Legal Briefing

Out of the frying pan: an analysis of implied terms in bespoke design contracts

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Corporate and commercial | 01 November 2012

When existing, off-the-shelf products do not meet requirements, a customer must obtain a tailor-made product or system. The Court of Appeal has recently considered the implied terms applicable to a contract to design and install a bespoke system, restricting the obligation of the contractor to a duty to take reasonable care only. Although the decision may provide some comfort to suppliers of such systems, that may prove illusory: this decision is likely to lead to tighter contractual drafting and even where this is not the case, previous case law, including a House of Lords decision, may give rise to further dispute.

In Trebor Bassett Holdings Ltd and The Cadbury UK Partnership v ADT Fire and Security plc [2012] the court considered whether a contract to design and supply a bespoke fire suppression system (‘the Contract’) imposed only an obligation to exercise reasonable care in doing so (pursuant to s13 of the Supply of Goods and Services Act (SGSA) 1982). Although both claimants appealed, Trebor had no contractual relationship with ADT and the appeal was run wholly by Cadbury. Cadbury argued that wider obligations were imposed by the express terms of the contract and also implied as a result of s4 of the SGSA 1982.

THE LAW

The case was primarily concerned with ss4 and 13 of the SGSA 1982, which state:

‘Section 4 Implied terms about quality or fitness.

1) Except as provided by this section…there is no implied condition or warranty about the quality or fitness for any particular purpose of goods supplied under a contract for the transfer of goods.

2) Where… the transferor transfers… goods in the course of a business, there is an implied condition that the goods supplied… are of satisfactory quality.

[…]

4) Subsection 5 below applies where, under a contract for the transfer of goods, the transferor transfers… goods in the course of a business and the transferee, expressly or by implication, makes known… to the transferor… any particular purpose for which the goods are being acquired.

5) In that case there is… an implied condition that the goods supplied… are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied.’

‘Section 13 Implied term about care 
and skill.

In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.’

FACTS

Trebor owned a factory in Pontefract, a part of which Cadbury used to produce popcorn using the ‘oil pop’ method, which involves heating the corn in pans of oil until it reaches a temperature at which it ‘pops’. Cadbury had used the same method at a plant in Leeds which had a fire suppression system designed to discharge carbon dioxide automatically upon a fire being detected by its sensors. Cadbury wished to replicate that system 
at the Pontefract facility.

ADT’s representative was shown the Leeds facility and designed a system 
‘based on what they had at Leeds’. ADT then agreed with Cadbury to install that system and sent a quotation with attached specification, after which 
Cadbury returned its own purchase order. Both the quotation and the purchase order purported to incorporate separate standard terms, with key differences between the standard terms.

The court at first instance had to therefore resolve a classic ‘battle of the forms’ and, consistent with recent decisions, a traditional ‘offer and acceptance’ analysis was adopted. With no clear evidence to show an agreement otherwise, the last document in time (before work commenced), the purchase order, prevailed, thereby incorporating Cadbury’s standard terms.

The Contract, on Cadbury’s standard terms, included the following clause:

‘3 Qualities and Defects

a)

    All goods supplied and/or services carried out shall be of good quality and subject to the buyer’s [Cadbury’s] approval and in particular must meet the governing specification and CTB standards but without limitation would also be as required by law in respect of title, quantity, quality, purpose or description.’

In 2005 the entire factory was destroyed by a fire which began in the oil pop production area when some kernels overheated. Although a fire developed, because of inadequacies in the system design, no CO2 was discharged. However, two other factors contributed to the spread of the fire which ultimately destroyed the entire factory: Cadbury employees failed to take proper steps to deal with the fire when they discovered it; and the building was unprotected by any sort of sprinkler system.

At first instance, the judge found that, in breach of contractual and tortious duties, ADT had failed to design the CO2 suppression system with reasonable skill and care. However, he concluded that damages should be reduced by 75% to take account of Cadbury’s contributory negligence in failing to protect the factory with a sprinkler system and to instruct its employees how to deal with fires properly.

Cadbury appealed on the basis that the damages should not be so reduced as a result of its contributory negligence, as contributory negligence will only reduce damages for breach of contract if the scope of the contractual duty is the same or narrower than a duty to take reasonable care: Vesta v Butcher [1989].

COURT OF APPEAL 
ARGUMENTS AND DECISION

Cadbury claimed that there should be no reduction of damages for contributory negligence because ADT owed both express and implied contractual duties going beyond the s13 SGSA 1982 duty to take reasonable care. The terms upon 
which Cadbury relied were:

    1)

      clause 3(a) of the Contract, which required goods supplied to be of ‘good quality’; and/or

     2) ss4(2), 4(4) and 4(5) of the 
SGSA 1982.

