on the basis of its merits so far as contracts for services themselves are concerned. Professor Reynolds correctly pointed out that the Hong Kong Fir test was more appropriate for contracts for services, since breaches of those contracts varied very much in seriousness. Apart from this, services, unlike materials, are intangible. Terms implied by Cap 457 therefore include a "reasonableness" test, such as "reasonable care and skill" in section 5.[352] Even if the implied term in section 5 is made a condition, this will not enhance certainty since the determination of whether or not there is a breach of the condition will depend on how the "reasonableness" test is applied. For these reasons, this proposal for amendment is not justified.

7.57 Besides, amendment of Cap 457 arguably goes beyond the terms of reference of this Report even though this should not be a hindrance to discussion. In addition, option (b) would make Cap 457 deviate from the common law position.

(c) option (c)

7.58 Under option (c), both Cap 457 and the terms implied by the Recommended Legislation for contracts for work and materials will still reflect the common law position. Indeed, Part I and Part II of the 1982 Act correspond to this position.

7.59 However, the concern that in respect of contracts for work and materials alone, some statutory implied terms are classified as "conditions/warranties" (the "materials" part) while others are not (the "work/services" part) will still exist. Professor Reynolds pointed out that it could be justified by the difference in nature between materials and services, and the difference between breaches concerning the "materials" part and those concerning the "work/services" part. He said that breaches of the "work/services" part varied in nature and seriousness.[353] In explaining the reasons for the difference, Professor Reynolds has suggested:

"the difference between services and materials is that with materials one can specify more accurately what is wanted and so designate those specifications as conditions, whereas breaches of service contracts vary very much in nature and seriousness, so that the Hong Kong Fir test is more appropriate."[354]

(d) conclusion

7.60 It seems that option (c) is the safest option for the following reasons. First, it reflects the existing common law position in Hong Kong. Secondly, this is the existing position in England and Wales under the 1982 Act. Professor Len Sealy has said:

"The distinction between 'conditions', 'warranties' and 'terms' ('innominate terms') in the 1982 Act was intentional, and it was meant to reflect the position at common law .... I am sure that the Law Commission did not wish to alter what had been well settled law here for most of a century."[355]

7.61 Lastly, some academics find such a difference maintained in the 1982 Act justifiable.[356] In any event, this has not been criticised so far. Sir Guenter Treitel does not object to the fact that where the contract is one for the supply of materials and services, the implied term with regard to the materials is classified differently from that for the services in the 1982 Act. [357]

7.62 Unless there is a strong reason for choosing otherwise, it appears that option (c) is the most appropriate option even though differences between the terms implied by Cap 457 and those by the Recommended Legislation will still exist.[358]

Restriction on non-consumers' rights to reject goods

Is such a restriction appropriate for Hong Kong?

7.63 The Law Commission of England and Wales[359] has differentiated between consumer and non-consumer contracts of sale and supply of goods in respect of the right to reject goods. Obviously, there is a distinction between the interests of consumers and non-consumers. Consumers acquire goods for their own use and not for profit. A reduction in price or compensation for defective goods will not necessarily satisfy the needs of a consumer since he acquires the goods because of his wish to have goods in working condition for his own consumption. In addition, it is usually not easy for a consumer to dispose of defective goods, nor to quantify his loss. Last but not least, sellers or suppliers usually have much stronger bargaining power than consumers do.

7.64 On the other hand, non-consumers acquire goods for commercial purposes and it is easier therefore to quantify their losses. Monetary compensation can usually compensate non-consumers for defective goods and non-consumers can more readily dispose of defective goods. Furthermore, the motives behind the rejection of goods by consumers and non-consumers can be different. Consumers normally reject goods because defective goods cannot satisfy their needs. Non-consumers may, for business reasons, choose to reject goods for trivial or slight defects because of market fluctuations. The Hong Kong Federation of Insurers does not consider that there is justification to treat consumers and non-consumers differently. They argue that, just as in the case of consumers, monetary compensation may not satisfy a non-consumer, who may also not be able readily to dispose of defective goods. Moreover, both consumers and non-consumers may repudiate contracts legitimately because the defective goods cannot satisfy their needs, and they may also repudiate contracts for trivial defects.

