Merchantable quality is an implied condition in contracts for the sale of goods that protects the buyer when goods are bought by description from a seller who deals in those goods. In plain terms, it means the goods delivered must be of a quality that can reasonably be sold on, rather than stock that no one would buy. For Australian businesses that buy stock, components or equipment from other businesses, it is often the only quality protection the contract contains.
This guide explains what merchantable quality is, the conditions that must be met before the term is implied into a contract, and how courts work out whether particular goods measure up. It covers:
- The legal source: the implied condition in s 19(2) of the Sale of Goods Act 1923 (NSW), with equivalent provisions in the sale of goods legislation of the other states
- The three prerequisites: a sale by description, a seller who deals in goods of that description, and a buyer who has not examined the goods in a way that should have revealed the defect
- The practical test: whether the goods are fit for the purposes for which goods of that kind are commonly bought, having regard to price and description
- The consumer law contrast: how merchantable quality differs from the consumer guarantees in the Australian Consumer Law, and why that difference matters to business buyers
What merchantable quality actually means
Merchantable quality is not defined in the Sale of Goods Act 1923 (NSW). Section 19(2) states the condition without spelling out the standard: where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that the goods are of merchantable quality. The meaning has been filled in by the courts.
In Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31, the House of Lords stated the test in practical terms. Goods are of merchantable quality when they are fit for the purpose or purposes for which goods of that kind are commonly bought, having regard to their price, their description and all the surrounding circumstances. In shorthand, merchantable goods are commercially saleable goods: a buyer who knew the true state of the goods could still sell them on in the ordinary course of trade. Goods are unmerchantable when they are of no use for any purpose for which goods of that kind are commonly bought.
The High Court applied the same practical approach in George Wills and Co Ltd v Davids Pty Ltd [1957] HCA 6. A wholesaler bought canned beetroot in vinegar and complained that it deteriorated too quickly to hold in stock. The court held the beetroot was not unmerchantable. Because the goods were described and understood as beetroot canned in vinegar, and that product naturally keeps for only about a year, the goods matched what the description promised. The point is that merchantability is judged against the description, the price and the nature of the goods, not against an ideal of perfect quality.
Price is a constant part of the assessment. Goods are merchantable at the price paid if they can be sold on at something approaching that price. A buyer who pays a bargain price for seconds or clearance stock cannot expect the finish of premium goods, while a buyer who pays top dollar is entitled to goods that justify it. Description works the same way: a truck described as durable should not break down in its first week of use, and a batch of beans described as premium grade should not arrive rancid.
When the condition is implied
Under s 19(2) of the Sale of Goods Act 1923 (NSW), three things must be true before the implied condition of merchantable quality attaches to a contract. If any one of them is missing, the buyer has no claim under this section.
The goods must be bought by description
A sale by description is one where the buyer relies on a description of the goods rather than on the goods themselves. That covers the common case of ordering from a catalogue, a product sheet or an online listing, where the buyer never sees the actual goods before contracting. It also covers goods identified by description even where the buyer has seen examples, for example "grade A structural pine, 90 x 45 mm" or "single-origin Colombian beans, AAA grade". Section 18 of the Act adds a related condition: goods sold by description must correspond with the description.
This is the element that makes the whole section workable, because a buyer who has only seen a description has had no real chance to judge quality before committing.
The seller must deal in goods of that description
The implied condition only applies where the seller deals in goods of that description in the course of its business. A private seller offloading surplus equipment is not caught, and neither is a one-off trader. A supplier that regularly sells goods of the kind in question is.
The courts read this requirement broadly. In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, the House of Lords held that a company which compounded animal feed for farmers dealt in goods of that description even though the particular feed it was asked to make was new to it. The test looks at the seller's ordinary business and whether it accepts orders to supply goods of that kind in the way of that business, not at whether the exact item has been sold before.
The buyer must not have examined the goods, or the defect must have been hidden
Section 19(2) ends with a proviso: if the buyer examined the goods, there is no implied condition as regards defects which that examination ought to have revealed. The buyer has no duty to examine the goods, but if they choose to inspect, they carry the risk of defects that should have been obvious.
This reflects the underlying principle of caveat emptor, Latin for "let the buyer beware". Section 19 of the Act begins from that default position: there is no implied condition as to quality or fitness except in the cases the section itself sets out. The implied conditions are exceptions to a general rule that buyers check their own goods.
A buyer who inspects a delivery and sees nothing wrong is still protected against latent defects, the hidden faults a reasonable examination would not have exposed. The proviso only removes the condition in respect of defects the inspection should have caught.
Merchantable quality in practice: a worked example
Green Bean Co, a Melbourne café group, orders 400 kg of "single-origin Colombian beans, AAA grade" from Bean Wholesalers, a supplier that sells coffee beans to cafés in the ordinary course of its business. The order is placed from Bean Wholesalers' online product sheet, and the beans arrive in sealed sacks that Green Bean Co does not open on delivery.
All three prerequisites are met. The beans were bought by description: Green Bean Co relied on the product sheet, never on the goods themselves. Bean Wholesalers deals in goods of that description: supplying beans to cafés is its regular trade. Green Bean Co did not examine the beans, and even a cursory inspection of sealed sacks would not have revealed a quality problem inside them. The implied condition applies.