    The Court of Appeal held that the Contract and its specification did not impose a duty or wider obligations beyond one to take reasonable care, and so the damages should rightly be reduced to take account of Cadbury’s contributory negligence.

    However, the basis upon which the statutory implied terms were held not to apply may be open to some question. Perhaps more importantly, no consideration was given to the possibility of common law implication of terms.

    ANALYSIS OF THE DECISION

    The Court of Appeal held that the system did not properly address the risk of fire because the sensors that triggered its operation were placed in inappropriate locations.

    Cadbury argued that the ‘goods’ supplied was the fire suppression system, which had been found to be defective and so was not of ‘good quality’ within clause 3(a) of the Contract. Tomlinson LJ, giving the unanimous judgment of the Court of Appeal, found that the system as a whole could not properly be described as ‘goods’ for this purpose. He said that it was not:

    ‘… natural or accurate to regard Cadbury 
as having bought from ADT a system which can be equated with goods which are either of good quality or not 
as the case may be’.

    A key element of his reasoning was that the Contract term of ‘good quality’ was difficult to apply meaningfully to a bespoke system, without taking into account the particular solution it intended to address. The words ‘good quality’, he said should be assessed by reference to the essential characteristics of the goods themselves as opposed to the purpose for which they were supplied.

    Alternatively Cadbury argued that, while not imposing an absolute assurance of successfully overcoming the risk of fire, the Contract did require the system to address the risk of fire properly, implicitly recognising that in some circumstances 
the risk may overwhelm the system. The Court of Appeal’s decision was that clause 3(a) of the Contract did not create an absolute obligation to overcome successfully the risk of fire and, if that had been the intention, ‘very clear words indeed would be required’. However it is not clear that this reasoning properly addressed Cadbury’s argument, which was for a more qualified obligation.

    Cadbury’s second position was that obligations to deliver a system of satisfactory quality and/or reasonably 
fit for purpose ought to be imposed by reason of the SGSA 1982.

    This argument was dismissed again on the basis that the system was not ‘goods’ for the purposes of the SGSA 1982 and so the statutory implied terms could not apply. The Court also found that no ‘purpose’ had been sufficiently specified to enable Cadbury to rely upon the implication of a term of reasonable fitness for purpose in accordance with s4(4). This may seem a surprising conclusion given the supply was of a ‘fire suppression system’. However, the finding of no sufficiently identifiable purpose means that the decision on the meaning of ‘goods’, at least for the purposes of the s4(5) term, was strictly obiter and so not binding.

    The judgment did not address the question of ‘satisfactory quality’ within the meaning of s4(2). This might suggest that, with regard to s4(2), the decision about the meaning of ‘goods’ was not obiter because it was the only reason for the decision and so would be binding in subsequent cases. However, the Court’s statements about the inability to apply the quality term to the system as a whole may indicate that in this regard also the decision about the definition of ‘goods’ should be considered obiter.

    The failure to address satisfactory quality may also highlight a weakness in the Court’s analysis because the judgment does not address this question of statutory interpretation separately. It simply applied the meaning of the word ‘goods’ as used in the express term. However, it will be recalled that one of the main reasons for restricting the meaning of ‘goods’ in the express term to the individual components was the difficulty of ascribing an adequate meaning to the contractual requirement that the goods should be of ‘good quality’, without considering the outcome to be addressed by the supply. As the courts have repeatedly made clear in recent years, the same word will not necessarily have the same meaning in two different contexts and it is at least possible that the difficulty that was decisive in relation to the express term simply does not arise in an obligation to provide goods of ‘satisfactory quality’. One of the factors in determining satisfactory quality is fitness for usual purposes, which necessarily involves, at least to some extent, the analysis of purpose, which the Court of Appeal decided could not be required by the phrase ‘good quality’.

    COMMON LAW IMPLIED TERMS

    Cadbury based its submission that terms should be implied into the Contract solely upon the SGSA 1982. However, producers 
of bespoke systems will need to be aware 
that the courts have indicated in the 
past that terms similar in scope to the statutory terms could be implied into bespoke design contracts.

    In the context of construction contracts, Diplock LJ in the Court of Appeal in Hancock & ors v B.W. Brazier (Anerley) Ltd [1966], stated that, in circumstances where there is no definite specification (of the ‘hardcore’ to be used in the construction of houses), there is ‘room for the implied condition that the materials shall be fit, proper and suitable for the purpose [to operate in the area of the hardcore]’. The judgment stated that the relevant clause in the contract referencing the ‘hardcore’ should be read as:

    ‘… containing a contractual warranty 
on the part of the defendants that 
the hardcore used for the purpose of 
putting under the site concrete of the floors should be fit, proper and suitable for that purpose’.