7.65 We understand this concern, but believe that in general the differences between consumers and non-consumers mentioned above reflect the reality. For these reasons, we consider that there should be a distinction between the treatment of consumers and non-consumers in contracts for the supply of goods in respect of their rights to reject defective goods. The Law Commission's recommendations in this respect, as implemented in section 11A of the 1973 Act and sections 5A and 10A of the 1982 Act, should provide a model for similar provisions in the Recommended Legislation in Hong Kong.

(a) criticisms of the new restriction

7.66 There are three major criticisms of this new restriction on non-consumers' rights to reject goods. First, the scope of the restriction is too narrow. Professor P S Atiyah[360] regrets that it only applies to breaches of a supplier's statutory duties and that it should be enlarged to the general law of contract. Professor Reynolds[361] is of the view that it is of "severely limited effect" and makes "little difference in practice". Sir Guenter Treitel has also said:

"... the section scarcely goes far enough to promote justice: for this purpose, the right to reject should be restricted to serious breaches and not merely excluded if the breach is slight .... rescission by a seller can lead to just as much injustice as rejection by the buyer; but the section does nothing to limit the exercise by a seller of a right to rescind."[362]

7.67 Secondly, the restriction creates uncertainties. Professor Sealy has pointed out that the restriction is "a bad reform, because it [introduces] uncertainty".[363] Sir Guenter Treitel has also made similar remarks:

"[t]he question just when a breach is so slight as to make it unreasonable for the buyer to reject the goods remains to be settled by judicial decision; and the vagueness of section 15A on this point is a source of regrettable uncertainty ... the section undermines the certainty which classification of the implied terms in question as conditions was intended to provide .... It is submitted that the section has sacrificed certainty without attaining justice."[364]

7.68 Thirdly, the new restriction does not apply where a contrary intention appears in, or is to be implied from, the agreement. Both Professor Reynolds[365] and Sir Guenter Treitel[366] are of the view that it is uncertain as to when the restriction will be impliedly excluded. Sir Guenter Treitel has said that such an implication can arise from "the nature of the contract or from its commercial setting".[367]

(b) in favour of the new restriction

7.69 In the following paragraphs, we will deal with the academics' criticisms of the restriction one by one. As far as the criticism as to the limited scope of section 15A is concerned, since in the previous chapters we recommended introducing statutory implied terms only on suppliers' duties to customers, it is appropriate that the application of the restriction on the right to reject goods should be limited to those implied terms. The implication of extending the application to the law of contract is too complex to be dealt with under the present terms of reference.

7.70 In relation to the criticism that the application of the restriction is uncertain, we acknowledge that the question when a breach is so slight as to make it unreasonable for a buyer to reject creates uncertainties. Indeed, whenever there is any deviation from the strict adherence to the classification of terms, there will be uncertainties. We also acknowledge that certainty and predictability of the law are usually what the commercial community wants. However, a balance has to be struck between certainty and justice, as the Law Commission of England and Wales has pointed out.[368] The Commission argued that the uncertainty would be "more apparent than real and [was] a price worth paying". We emphasise that the restriction can prevent injustice by disallowing rejection of goods for slight defects. Even though the restriction may bring about some uncertainties, the price of a certain degree of uncertainty is, we believe, worth paying. Professor Atiyah also shares this view and has said:

"Of course, as the Law Commission recognised, these changes in the law would introduce some element of uncertainty where previously the right of rejection was unqualified, but this may well be an acceptable price to pay for penalising totally unreasonable commercial behaviour."[369]

7.71 As to the uncertainty concerning when the new restriction will be impliedly excluded, we accept that such a provision would create some uncertainties as to the application of the new section. On the other hand, if the new section can only be excluded expressly, it may not achieve its purpose since not all non-consumers will be aware of the need to make the exclusion express, nor will due recognition be given to the parties' intention in every case. We agree with the Law Commission that "in the appropriate circumstances there [would] be no difficulty in inferring" the parties' intention to exclude the application of the new section.[370] In this connection, the parties should be enabled to exclude the new section either expressly or by implication. The Consultation Paper therefore proposed that a distinction should be drawn between the interests of consumers and non-consumers, and non-consumers’ rights to repudiate a contract should be more restricted, as in section 15A of the 1979 Act.

