Up to scratch? Implied terms in contracts for sale of goods under the Vienna Convention

8 February 2012

A recent decision in the New South Wales Supreme Court, Fryer Holdings v Liaoning MEC Group [2012] NSWSC 18, demonstrates the implication of a warranty of fitness for purpose into contracts to which the United Nations Convention on Contracts for the International Sale of Goods (the Convention) applies.

A contract was formed between an Australian company, Fryer Holdings Pty Ltd (Fryer), and Liaoning MEC Group Co Ltd (MEC), a corporation in the People’s Republic of China, for the supply of glass bottles, among other things. Fryer was contracted to bottle and package drinks manufactured by Angostura, and arranged for MEC to source glass bottles made to Angostura’s specifications from within China.

In the space of some two weeks, a large number of customers complained that they had discovered fragments of glass in bottles of Angostura products bottled by Fryer. McDougall J accepted expert evidence which indicated that the defects were as a result of significant variations from bottle to bottle within the bottles supplied by MEC. In particular, the bottles did not meet the minimum required thickness in many cases, which caused them to break when subjected to the bottling process.

Because the contract between Fryer and MEC was for the supply of goods between parties in different states, McDougall J found that it was a relevant contract for the purposes of the Convention, which applies as part of the law of NSW pursuant to the Sale of Goods (Vienna Convention) Act 1986 (NSW). The Convention therefore provided for an implied contractual warranty, which in the circumstances required that the goods must be fit for the purpose of being filled with Angostura beverages, to be sold to the general public for their consumption.

Applying the test of “merchantable quality” to determine whether the bottles were fit for purpose, citing the decision of Dixon J in Australian Knitting Mills v Grant (1933) 50 CLR 387, McDougall J held that a buyer fully acquainted with the defects in the Angostura bottles would not have bought them at all, much less without some reduction to the product’s usual price. Therefore, McDougall J was satisfied that the implied warranty of fitness for purpose has been breached.

The full decision can be viewed in full here.