England and Wales Court of Appeal (Civil Division) Decisions
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Bence Graphics International Ltd v Fasson UK Ltd [1996] EWCA Civ 748 (17th October, 1996)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1996/748.html
Cite as:
[1996] EWCA Civ 748,
[1997] CLC 373,
[1997] 3 WLR 205,
[1998] QB 87
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BENCE GRAPHICS INTERNATIONAL LIMITED v. FASSON UK LIMITED [1996] EWCA Civ 748 (17th October, 1996)
IN
THE SUPREME COURT OF JUDICATURE
QBENF
95/0033/C
IN
THE COURT OF APPEAL (CIVIL DIVISION
)
ON
APPEAL FROM THE QUEEN'S BENCH DIVISION
(MR
JUSTICE MORLAND
)
Royal
Courts of Justice
Strand
London
W2A 2LL
Thursday
17th Octobe 1996
B
e f o r e
LORD
JUSTICE OTTON
LORD
JUSTICE AULD
LORD
JUSTICE THORPE
BENCE
GRAPHICS INTERNATIONAL LIMITED
Respondent
v.
FASSON
UK LIMITED
Appellant
(Handed
down transcript of
Smith
Bernal Reporting Limited, 180 Fleet Street
London
EC4A 2HD
Tel:
0171 831 3183
Official
Shorthand Writers to the Court)
MR
ANDREW MORAN QC and MR ANTHONY EDWARDS
(instructed by Messrs Hill Dickinson Davis Campbell, Liverpool) appeared on
behalf of the Appellant (Defendant).
MR
STEPHEN GRIME QC and MR DAVID HEATON
(instructed by Messrs Lace Mawer, Manchester) appeared on behalf of the
Respondent (Plaintiff).
J
U D G M E N T
(As
approved by the court)
©Crown
Copyright
LORD
JUSTICE OTTON: The defendants appeal against a judgment of Morland J whereby
he ordered that there be judgment for the plaintiff for £564,328.54
together with interest. The appellants seek to set aside the judgment and
assert that in substitution there be judgment for the plaintiff for the sum of
£22,000 (being the admitted value of returned goods) together with
interest or alternatively that there be a new trial or that an assessment of
damages according to the correct measure (being that contended for by the
appellant) be directed in any event.
The
sole issue raised on this appeal is whether the correct measure of damages was
(as the judge found) the difference in market value or the actual losses (if
any) suffered by the respondents under or arising from a breach of contract for
onward sales.
Background
The
appellants (defendants) were one of a small number of suppliers of cast vinyl
film, one of the uses for which is to manufacture decals which are used to
identify bulk containers, this being the only end use intended in the case of
film sold by them to the respondents (plaintiffs). The plaintiffs'
manufacturing process involved screen printing words, numbers or symbols on the
film and cutting it to size. The decals were then attached to the containers
by reason of the self-adhesive character of the vinyl. Between 1981 and 1985
the defendants supplied to the plaintiffs film to the value of £564,328.
This was to produce in excess of 100,000 decals. Of the decals manufactured
from the defendants' film, 93% went for use on Sea Containers Limited (SCL) who
were an important customer of the plaintiffs and who imposed their own
specifications for containers and decals on manufacturers. SCL owned the
containers and leased them to shipping lines and others so that the containers
passed out of physical possession of the owners for the vast majority of their
life and were used all over the world.
It
was common ground that the standard requirement in the container industry for
such decals was that they should have a "guaranteed minimum five year life".
The defendants know this to be so. Moreover it was a term of the contract
between the parties that the film would be of such a nature as to survive in
use in good legible condition for a period of five years at least.
The
plaintiffs alleged that the film did not fulfil the warranties with which it
was sold, was not reasonably fit for its intended purpose and was not of
merchantable quality. The reason for the defective condition was that the
polymer constituting the film had insufficient stabiliser against the effects
of ultra violet light and became degraded upon such exposure. The defendants
were at pains in their promotional literature to assure customers that their
film would be of such a nature as to survive in use in good legible condition
for a period of five years at least. The Dutch manufacturing associate of the
defendants incorrectly formulated the film sold to the plaintiffs by putting
insufficient UV stabiliser in the film so that, in use, it tended to degrade
over a period eventually making some decals illegible. There were extensive
complaints from customers of SCL about the poor performance of the film.
