House of Lords

Session 2006 - 07 Publications on the Internet Judgments PDF Print Version

Judgments - J & H Ritchie Limited (Appellants) v. Lloyd Limited (Respondents) (Scotland)

HOUSE OF LORDS SESSION 2006-07 [2007] UKHL 9 on appeal from:     OPINIONS OF THE LORDS OF APPEAL for judgment IN THE CAUSE   J & H Ritchie Limited (Appellants) v. Lloyd Limited (Respondents) (Scotland)     Appellate Committee   Lord Hope of Craighead Lord Scott of Foscote Lord Rodger of Earlsferry Lord Brown of Eaton-under-Heywood Lord Mance   Counsel Appellants: Charles Graham QC Gillian Wade (Instructed by McCartney Stewart, Renfrew) Respondents: Colin Tyre QC Pino Di Emidio (Instructed by Balfour & Manson, Edinburgh)   Hearing dates: 12 and 13 February 2007       on WEDNESDAY 7 MARCH 2007   HOUSE OF LORDS OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE J & H Ritchie Limited (Appellants) v. Lloyd Limited (Respondents) (Scotland) [2007] UKHL 9 LORD HOPE OF CRAIGHEAD My Lords,     1.  This is an appeal from an interlocutor of an Extra Division of the Court of Session (Lords Marnoch, Hamilton and Philip, Lord Marnoch dissenting) dated 11 January 2005 (2005 SLT 64), dismissing an appeal by the appellants, J & H Ritchie Limited, against an interlocutor of Sheriff Principal Iain Macphail QC dated 31 July 2003, by which he allowed an appeal by the respondents, Lloyd Limited, against an interlocutor of the sheriff (Sheriff Kevin Drummond QC) dated 7 January 2003. In that interlocutor the sheriff granted decree for the sum sued for by the appellants in their action for repayment of the price paid for an item of agricultural equipment which they had purchased from the respondents and had rejected on the ground that it was not in conformity with the contract. The appellants carry on a farming business at North Arkleston Farm, Paisley. The respondents carry on business as suppliers of agricultural machinery at various locations in Scotland, including Hunters Hall, Kelso.     2.  The equipment, which was purchased from the respondents as a single item, incorporated a combination seed drill and a power harrow. It was part of a range of machinery manufactured by Amazone, whose administration centre is in Cornwall and sales, service and parts centre in Yorkshire. Although the seed drill and harrow were capable of being operated separately, the equipment had been advertised for sale in The Scottish Farmer as a single piece of equipment at a reduced price because it had been repossessed from a previous purchaser. Mr James Ritchie, a director of the appellants, responded to the advertisement by telephone on 12 February 1999. The respondents agreed to make various modifications to it to suit the appellants' requirements. A price of £12,100 plus VAT was agreed for the equipment as modified. The respondents agreed to sell it to the appellants for that price, which amounted in total to £14,217.50. On 4 March 1999 the appellants issued a cheque for that sum in the respondents' favour, and they took delivery of the equipment on the same day.     3.  The appellants began seeding on their farm on 26 April 1999. They used the equipment for the first time that day. On 27 April 1999 it was noticed that vibration was coming from part of the harrow's drive chain. There was no obvious defect on visual inspection, so the appellants did not stop using it immediately. But when the vibration was still present on 28 April 1999 Mr Ritchie decided that there was a serious problem, and he stopped using the equipment. He telephoned the respondents and spoke to a workshop supervisor, who arranged for a replacement unit to be delivered to the appellants the next day. On 29 April 1999 the harrow was removed from the equipment and replaced with a second-hand harrow to enable the appellants to complete their sowing operations for the season. After discussion between Mr Ritchie and the respondents' fitter, Mr Thomas Fairley, the harrow was taken back to the respondents' premises for inspection.     4.  The harrow was stripped down and examined by the respondent's fitter in their Kelso premises. He found that the problem was due to the fact that two bottom bearings which ought to have been fitted to two of the rotors on the harrow were missing. This was a major defect. It made the equipment as a whole unfit for the purpose of tilling and sowing and not of satisfactory quality. The fitter ordered the missing parts from the manufacturer. When they arrived he inserted them into the harrow and it was reassembled. Some weeks after its removal to their premises the respondents telephoned the appellants and told them that the harrow had been repaired and was ready for collection.     5.  There then followed a series of conversations between Mr Ritchie and various employees of the respondents which gave rise to this litigation. They are important because no agreement was entered into prior to the removal of the harrow to Kelso as to what the consequences were to be once the defect had been identified. Mr Ritchie did not know what the problem was. It was not yet clear that the appellants were entitled to reject the equipment on the ground that the respondents were in material breach of the contract: see section 15B(1)(b) of the Sale of Goods Act 1979, which was inserted into the 1979 Act by the Sale and Supply of Goods Act 1994, section 5(1). So Mr Ritchie agreed to the respondents' proposal that the harrow be taken back by them with a view to investigation and, if possible, repair. This was how Lord Hamilton described the arrangement which was entered into: 2005 SLT 64, 73A-B, para 48. The question whether the appellants would exercise their right of rejection if the inspection revealed that there was a material defect was left open until after the inspection had been carried out.     6.  