7.72 Both the Chinese General Chamber of Commerce and the Chinese Manufacturers’ Association of Hong Kong favour the recommendation in the Consultation Paper. The latter is also of the view that the bargaining power of the parties would then be better balanced and the fairness of the law would be enhanced.

7.73 The Judiciary Administrator’s Office considers that the restriction of the right of rejection should also apply to consumers. The Office suggests that an exception could be made where a consumer can show that the goods are unique, making the standard market value irrelevant or the ordinary compensation by damages inadequate. We are of the view that the exception suggested by the Judiciary Administrator’s Office is too narrow and shifts the burden to consumers to prove that the goods are unique or compensation by damages is inadequate. We consider it more appropriate to place the burden of proof on suppliers and to adopt the broader and more general "reasonableness" test put forward in the Consultation Paper.

7.74 The Hong Kong Bar Association argues that section 15A has created much controversy and uncertainty in England. As section 15A is relatively new and has prompted little or no case law, the Bar Association believes that it may be prudent to wait to see how the new section operates in England before reconsidering whether it should be introduced to Hong Kong. We do not favour such an approach. We believe there is a need for reform, and that consideration of that reform should not be dependant on developments which may or may not take place elsewhere. Before any one of our recommendations is implemented by legislation, it would be subject to detailed consideration by the Administration and the legislature at different stages. The new restriction is limited in scope: it restricts, but does not totally remove, non-consumers’ rights of rejection. In addition, the contracting parties can contract out of the restriction. The new restriction is intended to deal with a particular mischief: rejection by buyers for extrinsic reasons, such as a fluctuation in the market.

7.75 On balance, we recommend adopting a new restriction on non-consumers' rights to reject goods similar to that in England, since it can prevent rejection of goods for slight defects. As discussed above, the classification of the terms into "conditions" and "warranties" has long been considered too inflexible. The strictness of the classification causes injustice in some cases. We concluded above that it was too drastic to do away with the classification altogether. In order to prevent the injustice that may be caused, however, we recommend incorporating the restriction applied in England, which should be able to reduce the strictness of the classification. Geraint Howells[371] has mentioned that the new restriction removes the danger of unfairness in commercial transactions, which might result from goods which are commercially usable being rejected for non-functional defects. Professor P S Atiyah[372] has also stated:

"These changes are generally to be welcomed, because there is no doubt that the former law permitted rejection on capricious and technical grounds. In particular, rejection was often justified on the ground of a technical breach of the statutory implied terms, even though the buyer's real motive in rejecting the goods was that market prices had fallen since the contract was made."

7.76 It must be pointed out that this recommended restriction on non-consumers' rights to reject goods applies to trivial breaches of some, but not all, statutory implied terms in the Recommended Legislation. A right to transfer the property in goods (in a contract for the transfer of property in goods)[373] and a right to have a reasonable opportunity to compare the bulk with the sample are not matters of degree. But the new restriction on non-consumers' rights to reject goods applies only where the breach is slight. The recommended restriction should therefore not apply to implied conditions in respect of these two matters. In addition, since the restriction is to limit a non-consumer's right of rejection, it should be for a supplier to prove that the restriction is applicable.

7.77 On the other hand, consumers' rights to reject remain intact since consumers acquire goods for self-use and expect the goods to be in working condition. A reduction in price or monetary compensation will not necessarily satisfy their needs. We therefore recommend that non-consumers' rights to reject defective goods should be limited to non-trivial breaches while consumers' rights to reject should be unfettered.

Relevance of non-consumers' individual circumstances to the "reasonableness" test

7.78 The new restriction on non-consumers' rights to reject goods in England is silent as to how far the individual circumstances of non-consumers will be relevant in determining the question of reasonableness. Unfortunately, we have been unable to find any case law on this issue. In making their recommendation, the Law Commission of England and Wales stressed that a non-consumer's "motive in seeking to reject the goods and treat the contract as repudiated would not be relevant".[374] The Law Commission also stated that an element of subjectivity is undesirable:

"This test is broadly similar to that suggested in the Consultative Document save that the Law Commission considers that it would be better not to refer to 'the consequences' of the breach. Such a test, as was pointed out on consultation, might admit an element of subjectivity which the Law Commission considers (as stated in the Consultative Document) to be undesirable."[375]

7.79 Professor Atiyah has pointed out that it is "not entirely clear how far the personal position of the buyer will be relevant in examining the question of reasonableness".[376] He has further said:

"Presumably if the buyer has his own good reasons for needing goods which are in precise conformity with the contract (even if this was not known to the seller) it will not be unreasonable of him to reject them for any slight nonconformity.... It is also unclear whether other personal circumstances of the buyer (his market position, for instance) will be relevant in deciding whether rejection is reasonable."

