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What Does ‘Fit for Purpose’ Mean in Commercial Transactions?

What Does ‘Fit for Purpose’ Mean in Commercial Transactions?

Fit for purpose is a term often used in consumer purchases, but it has a different application in commercial transactions. Click here to find out more.

23rd November 2019

Chances are, you’ve probably heard the term ‘fit for purpose’ before. It might have been used in the context of consumer guarantees. While it’s very relevant for consumers, it has a different use when it comes to commercial (business to business) transactions. In this article, we’ll have a look at what this term means when it comes to those commercial transactions.

This article will deal with the Sale of Goods Act (NSW). This legislation is concerned with contracts of sale that are for trade and commerce and are not for consumer use. When consumers are involved, the Competition and Consumer Act applies instead. Consumer transactions will involve anything under $40,000. Or, if the amount is over, it must be for personal or household use. You should speak to a commercial lawyer if you need personalised advice about the quality of the goods you’re buying or selling.

Under the Sale of Goods Act, there are a number of conditions that are implied into contracts of sale. Especially when it comes to the fitness of purpose, implied terms don’t apply unless a few things are satisfied. The reason behind this is that buyers should understand the principle of caveat emptor. This is a fancy legal term that tells buyers they are responsible for checking the quality of goods. One such implied term is found in section 19(1) and it defines fitness for purpose. This subsection might seem similar to ‘merchantable quality‘, but is different in its prerequisites and has a narrower scope.

Prerequisites to ‘Fit for Purpose’

To understand whether goods purchased actually have to be fit for purpose, it’s first important to know when this section applies. There are three main conditions that must be met before goods have to be fit for purpose.

1. The Buyer Must Make the Purpose of the Goods Known

When entering into a contract for the sale of goods, the buyer of goods must have made known to the seller, whether expressly or by implication, that the goods would be used for a particular purpose. This sounds like a mouthful there’s indeed a lot to unpack. However, it just means that you need to tell the supplier what the goods you’re purchasing are being used for.

An example might explain this concept more clearly. Let’s say your business needs a certain chemical that’s used to extract gold from ore. This chemical has to be very specific because if it isn’t, you risk damaging your tools and destroying the gold in the process. If you make this use clear to the seller, then they should provide you with goods that are fit for the purpose of extracting gold. Providing you with a different chemical that destroys the gold and your tools would not be fit for purpose. In this case, it would be unfair to expect to receive this exact chemical if you did not specify to the seller that you would use the chemical for extracting gold.

2. The Buyer Relied on the Seller’s Skill and Judgement

The second prerequisite to goods needing to be fit for purpose is based on reliance. In this condition, the particular purpose must have been explained to the seller in such a way that it was clear that the buyer was relying on the seller’s skill and judgement. If the buyer relies on the seller’s judgement and goods aren’t fit for purpose, then the seller might be liable. This is regardless of whether they knew the goods were defective. This might seem a little complex, too. However, it’s just a matter of communication and what is reasonable in the circumstances.

To explain, let’s use the earlier example of gold extraction. The buyer of chemicals does not need to explicitly state that they are relying on the seller’s skills, but this might help effectively communicate that the buyer is doing so. It’s enough that a reasonable person would have realised that they were inviting the buyer to rely on skill and judgement. This is because as a manufacturer, it would be rare that your business customers know how to do what you specialise in. So, purchasers will assume they’re getting what they need. Merely the fact that a gold extractor does not know about how to create the proper chemicals may be enough to prove that they rely on the seller’s expertise.

3. The Seller is in the Business of Providing Specific Goods

For this condition, the seller must be in the business of providing specific goods. A seller deals in goods of that description if their business is willing to take orders for them. It doesn’t matter that the seller is dealing in these particular goods for the first time.

Back to the exampled of the gold extractor. If the seller of chemicals sells lots of different chemicals, they are a seller in the business of providing these goods. Therefore, any chemicals they sell should be fit for purpose. If the seller provides a variety of tools to gold extractors, they are still a seller in the business or providing these goods. The chemical should be fit for purpose here, too. However, let’s say the seller deals in candy bars. If you’re a gold extractor buying chemicals from a candy bar company, then you shouldn’t expect that they’d have any idea about gold extraction or chemicals.

Conclusion

In all business transactions involving goods, the principle of caveat emptor is important to remember. Ultimately, you should do everything possible to ensure you’re getting the right goods that you need. At the end of the day, ensuring goods are fit for purpose is mostly up to you. Most of the prerequisites mentioned are fairly self-explanatory. You shouldn’t be buying candy bars from a chemical company or the other way around. If you need advice on how the fitness for purpose of goods can affect your business, speak to a commercial lawyer. Commercial lawyers will be best be able to advise you on commercial transactions. They’ll be able to show you how to best succeed and avoid legal issues.

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Author
MHoyle
Michael Hoyle

Michael is a legal intern at Lawpath working with the content team. With an interest in contracts, intellectual property, and constitutional law, Michael is currently completing a Bachelor of Laws with a Bachelor of Commerce at Macquarie University.