However, only one claim relating to 349 Tsujii Containers was met by the
plaintiffs who applied new decals at their expense and the defendants paid an
agreed amount to the plaintiffs in compensation. There was also an intimation
of a claim from SCL which was has so far not been pursued. The plaintiffs
retained about £22,000 worth of unused and defective material.
By
the statement of claim served in August 1988 the plaintiffs claimed for the
difference in value (ie the recovery of the whole purchase price). By an
amendment served three years later the claim was enlarged to include an
alternative claim for indemnity against "all claims" by customers of the
plaintiff. The appellants sought to rely on exclusion clauses contained in
their standard trading terms. However, on the penultimate and final days of
the trial the appellants made several admissions including that their terms did
not operate so as to exclude or limit their liability for any breach and that
they were in breach of their warranty that their product was durable for five
years. Thus in the concluding stages of the trial the only issue left to the
judge was the proper measure of damage. The defendants conceded that at least
the plaintiffs were entitled to be reimbursed in the sum of £22,000 in
respect of the stock returned to them. The judge accurately summarised the
position thus :
"In
the present case the plaintiffs have not suffered a loss in the shape of a
claim for damages from their customers in respect of the decals processed by
them from the defective Fasson 940 sold to them by the defendants to whom they
have paid the contract price. Although they have suffered no such loss, they
have been exposed and
remain
exposed
to claims from their customers and they have been put to the expense of
investigating and answering complaints. Also their commercial reputation may
have suffered."
The
judge found applying a section 53(3) Sale of Goods Act 1979 that the plaintiffs
were entitled to the difference between the value of the goods at the time of
delivery and the value they would have had if they had fulfilled the
warranties.
At
the heart of this appeal is the appellants' assertion that the judge
mis-directed himself in defining the issue as to the proper measure of damages
which fell for determination.
Section
53 Sale of Goods Act 1979 is headed "Remedy for Breach of Contract":
"(1)
Where there is a breach of warranty by the seller, or where the buyer elects
(or is compelled) to treat any breach of a condition on the part of the seller
as a breach of warranty, the buyer is not by reason only of such breach of
warranty entitled to reject the goods; but he may -
(a) set
up against the seller the breach of warranty in diminution or extinction of the
price, or
(b) maintain
an action against the seller for damages for the breach of warranty.
(2)
The measure of damages for breach of warranty is the estimated loss directly
and naturally resulting, in the ordinary course of events, from the breach of
warranty.
(3)
In the case of breach of warranty of quality such loss is prima facie the
difference between the value of the goods at the time of delivery to the buyer
and the value they would have had if they had fulfilled the warranty.
(4)
The fact that the buyer has set up the breach of warranty in diminution or
extinction of the price does not prevent him from maintaining an action for the
same breach of warranty if he has suffered further damage."
Section
54 provides:
"Interest
Nothing
in this Act affects the right of the buyer or the seller to recover interest or
special damages in any case where by law interest or special damages may be
recoverable, or to recover money paid where the consideration for the payment
of it has failed."
The
Sale of Goods Act 1979 lays down the basic principles for remoteness of damage
in language derived from the leading case of
Hadley
v Baxendale
(1854) 9 EXCH 341 where the main proposition was:
"Where
two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of contract
should be such as may be fairly and reasonably be considered either as arising
naturally, ie according to the usual course of things, from such breach of
contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it." Per Alderson B. at page 354."
The
principles in
Hadley
v Baxendale
have been interpreted and restated by the Court of Appeal (see
Victoria
Laundry (Windsor) Ltd v Newman Industries Ltd
[1949] 2 K.B. 528 and in the House of Lords in
Koufos
v C. Czarnikow Ltd
[1969] 1 AC 350 - "
The
Heron II
").
