A decision of the Christchurch High Court caught my eye recently because it concerned something I am very fond of. Cheese. Over $90,000 of imported cheese. To my mind, a commercial dispute involving that much cheese warranted a closer look. This decision is about more than just European delicacies. It is a topical example of how the Sales of Goods Act 1908 (soon to be superseded by the Contract and Commercial Law Act 2017) governs disputes between buyers and sellers.
In February 2014 the buyer placed an order with the seller for a large quantity of hard cheeses and coffee. The seller arranged to import these items from Europe. An email from the seller to the buyer recorded the varieties and quantities of cheese ordered, the price per kilogram, and noted “terms as discussed seven days after receipt of container”.
When the container packed with cheese and coffee arrived in June 2014 the buyer had a number of outstanding accounts with the seller. The seller invoiced the buyer for the imported goods and set the goods aside in a cool store pending payment. On 30 June the invoice had not been paid so the seller emailed buyer stating that the goods were “on hold as your account extremely overdue”.
In September, with the account still unpaid, the seller threatened legal action if invoices totalling more than $300,000 were not paid. Having previously accepted the amount of the invoice for the imported goods, the buyer then asserted that they were not obliged to pay for the goods until they were delivered.
In January 2015 the buyer asserted that they had a right to examine the goods for the purpose of ascertaining whether they were in conformity with the contract. After inspecting the cheese in February the buyer wrote to the seller advising that they were “rejecting the goods and rescinding the contract”. The buyer’s issue was that the best before dates on the cheese packaging had either expired, or were close to expiring.
The High Court had to consider two issues. Firstly, had the ownership and risk (of the cheese spoiling) already passed to the buyer even though the cheese remained under the control of the seller? Secondly, if risk had not passed, was the cheese still of merchantable quality?
On the first issue the High Court was not persuaded that the cheese needed to be delivered to the buyer for ownership and risk to pass. The cheese had been ordered specifically for the buyer, it was a perishable product, and no contrary intention as to when ownership would pass had been discussed. From the point that the cheese was set aside for the buyer in the seller’s warehouse ownership and risk had passed to the buyer and the buyer could not reject the cheese for becoming unmerchantable after that.
The seller was still entitled to withhold the cheese pending payment. The Sale of Goods Act provides that, in certain cases, an unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment.
For completeness the High Court Judge still considered whether the cheese was of merchantable quality (as required by the Sale of Goods Act) when it was inspected in February. A food scientist confirmed that all the cheese was within acceptable standards for moisture content, water activity and pH analysis. No foodborne pathogens were found and the cheese tasted as expected.
The buyer argued that the expired or short best before dates meant that consumers would only buy the cheese at a significant discount and accordingly was not of merchantable quality.
However, the requirement in the Sale of Goods Act that goods have to be of “merchantable quality” must be considered in the context of how the goods have been described. In this case there was no requirement in the order about best before date labels. The buyer had ordered a certain quantity of certain types of cheese and the seller had sourced goods matching that description.
The buyer was ordered to pay the seller damages totalling $92,314.95 plus interest and storage costs.
While the seller had a favourable outcome in this case, sellers can give themselves more certainty as to how matters like these will be dealt with by setting robust terms and conditions of trade at the time an order is placed. By addressing these matters upfront sellers can lessen the risk of having to engage in costly litigation to settle disputes.