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GUARANTEES IN A COMMERCIAL AND CONSUMER CONTEXT

Iqbal Mohammed

1. This seminar will cover guarantees in a commercial context, in a consumer context

and also extended warranties.

BACKGROUND: QUALITY

2. Quality, insofar as consumers are concerned, is governed primarily by the Sale of

Goods Act 1979 (SGA) and/or the Supply of Goods and Services Act 1982

(SGSA).

3. In addition, the consumer may be able to rely upon additional rights conferred by a

contract, product guarantee or public statement made by the manufacturer or seller.

4. Under s.14(2A) SGA, satisfactory quality is one which is one which a reasonable

person would so regard, taking into account the price and relevant circumstances.

Aspects of quality include (amongst others) fitness for purpose, safety and durability:

s.14(2B) SGA. For consumer, the relevant circumstances include labelling etc.

5. Sections 4 and 9 of SGSA contain similar provisions for the transfer or hire of goods.

Sections 13 and 14 SGSA requires the supply of services to be carried out with

reasonable care and skill and in a reasonable time.

6. Also bear in mind the Consumer Protection Act 1987.

GUARANTEES

7. Guarantees must generally be, or evidenced, in writing and signed by the guarantor:

s. 4, Statute of Frauds 1677.

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8. An agreement to provide a guarantee may also need to be in writing: Compagnie v

Myson Group Ltd. [1984] 134 New L.J. 788. However, see for example: Northwood

Development Co. Ltd. V Aegon Insurance Co. Ltd. [1994] 10 Const. L.J. 157, 163.

9. A guarantee is importantly distinct from an indemnity; the former provides a

secondary liability and the latter provides a primary liability. Whether or not the word

guarantee is used is not determinative: Clement v Clement [1996] 71 P. & C. R.

D19 (CA).

10. Reference to a guarantee in a series of emails, albeit with no actual terms, may

suffice as a guarantee: Golden Ocean Group Ltd. v Salocar Mining Indistries PVT

Ltd. [2012] EWCA Civ 265.

11. Contracts for guarantees are formed like any other contract with an offer, acceptance

and consideration. Consumer guarantees do not require consideration and nor do

those contained within a deed. Consideration can include forbearance and the

guarantee of past or future transactions: Johnston v Nicholls [1845] 1 C.B. 251.

12. A guarantee remains revocable until the act or forbearance for which it is given is

performed: Chitty, 30th Ed., at 44-016. In the case of continuing guarantees,

whether they can be revoked depends on whether the consideration is divisible or

entire.

13. Contracts for guarantees may be vitiated in accordance with ordinary principles on

the grounds of mistake, non est factum, fraud, misrepresentation of undue influence

by the creditor or a third party.

14. Undue influence by a third partyusually the principal debtorover the surety are

not unusual in the Barclays Bank v OBrien [1994] 1 A. C. 180 or RBS v Etridge

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(No. 2) [2002] 2 A. C. 773 types of cases. Where the surety has been induced into

providing a guarantee as a result of non-disclosure, this may also vitiate the contract.

CONSUMER GUARANTEES

15. The Sale and Supply of Goods to Consumers Regulations 2002 (the

Regulations) relate to consumer guarantees. Regulation 2 defines consumer

guarantee as:

any undertaking to a consumer by a person acting in the course of his business,

given without extra charge, to reimburse the price paid or to replace, repair or handle

consumer goods in any way if they do not meet the specifications set out in the

guarantee statement or in the relevant advertising.

16. Note that s. 5(2)(b) of the Unfair Contract Terms Act 1977 (UCTA) states that:

anything in writing is a guarantee if it contains or purports to contain some promise

or assurance (however worded or presented) that defects will be made good by

complete or partial replacement, or by repair, monetary compensation or otherwise.

17. The Regulations do not require any guarantee to be made but where one is, it must

be:

made available in writing;

in plain intelligible English; and

State that the consumers statutory rights are not affected.

18. It also takes effect from the day of delivery as a contractual obligation owed by the

guarantor under the conditions of the guarantee and associated advertising: Reg

15(1).

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19. The Regulations give domestic effect to the European Union Directive 99/44/EC

amend the SGA and SGSA as follows.

Sale of Goods Act 1979, Part VA

20. Under s. 48A, where the buyer, who deals as a consumer, buys goods and they do

not conform to the contract of sale at time of delivery, the buyer has the right to:

Require a replacement or repair;

Require the seller to reduce the purchase price by an appropriate amount; or

Rescind the contract.

21. The above rights arise where the goods do not conform to the contract of sale at any

time within 6 months from the date of delivery: s. 48A(3). However, this does not

apply if it is incompatible with the nature of the goods or the lack of conformity.

22. Repair or replacement must take place within a reasonable time without causing

significant inconvenience to the buyer: s.48B(2). The seller bears any necessary

costs.

23. A seller may refuse however if either repair or replacement if it is impossible, or if

disproportionate to the other, or to if disproportionate to a reduction in price or

rescission: s. 48B(3). Disproportionate means:

It costs the seller an unreasonable amount of money when considering the value

or lack of conformity; and

Another remedy could avoid significant inconvenience to the buyer.

24. Reasonable time or significant inconvenience is determined in reference to the

nature of the goods and the purpose of their acquisition

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25. If the seller takes an unreasonable amount of time or causes significant

inconvenience, the buyer may then rescind the contract or ask for a reduction.

The seller is entitled to reduce the reimbursement to take into account the use of

the goods since delivery: s. 48C(3), SGA.

26. The court has broad powers to order specific performance of one of the remedies

above or make any other order as to damages it thinks just: s. 48E(6).

27. These provisions are identical in the SGSA, ss. 11A-11K.

Exclusion or limitation clauses

28. Terms in a consumer guarantee purporting to exclude or restrict liability for loss or

damage resulting from the negligence of a manufacturer or distributor of goods are

ineffective: s. 5(1) UCTA. Allowing a consumer to transfer his rights in a way that

dilutes the guarantee is likely to be rendered unfair under Unfair Terms in

Consumer Contracts Regulations 1999, sch. 2(1)(p).

EXTENDED WARRANTIES

29. These are defined under art. 2 of the Supply of Extended Warranties on Domestic

Electrical Goods Order 2005 (the Order) as means a contract for domestic

electrical good cover entered into by a consumer for monetary consideration. This

legislation applies to domestic goods.

30. Domestic good cover is defined as cover which at least provides cover against the

cost of repairing or replacing a domestic electrical good in the event of a breakdown

and which may also provide additional cover against eventualities such as accidental

damage, loss or theft and assistance in setting up and operating a domestic electrical

good.

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31. The Order prescribes various requirements which must be met on the display,

quotation and supply of extended warranties.

32. Prices for these warranties should be placed near the goods, be clear and legible

and make clear that the warranties are optional: art. 3(1)(a).

33. Any quotation must provide the information listed under art. 3(4).

34. Articles 4, 5 and 6 deal with those warranties which are advertised in newspaper

adverts, catalogues or websites respectively.

35. It is unlawful to supply an extended warranty for more than one year without allowing

the consumer to cancel the warranty within 45 days and obtain a full refund: art 8(1).

After 45 days, the warranty may still be cancelled and a pro rata refund must be

made. A refund does not include vouchers or credit notes: art. 8(6).

IQBAL MOHAMMED

15 June 2012