I. INTRODUCTION
6.1 Section 37(1) of the Sale of Goods Act 1923 (NSW) provides that where goods which the buyer has not previously examined are delivered, the buyer is “not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them” for the purpose of discovering whether the goods conform to their contractual requirements. Section 37(2) imposes an obligation on a seller tendering goods to afford the buyer a reasonable opportunity of examining the goods, for the purpose of ascertaining whether they conform, unless the parties have reached a contrary agreement.
6.2 Section 38 defines the acceptance concept. It deems acceptance to have taken place in three situations: where the buyer intimates acceptance to the seller of the goods; where the buyer does any act in relation to the goods “which is inconsistent with the ownership of the seller”; or where the buyer retains the goods for longer than a reasonable period of time without intimating rejection.
6.3 Superficially, s38 looks to be a codification of three recognised cases of election between the rights of rejection and acceptance, in favour of acceptance.1 Under the general law of contract “acceptance” corresponds with “affirmation”, that is an “election to continue the performance of a contract”. Accordingly, intimation of acceptance is equivalent to an express election to affirm the contract or to continue with its performance; doing an act inconsistent with the ownership of the seller corresponds with an act justifiable only if the buyer has elected in favour of continuing with the contract; and retention of goods for an unreasonable time is simply the failure to elect to terminate the performance of the contract within the period which would be allowed under the general law of contract.
6.4 This interpretation is reinforced by the first limb of s16(3) of the Act which, as was explained earlier, 2 states that acceptance limits the buyer’s claim to one for damages: the right to reject the goods and terminate the performance of the contract is therefore lost. In Wallis v Pratt3 Fletcher Moulton LJ said that after acceptance the buyer is in “precisely the same position..... as if he had voluntarily elected to take the remedy of damages” rather than termination.
6.5 The problem with the analysis of the acceptance concept in terms of election is that nothing is said in s38 as to the knowledge of the buyer. Under the general law of contract a promisee entitled to terminate the performance of a contract for breach (or repudiation) by the promisor, may elect to continue with the contract, but such an election requires “knowledge” on the part of the promisee.4 The extent of the knowledge required is uncertain and still to be settled by the High Court . Knowledge of the right to terminate is sufficient, and on one view of the law5 is necessary, if an election is to be inferred from the promisee’s conduct. But it is frequently said that knowledge of the circumstances giving rise to the right to terminate is sufficient.6 However, there is nothing in s38 which expressly incorporates either type of knowledge as a requirement for “acceptance”.
II. THE ISSUE
6.6 The question which arises is whether s38 is intended to be subject to s37. Clearly, if a buyer has examined the goods the buyer will have knowledge of the circumstances, and may even know of a right to reject the goods for breach by the seller. Section 38 contemplates that the seller may have breached the contract in such a way as to justify rejection of the goods. But what is the position if the buyer has not been given the opportunity to examine the goods, or the failure of the goods to conform with the requirements of the contract was not ascertainable by inspection?
6.7 It seems clear that acceptance may arise even though, for example, the defect in the goods was latent. There is nothing in s38 to preclude the acceptance of such goods.7 Moreover, there is nothing to preclude “waiver” by the buyer of the right of examination. And so, for example, a communication of acceptance may be effective as such even though the buyer has not examined the goods. These facts indicate that s38 cannot be looked at solely by reference to general principles of election.
6.8 The tension between s38 and s37 is most acute where the buyer does an act in relation to the goods inconsistent with the ownership of the seller prior to examination of the goods. If s38 is independent of s37 the buyer will be deemed to have accepted the goods in such circumstances. However, if s38 is subject to s37 no acceptance can take place by such an act, and the buyer’s subsequent examination of the goods would lead to an effective rejection if the buyer found that the goods were not in conformity with the contract, assuming, of course, that the disconformity justified rejection.
III. THE CASE LAW
6.9 The cases discussing the relation between s37 and s38 are not satisfactory. The law is extremely complicated, and some fine distinctions have been drawn due to the failure of the Act to express the relationship between the two sections.
6 10. In Hardy & Co v Hillerns8 an agreement for the sale of wheat provided for payment in London (against shipping documents) and for delivery to Hull. After discharge of the wheat at Hull had commenced, the buyers resold a quantity to sub-purchasers at Barnsley, Nottingham and Southwell. The wheat destined for Barnsley and Nottingham was then taken to a railway company’s wharf, bagged and despatched by rail, and that destined for Southwell forwarded by barge. On the same day, and the day following, samples were taken by the original buyers which showed that the wheat delivered was not of the description provided for by the contract. Notice of rejection was then given. Greer J held that rejection came too late as the wheat had been accepted by the buyers who had done acts inconsistent with the ownership of the sellers. That decision was affirmed by the Court of Appeal, even though there was no doubt that a reasonable period for examining the goods had not expired at the time of the buyers’ purported rejection. Bankes LJ said9 “[s38] is, in my opinion, independent of [s37], and it is quite immaterial for the purposes of that section that the reasonable time for examining the goods had not expired” when the inconsistent acts were done. His Lordship explained that it is not enough for a buyer to be in a position to give the seller possession at some time, for rejection to be effective the buyer must be in a position to give possession at the time of rejection. In the instant case the sale and despatch to the sub-purchasers precluded this.
