Commercial Contracts

 

Question 1

In contract law, each of the contracting parties accrues both rights and liabilities. The rights of a contracting party arise from the sanctity of the contract. Each of the parties that enter into a contract is obligated to honour the terms under that contract. Whenever a party fails to honour the terms of the contract, the other party has the right to sue for damages or rescission. In the case at hand the rights of the Watchtower Ltd (“WL”), or its liabilities thereof, towards Classic Gifts Ltd (“CGL”) depends on two issues. One is determining the legality of the exclusion clauses inserted in the contract, and two, is determining which of the party was responsible for the defective products.

CGL has claimed for a refund and want to recover damages that resulted from the purchase of defective products from WL. This assertion must be analysed from the terms of the contracts as well as the governing laws on contracts. WL has every right to enforce a valid contract. However, in English law, the contract may be declared voidable if it may be found to have violated the laws governing contract formation such as the Sale of Goods Act 1979, Misrepresentation Act 1967, and the Unfair Contract terms 1977. When a contract is declared voidable, the innocent party has the right to apply for rescission or any damages in tort[1].

In deciding the rights and liabilities that WL has towards CGL, the first and the most important question is to determine the legality of terms 3.3, 8.4 and 8.5 of the contract, which actually are exclusion clauses. Under the terms of the Unfair Contract Terms Act 1977, contracts may contain exclusion clauses so long as the nature of the exclusion is reasonable[2]. In this contract, the seller has tried to restrict his liability for the implied terms as provided by the Sales of Goods Act 1979. Then, the question now is does the exclusion clauses contained in the contract satisfy the reasonableness test?

In term 3.3, the seller alludes to the “nature of goods” to justify his exclusion clause. In this case “nature of the goods” will be the point around which the reasonability test will revolve. In case the dispute went to court, the judges will be concerned to determine whether the “nature of the goods” warranted some variations as WL assets in the contract. WL may argue that since the oil was intended to clean sophisticated parts of the watches, damages were bound to occur. The buyer, being a dealer in sophisticated watches seems to have agreed, when accepting the contract, that indeed the watches were delicate. With such a background, WL may have the right to enforce the contract, with the exclusion clauses intact. In this, WL has the advantage of the court interpretation of exclusion clauses contained in business to business contracts[3]. In Watford Electronic v Sanderson for example, the court ruled that where businessmen representing substantial companies have entered into a contract, “they should be taken to be the best judge of the commercial fairness of the agreement which they have made, including the fairness of each of the terms in that agreement”[4].    According to Chadwick LJ, “the court should not assume that either [of the party] is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms”[5]. In Regus v Epcot Solutions, the appellate court recently overturned the decision of the high court to strike down exclusions clauses. The argument of the court in this case was that the exclusion clauses were reasonable.

Having decided the legality of the contract, the next issue in this case, would be, given the terms of the contract, who bears the liability for the defective products? In term 3.3, the contract says that “the seller makes every effort to ensure that the Goods comply with the relevant specifications”.  This means that the seller is liable for any good that is defective. However, in the same condition, considering the nature of the goods, the contract shifts liability to the buyer in case of some variation.

In this case, the shifting of responsibility from the seller to the buyer and from the buyer to the seller will form part of contention and it may require analysis of the governing laws to determine who bears the responsibility for the defective goods. According to the Sale of Goods Act 1979, any contract for the sale of goods shall denote certain implied terms. In the first place any sale of goods contract implies that the goods are fit and satisfactory. This means that the good should be devoid of defect. Secondly the contract implies that the goods are fit for the purpose. The other expectation of the Sales of Goods Act is that the goods sold shall correspond to the description. Where the seller has failed to comply with the implied terms, the buyer has the right to seek refunds.

In light of these provisions, it would important to determine whether the specialist watch-cleaning oil that WL sold to CGL was satisfactory and fit for the purpose. From the CGL letter it is clear that the oil was not fit for the purpose. The important question to answer here would be who, between WL and CGL was responsible to ensure that the goods sold were fit for the purpose.

WL can argue that in normal circumstances, the condition of determining whether the goods are fit for the purpose lies with the buyer[6]. It is the buyer who knows where he intends to use the goods, and upon examining them he is supposed to determine whether they are fit for the purpose. Before purchasing a product, it is reasonably expected that the buyer will examine the goods and satisfy himself that what he is buying is fit for the purpose. This was so expected of CGL.

