This paper discusses the distinction between (a) a contract for the supply of a service, (b) a contract for the supply of goods and services and (c) a contract of exchange.

Introduction

In dealing with this question and distinguishing a contract of sale of goods, with the different abovementioned contracts (a), (b) and (c) there are essentially two points worth examining. The first point is the question of why this distinction matters at all? In other words what are the differences in the rules that apply to a contract of sale on the one hand and contracts (a), (b) and (c) on the other. If there is no difference in the rules you may as well not draw the distinction at all.[1] Although this paper will argue there does exist a varying difference in the rules, which apply to each of these contracts. The second question is then what test do you apply to decide whether a transaction is a contract for sale or one of the different abovementioned contracts (a), (b) and (c). Examination of these legal tests and their application will help to answer the question of whether the distinctions between a contract of sale of goods and contracts (a), (b) and (c) are necessary or trivial and whether they should be made at all? 

Contract of Sale and the Contract of Exchange

The first question is why does the distinction matter, and the answer is that is does not really matter. The only reason this distinction is drawn appears to be to determine when a sale, (an agreement to transfer property in goods, i.e. ownership) takes place and when the property in goods passes from owner to buyer.[2] In a contract for the sale of goods the basic rule is that the property in the goods is transferred from seller to buyer “at such time as the parties to the contract intend it to be transferred.”[3] It may well be the parties actually agree that the property will pass to the buyer at the moment the contract of sale is made and before the goods are actually delivered and paid for. In the contract of exchange the rule seems to be that the property in goods is transferred from seller (S) to buyer (B) only when the goods are actually delivered. This proposition is based on the authority of (an Irish case) Flynn v. Mackin and Mahon.[4] In this case Walsh J assumed the property in goods passes under a contract of exchange from party S to B only if the goods are physically delivered, a proposition for which he failed to cite any authority.[5] If this is the case, then the rules between a contract of sale and exchange are different because under s.17 of the Sale of Goods Act 1979 the property in goods (in a sale) can pass before delivery of the goods. This appears to be the only reason for maintaining the distinction between a contract of sale and a contract of exchange.

The second question is what is the legal test that has to be applied in order to decide whether a transaction is a contract of sale or a contract of exchange? The test is a contract will be for the sale of goods if the buyer has agreed on a monetary price,[6] (but) regardless as to how the price is to be paid.[7] This will be explained using a series of different transactions. First, if S transfers a car to B for the sum of £5000, this is clearly a sale, because B has agreed to provide a money consideration for the car. Second, if S agrees to transfer a car to B in return for B’s car, this does not involve a money consideration and therefore this is a complete exchange both ways. The third example is where S agrees to transfer a car to B for £5000, £3000 which will be in cash and the remainder through B’s used car worth £2000. In commercial transactions this (colloquially) will be termed a part exchange, although in law there is no such thing as a part exchange. There either has to be a complete sale or a complete exchange. What the court have decided is that this is actually a sale of S’s car to B. The cases on this are Aldridge v. Johnson [8] and Dawson (Clapham) Ltd. v. Dutfield [9] both of which are discussed by Canton in ‘Sale of Goods and Barter’.[10] What both these cases say is, if the parties agree on a monetary price, this entire price does not have to be satisfied be monetary payment alone. It will not matter if B pays S for the car with money (£3000) and chattels (B’s used car).[11] It can be argued at this stage we may as well abolish the distinction between sale and exchange, because there is such a fine line between the two. A further example can be used based on the case of Flynn v. Mackin. If S agrees to transfer his car to B for £3000 and B’s old car, Flynn v. Mackin tells us that this is an exchange and not a sale. Flynn v. Mackin says in order for this type of transaction to be a sale the parties would have had to financially valued B’s car, a financial value would have to be put on the chattels that are being provided in consideration. Thus Aldridge v. Johnson and Dawson (Clapham) Ltd. v. Dutfield can be distinguished with Flynn v. Mackin on the premise that the parties had agreed on a monetary price whereas in Flynn v. Mackin they had not.[12] There is a fair argument in favour of abolishing the distinction between sale and exchange with the result there would no longer be a need to make this trivial distinction.