Mr Ritchie's reaction on being told that the harrow was ready for collection was to ask the respondents' workshop supervisor, Mr Raymond Elliot, what the problem had been with it. Mr Elliot refused to tell Mr Ritchie. Having received no answer from Mr Elliot to his inquiry, Mr Ritchie had several telephone conversations with other employees of the respondents. Despite Mr Ritchie's requests, none of them would reveal what the nature of the problem was or what had been done to the harrow to repair it. All he was told was that it had been repaired to what was described as "factory gate specification". Mr Ritchie then asked for an engineer's report on the harrow. This too was refused. He was told informally by persons involved in repairing the harrow that there had been bearings missing from it and that they had been omitted on manufacture. But he was not satisfied by this information. He was concerned for any consequences that the missing bearings could have had on the other parts of the harrow. The harrow had, of course, been used by the appellants on 26, 27 and 28 April 1999 with the bearings missing. Mr Ritchie was concerned that this might have damaged the machine in other ways. He was concerned too that, if he were to take the harrow back, it would not be used again until the following spring. Many months would go by until he would have the opportunity of discovering for himself whether the problem had been rectified. He was also concerned as to the effect which this delay might have on the manufacturer's guarantee period.     7.  In the light of these concerns Mr Ritchie decided to reject the equipment. He did so in a telephone conversation with the respondents, in which he told them that he was doing so because they had refused to provide him with the information that he was seeking. He then consulted the appellants' solicitors. By letter dated 26 May 1999 they confirmed that the appellants had rejected the equipment on the ground that the respondents were in breach of contract and asked them to return the price which the appellants had paid for it. The respondents refused to do so. They maintained that the effect of the repair to the harrow was to make it as good as it would have been if it had left the factory as a new, correctly assembled harrow. So it was the duty of the appellants to accept the equipment: see section 27 of the Sale of Goods Act 1979. The proceedings below     8.  The sheriff held that the appellants were entitled to reject the equipment. He accepted Mr Ritchie's evidence about his attempts to discover what was wrong with the harrow and what had been done to repair it. In his opinion Mr Ritchie was entitled to be concerned about any consequential damage that might have followed from the material defect. He held that these were legitimate concerns which, having regard to the course which events took, entitled the appellants to reject the equipment. He did not include in his findings of fact a finding to the effect that the effect of the repair to the harrow was to make it as good as it would have been if had been correctly assembled when it left the factory. On the view which he took of the case, a finding to that effect would not have deprived the appellants of the right to reject the equipment. They were entitled to reject the equipment because there was a material defect in the harrow when it was delivered to them. It did not prevent the machinery from working, but it had the potential to limit the life of the equipment. The appellants did not lose their right to reject the equipment by the use they made of it, as this was necessary to disclose the existence of the defect. They retained that right because the respondents' insistence that the harrow had been put back to factory gate standard had failed to answer the appellants' concerns about consequential damage and the risk that the manufacturer's guarantee would expire in the meantime, which were legitimate.     9.  The Sheriff Principal was of the opinion that a number of changes needed to be made to the sheriff's findings of fact. He decided to produce a new set of findings, incorporating these changes, which could be read as a single document. Among the new findings that he made was the following: "19.  The effect of that repair was to make the harrow conform to 'factory gate standard', that is, to make it as good as it would have been if it had left the factory as a new, correctly assembled harrow." He accepted that the defect in the harrow was a material defect which rendered the equipment unfit for the purpose of tilling and sowing, and that the appellants were entitled to reject it and treat the contract as repudiated. He also accepted that the appellants did not lose their right to reject the equipment because they agreed to the removal of the harrow for inspection and repair: section 35(6)(a) of the Sale of Goods Act 1979, as inserted by the Sale and Supply of Goods Act 1994, section 2(1). But in his opinion it was necessary to establish the state of the equipment at the time when, following the repair, the appellants rejected it. The question then was whether the appellants still had the right to reject the equipment when the harrow was offered back to them. It was not enough for the appellants to have concerns about the equipment, however sincere these might have been. The effect of finding 19 was to show that their concerns were not well founded in fact. They had failed to prove that the equipment was not fit for its purpose at the time of the rejection, so it was their duty to accept it.     10.  In the Inner House Lord Marnoch said that the appellants, having acquired a right to reject the goods at the time of delivery, could not have that right taken away from them simply by the renewed tendering of the goods in an allegedly repaired condition. There was no provision to that effect in the 1979 Act: para 12. If the respondents were to have an answer to the appellants' claimed right of rejection, it was to be found in the doctrine of personal bar: para 14. But no plea of personal bar had been taken against the appellants, and the argument that the appellants were obliged to accept the harrow when it was re-tendered to them after the repair without demonstrating its effectiveness was unsound. He would have allowed the appeal.     11.  