However, the condition for ensuring that the goods are fit for the purpose may shift to the seller, if in writing or by implication; the buyer has let the seller know what he intends to use the goods for[7].  In BSS Group Plc v Makers for instance, the seller has supplied adapters to makers to be used in a plumbing project. The adaptors were incompatible with the project, and within few hours of their fixing, the exploded causing serious damages to the flour. In the ruling, the court found out that the quotation and the written order that the buyer had made expressed or implied the purpose of the goods. The court ruled that the adaptors were unfit for the purpose. Trebor Bassett Holdings Ltd & Anor V ADT Fire and Security Plc relied on Section 4 of the Supply of Goods Act 1982 which is similar to Sales of Goods Act 1979 s. 14 (3). In this case, the court found out that the seller was not liable for the defect since the buyer had not clearly indicated the purpose of the product.

The answer to question as to who was responsible to ensure the goods were fit for the purpose is a little bit tricky since the court, or someone deciding this case will have to balance the meaning of Section 14 (3) of the Sales and Goods Act and the construction of the contract. This brings this case to analysing the correspondences that went through before concluding the sales.

In term 3.1, the contract states that “the buyer shall be responsible to the seller for ensuring the accuracy of the terms of any order (including any applicable specification) submitted by the buyer...” WL can argue that in terms of this condition, CGL did not accurately specify what the product was intended for. However, CGL may try to rebut this claim by arguing that it explained to the sales representative “what the cleaning oil was required to do and the type of antique watches it was needed for”. Further, CGL claims that WL sales representative went to as far as examining “the interior of one of the most valuable watches which the product was intended to clean”.

In terms 2.3 and 2.4, the seller (WL) has tactfully any liability borne by its staff. According to the terms of the contract, “the seller’s employees or agents are not authorised to make any representations on its behalf in connection with any goods”. If there has to be such a case (under term 2.4), it has to be authorised by the seller in writing. In such a case, the court will likely observe that the case made through the sellers did not meet the condition set by Section 14 (3) of the Sales of Goods Act 1979. However, given that the seller’s representation where the link between the seller and the buyer, CGL may argue that any communication made through them is reasonably expected to hold. CGL may further argue that if the sales representative, with understanding that they were knowledgeable in their job, they could have let their employer know of the conditions of.

However, it should be known that even if, the buyer did let the seller know the purpose of the product (if the information released to the seller’s representative were to hold), the law may go an extra mile to determine whether the buyer relied, and indicated so, on the seller’s skills of judgement[8]. In normal circumstances, the knowledge of the parties is considered to be evenly balanced, but this may shift if either party proves that the other was more knowledgeable in the products on sale[9]. In the law of reasonableness, given that both of the parties were dealers in antique watches, it is expected that they were both knowledgeable about them, but if CGL expected WL to offer it skills of judgement, it could have clearly indicated so[10].

In case, CGL comes to know that that a batch of one of the natural oil mixtures purchased to manufacture the cleaning oil was defective as Matthew Archbold fears, WL will have a case to answer. CGL, in such a situation may successfully argue that the oil did not meet the description. However, WL may argue that the defect was part of the variation covered by the exclusion clause.

Question 2: EU Competition Law

Karen’s plan to expand is coming at a better time when the EU has relaxed competition rules within the EU market. On 20 April 2010, new vertical agreements block exemption and the accompanying vertical restraint guidelines came into force[11]. Before going into the expansion, it is very important that Karen familiarises with these new exemptions and guidelines lest she face the consequences of violating the strict EU competition law. The important question in this case is, does the proposal fall within the Block Exemption Regulation?

The EU competition laws are set out in Article 101 and 102 of the treaty on the Functioning of the European Union, (hereinafter referred to as “the treaty”). According to Article 101 (1), all agreements between undertakings that have as their as to restrict, prevent or distort competition within the European market are prohibited. However, according to Article 101 (3), an agreement may be exempted from the rule if it yields more benefits than the effect created by its anti-competitive behaviour[12].

The expansion approach that Climber Ltd (“CL”) wishes to take is known in EU competition laws as vertical agreements or supply contracts. Vertical agreements, in light of article 101 (1) of the treaty are normally considered to be anticompetitive. However, the EU has realised that it is not always that a vertical agreement will have an anti-competitive effect[13].  There are those vertical agreements that are entered to help determine the price and the quantity of specific sale and purchase without the intention of restricting or distorting competition.

