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

A buyer does not accept materially defective goods merely by agreeing that the seller may investigate and, if possible, repair them. The effect of that arrangement on the right to reject depends on its express and implied terms.

Where information about a defect and its repair is necessary for an informed choice, an obligation to supply that information on request may be implied by business efficacy. A seller’s material breach of that obligation may entitle the buyer to end the repair arrangement and exercise the preserved right to reject, even if the goods were in fact satisfactorily repaired.

The buyers purchased combined agricultural machinery which proved materially defective because two bearings were missing. They permitted the sellers to remove the harrow for investigation and possible repair. After repairing it, the sellers asserted that it met factory-gate standard but repeatedly refused to disclose the defect or what had been done.

The sheriff upheld rejection and ordered repayment of the price. The sheriff principal reversed that decision, and a majority of the Inner House dismissed the buyers’ appeal: [2005] SLT 64; [2005] ScotCS CSIH_3. The central issue was how section 35(6)(a) of the Sale of Goods Act 1979, and the parties’ inspection and repair arrangement, affected the buyers’ existing right to reject.

1. Appeal allowed unanimously. Lord Hope, Lord Rodger, Lord Brown and Lord Mance each concluded that the sellers’ refusal to disclose the nature of the defect materially breached an obligation implied into the inspection and repair arrangement. Lord Scott agreed with their analysis and the proposed orders.

2. Per Lord Hope, section 35(6)(a) of the Sale of Goods Act 1979 preserved the buyer’s position by preventing an agreement to repair from amounting, by itself, to acceptance. The provision did not prescribe what followed after a repair. In the absence of an express agreement, the consequences depended on terms properly implied into the parties’ arrangement.

3. Per Lord Hope, an implied term must be necessary to give the agreement business efficacy, rather than merely reasonable or desirable. The appropriate term depends on the circumstances. Where the defect and cure are obvious, a fully informed buyer who permits the seller to incur repair expense may be obliged to accept the goods after satisfactory repair. This case was different because the defect and its possible consequences were initially unknown.

4. Per Lord Hope, the right to reject was a right of election which the buyers could not fairly be expected to exercise without the information required for an informed choice. The machinery was complex, and information about the defect and repair was necessary to assess possible consequential damage. Every reasonable buyer would seek that protection, and no reasonable seller already in breach could refuse it as the condition of an opportunity to cure.

5. Per Lord Rodger, the inspection and repair arrangement was a separate, valid agreement. While the sellers duly performed it, an implied term suspended the buyers’ exercise of the right to rescind the sale. Business efficacy also required the sellers, upon request, to disclose what inspection revealed and what had been done. Their outright refusal was a material breach, allowing rescission of the repair agreement and removing the restriction on rescission of the sale.

6. Lord Brown and Lord Mance agreed that the repaired goods were tendered under the inspection and repair arrangement, not merely under the original sale. The sellers’ failure to follow the implied disclosure procedure justified rejection even though the harrow had in fact been restored to factory-gate standard.

7. The House granted declarator that the contract had validly been rescinded and decree for repayment of the price.

1. House of Lords: Allowed the buyers’ appeal unanimously, reversed the result below, granted declarator of valid rescission and ordered repayment of the price: [2007] UKHL 9.

2. Inner House of the Court of Session: By majority, dismissed the buyers’ appeal from the sheriff principal; Lord Marnoch dissented: [2005] SLT 64; [2005] ScotCS CSIH_3.

3. Sheriff principal: Allowed the sellers’ appeal, substantially revised the findings in fact, recalled the sheriff’s interlocutor and granted decree of absolvitor.

4. Sheriff court: Upheld the buyers’ rejection of the machinery and granted decree for repayment of the price.