Merchantable Quality

What is Merchantable Quality in a Sale of Goods?

Nov 22, 2019
Reading Time: 4 minutes
Written by Michael Hoyle

If you’re in the business of buying goods for use in your own, then you’ll probably want to make sure you’re getting quality products. You’ll want them to be of ‘merchantable quality’. After all, who would want to buy something that isn’t fit for its purpose? Chances are, you’ve heard people use the term ‘fit for purpose’ or ‘merchantable quality’ when it comes to the quality of products. While they are similar, they are not the same. This guide should help you understand what the latter means a bit better.

Keep in mind that this article will deal with the Sale of Goods Act (NSW) and not the Competition and Consumer Act. The difference between the two is that the first deals with sales in trade and commerce. It generally does not involve consumer purchases. It basically sets out rules for business to business dealing. The latter protects consumers from businesses. You should speak to a commercial lawyer if you need personalised advice about the quality of goods you’re buying or selling.

Under the Sale of Goods Act, there are a number of conditions that the law implies into your sales contracts. They are implied so long as a few prerequisites apply. Especially when it comes to the quality of goods, implied terms like merchantable quality don’t apply until a few things are satisfied. The reason behind this is that buyers should understand the principle of caveat emptor. This is a fancy Latin legal term that means that buyers are responsible for checking the quality of goods before they buy them. One such implied term is found in section 19(2) and it defines merchantable quality.

Prerequisites to Merchantable Quality

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

1. Sale by Description

The next prerequisite is whether the goods were bought by description. This is also known as a ‘sale by description’. A sale by description means that the purchaser was influenced by the description they were provided and bought them largely because of this influence. As an example, you provide a catalogue to your customers that contain pictures and general descriptions. This would be a sale by description.

2. Seller Deals in Goods of that Description

Following this, the seller of the goods must also deal in goods of that description. For section 19(2) to apply, the seller must also sell the goods you are buying in the usual course of their business. This requirement is pretty broad. A seller is considered to deal in goods of a particular description if he ‘accepts orders to supply goods in the way of business’ (Ashington Piggeries v Christopher Hill Ltd).

3. The Buyer Did Not Examine Goods

The first thing to know about this condition is that the buyer does not have an obligation to examine the goods before purchasing them. In fact, this section applies especially when the buyer does not physically examine the goods. If the buyer does, then this section might not apply. Again, this is because it’s the buyer’s responsibility to check the quality of goods. This is why a ‘sale by description’ is so important in this section. The sale should represent what was described to you.

If the goods are examined, then any possible defects in them shouldn’t be reasonably discoverable. For example, let’s say your business buys large luxury yachts. You examine three yachts before the purchase and can see nothing wrong with them. However, a few weeks after your purchase, the hulls of all yachts start to blister. This is not merchantable quality, especially when the yachts are described as ‘luxury’. Furthermore, even though the goods were examined, there would be no way to know about future defects.

What Quality is Merchantable?

There is actually no definition of merchantable quality under the Sale of Goods Act (NSW). This means that when considering whether or not goods are merchantable, considerations are subjective. Things that are likely to be considered are a combination of description, purpose, condition, and price.

Price might be one of the more obvious elements. If your business buys diamonds to craft into engagement rings, don’t expect them to be top quality diamonds if you pay $100 for one carat. A quick Google search can tell you that one carat costs thousands of dollars. It works the same the other way around, too. If you’re purchasing expensive goods then you should expect better quality. Description works in the same way and should match what is provided. Buying a truck described as ‘durable’ shouldn’t break down in its first week of use.

A good case that provides a description of merchantable quality is Henry Kendall & Sons v William Lillico and Sons Ltd. In this case, it was said that merchantable quality simply means commercially saleable. Therefore, not merchantable means goods that are of no use for any purpose for which they are bought. So, if goods can be used for several purposes, then they are merchantable if they are suitable for any of those.

Takeaway

No matter what, when entering into a business transaction, you should always inspect the goods and use your best judgement. It’s mostly up to you to figure out whether or not something is of merchantable quality. If you feel unsure about product quality and how this affects your business, it might be best to speak to a commercial lawyer. Commercial lawyers can give you personalised advice about the goods you’re buying or selling and can best help your business succeed and avoid legal issues.

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