Lord Hamilton and Lord Philip disagreed with Lord Marnoch. Lord Hamilton said that the result of the repair was to render the harrow fit for its purpose and, in the event of it being re-associated with the power drill, to render the equipment as a whole of satisfactory quality. So at the stage when the appellants declined to receive the repaired harrow and sought to treat the contract as repudiated the respondents were not in breach of contract: para 48: "All that can be said is that historically [they] had been so in breach. So far as appears, no contractually stipulated date for performance of the obligation to deliver the goods conform to contract had come and passed; nor had an unreasonable time elapsed. In these circumstances the purported rejection and rescission came, in my view, too late." Lord Philip said that, as the appellants had declined to rescind the contract when the harrow was originally tendered, the contract remained in existence for the benefit of both parties. The duties to deliver and to accept the goods under section 27 of the 1979 Act continued to be incumbent on them: para 54: "Accordingly, so long as the appellants refrained from rescinding the contract, if the respondents tendered delivery of the goods the appellants were bound to accept them. The appellants were, of course, protected by the terms of section 35(2) of the Act which gave them a reasonable opportunity to examine the goods before they were deemed to have accepted them." As to the question what effect section 35(6) had on this analysis, Lord Philip said that it was intended to be limited. Its effect was to remove the risk that, by agreeing to a repair, a purchaser will be deemed to have accepted the goods. The result was that a seller of defective goods who agrees to repair them, but then fails to do so, cannot demand payment of the price, or demand to retain it if it has already been paid. Discussion     12.  The issue which lies at the heart of this case, as Lord Philip observed, is the effect of section 35(6)(a) of the Sale of Goods Act 1979, as amended, on the buyer's right to reject goods which, on delivery, are materially disconform to the contract. Section 35 as a whole is concerned with when the buyer is, and is not, deemed to have accepted the goods. Subsection (6) provides: "(6)  The buyer is not by virtue of this section deemed to have accepted the goods merely because - (a)  he asks for, or agrees to, their repair by or under an arrangement with the seller, or (b)  the goods are delivered to another under a sub-sale or other disposition." Prior to the introduction of that provision into the 1979 Act it was open to question whether asking the seller to have defects in the goods remedied might amount to an implied intimation of acceptance by the buyer or to an inconsistent act which would prevent him from rejecting the goods. This problem was considered by the Law Commission and the Scottish Law Commission. In a joint report on Sale and Supply of Goods (May 1987, Law Com No 160; Scot Law Com No 104) the Commissions said that they had decided not to recommend giving the seller a right to cure the goods: para 5.28. Instead they recommended that the 1979 Act should be amended so as to provide that if the buyer asks for or agrees to attempts being made to repair the goods (whether by the seller or under an arrangement with him), then this does not of itself amount to acceptance of the goods by the buyer: para 5.29: "There may of course be other things done by the buyer which indicate that he has in fact accepted the goods, but in future he will safely be able to ask for or agree to repairs without reserving his right to reject the goods later. It does not in our view matter whether it is the seller or someone else who will attempt the repair. For example, the seller might repair the goods himself; he may have no repair facilities and send the goods way; or he may suggest that the buyer try some remedy himself (for example, changing a fuse or replacing a battery)."     13.  While the solution which the Commissions recommended to encourage attempts at cure solved one problem, it is apparent from this case that it created another for which no solution was provided. What happens to the right of rejection if the repair which the buyer has asked for or agreed to is carried out? The buyer is not deemed to have accepted the defective goods merely because he asked for or agreed to their repair. But is he bound in every case to accept and pay for the goods simply because they are said by the seller, following their repair, to be conform to the contract? If not, in what circumstances does the buyer lose the right to reject, and in what circumstances does that right remain exercisable? Wisely, as it now appears, the Commissions did not attempt to grapple with this problem. A solution cannot be found in the authorities which were cited to your Lordships, none of which were concerned with it. The problem is not capable of being solved satisfactorily by a pre-ordained code. In the absence of express agreement, the answer to it must depend on what terms, if any, are to be implied into the contract at this stage, bearing in mind that the seller was in breach at the time of delivery and that the buyer retains the right to resile because the goods were not in conformity with the contract.     14.  In William Morton & Co v Muir Brothers & Co, 1907 SC 1211, 1224 Lord McLaren said: "The conception of an implied condition is one with which we are familiar in relation to contracts of every description, and if we seek to trace any such implied conditions to their source, it will be found that in almost every instance they are founded either on universal custom or in the nature of the contract itself. If the condition is such that every reasonable man on the one part would desire for his own protection to stipulate for the condition, and that no reasonable man on the other part would refuse to accede to it, then it is not unnatural that the condition should be taken for granted in all contracts of the class without the necessity of giving it formal expression." In Liverpool City Council v Irwin [1977] AC 239, 258A-C Lord Cross of Chelsea pointed out that there was an important distinction between laying down by this means a prima face rule applicable to all cases of a defined type and cases where what the court was being in effect asked to do was to rectify a particular contract by inserting in it a term which the parties have not expressed. Dealing with the latter kind of case, he said at p. 258B-C: "Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give - as it is put - 'business efficacy' to the contract and that if its absence had been pointed out at the time both parties - assuming them to have been reasonable men - would have agreed without hesitation to its insertion."

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