UK: Remedies For Breach Of Sale Contract Specification

Last Updated: 1 November 2011
Article by Stuart Shepherd

RG Grain Trade LLP (UK) v. Feed Factors International Limited [2011] EWHC 1889 (Com)

The background facts

This case concerns the FOB sale by RG Grain Trade (Sellers) to Feed Factors (Buyers) of a cargo of sunflower expeller. A dispute arose in relation to whether the goods supplied under the contract were in accordance with the contractual specification. The Buyers ultimately rejected the goods and the documents. The goods were subsequently sold at a lower price by agreement between the parties. Against that background, the Sellers claimed approximately US$670,000, the balance of the purchase price, and the Buyers counterclaimed damages in the region of US$380,000. The GAFTA First Tier Tribunal found for the Sellers but the GAFTA Board of Appeal allowed the Buyers' damages claim and dismissed the Sellers' claim for the balance of the price.

There was a significant dispute between the parties concerning the interpretation of various provisions in the contract, both express and incorporated by reference, in relation to the determination of the quality of the goods supplied under the contract. We do not intend to dwell on that particular issue save to record that the Board of Appeal and the Court concluded that, by virtue of the various contractual provisions, the goods had been determined not to comply with the contractual specification.

What we do intend to look at, however, is the Court's determination on the issue of whether the fact that the goods did not meet the contractual specification entitled the Buyers to reject them. So far as is relevant to this issue, the contract provided as follows:

"Commodity: UKRAINIAN ORIGIN SUNFLOWER EXPELLER

In bulk, sound, loyal and merchantable quality.

Specifications: protein min 32% moisture max 7% - fiber (sic) max 23% - fat min 11%

Special Conditions: Other terms and conditions not in contradiction with above as per GAFTA 119... "

Clause 5 of GAFTA 119 provides as follows:

"5. Quality

Official ... certificate of inspection, at time of loading into the ocean carrying vessel, shall be final as to quality.

Warranted to contain not less than ....% of oil and protein combined and not more than 1.5% of sand and/or silica. Should the whole, or any portion, not turn out equal to warranty the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below".

The Board of Appeal found that a certificate issued by Salamon & Seaber was final and binding and Mr Justice Hamblen agreed. That certificate stated that the protein content of the cargo was 26.8% (less than the minimum of 32% specified in the contract) and the fibre content was 26.57% (more than the maximum of 23% specified in the contract).

In light of this finding, the Board of Appeal said in its Award:

"If a contract does not contain a scale of allowances for deficiency in certain specifications (viz fibre) and the goods subsequently fall outside this then it must follow that the goods can be rejected unless the parties agree to any other course of action".

The Sellers contended before Mr Justice Hamblen that this conclusion was wrong on two grounds;

  1. The Board had failed to give effect to clause 5 of GAFTA 119 which is a non-rejection clause.
  2. The Board had proceeded on the erroneous basis that any failure of the goods to meet the specification would justify rejection.

The Commercial Court decision

With regard to ground (1), the Court agreed with the Board of Appeal that the provision in clause 5 of GAFTA 119 referring to the goods being taken at an allowance applied only to the warranties in respect of oil and protein combined and sand and / or silica as expressly referred to in that clause. It did not, therefore, apply to the specification in relation to fibre. Accordingly, that clause did not, of itself, prevent rejection of the cargo by the Buyers on account of a failure of the cargo to meet the contractual specification in relation to fibre.

With regard to ground (2), the underlying issue was whether the contractual requirement that the goods have a maximum fibre content of 23% was (i) a condition entitling the Sellers to reject the cargo or (ii) a warranty limiting the Sellers' remedy to damages or (iii) an innominate term, the breach of which would only entitle the Buyers to reject if the breach would deprive them of substantially the whole benefit of the contract.

The Buyers contended that the Board had in fact determined that the breach was one of a condition, alternatively that the Board's conclusion could be upheld on that basis. In particular, the Buyers argued that the breach in respect of fibre content was a breach of description – the implied obligation that the goods supplied would meet the contractual description being a condition. Mr Justice Hamblen noted that there was no suggestion in the Board's reasons that they regarded the fibre content provision as a matter of description. Indeed, it was clear that the Judge was of the view that it was a matter of quality, referring as he did to the fact that the fibre content provision appeared under the heading "Specifications" and next to a specification characteristic which was clearly a matter of quality rather than description, namely protein.

As to the contractual nature of the provision with regard to fibre content, Mr Justice Hamblen referred extensively to the judgment of Mr Justice Slynn in Tradex v. Goldschmidt SA [1977] 2 LLR 604, where the Judge found that a contractual provision providing for "4% foreign matters" was an innominate term. Mr Justice Hamblen commented that there is "no hint in the Board's reasons that they have addressed their minds to the issue of whether the fibre content provision should properly be regarded as a condition, as opposed to a warranty or an innominate term. They have assumed that the term is a condition unless there is an indication to the contrary. That is not the law".

On that basis, Mr Justice Hamblen concluded that the Board had erred in law. In such circumstances, and as he recorded, it was common ground between the parties that the appropriate cause of action was to remit the matter to the Board of Appeal to consider whether the specification in relation to fibre was a condition, warranty or innominate term rather than for the Court to decide that issue.

Comment

There may be cases where there would be a legitimate debate as to whether a contractual requirement in respect of goods to be supplied under a contract amounts to a matter of description or quality – and there may be cases where it will be a matter of both. However, the requirements of a contractual specification will normally be a matter of quality not description. If so, one then needs to determine whether that aspect of the contractual specification amounts to a condition, warranty or an innominate term. This will depend upon the intentions of the parties derived from the wording of the contract. However, all things being equal, in most cases the requirements of a specification will amount to an innominate term, the breach of which will only give rise to the right to reject the goods if the breach is such as to deprive the buyer of substantially the whole benefit of the contract. In most cases, this is unlikely to be the position.

One must also bear in mind, however, that if the contract is governed by English law, then unless excluded, the buyer may be able to rely upon the implied condition in S.14 of the Sale of Goods Act that the goods supplied will be of satisfactory quality. Of course, a breach of the contractual specification will not necessarily render the goods "unsatisfactory". It will be a question of whether the failure of the goods to meet the specification renders the goods "unsatisfactory" applying all the factors which are to be taken into account, in accordance with S.14, in determining that question.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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