In the latter case the word "directly" is eliminated and more emphasis is
placed on the "reasonable contemplation" of the parties. Such moderately
differing formulations of the Common Law principles for remoteness of damage in
contract are still based on
Hadley
v Baxendale
.
Lord Reid in the latter case stated:
"The
crucial question is whether, on the information available to the defendant when
the contract was made, he should or the reasonable man in his position would,
have realised that such loss was sufficiently likely to result from the breach
of contract to make it proper to hold that the loss flowed naturally from the
breach or that loss of that kind should have been within his contemplation."
(At page 385)
Lord
Upjohn at page 424 stated:
"A
broad rule as follows : what was in the assumed contemplation of both parties
acting as reasonable men in the light of the general or special facts (as the
case may be) known to both parties in regard to damages as the result of a
breach of contract."
The
so-called second rule in
Hadley
v Baxendale
applies when the loss caused by the breach of contract is greater than, or
different from, what would have been in "normal" circumstances. The rule is
that:
"If
the special circumstances under which the contract was actually made were
communicated by the plaintiffs to the defendants, and thus known to both
parties, the damages resulting from the breach of such a contract, which they
would reasonably contemplate, would be the amount of injury which would
ordinarily follow from a breach of contract under the special circumstances so
known and communicated." (Supra 354 - 355)
Section
53(2) lays down the basic rule in terms of
Hadley
v Baxendale
.
The second rule is not expressly incorporated in the SOGA 1979 but is
considered to be impliedly accepted by the wording of section 54 : "Nothing in
this Act affects the right of the buyer or the seller to recover... special
damages in any case where by law... special damages may be recoverable..."
(See Benjamin Sale of Goods 4th Edition 126-040).
The
Judgment
The
judge approached the problem thus. At page 6e-f he said:
"In
my judgment -- the main issue which I have to determine in this action is
whether the prima facie measure damages is displaced by some other measure. At
the time the contracts were made what may the Court reasonably suppose to have
probably been in the contemplation of the parties as to the
remedy
to be available to the plaintiffs in the event of breach of the warranty of
quality, assuming the parties to have applied their minds to the contingency of
there being such a breach."
At
page 7f:
"...
Unless the court is satisfied on the balance of probabilities that some other
measure
of damages
was objectively in the contemplation of the parties when the contract was made,
the prima facie measure set out in section 53(3) remains un-displaced if as the
result of transactions by the buyer with other parties either the buyer may
recover a windfall or the seller's liability may be limited to the prima facie
measure albeit that the buyer's loss is much greater (emphasis added)."
At
page 17e:
"A
plaintiff will only be restricted in his claim for damages (by reduction from
the prima facie measure) as a result of special circumstances when those
special circumstances have been brought home to him in such a way as to show
that he has accepted or is taken to have accepted the risk that
he
will not be able to claim damages in respect of defective goods supplied to him
unless his customer of his processed goods brings a claim against him
."
At
page 17g:
"Not
only at the time that the contract was made must the parties be viewed
objectively to have contemplated that the plaintiff is taking the risk of
having his normal measure of damages restricted in the event that his customer
does not claim against him although he may still suffer loss because his
customer may not re-order from him because of the defective quality of the
goods supplied to him but also they must be taken to have contemplated that the
defendant is taking the risk that the damages awarded against him will not be
limited to the prima facie measure but that he will be exposed to a potential
open-ended liability that he will have to indemnify the plaintiff in respect of
any claim made by a customer against him."
And
at page 18c
"The
defendants have failed to satisfy me on the balance of probabilities that
having regard to all the circumstances in which the contract was made the
parties must be taken to have contemplated that the section 53(3) measure of
damages was displaced."