7.80 Professor Reynolds is of the view that the test of reasonableness is an objective one:

"It is also stated that the buyer's motives for rejection are not intended to be regarded as relevant, as 'subjectivity' is referred to as undesirable. It appears therefore that the test of reasonableness is intended to be an objective one, though it still ought to be geared to a person in the buyer's position rather than an external observer."[377]

7.81 Professor Reynolds has said subsequently: "I do not agree with Professor Atiyah: the matter should be one of the understanding between the parties, objectively ascertained. Unknown factors peculiar to the buyer should not be relevant."[378] When referred to the different views of Professor Atiyah and Professor Reynolds, Sir Guenter Treitel has said that Professor Reynolds must be right and the burden of proof which section 15A(3) puts on the seller would be virtually impossible to discharge if the buyer's personal idiosyncrasies could be a ground for rejection under section 15A.[379]

7.82 Professor Sealy also has pointed out that subjective factors should be irrelevant. He has said: "I am sure that subjective reasons which are entirely personal (like changing your mind) would never influence the court ... any degree of subjectivity in the test could lead to a great deal of uncertainty."[380]

7.83 After considerable deliberation, we have come to the conclusion that the proposed "reasonableness" test should be objective. This is in line with the views of the Law Commission and the academics' opinions mentioned above. The test should be an objective one to be judged in the particular context in question, and not in a vacuum. The court would take into account the factual circumstances of a non-consumer and consider how a reasonable man would react in those circumstances. We agree with Professor Reynolds that the test "is intended to be an objective one, though it still ought to be geared to a person in the buyer's position rather than an external observer."[381]

7.84 We have considered, instead of simply adopting the English provision, adopting it with adjustments by putting in the Recommended Legislation a list of those non-consumers' circumstances which should be (and another list of those which should not be) considered in applying the test, or some criteria as to what circumstances should be considered. For the following reasons, we recommend adopting the English provision without adjustments. First, any list of circumstances can hardly be exhaustive, nor can such criteria be applicable to all cases. Secondly, apart from the question of feasibility, it would be undesirable to restrain unduly the court's freedom to decide in individual cases. Thirdly, a list of circumstances or criteria would tend to limit the parties' minds to whether a non-consumer's circumstances fall within this statutory list, rather than on the "reasonableness" of the rejection itself. Fourthly, in recommending the implied condition as to fitness for any particular purpose in Chapter 5, an exception is provided for circumstances where a customer does not rely, or it is "unreasonable for him" to rely, on the supplier. The same phrase "unreasonable for him" also appears in section 16(3) of Cap 26[382] with no further explanation. In this connection, it is desirable to formulate the "reasonableness" test consistently.[383] Fifthly, by adopting the English provision without adjustment, Hong Kong will have the benefit of guidance from the relevant English cases.

7.85 Having said this, we would make the following additional points. First, we agree with the views of the Law Commission and the academics discussed above that a non-consumer's personal idiosyncrasies should not be a ground for rejection and his motive for rejection should not be relevant in assessing reasonableness.

7.86 Secondly, despite the objectivity of the test, the reasonableness of the rejection by a non-consumer should be measured against non-consumers of the same nature (scale of operation) as the non-consumer in question. In recommending different measures to reform the remedies for consumers and non-consumers, the Law Commission was aware that there were some "borderline" non-consumers who were "probably in very much the same position as an individual consumer".[384] An example would be a small corner shop which buys a refrigerator for use in the shop.