In the case of Climbers, the vertical restraints have the intention of entering a new market and ensuring that the distributors will benefit from marketing the product in their restricted territories. The new block exemption regulation are intended to ensure that the members of the EU market enjoy the positive impact of the vertical agreements while at the same time taming the vertical agreements that may result in negative effects[14]. CL can benefit from the new safe harbour but this will require that the vertical agreements meet the conditions set out in the new Block Exemption Regulation. The new regulation provides a way of entering into vertical agreements without violating Article 101 (1) of the treaty.

In the first place, CL qualifies for the block exemption thanks to its market share. Under the new Block Exemption Regulation, where both parties (supplier and distributor) commands less than 30% market share, vertical agreement is presumed to have a positive effect[15]. Since Climbers has a 15% market share, it is within the limits of this provision. What the Karen needs to do is to enter into a contract with distributors who also command less than 30% market share.

In the CL proposal, there are four issues that touch on the EU competition law. One, is the proposal to set a benchmark price; two, the decision to retain the exclusive right to sell these products over the internet, three, restriction of the distributors in their own defined territory, and four, prohibiting the distributors from selling competing products. Whether a vertical agreement restricts competition depends on the market structure, but there are those hardcore restrictions that are considered out rightly restrictive.

In order for Climbers to benefit from Block Exemption Regulation (BER), it must first of all drop its hardcore restriction[16].  According to the EU guidelines on vertical restraints, “the Block Exemption Regulation exempts vertical agreements on conditions that no hardcore restriction, as set out in Article $, is contained in or practised with the vertical agreement”[17]. The hardcore restrictions in the new regulations are as they were in Regulation 2790/1999 (the older regulation)[18].  In the Karen proposal, there are two restrictions that will be considered hardcore. One is the resale price maintenance and two is the demarcation of territories. As per the provision of Regulation 330/2010, Karen will stand not to benefit from the safe harbours created by the EU completion law.

Any attempt, as Karen has tried to do, to impose a fixed or a minimum price is considered a hardcore restriction. If Karen still wants to have a say on the price, she can only fix a maximum resale price or recommend the resale price. Setting a maximum resale price or recommending to the distributors a resale price will not be considered as a hardcore restriction and thus she will stand to benefit from the safe harbours.

The second hardcore restriction that Karen needs to drop is the partitioning of territory. In line with competition principles, the EU completion law requires that the distributors be given a free way to where and to whom to sell their goods. Karen attempts to define territories for distributors will fly in the face of this law. However, the EU recognises that defining of territories have its advantages to competition. When the distributors are allowed to have an exclusive territory, they are able to reap from their aggressive marketing. This eliminates a situation where some of the distributors will wait to reap from what others have sown. In light of this understanding, the EU completion law allows suppliers to restrict “active sales” but nor “passive sales”[19]. For the purpose of the block exemption regulations, active sales means actively approaching customers in other distributors exclusive territory while passive sales is where a distributor responds to unsolicited approaches from buyers from another distributor’s exclusive territory.

In terms of the internet sales, Climbers requirement that it retains the exclusive rights to sell the products over the internet risks falling out of the Block Exemption Regulation. In a recent case, Pierre Fabre decision, the European court of justice concluded that a retaining exclusive rights for the sale over internet amount to a restriction of competition[20]. The increased sale of goods over the internet is one of the issues that have necessitated the revision of block exemption regulation. The commission notes that the internet has become a marketing platform and restricting its use is like restricting resale. According to the new rules, online sales are considered passive.

In Climbers Ltd case, it can retain exclusive rights to sell over the internet, but it cannot restrict passive sales. A passive online sale is considered as where a distribution sets a website, and a following unsolicited visit by the customer, the distributor closes the deal. However, the new guidelines allow Karen to restrict active sales. Active sale is where the restricted distributor may engage in aggressive marketing like advertising or soliciting buyers over the internet. However, since the main intention of Karen is to protect her brand name, she can go ahead and allow the distributors to make active sales online but impose certain conditions allowed by the new regulations. For instance, Karen may demand that all distributors must sell a certain percentage of their goods online or they should maintain several numbers of physical shops.

If at all, Karen wants to hold to these hardcore restrictions, she will be required to satisfy the European Commission that they meet the conditions of Article 101 (1) of the treaty[21]. This will be an uphill task as the EU vertical restrains guideline has already stated that a vertical agreement with hardcore restraints will rarely meet the conditions of Article 101 (3) of the treaty[22]. The best way would be to comply with the new vertical restrains guidelines.

