Here is a common scenario we see all the time in the construction industry. You enter into a construction contract which has specifications that require you to install a particular product, for example, a bath, air-conditioning system, a fire collar or whatever.

You go out and buy the specified equipment from the supplier.

You install it.

It turns out to be defective and is rejected by the client or the client’s principal.

What are your rights? Firstly, we will talk briefly about your rights in relation to the builder or client and then we will discuss your rights in relation to the supplier.

1. The builder or client

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 which prevent them from being used for the purposes for which they are commonly used by buyers¹.

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

In addition, most standard construction contracts require you to sign a warranty at the end of the job guaranteeing the quality of the goods you have supplied and incorporated into the works for a specified period.

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.

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

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:

  • Credit agreements. This is a place that people often forget to look for terms and conditions limiting the liability of the supplier.
  • On the back of their quotation.
  • On the website. Quite commonly these days, 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 prior to you entering 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.
  • In specific contract documents signed at the time of 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.”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.”³
  • “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 buyer has made any specific representations to you about the quality of the goods, in a brochure for example. If they have, you might have a claim for misleading and deceptive conduct.

However, in order to make a claim on the basis of misleading and deceptive conduct, you have to prove that you relied upon the statements about the quality of the goods. The difficulty with that claim will be that if the goods were specified in your contract with the builder, you will not be able to say that you relied upon the statements, because you had no choice but to supply the particular product.

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 by reason 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.

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 $40,000, 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:

  • either you or the other party to the contract is a small business, meaning either of you employs fewer than 20 staff (including casual employees); and
  • the “upfront price payable” is no more than $300,000 for a 12 month contract, or $1 million for contracts longer than 12 months.

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.

Finally, you might be able to challenge the terms excluding liability for the defective product as being unconscionable. However, as yet, there is no case establishing clearly that clauses of the type we are discussing here can be considered unconscionable.

3. How can I protect myself?

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 incorporating your own terms and conditions.

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 client of the exclusion terms, you can shift liability to the client.

For more information contact our experienced construction law team.

¹ Whether a product is of merchantable quality is usually determined by asking whether the buyer would have paid less had the true state of the product been known.

² Sterren v Cibernetics Holdings 44 ALJR 157

³ Based on George Mitchell (Chesterhall) v Finney Lock Seeds 1983 2 AC 803