Mr
Stephen Grime QC on behalf of the appellants submits that the learned judge
misdirected himself in defining the issue as to the measure of damages which
fell for determination. He submits that the principle issue which the learned
judge had to decide was as to whether at the time of the making of the relevant
contracts the parties contemplated that the loss which would be suffered by the
plaintiff in the event of a serious breach of warranty of quality resulting in
premature deterioration in service of the decals made from the defendant's
goods was (i) diminution in the value of goods supplied by the defendant or
(ii) liability in damages to purchasers of the decals together with loss of
business and goodwill and any incidental loss and expense. The learned judge
wrongly defined the issue as being as to the parties contemplation of the legal
remedy which was available to the plaintiff in the event of breach of contract
rather than as to their contemplation of the nature of the financial loss which
the plaintiff would be likely to suffer upon breach.
Leading
counsel advanced the following propositions:
"1. In
case of sale of goods where a term as to quality is broken, the measure of
damages depends upon the contemplation of the parties as to the consequence of
a breach of the type committed, such contemplation being based on either their
imputed or actual knowledge at the time of contracting.
2. There
will be imputed to parties knowledge of facts which they had learnt as to the
nature and background of their respective businesses (first limb of
Hadley
v Baxendale
so called).
3. In
SOGA S53(3) words "prima facie" are not an expression of special quality or
merit being attached to difference in value measure but more a reflection of
the trading/mercantile conditions of times. Where the sale contract is not
made between merchants dealing in a market the displacement burden is a light
one.
4. Actual
knowledge of special circumstances may extend the ambit of potential damages
(S.54).
5. In
some cases the finding as to contemplation of the parties as to the
consequences of breach may be to show that breach will give rise to difference
in value measure under S.53(3) and special damages under S.54. The claimant
will not be limited if he wishes to choose one or both.
6. In
other cases the finding as to contemplation of the parties as to the
consequences of breach will show that the possible measures are alternatives.
7. Where
the measures are alternatives it is for the court to choose the correct
measure, not the claimant.
8. Where
the court chooses one or other measure, the effect of the choice may reduce the
amount of damages which may be claimed or increase it."
Mr
Andrew Moran QC on behalf of the respondents submits that the judge did not
misdirect himself in defining the issue as to the measure of damages which fell
for determination. The issue was whether the loss claimed by the respondent
was too remote a consequence of a breach of contract. In approaching this
issue the judge was correct to proceed to the measure prescribed by section
53(2) and (3) of the Act as the starting point and then to consider whether on
the facts of this case, the defendants had satisfied him that the prima facie
measure was displaced by some other measure. This was to be resolved by asking
the question, what loss to the plaintiffs is it reasonable to suppose would
have been in the contemplation of the parties as a "serious possibility" or "a
not unlikely result" had they had in mind the breach when they made their
contract? The time of assessment is the time of making the contract. The
learned judge both correctly defined the issue and expressed a proper approach
to its resolution. Section 53(2) lays down a rule defining the measure of
damages as a particular "loss" and section 53(3) is the exposition is how "such
loss" is ordinarily calculated.
Leading
counsel advanced the following propositions:
"1. In
a case of sale of goods when a term as to quality is broken the court should
resolve any issue as to the measure of damage by first recourse to section 53
SOGA 1979. In doing so the court is objectively ascertaining what loss would
have been in the contemplation of the parties at the time of making the
contract had they been made aware that a breach of the type which in fact
occurred would occur.
2. The
reference to "loss" in paragraph 1 does not involve the precise detail of the
damage or the precise manner of its happening it is enough for the innocent
party to show that loss of that kind is not unlikely or a serious possibility.
3. The
parties are deemed to contemplate loss which directly and naturally results in
the ordinary course of events. In the ordinary course of events when goods of
defective quality are delivered such loss is prima facie the difference in
value. This principle is of universal application and not confined to
mercantile or trading conditions of the time when the predecessor of the Act
appeared.
4. Additional
actual or imputed knowledge proved by a party seeking to rely on it, may
demonstrate that particular loss would have been in the contemplation of the
parties either i) as a serious possibility of additional loss or, ii) (as in a
chain sale proper) as the exclusive kind of loss that might be suffered. In i)
the party suffering loss may confine his claim to the loss which the parties
are deemed to contemplate as in para 3 above, or he may add a claim for
additional loss in contemplation. In ii) he is confined to a claim for the
exclusive loss so contemplated.