6.11 Hardy & Co v Hillerns does not lay down the proposition that every dealing with the goods is an act by the buyer inconsistent with the ownership of the seller. For example, a buyer under a cif contract may sell (or pledge) the documents representing the goods without doing an act inconsistent with the ownership of the seller, provided that the buyer purports to deal only with the conditional property in the goods obtained on receipt of the documents.10 And if it is contemplated by the contract that the examination by the buyer will take place at the premises of the sub-buyer, taking delivery of the goods and despatching them to the sub-buyer will not, it seems, be regarded as acts inconsistent with the seller’s ownership.11
6.12 Professor Sutton says12 that Hardy & Co v Hillerns has been regarded with “universal disfavour”. In 1975 the Commission tentatively suggested13 that it was “highly desirable” that it be made clear that acceptance cannot take place until the buyer has had a reasonable opportunity of examining the goods.
IV. REFORM IN OTHER JURISDICTIONS
6.13 In a number of jurisdictions the provision equivalent to s38 of the Sale of Goods Act 1923 (NSW) has been amended so as to make s37 the dominant provision, but usually only in respect of acts inconsistent with the ownership of the seller.
6.14 Section 35 of the Sale of Goods Act 1979 (UK) states, so far as is material:
The buyer is deemed to have accepted the goods..... (except where section 34 above otherwise provides) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.......
The parenthetic exception was introduced by s4(2) of the Misrepresentation Act 1967 (UK) into s36 of the Sale of Goods Act 1893 (UK) and, as can be seen, is present in the consolidating Act.
6.15 The first Australian jurisdiction to adopt the United Kingdom amendment was South Australia, where s12 of the Misrepresentation Act 1971 (SA) amended the Sale of Goods Act 1895 (SA). Victoria adopted the amendment when s3 of the Goods (Sales and Leases) Act 1981 (Vic) amended s42 of the Goods Act 1958 (Vic). The reform was also adopted in New Zealand when s14 of the Contractual Remedies Act 1979 (NZ) amended s37 of the Sale of Goods Act 1908 (NZ).
6.16 In the Australian Capital Territory, s4 of the Sale of Goods Ordinance 1975 (ACT) amended s39 of the Sale of Goods Ordinance 1954 (ACT) so as to make the description of acceptance subject to s38 in each of the three cases mentioned. It therefore went further than the United Kingdom amendment.
V. RECOMMENDATION
6.17 Consideration of the amendments made in other jurisdictions raises one further question. Should s38 be amended by making the entire section subject to s37, as in the Australian capital Territory,14 or should the more limited amendment adopted in the United Kingdom, South Australia, Victoria and New Zealand be followed?
6.18 The main justification for making s38 as a whole subject to s37 is that, in essence, s38 is a statutory embodiment of a principle of election.15 Unless s38 is subject to prior examination of the goods by the buyer the section cannot truly reflect election principles because the buyer may not know of the defect in the goods which justifies rejection.
6.19 For two reasons, however, we conclude that the more limited amendment should be made. First, there is no evidence of s38 operating unsatisfactorily except in relation to acts of the buyer inconsistent with the ownership of the seller. Secondly, there is no reason, in principle, why a buyer should not be permitted to accept goods in advance of examination if the buyer chooses to do so. If s38 is made subject to s37 in all cases a court would need to ask whether the buyer has waived the right of examination. It seems preferable that that issue should directly arise only in relation to the buyer’s dealings with the goods after delivery by the seller. We therefore recommend that the description of acceptance in s38 be subject to s37 in the case of acceptance by an act of the buyer inconsistent with the ownership of the seller.
FOOTNOTES
1. See Carter, Breach of Contract (1984) para 1092.
2. See para 5.1
3. [1910] 2 KB 1003 at 1013 (adopted [1911] AC 394).
4. See the statement of principle by Lord Atkin in United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30 and generally Carter, Breach of Contract (1984) paras 1065-1067.
5. See Coastal Estates Pty Ltd v Melevende [1965] VR 433 followed by Lee J in Parker v Registrar-General [1976] 1 NSWLR 342 (misrepresentation); Peyman v Lanjani [1985] Ch 457.
6. See cases cited in Carter, Breach of Contract (1984) para 1069. It may be necessary to draw a distinction between cases where the right is conferred by law and cases where the right is conferred by the contract; see Khoury v GIO of NSW (1984) 58 ALJR 502.
7. But acceptance cannot take place if the seller was not the owner of the goods and the implied term stated in s 17(l) was present in the contract: Rowland v Divall [1923] 2 KB 500.
8. [1923] 2 KB 490.
9. [1923] 2 KB 490 at 495. The New South Wales section numbers have been inserted for ss34 and 35 of the Sale of Goods Act 1893 (UK). For the present position in the UK see para 6.14.
10. See Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459; JS Robertson (Aust) Pty Ltd v Martin (1956) 94 CLR 30 at 44, 51-52, 59-60.
11. Compare E & S Ruben Ltd v Faire Bros & Co Ltd [1949] 1 KB 254 with Hammer v Coca Cola [1962] NZLR 723.
12. Sales and Consumer Law in Australia and New Zealand (3rd ed 1983) p380.
13. New South Wales Law Reform Commission, Working Paper on the Sale of Goods (WP 13 1975) para 3.41.
14. See para 6.16.
15. See para 6.3.
