Sale of Goods Update

In recent months we have seen several developments in the law relating to the sale of goods, all of which bring new principles for businesses to get to grips with.

The Consumer Rights Act 2015

The fundamental change to the legal landscape where sale of goods is concerned came in the form of the Consumer Rights Act 2015, on which we produced a series of articles in the later part of last year. The Act came into force on 1 October 2015, with the aim of bringing together the existing legislation on the supply of goods and services and codifying the remedies for breach of goods contracts.

The key changes under the 2015 Act (which applies to business to consumer contracts entered in to on or after 1 October 2015) are as follows:-

• The introduction of a tiered system of remedies available to consumers where the goods supplied are not in compliance with the contract. These are the short term right to reject, the right to repair or replacement and, finally, the right to a price reduction or the final right to reject.
• New rules applicable to goods that are both supplied and installed by a trader, or installed under the supplier's responsibility. In such instances, if the goods are not correctly installed then the tiered remedies above are available to the consumer.
• Changes to the regulation of exclusion clauses and unfair terms, making attempts to exclude or restrict certain terms in business to consumer contracts subject to an outright ban. These include, by way of example, terms which seek to exclude liability where goods are of unsatisfactory quality, unfit for a particular purpose, not as described or not in compliance with a sample or model.

As the 2015 Act only came into force relatively recently, we have yet to see any test cases making their way through the Courts. However, it is anticipated that we will start to see litigation in instances where customers claim the right to progress to the next tier of remedies under the Act and the trader is not satisfied that the customer is entitled to do so, and also around the final right to reject, which allows for a deduction for use of the goods in certain circumstances, which will no doubt generate litigation as to how much of a deduction is permissible.

"Goods and "Sale of Goods"

Outside of the 2015 Act, there have also been some interesting cases before the High Court and Supreme Court in relation to the legal interpretation of the words "goods" and "sale of goods".

In May of this year, the Supreme Court handed down a much-anticipated decision in relation to the interpretation of a fuel supply agreement, and whether this was a contract for the sale of goods within the meaning of the Sale of Goods Act 1979 (which, by way of reminder, continues to apply to business to business contracts and business to consumer contracts entered in to before 1 October 2015). The case, PST Energy 7 Shipping LLC v. OW Bunker Malta Limited, was a shipping case dealing with the supply of bunkers of marine fuel. The bunkers were sold for immediate use but on 60 day credit terms, with a retention of title clause in place pending payment. It was accepted by the suppliers that consumption of the fuel in the bunkers by the vessels to which the bunkers were supplied would be permissible prior to any payment being made. Upon payment, the vessel owners then acquired the property in any remaining bunkers.

When the supplier, OW Bunkers, became insolvent, the vessel owners sought a declaration that they were not bound to pay for the bunkers on the basis that title in the fuel had not passed to them, in breach of the Sale of Goods Act 1979. However, the Supreme Court determined that the contract was not a contract for the sale of goods within the meaning of the Act as there was no transfer of property in the bunkers used before payment. To quote Lord Mance, who delivered the leading judgment in the case,

"the property in bunkers consumed never passes and [was] never agreed to be passed".

As such, the vessel owners could not rely on the Act and had no defence to the claim for payment.

As an aside, the Supreme Court also commented on whether, if the contract had been found to be a contract for the sale of goods within the meaning of the Act, section 49 of the Act would have prevented OW Bunkers from claiming for the price of the bunkers used. Section 49 allows a seller to bring a claim for the price of goods sold where the property in the goods has been transferred but the buyer has failed to pay the price due, but gives only limited examples of where the section may be applied. Some previous authorities had found that section 49 would exclude any claim to recovery of a price outside the situations completed by the express terms of the section. However, in this instance, the Court found that section 49 was not intended to be a "complete code" of situations in which the price may be recoverable under a contract of sale and therefore section 49 would not have stopped OW Bunkers from claiming payment of the agreed price.

Can software be goods?

In another case dealing with the interpretation of the word "goods", the High Court was asked to consider the definition of that word for the purposes of the Commercial Agents Regulations 1993. The claimant agent, The Software Incubator Limited ("SIL"), had entered into an agreement with the Defendant, Computer Associates UK Limited, to act as agents for the promotion of software in the UK for an initial term of 12 months. The Defendant later gave notice to terminate the agreement and SIL claimed damages for breach and compensation and commission under the Regulations. The Defendant argued that there was no claim under the Regulations because the sale of software being promoted by SIL was not "the sale of goods" for the purposes of the definition of a commercial agent under the Regulations.

A commercial agent is described, for the purposes of the Regulations, as somebody who has continuing authority to negotiate the sale or purchase of goods on behalf of another person. In determining whether software could be classed as "goods" in this context, the High Court considered the nature of the software. Although this was not a tangible item, the Court found that "as a piece of sophisticated, commercial non-bespoke software, it would be regarded, at the very least as a 'product' ". In addition, in spite of it being intangible, the software could only operate in a tangible environment, such as being loaded on to a disc or server or some other permanent storage system, and for the purposes of the disputed agreement, the software was treated as tangible goods. SIL could promote, market and sell the software and the Defendant clearly did not have any difficulty in referring to sales of the software and commission on those sales. Accordingly, the Court found that the fact of the software being intangible did not preclude it from being regarded as "goods".

The High Court also considered whether a supply of software could constitute a "sale" of goods for the purposes of the Regulations. The Defendant had suggested that because, in some instances, the software might be supplied on a limited licence, there was no "sale". However, the Court relied on a previous authority from the European Court of Justice and the desire for the concept of "sale" to be regarded as an autonomous EU concept and interpreted uniformly. Having this in mind, and also the fact that the agreement itself referred to "sales" of the software, the Court determined that there was a sale. Most customers would receive a permanent licence for the software limited only to specific conditions in relation to breach. The Court stated that "the intention, as with the sale of any product [was] that the purchaser has the unfettered ability to use it forever subject to copying restrictions and so on".

Interestingly, the decision in this case further demonstrations that the Sale of Goods legislation is evolving to accommodate contracts for the supply of software, this being embodied in the 2015 Act, which sets out specific principles in relation to the supply of digital content. Although the definition of "goods" for the purposes of the Regulations may not be apt for the purposes of the 2015 Act, which gives software its own category of treatment (as noted by the High Court in the SIL case), the legislation and the case demonstrate how the law of sale of goods continues to evolve and to adapt for the purposes of transactions in the digital era. No doubt the law will develop further as cases begin to be decided under the 2015 Act, and businesses will need to keep up-to-date with the changes to avoid falling foul of the legislation.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.