5. It
is for the judge to resolve as a question of fact whether such additional
knowledge as is relied on, demonstrates that some exclusive alternative loss
was in contemplation."
Conclusion
I
take as my starting point that section 53(3) lays down only a prima facie rule,
from which the court may depart in appropriate circumstances. The burden of
proof lies upon the person who seeks such a departure. The plaintiffs do not
suggest that it is only open to a buyer to rebut the presumption. In my view,
there is no reason in logic or principle why a seller cannot, in appropriate
circumstances, seek to discharge the burden and displace the presumption (and
see
Biggin
v Permanite
supra at page 435-6).
The
situation often arises where the buyer seeks to displace the presumption and
recover losses other than the diminution in value. Where a seller knows that
the buyer intended to re-sell the goods and ought reasonably to have
contemplated that a breach of his undertaking as to the description or
condition of goods would be not unlikely to cause the buyer to lose the profit
he hoped to make on the re-sale, or potential sub-sale, the buyer may recover
damages in respect of such loss of profits caused by a breach of the sellers
undertaking (see Chitty on Contracts 27th Edition 41/315).
Situations
arise where the court is satisfied and finds as a fact that it was within the
contemplation of the parties, at the time of making the contract that:
"(a)
the buyer intended to resell, or probably would do so, and that his sub-buyer
would probably resell, and so on, so that there would be a series of sub-sales
or 'string contracts' of the same goods; and
(b)
that each contract in the series would, or probably would, contain the same, or
a similar, contractual undertaking as to the description or condition of the
goods; and
(c)
that it was not unlikely that a breach of the seller's undertaking would cause
the buyer and each sub-buyer in the series to be in breach of his undertaking
to his own buyer; and
(d)
that it was not unlikely that, in the case of such a breach, the ultimate
buyers would recover damages from their sellers, so that liability would in
turn be passed up the chain of sellers and buyers.
In
these circumstances, the buyer who has paid to his sub-buyer damages and costs
for breach of the undertaking in the first contract of sub-sale (which the
sub-buyer claimed from the buyer, as the result of similar payments of
compensation between successive sub-buyers down the chain) may recover the
amount paid by him to the sub-buyer, together with his own reasonable costs in
reasonably defending the sub-buyer's claim against him; the damages and costs
paid or incurred by the buyer are taken as the measure of damages for the
seller's breach of the original contract (see
Hammond
v Bussey
(1887) 20 QBD 79,
Kasler
and Cohen v Slavouski
[1928] 1 K.B. 78." [per Chitty (supra) 41 - 321].
In
the present case there was no series or "string" contracts. The same goods
were not sold on. Even so the string contract cases illustrate graphically how
the court is permitted to and will depart from the presumption in order to do
justice between the parties based on a finding of fact of what the parties
reasonably contemplated.
If
the buyer uses the goods to make some product out of them the value of the
goods is not taken. In
Holden
(Richard) Ltd v Bostock and Co Ltd
(1902) 18 T.L.R. 317 where sugar was sold to brewers to be used for brewing
beer and because of arsenic in the sugar the beer was rendered poisonous and
was destroyed by the brewers the value of the beer at its market price in their
cellars was allowed, inter alia as damages. Similarly in
Bostock
v Nicholson
[1904] 1 KB 725 where commercial sulphuric acid warranted free from arsenic
was used by the buyer for making brewers sugar, one of its ordinary uses, he
recovered not only the price paid for the acid rendered worthless to him by the
breach of warranty but the value of other ingredients spoilt by being mixed
with the acid.
In
McGregor on Damages 15th Edition paragraph 808 it is stated:
"In
all these cases, it is once again vital that the use to which the goods have
been put by the buyer is one that the seller either contemplated or must be
taken to have contemplates: otherwise the damage will be too remote. If the
buyer adopts the ordinary use of the goods, as where food sold for human
consumption is eaten by him, or adopts one of the ordinary and well recognised
uses although not the only one, as in
Bostock
v Nicholson
,
or adopts even a use which is not the predominant one provided it is a use
which is sufficiently common, as in
Hardwick
Game Farm v Suffolk Agricultural Poultry Producers Association
where contaminated groundnut extractions were supplied for compounding into
poultry food and the compound was fed to pheasants and partridges, he will
recover under the first rule in
Hadley
v Baxendale
.
