AEG (UK) Ltd v Logic Resource Ltd [1995] EWCA Civ 19 (20 October 1995)

Facts

The claimant, AEG (UK) Ltd (‘AEG’), a buyer, entered into a contract with the defendant, Logic Resource Ltd (‘Logic’), a seller, for the purchase of cathode ray tubes. The contract was formed on AEG’s standard conditions of purchase. After delivery to AEG’s premises in the UK, the tubes were incorporated into products that AEG sold to a sub-purchaser in Hong Kong. The tubes were subsequently found to be defective. AEG sought to exercise its contractual right to return the goods. A dispute arose regarding the location for the return. AEG contended that Logic was obliged to collect the defective goods from the sub-purchaser’s location in Hong Kong. Logic refused, arguing their obligation was limited to collecting the goods from AEG’s UK premises, the original place of delivery. The contractual terms were ambiguous. Clause 7 provided AEG with the option to have defective goods repaired or returned at Logic’s expense but was silent on the location. Another condition, seemingly an unamended boilerplate clause more suitable for a seller, referred to goods being returned to ‘our works’, which was interpreted as AEG’s UK factory.

Issues

The central legal issue was the proper construction of the contract concerning the place for the return of defective goods. The Court of Appeal had to determine: 1. In the absence of an express provision, where is the contractual place for the return or collection of rejected goods? 2. Whether a term requiring the seller to collect rejected goods from anywhere in the world, at the buyer’s direction, was an ‘onerous and unusual’ term. 3. If so, whether such a term was validly incorporated into the contract, considering the principle established in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd that special notice is required for such terms.

Judgment

The Court of Appeal, by a majority, dismissed AEG’s appeal, upholding the first instance judgment in favour of Logic. The court was divided, with Lord Justice Waite and Lord Justice Hirst forming the majority, and Lord Justice Hobhouse dissenting.

Majority Judgment (Waite LJ and Hirst LJ)

The majority held that in the absence of an express term to the contrary, the common law position, reflected in the Sale of Goods Act 1979, applies: the buyer’s duty is to make the rejected goods available for collection by the seller at the buyer’s place of business (the original place of delivery). They determined that a contractual term imposing an obligation on the seller to collect goods from any location worldwide at their own expense was a significant departure from this default position. Such a term was characterised as ‘onerous and unusual’. The majority applied the ‘red hand rule’ from the Interfoto case, which requires that for such a term to be incorporated into a contract, it must have been fairly and reasonably brought to the attention of the other party. Lord Justice Waite stated that AEG’s condition was a:

classic case of a party seeking to rely on a contractual term which is so stringent as to be unreasonable in its purport and which has not been ‘fairly and reasonably brought to the notice’ of the other party… It was tucked away, … in a fasciculus of clauses, the majority of which were either bland and unexceptionable or ferocious in their own context but irrelevant to the particular duty in question.

Finding no evidence that AEG had taken any steps to give Logic special notice of this particularly burdensome clause, the majority concluded it was not incorporated into the contract. Therefore, Logic’s only obligation was to collect the goods from AEG’s premises in the UK.

Dissenting Judgment (Hobhouse LJ)

Lord Justice Hobhouse delivered a strong dissent, arguing from a commercial perspective. He reasoned that the contract was silent on the place of return and the court’s task was to determine the parties’ intentions based on business efficacy. In the context of international sales, he viewed it as commercially sensible for the risk and expense of dealing with defective goods to fall on the seller who was in breach of contract. He argued that the clause was not a ‘trap’ or a hidden ‘penalty’ but a legitimate allocation of commercial risk between two commercial parties. He distinguished the Interfoto principle, stating:

A term which allocates the expense of remedying a breach of contract to the party in breach cannot without more be described as an onerous clause of a type which will not be enforced unless it has been fairly and reasonably drawn to the attention of the other party. It is a contractual allocation of the risk of the consequences of a breach of contract.

He would have allowed the appeal, finding that the obligation to retrieve the goods from their location at the time of rejection fell upon Logic.

Implications

This case is a significant authority on the incorporation of terms in standard form contracts. It confirms and extends the application of the Interfoto ‘red hand rule’ beyond penalty clauses to any term that is particularly onerous or unusual, including those which substantially alter common law positions or allocate commercial risk in a burdensome way. The decision underscores the duty on a party wishing to rely on such a term to take positive steps to ensure it is brought to the other party’s attention. The powerful dissent by Hobhouse LJ, however, highlights the ongoing tension between judicial intervention to ensure fairness in contracting and the principle of freedom of contract, particularly in a business-to-business context.

Verdict: The appeal was dismissed. The court found in favour of the respondent, Logic Resource Ltd.