Caught Between A Supplier Of A Defective Product And A Customer Or Builder

 

When you install a piece of equipment from a supplier, and that equipment is found defective, what are your rights and responsibilities as the contractor?

Quite often, what is described as a warranty has been issued by the supplier, and also on many occasions, the supplier accepts that the product was defective and offers to replace it. But the customer wants more than a replacement product because their ceiling has been damaged, and so far as the customer or builder is concerned, it is the contractor who is in the wrong. What do you do?

1.Rights of the customer

If your contract is entirely verbal or is not a formal contract with terms and conditions, the common law implies a term that the materials you supply will be of merchantable quality and fit for the purpose made known to you.

If the client has specified the actual product which has to be used, the implied term as to fitness for purpose will not apply, but the implied term that it has to be of merchantable quality will still apply. That is, the products must be free from defects that prevent them from being used for the purposes for which they are commonly used by buyers1.

But more importantly, in consumer transactions, the Australian Consumer Law requires that the products be of “acceptable quality”. That provision applies to all purchases of goods valued at less than $100,000, whether or not the purchaser is a consumer, as well as to all cases in which the goods are of a kind ordinarily required for personal, domestic or household use or consumption.

The obligation to provide goods of "acceptable quality" is much more stringent than the common law obligations in relation to the sale of goods. It is a guarantee that, amongst other things, the goods will be fit for all the purposes for which goods of that kind are commonly supplied, durable and free from defects.

All the standard written construction contracts expressly include the common law terms. Many standard contracts also require that a higher quality or standard of goods or materials be supplied.

In short, you are likely to be obliged to either replace the defective products or the client can have them replaced and sue you for damages for breach of contract.

The cost of replacing any defective products could be more than the cost of the replacement goods themselves. It could be quite significant if replacing the goods involves removing them from the structure of the building, repairing the damaged structure, as well as installing the replacement goods.

For completeness sake, brief mention should also be made of the non- conforming products rules which apply in Queensland under which in respect of goods which are not safe or do not comply with relevant regulatory provisions or do not perform as represented, as well as fines, the QBCC can direct you to remove, repair or modify non-conforming building products.

So, unless it is a very unusual case, if you supply defective goods, you are going to be liable to the client not just for the costs of the replacement goods but also the cost of installing the replacement goods and the costs of any rectification work.

2. The Supplier

Another common feature of these cases is that the supplier has issued what is called a "warranty" document. In most, if not all, cases, this document has been supplied to the customer by the contractor, given that the supplier never has any direct contact with the customer.

It also has to be acknowledged that in many of these cases, the supplier acknowledges the warranty and indicates that they are prepared to supply a replacement product. However, it is not at all clear how, in most of these cases, the customer acquires a right to sue the supplier directly for breach of one of these warranties.

I will not bore you with a discussion of the legal niceties, since in most of these cases the customer has no interest in taking on the supplier. The contractor is the person who supplied the equipment, and quite reasonably, they see it as the contractor's job to fix the problem.

Another common issue is that the supplier relies upon the "warranty" to say that their obligation is limited to replacing the goods supplied and does not cover the cost, for example, of rectifying damaged parts of the building.

So, unless you are in the unusual and fortunate position of not being liable to the client, you will next be looking to recover your costs from the supplier.

2.1 Sale of Goods Law

The law implies into contracts for the sale of goods by suppliers, certain warranties, including that the goods will be of merchantable quality and fit for any purpose made known by the buyer. However, outside of consumer transactions, these implied warranties can be removed from the contract by agreement.

2.2 What suppliers’ contracts often say

Most suppliers in the market have very comprehensive terms and conditions which are designed to remove these implied warranties and prevent the supplier from being held liable, should the goods turn out to be defective.