If however he puts them to some special use, he will recover only if this
intention is communicated to the seller, ie under the second rule in
Hadley
v Baxendale
.
Here, as elsewhere, the dividing line between the first and second rules is
not always clear in the cases."
Mr
Moran in argument invoked the principle that where the seller delivers
defective goods but the buyer is nevertheless able to perform a sub-contract by
delivering the goods to his sub-buyer, the buyers damages against the seller
cannot be reduced by taking this into account. He relied upon the decision of
the Court of Appeal in
Slater
v Hoyle and Smith Ltd
[1920] 2 K.B. 11 where the buyer bought cotton cloth from the seller in order
to fulfil another contract which the buyer had already made with a sub-buyer.
The seller delivered cloth which was not up to the contractual quality, but the
buyer was able to perform the sub-contract by delivering the same cloth. The
sub-buyer paid the full price under the sub-contract. The buyer sued the
seller for damages. The court awarded the buyer damages assessed at the normal
measure, namely, the difference between the market price at the time and place
of delivery of cloth up to the contractual quality and the market price, at the
time and place of delivery of the cloth actually delivered. Scrutton LJ said
that "if the buyer is lucky enough, for reasons with which the seller has
nothing to do, to get his goods through on the sub-contract without a claim
against him, this on principle cannot affect his claim against the seller any
more than the fact that he had to pay very large damages on his sub-contract
would affect his original seller."
In
my judgment the decision in
Slater
can be narrowly distinguished from the instant case. In
Slater's
case the sub-sale was of the same goods albeit after bleaching; the seller did
not know of the contemplated sub-sale. In the instant case the goods were
substantially converted or processed by the buyer and the sellers were aware of
the precise use to which the film was to be put at the time the contract was
made. I recognise Auld LJ's reservations.
This
last case must be considered in the light of the dicta of Devlin J in
Biggin
& Co Ltd v. Permanite Ltd
[1951] 1 K.B. 422 at 435:
"Damages
which arise under the so-called "second rule" in
Hadley
v Baxendale
(ii), are sometimes referred to as if they were an increased sum which the
plaintiff could obtain if he could show "special circumstances", or as if the
rule embodied a measure of damage specially beneficial to the plaintiff which
he could invoke if he fulfilled the necessary conditions. It is, no doubt,
true that it generally operates in favour of a plaintiff rather than against
him, but I think that it is capable of doing either."
And
later at 436:
"It
has often been held that the profit actually made on a subsale which is outside
the contemplation of the parties cannot be used to reduce the damages measured
by a notional loss in market value. If, however, a subsale is within the
contemplation of the parties, I think that the damages must be assessed by
reference to it, whether the plaintiff likes it or not. Suppose that the only
fault in the compound was its incompatibility with bitumen felt, the chance
that it might produce bad results would certainly reduce its market value
before use. But if it is the plaintiff's liability to the ultimate user that
is contemplated as the measure of damage and if in fact it is used without
injurious results so that no such liability arises, the plaintiff could not
claim the difference in market value, and say that the subsale must be
disregarded.
I
say this so as to make it clear, that although I have come to the conclusion
that, if the plaintiffs' basic claim fails, they can to some extent rely on the
alternative of difference in market value, it is not because I think the
plaintiffs have an option in the matter."
Lord
Pearce in
Koufos
v Czarnikow
(supra) made a similar point
when
he said at page 46:
"Of
course the extension of the horizon need not always
increase
the damage; it might introduce a knowledge of particular circumstances, eg a
sub-contract, which show that the plaintiff would in fact suffer
less
damage than a more limited view of the circumstances might lead one to expect."