7.87 Non-consumers can have varying scales of operation, from a small retailer to a large corporation. While a large corporation in practice may have stronger bargaining power, a small corner shop will be "probably in very much the same position as an individual consumer if the refrigerator proves to be defective"[385] in the above example. The owner of the small corner shop expects to buy a refrigerator in working condition to refrigerate his wares. A reduction in price or compensation for the defective refrigerator does not necessarily satisfy his wish to have a working refrigerator. It is not easy for him to dispose of the defective refrigerator in the market either. In such a case, the owner is very much like a consumer, and his right of rejection should justifiably be as unfettered as that of a consumer. Therefore, to set a fairer yardstick, in assessing the reasonableness of the rejection by a non-consumer, the non-consumer should be measured against non-consumers of the same nature (scale of operation).

Consequential amendment to Cap 26

7.88 We must point out that if the above recommendation as to restriction on non-consumers' rights of rejection is enacted in the Recommended Legislation, it will be necessary to amend Cap 26 consequentially for the sake of consistency.

Who are consumers?

7.89 As to who is a consumer, there is an existing definition in the Hong Kong legislation. Section 2A of Cap 26 defines "deals as consumer" as follows:

"(1) A party to a contract of sale 'deals as consumer' in relation to another party if –

(a) he neither makes the contract in the course of a business nor holds himself out as doing so;

(b) the other party does make the contract in the course of a business; and

(c) the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.

(2) Notwithstanding subsection (1), on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.

(3) It is for the person claiming that a party does not deal as consumer to prove that he does not."

7.90 Section 2A of Cap 26 is almost identical to section 4 of Cap 71 which was modelled on section 12 of the 1977 Act. Professor P S Atiyah[386] has commented on section 12 of the 1977 Act that, in general, the section is clear enough. The Consultation Paper recommended that section 2A of Cap 26 should provide a good basis for the definition of the expression "consumers" in the Recommended Legislation. The Chartered Institute of Purchasing & Supply argues that under the definition in section 2A of Cap 26, all institutional purchasers would be treated as non-consumers, even though the goods may be "consumed" within the institution. While this does not pose any problem for large institutional purchasers who can protect themselves through carefully drafted contract terms, smaller institutions (such as some charitable bodies) may not have the same power of influence over the contract terms and hence should be treated as consumers under the law.

7.91 Before responding to this comment, it is worth discussing two English Court of Appeal cases. In R & B Customs Brokers & Co v United Dominions Trust Ltd[387], the plaintiff, a shipping brokerage, bought a second-hand car for its director’s use. All the warranties and descriptions were excluded by the conditional sale agreement unless the buyer was dealing as a consumer. The director discovered that the roof leaked. The defendant then countersigned the contract of sale. The plaintiff rejected the car. The judge held that the plaintiff was dealing as a consumer so that the defendant was in breach of the implied term as to fitness for purpose, namely ordinary use on English roads. The question was whether the purchase was made in the course of the plaintiff’s business. The Court of Appeal dismissed the appeal and held that no sufficient degree of regularity had been shown by the defendant so as to establish that the activity was an integral part of the plaintiff’s business and hence was carried on in the course of the business. The plaintiff was therefore dealing as a consumer within the terms of section 12(1) of the 1977 Act. Accordingly, by virtue of section 6(2) of the 1977 Act, the implied term on fitness for purpose could not be excluded. Where an activity is merely incidental to the carrying on of a business, a degree of regularity has to be established before it can be said that the activity is an integral part of the business and therefore is carried on in the course of the business.

7.92 In Stevenson and another v Rogers[388], the defendant, a fisherman, had operated a fishing boat for some time before selling it to the plaintiff. The plaintiff appealed against a decision that the sale of the defendant's boat was not a sale of goods "in the course of a business" for the purposes of section 14(2) of the 1979 Act. The Court of Appeal allowed the appeal and held that the sale of the boat was "in the course of a business" and was therefore subject to the implied term as to merchantable quality.

7.93 The Court of Appeal in the Stevenson case distinguished the R & B Customs Brokers & Co case. Plotter LJ stated in the Stevenson case that the ratio of the R & B Customs Brokers & Co case was limited to its context (ie section 12 of the 1977 Act). He further stated that to apply the reasoning in that case only for the sake of consistency, thereby undermining the wide protection for buyers which section 14(2) of the 1979 Act was intended to introduce, would be "an unacceptable example of the tail wagging the dog". The original wording of section 14(2) of the 1979 Act was "a seller who deals in goods", but this was changed to "sellers [who] sell goods in the course of a business" in order to widen the protection afforded to buyers. After referring to the relevant Hansard and the Law Commission’s report, Plotter LJ concluded that, given the removal of the requirement that a seller had to deal in the type of the goods sold, there was no justification for re-introducing an implied and indefinable qualification on the apparently wide scope and purpose of section 14(2).