The beans turn out to be over-roasted and rancid, unusable for the café's espresso service and unsellable to its wholesale customers. They are of no use for any purpose for which coffee beans of that kind are commonly bought, so they are not of merchantable quality. Because the implied term is a condition rather than a mere warranty, Green Bean Co may reject the batch and treat the contract as repudiated, or accept the beans and claim damages for the loss: that election is given by s 16 of the Act. The right to reject is lost once the buyer has accepted the goods; after acceptance, s 16(3) provides that the breach can only be treated as a breach of warranty, giving rise to damages rather than rejection.
Had Green Bean Co's head barista cupped samples from the delivery and the rancid taste been obvious, the examination proviso would have removed the condition as to that defect. Whether the buyer inspected the goods, and what that inspection should have revealed, often decides the case.
How merchantable quality differs from the consumer guarantees
Business buyers should not assume the Australian Consumer Law (ACL) protects them the same way it protects consumers. The consumer guarantees, including the guarantee of acceptable quality in s 54 of Schedule 2 to the Competition and Consumer Act 2010 (Cth), apply only to supplies to a "consumer" as defined in s 3 of the ACL.
A business that buys goods for re-supply, or to use them up or transform them in production or manufacture, is expressly excluded from the definition of consumer. Stock bought to sell on, ingredients bought to cook with and components bought to assemble are all outside the consumer guarantees, and the implied conditions in the state sale of goods legislation are the main statutory protection for those purchases. There is an overlap at the edges: a business that buys a laptop under $100,000 for office use can be a consumer for ACL purposes, because laptops are goods of a kind ordinarily acquired for personal, domestic or household use and the price threshold in s 3 is met. Whether the ACL applies to a particular business purchase is a fact-specific question.
The two regimes also use different language. The ACL guarantees that goods are of acceptable quality, assessed from the viewpoint of a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects (s 54). The state sale of goods Acts still use the older test of merchantable quality. In NSW, s 64(3) of the Sale of Goods Act 1923 provides a statutory meaning for consumer sales under that Act: goods are not of merchantable quality if they are not as fit for the purposes for which goods of that kind are commonly bought as is reasonable to expect, having regard to their price, any description applied to them and all other circumstances.
Common misconceptions
A few misconceptions recur when business buyers think about merchantable quality:
- Merchantable quality means top quality: It does not. Goods are merchantable if they can be sold on in the ordinary course at the price paid, judged against their description. A $100 diamond that is perfectly saleable as a $100 diamond is merchantable; the same stone misdescribed as premium would not be. Expecting luxury-grade quality from a bargain price is the quickest way to misread the test.
- It is the same as fitness for purpose: The two are separate implied conditions with different prerequisites. Fitness for a particular purpose under s 19(1) requires the buyer to make known the specific purpose and to rely on the seller's skill or judgment. Merchantable quality under s 19(2) is judged against the purposes for which goods of that kind are commonly bought, regardless of what the buyer told the seller. Goods can be merchantable yet unfit for the buyer's particular use, and fit for the buyer's use yet unmerchantable.
- Every business sale carries the condition: It does not. The default is caveat emptor, and the condition only arises where all three prerequisites are met. Sales by private sellers, goods the buyer examined, and goods bought without any description all fall outside s 19(2). In business-to-business contracts, an express term that is inconsistent with the implied condition can also displace it under s 19(4), whereas s 64 voids such exclusions in consumer sales.
- It is a warranty: It is a condition. The distinction matters because a breach of condition, before acceptance, entitles the buyer to reject the goods and treat the contract as at an end, not merely to claim damages. After acceptance, the breach is reduced to a warranty claim under s 16(3).
When to bring in a commercial lawyer
A commercial lawyer's work here starts before the dispute, in the contract itself. In business-to-business sales the parties can usually decide whether the implied conditions will apply at all, because s 19(4) allows an express term to negative an implied condition where the two are inconsistent, and the consumer-sale protection in s 64 does not extend to business purchases. Drafting those clauses is delicate: an exclusion that is ambiguous may be read down, and a supplier selling to both businesses and consumers needs to know which regime applies to each customer. A lawyer can draft or review supply agreements so the risk lands where the parties intend.
When goods are delivered and found wanting, the lawyer's job is to work out which condition has been breached and what remedy follows. That means assessing whether the sale was by description, whether the seller dealt in the goods, and what the buyer's examination revealed, then deciding between rejection and damages under s 16. Proving merchantability often turns on evidence about the trade: s 19(3) allows implied terms as to quality to be annexed by the usage of trade, and industry standards, expert reports and the seller's own representations all feed into whether the goods were commercially saleable at the price. A lawyer gathers that evidence, negotiates with the supplier, and, if necessary, runs the dispute. Getting the assessment right matters, because a buyer who rejects goods without a sound basis can itself be in breach.
The three questions that decide a merchantable quality claim
The implied condition of merchantable quality is narrower than most business owners assume, and the difference is worth real money. Before a dispute starts, three facts decide whether the condition applies at all: was the sale by description, does the seller deal in goods of that description, and did you examine the goods in a way that should have revealed the defect?
If those three facts are met, the harder question is whether the goods are actually unmerchantable. Would a reasonable buyer, knowing what the goods are really like, still buy them for the purposes for which goods of that kind are commonly bought, at the price you paid? That is the question to answer before you reject a delivery, because rejection without a sound basis can itself put you in breach. A commercial lawyer can assess the strength of the claim, the effect of any exclusion clause, and the safest way to preserve your rights before you act.