Contract of sale of Goods,

Contract of Supply of Goods and Services and

Contract of Pure Service

The essence of the sale of goods contract is that the subject matter is goods. [13] The essence of the contract of goods and services is that there are two components. Firstly there is an agreement for the transfer of property in goods and second there is an agreement to supply services, i.e. skill and work. These are not distinct they are two mechanisms within one composite contract.[14] There is also the contract for the supply of a pure service; this is where the contract is really to supply skill and nothing else. In this type of contract there is no goods provided. A classic example would be a lawyer providing a client advice on legal issues. On paper the distinction appears to be fairly obvious, but there does become a really fine line between the distinctions.

Again two questions need to be asked. First why do these distinctions matter at all? In other words what are the differences in the rules that actually apply to these different contracts? Historically the distinctions used to be important because s.4 Sale of Goods Act 1893 (the original statute) provided that a contract for the sale of goods of a value of £10 or more had to be evidenced in writing otherwise the contract would be unenforceable.[15] This rule did not apply to contracts for goods and services or contracts for providing a pure service. In some of the old cases, with contracts not evidenced in writing the question would arise as to whether it was goods and services contract. This point is no longer significant because s.4 1893 Act was repealed by the Law Reform (Enforcement of Contracts) Act 1954. 

The crucial reason why the distinctions are still important relates to implied terms.[16] Implied terms[17] are inserted into contracts of the sale of goods by ss.12-15 of the Sale of Goods Act 1979.[18] The important point about these implied terms is that the liability of the seller is said to be a strict liability, it is not a liability, which is based on fault. This means if the goods supplied under the contract are not of satisfactory quality then the seller is liable.[19] There will be no defence available to the seller to say that he was not negligent and at fault. Authority for this is found in Frost v. Aylesbury Dairy Co. Ltd.[20] where a woman died of typhoid contracted from infected milk supplied by the dairy.[21] The defence of the dairy was that they had taken all necessary precautions to produce a pure product. The court said there is no defence of all reasonable care used, this is liability not based on negligence.

The implied terms in contracts for the supply of goods and services are found in the Supply of Goods and Services Act 1982 (they are not governed by the Sale of Goods Act 1979). The supplier of goods and services has certain obligation in respect of the quality of the goods and different obligations for the supply of services. Part 1 of the 1982 Act applies to the transfer of goods element, i.e. in a construction contract Part 1 will govern the materials supplied. Part 2 of the 1982 Act applies to the services provided, i.e. the level of skill used by the contractor in doing the work.

Part 1 of the Supply of Goods and Services Act 1982 applies to contract for the transfer of goods. It is important to distinguish carefully between the contract for the “sale of goods” and a “contract for the transfer of goods”. These are similar but distinct. Section 1(1) of the Supply of Goods and Services Act 1982 defines the “contract for the transfer of goods” as “a contract under which one person transfers or agrees to transfer to another the property in goods [ownership], other than an excepted contract”.[22] The whole purpose of part 1 of the 1982 Act is actually to make uniform the terms, which are implied into sale and similar contracts. The effect of ss.2-5 of the Supply of Goods and Services Act 1982 is it implies terms into supply of goods and services contracts, which are identical to ss.12-15 of the Sale of Goods Act 1979. In other words the terms implied into the transfer of goods by Part 1 of the 1986 Act mirrors (renders uniform) the implied terms inserted by the 1979 Act in the sale of goods and other similar contracts. It can be argued this should be taken a stage further because there are ways in which the law can actually unify the rules applicable to sale and transfer of goods. Really there is no real distinction between Supply of Goods and Services Act 1982 and Sale of Goods Act 1979 from the point of view of implied terms.

Another point, which has to be made, is that liability for transfer of goods under Part 1 is strict liability, just as same as the liability of the seller of goods has under a contract for the sale of goods. It is not fault-based liability. If a building contractor under a contract to supply goods and services supplies defective materials which are not of satisfactory quality, he will not be able to avail under a defence that he had no knowledge of the defect in the goods, because he is strictly liability.

Part 2 of the Supply of Goods and Services Act 1982 governs the contract for the supply of a service. It applies in two situations, first where there is a contract for a pure service. Where the contract is for the supply of work or skill only and no goods are changing hands, i.e. a contract with a lawyer to provide advice. Second it also applies to the services component of a contract for the transfer of goods and services, because the contract to provide the workmanship is a contract of service.