7.94 Both the R & B Customs Brokers & Co case and the Stevenson case are still good law, though Professor Hugh Beale suggests that the decision in the former case may be incorrect. The ratio in the R & B Customs Brokers & Co case applies to either party (generally speaking, more often to the case of buyers) under section 12 of the 1977 Act (section 4 of Cap 71). That case concerned a buyer and required a degree of regularity of purchases before they could be regarded as being made "in the course of a business". In the Stevenson case, the issue was whether the seller was selling "in the course of a business" under section 14(2) of the 1979 Act (section 16(2) of Cap 26). The Court did not require "a degree of regularity", and so enhanced the protection afforded to buyers. It appears that the English Court of Appeal has dealt with the test for the phrase "in the course of a business" differently, depending on whether the context is a seller or a buyer. Professor Atiyah observes that it is clear from the Stevenson case that the ratio of the R & B Customs Brokers & Co case is limited to the application of section 12 of the 1977 Act.[389]

7.95 The definition of "dealing as consumer" in section 2A of Cap 26 is identical to that in section 4 of Cap 71. It is questionable whether the test for the phrase "in the course of a business" in section 2A of Cap 26 should follow that for section 16(2) of the same Ordinance (ie the Stevenson case), or that for section 4 of Cap 71 (ie the R & B Customs Brokers & Co case). Since section 2A of Cap 26 is in identical terms to section 4 of Cap 71, the same test should apply to both provisions. In addition, the policy behind section 4 of Cap 71 seems to be different from that behind section 16(2) of Cap 26, even though both adopt the phrase "in the course of a business". In responding to the Chartered Institute of Purchasing & Supply’s comment, we observe that if the decision in the R & B Customs Brokers & Co case applies to section 2A of Cap 26, an institutional purchaser would not necessarily be considered as purchasing "in the course of a business" (and therefore would be treated as a consumer) unless there is a sufficient degree of regularity in respect of its purchases. For example, a small corner shop which purchases a refrigerator for use in the shop will not be regarded as a non-consumer in respect of that purchase. The position is, however, uncertain and will remain so until there is authority to put the matter beyond doubt.

7.96 The Chinese General Chamber of Commerce considers that the definitions of consumers and non-consumers lack clarity and that it is necessary to define the two terms unequivocally. We agree that the phrase "in the course of a business" in the definition of "dealing as consumer" is ambiguous and, as we have seen, has been interpreted differently by the English Court of Appeal, depending on the context. Some other jurisdictions have adopted alternative definitions. For instance, in New Zealand, section 2 of the 1993 Act provides:

"’Consumer’ means a person who---

(a) Acquires from a supplier goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption; and

(b) Does not acquire the goods or services, or hold himself or herself out as acquiring the goods or services, for the purpose of---

(i) Resupplying them in trade; or
(ii) Consuming them in the course of a process of production or manufacture; or
(iii) In the case of goods, repairing or treating in trade other goods or fixtures on land"

In Hong Kong, the definition of "consumer" adopted in Cap 26 is also used in Cap 71, the Supply of Services (Implied Terms) Ordinance (Cap 457) and the Unconscionable Contracts Ordinance (Cap 458). We agree that the definition of "dealing as consumer" can be better defined. However, in view of the need to retain consistency with other Ordinances, we consider that any change should await an across-the-board review.

[313] Chitty on Contracts, 26th Ed, Vol 1, para 787.

[314] Cap 26, sections 14(1)(a), 15, 16(2) and (3), 17(2).

[315] Cap 26, section14(1)(b) and (2).

[316] [1962] 2 QB 26.

[317] [1962] 2 QB 26, at 70.

[318] P S Atiyah, The Sale of Goods, 10th Ed, 2001 at 80.

[319] [1976] QB 44.

[320] [1976] 1 WLR 989, per Lord Wilberforce at 998.

[321] [1981] 1 WLR 711.