(his emphasis)
In
my judgment, once the goods had been converted in a manner which was
contemplated by the parties,
Slater
has no application, the damages must be assessed by reference to the sub-sale
"whether the plaintiff likes it or not". Thus the plaintiff does not have the
option to choose which outcome is most favourable to him. It is for the court
to determine the correct measure of damage, not the aggrieved party. Where the
court determines the proper measure the effect of the choice may reduce the
amount of damages claimed or increase it.
With
this analysis I address the issue as to what was within the contemplation of
the parties. The evidence showed that there was a close and protracted
business relationship between the parties from which it can be readily inferred
that the defendants had detailed knowledge of the plaintiffs' business. The
end use of the film was exclusively for container decals. The defendants knew
that the plaintiffs then supplied the decals to container manufacturers and the
manufacturers subsequently supplied the containers (suitably marked by the
decals) to subsequent purchasers. The sellers knew that the plaintiffs'
customers demanded five-year durability of their product.
Moreover,
the sellers would have known that any defect in the film would not have been
detected on delivery or in the process of manufacture. The defect, ie the
breach, would have caused deterioration of decals in service with the result
that the ultimate users of the containers (lessees of the owners) would
complain to and claim damages against the container owners who would in turn
make claims against the container manufacturers. The manufacturers in turn
would make claims for damages against the plaintiffs which the plaintiffs would
be 'not unlikely' obliged to meet. Moreover the defendants would expect to be
liable for the value of unmerchantable film processed by the plaintiff and of
unsaleable raw materials supplied by the defendants.
These
factors, to my mind, point indubitably against a loss of value basis and
towards a measure of damage based upon the plaintiff's liability to the
subsequent or ultimate users of the plaintiffs product in which the defendants'
goods were an integral part and in the event of a breach of the warranty as to
quality the plaintiffs' liability to those others would be triggered.
It
is not without significance that after the breach had been discovered the
remedy sought by the plaintiffs in correspondence was one of indemnity and not
the difference of value of the goods. However, when the statement of claim was
served in 1988 it was solely for the difference in value. The obvious
inference to draw is that by that time the plaintiffs had realised that the
claim for indemnity and the peripheral claims were of lesser value than a claim
for the market value. It is true that the statement of claim was amended in
1991 to include, in the alternative, an indemnity against all claims by
customers of the plaintiff. However, at trial they pressed for relief under
the section 53(3) presumption.
Thus,
in my view, at the time of making their contract the parties were aware of
facts which indicated to both that the loss would not be the difference between
the value of the goods delivered and the market value and accordingly the prima
facie measure ceased to be appropriate.
Finally,
the judge in rejecting the defendant's case at trial said:
"Mr
Heaton's submission is that the measure of damages recoverable by the plaintiff
is in effect an indemnity in respect of claims by their customers made against
them. The weakness of the Heaton submission is demonstrated by
nebulousness
of what Mr Heaton called an indemnity. Was it unlimited in amount? The
purpose for which the vinyl was made was for processing into decals. A
degraded decal, that is not having the 5 year durability quality, could result
in the loss of a container and the goods within it, the value of which could be
large or small. It could also result in a container and its goods going to a
wrong destination. Did the indemnity cover such losses which might well be of
a magnitude out of all proportion to the price of the vinyl when sold to the
plaintiffs or the price of the decal, the vinyl processed by the defendants
when sold on to their customers? Did the indemnity only cover claims the
defendants were legally obliged to satisfy or did it cover claims which could
be defeated by reason of the Limitation Act but which would be commercially
suicidal not to satisfy? Did the indemnity cover claims successfully defended
in respect of costs of successfully defending claims arising out of the breach
of warranty. Did it cover the costs of processing and investigating complaints?"
I
do not see any "nebulousness" of what Mr Heaton called an indemnity. The
defendants will only be liable to indemnify the plaintiffs in respect of any
liability which they may be held to have incurred to third parties. The
difficulties posed by the trial judge are, to my mind, more apparent than real
and would be a matter for determination in any subsequent action by third
parties and in third party proceedings against the defendants.
I
accept Mr Grime's submission that the learned judge attached weight to the
supposed difficulties in assessment that adoption of the measure of damages
contended for by the defendant would create when such difficulties as may exist
were irrelevant to the issue which the learned judge had to decide.
