A seller’s liability for selling goods with latent defects – what are your rights?

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By Frazer Hunt, Partner and Diana Lee, Law Graduate

While it is clear that a seller should be liable for an obvious defect in goods, a seller’s liability to a buyer for a latent defect is less clear. We explore the seller’s liability  for latent defects in goods under sales of goods legislation and discuss the case of Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER which provides insight as to how the courts apply these principles.

A latent defect is a defect in goods which does not materialise and cause damage to the good until some time after a buyer has taken delivery of the goods. At the time of purchase, the seller may have no knowledge that the goods have a latent defect and the goods may apparently be in good condition. Despite this, sale of goods legislation in Australia indicates that a seller will generally be liable for a latent defect which makes the good not of ‘merchantable quality’. This is also supported by case law. Accordingly, if you purchase goods and later discover that they have defects that were not apparent when you purchased them, you will likely be able to hold the seller accountable. This article will explore a seller’s liability for latent defects under sale of goods legislation in Australia, then discuss the case of Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER, which highlights further relevant considerations for determining a seller’s liability for latent defects.

Sale of Goods Legislation

Under sale of goods legislation in all states and territories,[1] a seller is required to supply goods that are of ‘merchantable quality’. Generally, goods are of merchantable quality if they are useable, fit for purpose, match the contract description of the goods and are free from defects.

Relevantly, sale of goods legislation in all states and territories provides a defence to sellers of defective goods if the defect could be discovered by the buyer through the buyer’s examination of the goods. This indicates that as a latent defect will not be discoverable by a buyer, a seller will not be able to rely on this defence. Accordingly, a seller will generally be liable for latent defects in goods. This is regardless of whether or not the seller had knowledge of the latent defect.

The case of Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER below highlights some additional factors that a Court may consider in determining a seller’s liability for a latent defect. Namely, the Court may consider whether the latent defect existed at the time that the good was delivered to the buyer and the degree or extent of damage to the good if the defect manifested in the good.

Bernstein v Pamson Motors (Golders Green) Ltd [1987] 2 All ER

In this case, the plaintiff purchased a new car from the defendant. The car did not have any apparent defects at the time of purchase and functioned well. However, after three weeks of use, the car experienced engine failure, rendering it inoperable. The plaintiff brought action against the defendant for breach of the implied condition that the good is of merchantable quality under the English Sale of Goods Act 1979, after which the Australian sale of goods legislation is modelled.

Upon considering the evidence, the Court found that the engine failure was likely caused by a “a piece of mastic sealant within the lubrication system”, which became free floating and wedged in the oil piping at the point of the restrictor, which cut off the oil supply to the rest of the engine. This defect could only be found after the engine was dismantled. Further, the presence of the mastic sealant in the lubrication system was caused by the manufacturer of the car misapplying the sealant, which inadvertently allowed a drip to fall into the orifice leading to the restrictor. The Court found that once the piece of sealant had dropped into the lubrication system, there was a significant likelihood that sooner or later it would create a blockage in that system, resulting in the seizure of the engine.

The Court held that the car was not of merchantable quality. This was for a number of reasons. Firstly, the Court noted that while an obvious defect, such as a wheel missing from the car, may prevent delivery in the first place, for less obvious defects, “there will always be an element of latency in any particular defect” as “in practice the argument whether a car was of merchantable quality only arises when, after accepting delivery, the buyer becomes aware of some defect”. Accordingly, it is necessary to consider the condition of the good at the time of delivery and determine when the defect which may ultimately cause damage to the good came into existence. In this, the Court found that as the misapplication of the sealant occurred during the manufacturing process, the sealant was present in the car at the time it was delivered to the plaintiff. Accordingly, the car had a “potential defect” which could be “crystallised…if the particle of sealant became free floating instead of adhering to the internal walls of the oil pipe”.

Following, the Court held that the presence of the sealant in the lubrication system at the time of delivery to the plaintiff rendered the car unmerchantable. This was because of the “extent and the area of the potential damage” (original emphasis) to the car, and the degree of danger that the potential seizure of the engine could cause to the plaintiff. In other words, as the piece of sealant had a high likelihood of causing eventual seizure of the engine, and the engine seizure would render the car unsafe, the car was not merchantable at the time of delivery. Indeed, the Court held that “it is not reasonable for the buyer of a new car of this type and price to expect to sustain a major breakdown in the first 150 miles”, accordingly “it was not of merchantable quality, still less was it fit for its purpose”.

Accordingly, Bernstein v Pamson Motors highlights that in respect of latent defects, the Court will also consider whether the latent defect existed in the goods at the time of delivery to the buyer and the degree or extent of damage to the goods if the defect manifested or “crystallised” in the goods.

Comment

Sales of goods legislation and case law indicate that a seller will usually be liable for a latent defect in a good which existed prior to delivery to a buyer, and would ultimately cause damage to the goods, rendering it no longer of ‘merchantable quality’. In this regard, legislation and case law seek to protect consumers by placing the onus on sellers of goods to ensure that goods are free from defects, whether they are latent or not. Accordingly, if you purchase goods which have a latent defect, you will likely be able to hold the seller accountable and recover compensation.

[1] Sale of Goods Act 1954 (ACT), s 19(3).

Sale of Goods Act 1972 (NT), s 19(b).

Sale of Goods Act 1923 (NSW), s 19(2).

Sale of Goods Act 1896 (QLD), s 17(c).

Sale of Goods Act 1895 (SA), s 14(b).

Sale of Goods Act 1896 (TAS), s 19(b).

Goods Act 1958 (VIC), s 19(b).

Sale of Goods Act 1895 (WA), s 14(3).

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