[322] [1981] 1 WLR 711, at 718.

[323] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 82.

[324] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 82. Benjamin's Sale of Goods, 5th Ed, 1997, at para 10-037.

[325] [1976] QB 44, at 62.

[326] 1976 SLT (Notes) 66.

[327] [1976] 1 WLR 989, per Lord Wilberforce at 998.

[328] Mackay v R J Hobbs Pty Ltd (1986) ASC 55-466, Fed C of A.

[329] The Commission based their saying on Halsbury's Laws of England, 4th Ed, (1979) Vol 9, para 543, n2. See The Law Commission, Report on Sale and Supply of Goods, Law Com No 160, 1987, para 2.32.

[330] Law Com No 160.

[331] He can be a buyer in a contract of sale, a hirer in a contract of hire or a hire purchase agreement, or a transferee in a contract for transfer of property in goods.

[332] The Law Commission, Sale and Supply of Goods, Working Paper No 85, 1983, at para 4.30.

[333] Law Com No 160, at para 4.15.

[334] Law Com No 160, at para 4.21.

[335] The Law Commission Report on Sale and Supply of Goods, Law Com No 160, 1987, at paras 4.31-4.32.

[336] See Law Com No 160, Recommendation (10) in para 8.1, Summary of Recommendations.

[337] For sale of goods, see section 15A of the 1979 Act.

[338] Sections 5A and 10A of the 1982 Act are in similar wordings.

[339] Law Com No 160.

[340] Law Com No 160, at paras 4.13 - 4.14.

[341] Law Com No 160, at para 4.13.

[342] The Commission based their saying on Halsbury's Laws of England, 4th Ed, (1979) Vol 9, para 543, n2. See Law Com No 160, at para 2.32.

[343] Those implied by the Recommended Legislation (for the "materials" part).

[344] Those implied by Cap 457 (for the "work/services" part).

[345] The remedy for a breach of a term implied by the Recommended Legislation depends on whether the term is classified as a condition or warranty. On the other hand, the remedy for a breach of a term implied by Cap 457 depends on how serious the breach is.

[346] See Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454 as discussed in Chapter 3.

[347] The Law Commission, Report on Implied Terms in Contracts for the Supply of Services, Law Com No 156, 1986, at para 2.18.

[348] The Law Commission, Report on Implied Terms in Contracts for the Supply of Goods, Law Com No 95,1979 and Report on Implied Terms in Contracts for the Supply of Services, Law Com No 156, 1986.

[349] It appears that the report published by the National Consumer Council in 1981 "Services Please - Services and the Law: a Consumer View", which brought about Part II of the 1982 Act, has not dealt with this issue specifically.

[350] The Law Commission, Implied Terms in Contracts for the Supply of Goods, Working Paper No 71, 1977, at para 16. The Law Commission, Report on Implied Terms in Contracts for the Supply of Goods, Law Com No 95, 1979, at para 33.

[351] The Law Commission, Sale and Supply of Goods, Working Paper No 85, 1983, at para 4.30.

[352] Similar term in section 13 of Part II of the 1982 Act.

[353] In general, materials are tangible and services are intangible, and therefore, with materials one can specify more accurately what is wanted. However, it must be pointed out that breaches concerning the "materials" part can also vary in nature and seriousness.

[354] In an e-mail dated 23 Oct 1999 to the Secretary of the Sub-committee. Professor Reynolds assumed that the parties would designate the specifications on materials as conditions - "one can specify more accurately what is wanted and so designate those specifications as conditions ...". But the present discussion is about implied terms, which would apply even though the parties have not specified them as conditions or even just terms.

[355] In an e-mail dated 6 November 1999 to the Secretary of the Sub-committee.

[356] In an e-mail from Professor Reynolds dated 23 Oct 1999 as discussed above to the Secretary of the Sub-committee.

[357] In an e-mail dated 10 November 1999 to the Secretary of the Sub-committee.

[358] In any event, there are two other differences. First, duties imposed by Part I of the 1982 Act (the Recommended Legislation) are strict liabilities, while those imposed by Part II of the 1982 Act (Cap 457) are duties of due care only, for example, "reasonable care and skill".