The most significant term, which is implied into a contract for the supply of service, is s.13 of the Supply of Goods and Services Act 1982.[23] This provision states: “…in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.”  The essence of this provision is that the liability of the supplier of the service is fault based and not strict liability as we have seen up till now in regards to the liability of the seller or transfer of goods. The liability of the supplier of service is based on negligence and judged on whether s/he has failed to use “reasonable care and skill”.

In the case of a person supplying a service how do we decide whether this person has exercised reasonable care and skill or not? The Bolam test as laid down in Bolam v. Friern Hospital Management Committee[24] helps determine whether someone who provides a professional service or a trade service is negligent. The test states a member of a trade and profession will only be deemed to be negligent if they fail to display the care and skill, which would be displayed by a reasonably competent member of that relevant trade or profession. If a doctor is being sued for medical negligence, what the court will ask is what would any reasonably competent doctor (in that situation), have done or not done. Normally expert evidence would be deduced to determine what is generally acceptable procedure of members in that profession.[25] The consequence of this is that a service supplier can make a mistake and still not be negligent. It may well be there is a risk involved, that the profession as a whole did not appreciate at that time.[26] Thus the distinctions between sale of goods and the supply of goods and services surfaces in the difference between fault-based liability (when supplying a skill) and strict liability, which applies, to the selling or transferring of goods. It can be argued it is not very convincing why the law should impose a much lower standard on people who agree to supply work or skill than on somebody who agrees to transfer or sell goods.

The second question is then what test do we apply to actually decide whether a contract is a sale of goods or one for the supply of work and materials or for the supply of services. The courts have been indecisive in their approach to this question. In Clay v. Yates [27] the courts were concerned with the relative importance of the two elements of the labour and materials. In the case of Lee v. Griffin [28] the court sated if the purpose of the contract was to transfer the property in goods of some chattel regardless of the skill involved then it would be a sale of goods. The recent position adopted by the Court of Appeal in Robinson v. Graves[29] laid down what it called the “substance of the contract test”. This test is something of a main purpose test, a test that asks what is the operative purpose behind the contract?  If the substance (main purpose) of the contract was the production of something to be sold, then this will be a sale of goods. On the other hand Robinson v. Graves says if the substance of the contract is the supply of some skill, then it is a contract for the supply of goods and services. There are two problems with this test. The First problem is that there is a gap, because Robinson v. Graves fails to provide a test for a contract for the supply of a pure service. The test omits to mention when a contract will be one for a pure service, thus one has to insert a presumption. One has to deduce that Robinson v. Graves would say that a contract is one for the supply of a pure service, where it’s substance is only for the supply of some skill and work.

The second problem with the test in Robinson v. Graves is that it is very vague and difficult to apply, how does the court decided what is the main purpose? The test assumes there is one substance to all contracts (this is not true of all contracts that have come before the courts). This is an uninformed formula for determining whether something is a sale of goods or supply of goods and service, where there is more than one substance in a contract.[30] This means judges are still able to fall into the old trap of making arbitrary rulings of whether a contract really is a sale of goods or supply of goods and service just to meet the justice of each case.[31]

It is argued this results in a confusion of whether a strict liability or fault based liability test applies. For example if the contract is one of supply of goods and service the correct test for determining faulty service (has the supplier failed to use “reasonable care and skill”)[32] may become immersed into a strict liability test[33] if the contract is deemed a transfer of property in some sort of tangible goods. The court has continually disregarded the skill used in many cases as purely incidental.[34] One way of overcoming this danger is to abolish the distinction between fault based and strict liability in contracts for sale of goods and supply of goods and services. Then we will not have to worry about the courts coming to a decision through the Robinson v. Graves test about what type of contract is before them.

Bibliography

Adams and Macqueen, Sale of Goods by Atiyah, (10th ed.) (London: Pearson Education, 2000)

Canton. Clare, E., M., ‘Sale of Goods and Barter’, [1976] 39 MLR 589 – 592

Case Comment, ‘Negligence - Bolam Test - Responsible/Substantial Body Of Opinion - Quantitative Test’ [1995] Journal of Personal Injury Litigation Dec, 313-315

Goode, Roy, Commercial Law, (2nd ed.,) (Harmondsworh: Penguin, 1995)

Guest, A., G., (General Editor), Benjamin’s Sale of Goods, (6th ed.,) (London: Sweet & Maxwell, 2002)

Miller, C., J., (General Editor), Benjamin’s Sale of Goods, (Special Supplement to the 6th ed.,) (London: Sweet & Maxwell, 2003)

Sealy and Hooley, Commercial Law, Text, Cases and Materials, (London: Butterworths, 1999)

Footnotes

[1] Adams and Macqueen, Sale of Goods by Atiyah, (10th ed.) (London: Pearson Education, 2000), at p.22

[2] This is particularly important if the goods are actually destroyed, or the seller becomes insolvent.