To sum this advice, it is very important for Karen to ensure that her company adhere to the EU competition law. A breach of the EU competition law can attract a hefty fine which may go to as far as 10 percent of the company’s turnover in the last financial year. The National Competition Authority has the powers to impose the same[23]. Such an adherence would be to drop the hardcore restrictions until Climbers are sure that its proposal is within the Block exemption Regulations.

 

 

 

Bibliography

Bael, Van &Firm, Bellis, ‘Competition Law of the European Community’ (Kluwer Law International 2005)

Bridge, MG, ‘The Sale of Goods’ (Oxford university Press, 1997)

Dabbah, Maher, ‘EC and UK Competition Law: Commentary, Cases and Materials, (Cambridge University Press)

Ritter, Lennart & Braun, David ‘European competition law: a practitioner's guide’, (Kluwer Law International 2008)

Turley, Ian ‘Principles of Commercial Law’ (Taylor & Francis Group 2001)

Vogel, Louis ‘EU Competition Law Applicable to Distribution Agreements: Review of 2011 of 20111 and Outlook for 2012’.  JECLP [2012], 1-16

Wijckmans, Frank & Tuytschaever, Filip ‘Vertical Agreements in EU Competition law’ (Oxford university press 2011)

Tables of Case and Statutes

Article 101 and 102 of the Treaty of the Functioning of European Union

Ashington Piggeries Ltd v Christopher Hill Ltd. [1972] 1 A.C. 441

BSS Group Plc v Makers (UK) Limited [2011] EWCA Civ 809

C-439/09, Pierre Fabre, Judgement of 13 October 2011

Commission Regulations (EU) No 330/2010

Competition Act 1998

European Union, ‘Guidelines on vertical restraints’ C 130 OJEU [2010]: 1-46

Grant v The Australian Knitting Mills [1936] AC 562)

Henry Kendall Ltd v William Lillico Ltd [1969] 2 AC 31

Manchester Liners v Rea Ltd [1922] AC 24 150

Misrepresentation Act 1967

Peter Gillies, ‘Concise Contract law’ (Federation Press 1988)

Regus (UK) Ltd v Epcot Solutions Ltd, [2008] EWCA Civ 36

Sale of Goods Act 1979

Trebor Bassett Holdings Ltd & Anor v ADT Fire and Security Plc [2012] EWCA Civ 1158

Unfair Contract Terms Act 1977

 Watford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696

 



[1] MG Bridge, ‘The Sale of Goods’ (Oxford university Press, 1997) 302

[2] Section 11 of Unfair Contract Terms Act 1977: reasonability test: in relation to a contract term, the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made.

[3] Peter Gillies, ‘Concise Contract law’ (Federation Press 1988)

[4] Watford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696

[5] Ibid

[6] Ian Turley, ‘principles of Commercial Law’ (Taylor & Francis Group) 157

[7] Section 14(3) of the Sale of Goods Act, where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought; there is an implied term that the goods supplied under the contract are reasonably fit for that purpose.

[8] Manchester Liners v Rea Ltd [1922] AC 24 150: the suppliers decided to supply a different product that he thought would still service. Although the buyer expected this to happen, he still relied on the suppliers’ skill of judgement.

[9] Henry Kendall Ltd v William Lillico Ltd [1969] 2 AC 31

[10] Ashington Piggeries Ltd v Christopher Hill Ltd

[11] Regulations (EU) No 330/2010

[12] Van Bael and Bellis Firm, ‘Competition Law of the European Community’ (Kluwer Law International 2005), p.275

[13] Van Bael and Bellis Firm, ‘Competition Law of the European Community’ (Kluwer Law International 2005), p.275

[14] Louis Vogel, EU Competition Law Applicable to Distribution Agreements: Review of 2011 of 20111 and Outlook for 2012.  JECLP [2012], 1-16

[15] European Union, ‘Guidelines on vertical restraints’ C 130 OJEU [2010]: 1-46, Para 23

 

[16] Article 4 of regulation 330/2010

[17] Commission Regulations (EU) No 330/2010

[18] Frank Wijckmans and Filip Tuytschaever, ‘Vertical Agreements in EU Competition law’ (Oxford university press 2011), p128

[19] Lennart Ritter and David Braun, ‘European competition law: a practitioner's guide’, (Kluwer Law International 2008), p. 283

[20] C-439/09, Pierre Fabre Decision

[21] Frank Wijckmans and Filip Tuytschaever, ‘Vertical Agreements in EU Competition law’ (Oxford university press 2011), p128

[22]  European Commission Guidelines on vertical Restraints, Para. 47

[23] Competition Act 1998

 

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