It is important to be alert to the fact that sellers’ terms and conditions can be found in a number of different places:

1. Credit Agreements. This is a place that people often forget to look for terms and conditions limiting the liability of the supplier.
2. On the back of their quotation.
3. On the website. Quite commonly, quotations refer buyers of products to terms and conditions found on the supplier’s website. Terms and conditions on the supplier’s website will be binding on you if they are brought to your attention before you enter into the contract. In most cases, the contract will be entered into by you when you place your order and if you have been given a document stating that the terms and conditions on the supplier’s website apply before you place your order or you have been told that those terms and conditions apply, you will be bound by those terms and conditions and the supplier will be relieved of its obligations to ensure that the goods are of merchantable quality and fit for any purpose made known to them by you as the buyer.
4. Specific contract documents signed at the time of the order

Suppliers’ agreements can include exclusion clauses restricting your potential rights to recover your losses from the supplier. Here are some examples:

• The seller “shall not be liable for any claim under this clause or in any other way whatsoever in relation to the products unless such claim is notified to the company within 14 days of delivery of the products”. Sterren v Cibernetics Holdings 2
• In the event of goods agreed to be sold by us not complying with the express terms of the contract of sale… or the goods proving defective we will, at our option, replace the goods, free of charge to the buyer or will refund all payments made to us by the buyer in respect of the defective goods… This shall be the limit of our obligation.
• Any express or implied condition, statement or warranty, statutory or otherwise, not stated in these conditions is hereby excluded.

The first clause was held to prevent the buyer claiming in respect of defective goods, where they had not given notice within 14 days. The 2nd clause prevented the buyer from making any claim, except for a refund of the price of the goods which have been supplied. In that case, the loss suffered by the buyer was £61,000, while the price paid for the goods was £201.

2.3 Can you challenge the supplier’s contract?

Assuming that you have agreed to some terms and conditions that exclude your rights against the supplier, is there anything that you can do?

The first thing you might do is to check whether the supplier has made any specific representations to you about the quality of the goods, for example, in a brochure. If they have, you might have a claim for misleading and deceptive conduct. However, to make a claim based on misleading, deceptive conduct, you have to prove that you relied upon the statements about the quality of the goods.

There is a principle of interpretation under which the courts will not apply the words of an exclusion clause if doing so would defeat the main object of the contract. This principle has mainly been applied in cases where goods have been delivered to the wrong person or have been lost because of a deliberate act by someone, such as theft. Alternatively, they have been applied where the completely wrong thing has been delivered, such as a bicycle rather than a motorbike. This principle is no longer applied in cases where the goods are of a different quality only, as is the case being discussed here.

As noted above in consumer transactions, the Australian Consumer Law requires that the products be of "acceptable quality". That provision applies to all purchases of goods valued at less than $100,000, whether or not the purchaser is a consumer. However, it does not apply when the goods are being purchased to be resupplied. Hence, it would not protect you in this situation.

You will be in a better position if your business employs fewer than 100 people at the time the contract is signed (including casual employees employed on a regular or systematic basis, and part-time employees as an appropriate fraction of a full-time equivalent employee) or has a turnover for the last income year of less than $10,000,000

In that case, the unfair contracts legislation may apply, and you could have a right to challenge the terms excluding liability for the defective product as being unfair.

3. How can you protect yourself?

In summary, when ordering goods or materials to be used in a contract with a builder or other client, you need to check carefully what you are agreeing to. If you sign the wrong type of document, you could find yourself exposed to a liability to a builder or client to replace defective goods which have been installed in a building, but with no prospect of recovering those costs from the supplier.

3.1 Don’t agree to draconian terms

You need to review terms and conditions contained in any supplier credit agreement, quote, on any website, or in any contract, to see what rights you are giving up. You may then need to attempt to negotiate changes.

3.2 Have your own terms and conditions

Alternatively, you can have your own terms and conditions, which are referred to as being on your website or included in your purchase order. When you receive a quote from a supplier, you can respond with your purchase order. The general principle is that if you exchange terms and conditions in this fashion, and the seller does not respond to your purchase order other than to deliver the goods, your terms and conditions will prevail over theirs.

3.3 Notify the builder/client

There is one final option, if the supplier won’t agree to remove the exclusion clauses-notify your client. There is some authority that, particularly if the supplier is the only one in the market, and you notify the client before you enter into the contract with the builder of the exclusion terms, you can shift liability to the client.

Cornwalls can assist you in protecting yourself by reviewing terms and conditions provided by suppliers or drafting terms and conditions to be used by you. MPAQ members get a free debt collection letter (debts over $550) and 20-minute legal consultation as part of your Member Benefits.

Member benefit: Cornwalls

For further information regarding the above, please contact the author or any member of the Building & Construction team.

Disclaimer: This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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Article by Michael Cope, Special Counsel, Cornwalls Brisbane