Sales Contract (UK)

The Sale of Goods Act 1979 (SGA 1979) is the primary statute governing contracts for the sale of goods in England and Wales. It implies a number of important terms into every contract for the sale of goods, which the parties cannot generally contract out of (particularly in consumer contracts). The key implied terms are as follows. Section 12 implies a term that the seller has the right to sell the goods (i.e. it holds legal title and the buyer will receive unencumbered ownership). This term cannot be excluded in any contract. Section 13 implies a term that where goods are sold by description, the goods must correspond with that description. For example, if a contract describes goods as made of stainless steel and they are in fact made of a cheaper alloy, there will be a breach of section 13. Section 14(2) implies a term that where the seller sells goods in the course of a business, the goods shall be of satisfactory quality. Satisfactory quality is assessed by reference to what a reasonable person would regard as satisfactory having regard to the description, price, and all other relevant circumstances of the goods. Section 14(3) implies a term that where the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are required, the goods shall be fit for that purpose, unless the circumstances show the buyer did not rely on the seller's skill and judgement. Section 15 implies terms where the goods are sold by sample.

The passing of risk and the passing of title (legal ownership) are two distinct concepts under the Sale of Goods Act 1979 and should be addressed separately in a sales contract. Risk relates to who bears the loss if the goods are damaged or destroyed. Under section 20 of the SGA 1979, risk passes with property (i.e. at the same time as title) unless the parties agree otherwise. This default rule means that if the seller retains title to the goods (for example, under a retention of title clause), the seller would also bear the risk of damage in transit, which is commercially undesirable for the seller. The contract should therefore expressly state when risk passes, typically on delivery to the buyer or to a carrier. Title (property) in goods passes when the parties intend it to pass, under section 17 of the SGA 1979. For specific or ascertained goods, the general rule under section 18 is that title passes when the contract is made. For unascertained or future goods, title cannot pass until the goods are ascertained (i.e. specifically identified). A retention of title clause (also known as a Romalpa clause, following the leading case Aluminium Industrie Vaassen BV v Romalpa Aluminium [1976]) delays the passing of title until the seller has received full payment. Such clauses are common in B2B sales contracts and are generally effective under English law, provided the goods are clearly identifiable as the seller's property.

A retention of title (ROT) clause, also known as a Romalpa clause, is a contractual provision in a sales contract under which the seller retains legal title to goods supplied until certain conditions are met, typically until the buyer has paid the purchase price in full. The purpose of a retention of title clause is to protect the seller against the risk of the buyer's insolvency before payment has been made. If the buyer becomes insolvent and the seller's goods can be identified as belonging to the seller (by virtue of the ROT clause), they should not form part of the insolvent buyer's estate available for distribution to creditors. Under English law, simple retention of title clauses (providing that title remains with the seller until the price of those specific goods is paid) are generally enforceable and effective. However, extended ROT clauses (for example, claiming title to all-monies outstanding, or asserting a proprietary interest in the proceeds of resale by the buyer) may create charges that require registration at Companies House under section 859A of the Companies Act 2006. An unregistered charge is void against a liquidator, administrator, or creditor. For this reason, retention of title clauses should be carefully drafted, reviewed by a solicitor with experience in commercial law, and the practicalities of identification and recovery of goods in an insolvency situation should be considered.

In a business-to-business (B2B) sales contract in England and Wales, the seller's obligations with respect to the quality and conformity of goods are governed by both the implied terms of the Sale of Goods Act 1979 and any express warranties included in the contract. Under sections 14(2) and 14(3) of the SGA 1979, goods must be of satisfactory quality and fit for any disclosed purpose. In a B2B contract, these implied terms can be excluded or restricted by an express term of the contract, but only if such exclusion satisfies the reasonableness test under the Unfair Contract Terms Act 1977 (UCTA 1977). A blanket exclusion of all implied terms is unlikely to satisfy the UCTA 1977 reasonableness test. In addition to the statutory implied terms, the seller may choose to provide express warranties on the goods, for example, a warranty that the goods will be free from defects in materials and workmanship for a specified period after delivery. Express warranties are subject to the terms of the contract and typically require the buyer to give notice of any warranty claim within the warranty period. The contract should clearly state the duration of the warranty period, what defects are covered, the seller's obligation on a warranty claim (repair, replacement, or refund), and any exclusions (for example, defects caused by misuse or modification of the goods by the buyer). Both parties should be aware that, regardless of any express warranty, the implied terms under the SGA 1979 apply to the extent not validly excluded.

Late payment is a significant commercial risk for sellers under UK sales contracts. The primary statutory remedy for late payment in B2B contracts is provided by the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payment Act). Under the Late Payment Act, where a business sells goods or services to another business and the buyer fails to pay the agreed price by the contractual due date (or, if no payment date is agreed, within 30 days of delivery of the goods or the invoice, whichever is later), the seller is entitled to charge statutory interest on the overdue amount at a rate of 8% per annum above the Bank of England base rate. This statutory interest rate is significantly higher than the general interest rate available in litigation proceedings and is intended to deter late payment. In addition to interest, the Late Payment Act provides the seller with the right to recover a fixed sum of compensation for each overdue debt: £40 for debts below £1,000, £70 for debts between £1,000 and £10,000, and £100 for debts of £10,000 or more. The seller is also entitled to recover reasonable costs of recovering the debt beyond the fixed sums. The parties to a B2B contract may agree a contractual interest rate that is different from the statutory rate, but any such contractual term that purports to exclude or limit the buyer's liability to pay statutory interest must be substantial contractual remedy for late payment and must be fair and reasonable.

In a business-to-business sales contract governed by English law, a seller may include a limitation or exclusion of liability clause, subject to the constraints of the Unfair Contract Terms Act 1977 (UCTA 1977). Under UCTA 1977, certain liabilities cannot be excluded or restricted at all: liability for death or personal injury caused by negligence is absolutely non-excludable (section 2(1) UCTA 1977); liability for fraud or fraudulent misrepresentation cannot be excluded; and (in consumer contracts) the implied terms under sections 13 to 15 of the Sale of Goods Act 1979 relating to description, quality, fitness for purpose, and correspondence with sample cannot be excluded. In B2B contracts, sections 13 to 15 implied terms can be excluded or restricted only where it is reasonable to do so (section 6(1A) UCTA 1977). Reasonableness is assessed at the time the contract is made and takes into account the bargaining strength of the parties, whether the buyer received an inducement to agree to the exclusion clause, whether the buyer knew or ought reasonably to have known of the exclusion, and other factors listed in Schedule 2 to UCTA 1977. A cap on financial liability (for example, limiting the seller's liability to the total purchase price paid under the contract) is generally more likely to be upheld than a blanket exclusion of all liability, particularly where the parties are of broadly equal bargaining strength and the cap is proportionate to the transaction value and available insurance cover.