Secondly, as to restrictions on contracting out, Part I of the 1982 Act (the Recommended Legislation) is governed by sections 6 and 7 of the 1977 Act (sections 11 and 12 of Cap 71). Part II of the 1982 Act (Cap 457) is governed by sections 2 and 3 of the 1977 Act (sections 7 and 8 of Cap 71) which are more lenient. See PS Atiyah, The Sale of Goods, 10th Ed, 2001, at 24.

Sir Guenter Treitel also notes that a somewhat similar distinction exists at common law where the issue is as to the standard of liability under such a contract: liability for defects in the materials is strict but liability for defects in the services is not. In an e-mail dated 10 November 1999 to the Secretary of the Sub-committee.

See also G Treitel, The Law of Contract, 10th Ed, 1999, at 780.

[359] Law Com No 160, at paras 4.1- 4.34.

[360] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 502.

[361] Benjamin's Sale of Goods, 5th Ed, 1997, para 12-026.

[362] G Treitel, The Law of Contract, 10th Ed, 1999 at 745. Brian Childs has also made similar comments that the new section does not apply to other obligations of a seller other than those statutory implied terms, or where it is the seller who seeks to escape from the contract. Brian Childs, "Goodbye to all that?" (1995) 46 NILQ 232, at 241-242.

[363] In an e-mail dated 6 Nov 1999 to the Secretary of the Sub-committee.

[364] G Treitel, The Law of Contract, 10th Ed, 1999 at 744-745.

[365] Benjamin's Sale of Goods, 5th Ed, 1997, para 12-026.

[366] G Treitel, The Law of Contract, 10th Ed, 1999 at 745.

[367] G Treitel, The Law of Contract, 10th Ed, 1999 at 744. The Law Commission of England and Wales stated that it would be normal to infer an intention that any breach of a time clause, however slight, would justify rejection of the goods, whether or not such a clause was part of the description of the goods (ie within section 13 of the 1979 Act). Law Com No 160 at para 4.24.

[368] Law Com No 160 at para 4.23.

[369] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 503.

[370] Law Com No 160 at para 4.23.

[371] Geraint Howells, "The Modernisation of Sales Law?" [1995] LMCLQ 191, at p193. Ian Brown has also said that these are desirable recommendations. Ian Brown, "The Meaning of Merchantable Quality in Sales of Goods: Quality or Fitness for Purpose?" [1987] LMCLQ 400, at 405.

[372] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 503.

[373] 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); a right to sell the goods at the time when the property is to pass (in a hire purchase agreement).

[374] Law Com No 160 at para 4.19.

[375] Note 23, Part 4, Law Com No 160.

[376] P S Atiyah, The Sale of Goods, 10th Ed, 2001 at 503.

[377] Benjamin's Sale of Goods, 5th Ed, at para 12-026.

[378] In an e-mail dated 23 Oct 1999 to the Secretary of the Sub-committee.

[379] In an e-mail dated 10 Nov 1999 to the Secretary of the Sub-committee.

[380] In an e-mail dated 6 Nov 1999 to the Secretary of the Sub-committee. Professor Sealy also said in his e-mail: "what worries me most is the position of a buyer who has contracted to resell the goods. Suppose A has agreed to sell to B and B has agreed to resell to C, and suppose that B has no obvious reason himself to reject the goods - he will be bound to accept them. Then he delivers them to C who (the court holds) does have a good reason. B will be stuck with the goods. Now suppose that there are ten sub-buyers in the chain, and only the tenth has a good reason. In litigation between A and B, neither of them is likely to know who is going to be the ultimate buyer and what his personal circumstances are. ... But, if you were a judge, would you feel entitled to take account of the fact that B had agreed to resell? And would it be relevant whether A knew, or might have suspected, this?"

[381] Benjamin's Sale of Goods, 5th Ed, 1997, at para 12-026.

[382] "[E]xcept where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's skill or judgment".

[383] "[T]he breach is so slight that it would be unreasonable for him to reject them". See section 11A of the 1973 Act and sections 5A and 10A of the 1982 Act.

[384] Law Com No 160, 1987, at para 4.6.

[385] Law Com No 160, 1987, at para 4.6.

[386] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 236.
[387] [1988] 1 WLR 321.
[388] [1999] QB 1028.
[389] P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 160 n109.