[3] s.17(1) Sale of Goods Act 1979

[4] [1974] I.R. 101

[5] Canton. Clare, E., M., ‘Sale of Goods and Barter’, [1976] 39 MLR 589 - 592

[6] s.2(1) Sale of Goods act 1979

[7] The sale may be for cash or on credit. See Guest, A., G., (General Editor), Benjamin’s Sale of Goods, (6th ed.,) (London: Sweet & Maxwell, 2002), at 1-034, p.30

[8] (1857) 7 E. & B. 885

[9] [1936] 2 All ER 232

[10] Canton. Clare, E., M., ‘Sale of Goods and Barter’, [1976] 39 MLR 589 - 592

[11] The chattel here can be seen as consideration for making the separate contract for the sale of the car for £3000. Esso Petroleum Co. Ltd v. Customs and Excise Commissioners [1976] 1 WLR 1 at 5, 7, 11. 

[12] The distinction between sale and exchange in Flynn v. Mackin could also be reconciled through the facts. The second defendant negligently crashed the car while delivering it to the first defendant in which the plaintiff was a passenger, who sued. It can be argued the court in an attempt to amend this situation to be fair to the plaintiff have created this fine distinction. 

[13] If the product supplied falls outside of the statutory definition of “goods”, the contract cannot be deemed a sale of goods or supply of goods, but sui generis. St Albans City and District Council v. International Computers Ltd. [1996] E.W.J. No. 239

[14] A classic example is the construction contract because under a building contract the contractor agrees to provide skill and he also aggress to transfer materials to the client.

[15] Sealy and Hooley, Commercial Law, Text, Cases and Materials, (London: Butterworths, 1999), at p.246

[16] Adams and Macqueen, Sale of Goods by Atiyah, (10th ed.) (London: Pearson Education, 2000), at p.23

[17] These are terms and obligations that are implied by law into contracts.

[18] The types of implied terms that exist are: the seller must have ‘a right to sell the goods’ (s.12(1)); that where the goods are sold by description, they must ‘correspond with the description’ (s.13(1)); that, where goods are sold in the course of a business, they must be of satisfactory quality (s.14(2)); and reasonably fit for that purpose (s.14(3)).

[19] s.14(2) Sale of Goods Act 1979.

[20] [1905] 1 K.B. 608

[21] Her husband sued for breach of contract, relying on a term implied by s.14(1) of the Sale of Goods Act 1893.

[22] An “excepted contract” means a contract of sale or a contract of hire purchase, this is defined at s.1(2) of the Supply of Goods and Services Act 1982. The reason these contracts are “excepted” and not governed by Part 1 is because these contracted are governed by the Sale of Goods Act 1979.

[23] This is not the only implied term.

[24] [1957] WLR 582 to 587

[25] Case Comment, ‘Negligence - Bolam Test - Responsible/Substantial Body Of Opinion - Quantitative Test’ [1995] Journal of Personal Injury Litigation Dec, 313-315

[26] Roe v. Minister of Health [1954] IQB 66

[27] (1856) 1 H & N 73

[28] (1861) 1 B & S 272

[29] [1953] 1 KB 579

[30] Guest, A., G., (General Editor), Benjamin’s Sale of Goods, (6th ed.,) (London: Sweet & Maxwell, 2002), at p. 34

[31] Sealy and Hooley, Commercial Law, Text, Cases and Materials, (London: Butterworths, 1999), at p.246

[32] s.13, Part 2, Supply of Goods and Services Act 1982

[33] s.14(2) Sale of Goods Act 1979

[34] Lee v. Griffin (1861) 1 B & S 272; Cammell Laird v. Manganese Bronze [1934] AC 402; Lockett v. Charles [1938] 4 All ER 170; Philip Head & Sons Ltd v. Showfronts Ltd [1970] Lloyds Rep 140