    It is not clear whether the Court of Appeal intended to imply only a fitness for purpose term or also a satisfactory (or ‘proper’) quality term.

    Common law implication of terms into bespoke design contracts was further considered by the House of Lords in the decision in Independent Broadcasting Authority v EMI Electronics Ltd and BICC Construction Ltd [1980]. BICC designed a cylindrical television mast for IBA. Erected in 1966, it collapsed in 1969 following accumulation of ice on the stays of the mast. The claim for damages was made on two bases: negligence in design; and breach of an implied term that the mast should be reasonably fit for its intended purpose.

    The House of Lords upheld an earlier finding of negligence so its discussion of the implied terms was strictly obiter. However, Lord Scarman, with whom the other judges agreed, stated that he saw no reason why, in the absence of a clear, contractual wording to the contrary:

    ‘… one who in the course of his business contracts to design, supply, and erect a television aerial mast is not under an obligation to ensure that it is reasonably fit for the purpose for which he knows it is intended to be used’.

    The Court of Appeal considered a similar point in relation to a bespoke computer system in St Albans City and District 
Council v International Computers Ltd [1997]. Sir Iain Glidewell expressed the 
view, again obiter, that in a contract to supply a bespoke computer system:
‘… in the absence of any express term as to quality or fitness for purpose, or of any term to the contrary, such a contract is subject to an implied term that the program will be reasonably fit for, ie reasonably capable of achieving, the intended purpose’.

    As the Court of Appeal in Trebor found that there had been no sufficient expression of intended purpose to enable the SGSA 1982 term to operate, even if it applied, the existence of a common law implied term would not have altered the result (unless Hancock also imposes a quality term). However, it is not clear why Cadbury did not rely upon the implication of such a term at common law. It is possible that it took the view that these terms were excluded by s4(1) SGSA 1982, which excludes implied terms about the quality or fitness for purpose of goods from being implied other than by the SGSA 1982, and may not have considered Hancock and IBA given that they pre-date the SGSA 1982. However, although s4(1) may appear to exclude all implied terms, it is in fact limited to terms applicable to ‘goods’. As the Court of Appeal decided that a bespoke system is not ‘goods’ for the purposes of the SGSA 1982, the exclusion provision in s4(1), limited to terms applicable to ‘goods’, ought not to extend to a bespoke system as is the subject of the Trebor case.

    COMMENT AND PRACTICAL APPLICATION

    Although at first sight this decision appears to be a restriction on the potential liabilities of a bespoke system supplier, contractors would be well advised not to rely upon this interpretation.

    First, although there will be cases in 
which a quality standard term may impose liability in the absence of negligence, negligence liability will often mirror the quality standard liability.

    Furthermore, purchasers of bespoke systems will no doubt wish to establish performance standards more clearly in the express terms of their contracts in light of this decision. However, even if that is not done, it may be imprudent for contractors to rely upon Trebor as clearly establishing that terms as to quality and purpose will not be implied into a bespoke system contract.

    Trebor was heavily influenced by the conclusion that the purpose for which the system was acquired was not adequately spelt out. This arose in the rather unusual circumstances of the request to install a similar system to that installed elsewhere. A well-advised purchaser should in future spell out what the system is designed to achieve in more detail, such as a statement of user requirements as in St Albans.

    The decision that the Trebor system 
was not ‘goods’ (with the result that 
the statutory implied terms do not 
apply) is somewhat controversial, 
possibly open to challenge as a matter 
of statutory interpretation for the 
reasons explained above, and may 
not be considered authoritative in 
future cases. It will also always involve a fact-specific enquiry as it must be a question of degree. It follows that it 
cannot safely be assumed that the statutory implied terms would not apply 
in any bespoke contract.

    In any event, there appears to be a real 
risk that, if the purpose of the system is stated, a term that the system will be reasonably fit to achieve that purpose will be implied at common law.

    Parties to a bespoke system contract 
would be well advised to seek the 
certainty of a carefully drafted contract setting out the purpose for which the system is required, providing express 
quality standards to be achieved and allocating the risk of non-achievement in accordance with their commercial objectives. To the extent that the design of the system involves significant new technology which may fail, without any negligence, to achieve the objectives, 
the parties should address specifically where the risk of non-achievement will lie. If they fail to do so there would appear to remain a substantial risk that it will fall on the supplier.