It
follows that, with respect to the learned judge, I consider his reasoning and
conclusion cannot be sustained. If the plaintiff had sought to rebut the
presumption they would have succeeded with ease. Any argument by the
defendants that the correct measure of damage was the difference in value would
have been doomed to failure. I am satisfied therefore that the learned judge
erred in law in holding that the prima facie measure of damages for breach of
warranty of quality provided for by section 53(3) SOGA (1979) was not displaced.
Accordingly
I would allow the appeal, substitute a judgment for £22,000 with any
appropriate interest and direct that the case be remitted for assessment of
damages.
LORD
JUSTICE AULD: I agree with the conclusion of Otton LJ and his general
reasoning, but wish to add some words on the effect of section 53(3) of the
1979 Act and on mercantile contracts where the parties obviously contemplate
that the buyer will sell on the subject matter of the contract in its existing
or in an altered form or as part of some other thing.
As
to section 53(3), there is, in my view, a danger of giving it a primacy in the
code of section 53 that it does not deserve. The starting point in a claim for
breach of a warranty of quality is not to determine whether one or other party
has "displaced" the prima facie test in that sub-section. The starting point
is the
Hadley
v. Baxendale
principle reproduced in section 53(2) applicable to a breach of any warranty,
namely an estimation on the evidence, of "the ... loss directly and naturally
resulting in the ordinary course of events from the breach of warranty". The
evidence may be such that the prima facie test in section 53(2) never comes
into play at all.
The
Hadley
v. Baxendale
principle is recovery of true loss and no more (or less), namely to put the
complaining party, so far as money can do it, in the position he would have
been if the contract been performed. Where there is evidence showing the
nature of the loss that the parties must be taken to have contemplated in the
event of breach, it is not to be set aside by applying the prima facie test in
section 53(3) simply because calculation of such contemplated loss would be
difficult. Equally, it should not be set aside in that way so as to produce a
result where the claimant will clearly recover more than his true loss.
Where,
as here, the contract of sale is between two merchants both of whom contemplate
that the subject matter of the sale is to be sold on in whatever form, it
offends the
Hadley
v. Baxendale
principle to rule out mutual contemplation by them of damage arising from the
buyer's onward sale simply because the subject matter is to be altered or
incorporated in another product, or because the terms of the sub-sale may not
be identical to those in the sale. It is equally offensive to that principle
to describe the subject matter, as Mr Moran did, as "worthless" or of "no
value" to the buyer at the time of delivery if it appeared then to be of the
contract quality and he was able to incorporate it in his product and sell it
on without claim or provable prospective claim.
Put
shortly, and drawing on the analysis of Scarman LJ in
H.
Parsons (Livestock Ltd. v. Uttley Ingham & Co. Ltd
.
[1978] 1 Q.B. 791, CA, at 807F-H, the sort of question the judge should have
asked is "What would the parties have thought about the probable loss to the
buyer in the event of a latent defect in film at the time of delivery later
causing causing trouble?".
Those
observations run contrary to the judgments of this Court in
Slater
v. Hoyle & Smith Ltd
.
[1920] 2 K.B. 11, though they are of a piece with the approach of Devlin J in
Biggin
v. Permanite
[1951] 2 All ER 191.
In
my view, the time has come for the former case to be reconsidered at least in
the context of claims by a buyer for damages for breach of warranty where he
has successfully sold on the subject matter of the contract in its original or
modified form without claims from his buyers. With respect to Otton LJ, I do
not think that the case is materially distinguishable from the present on the
two bases that he suggests.
As
to the first, the seller's knowledge of the buyer's intended use of the goods,
the report in
Slater
states that the seller did not know of the buyer's onward sale contracts.
However, that must simply mean that he did not know of the specific contracts;
for there can be no doubt that, in contracting to sell 3,000 pieces of
unbleached cloth of a certain quality, the seller knew that he was dealing
with a commercial buyer who would sell them on either unprocessed or processed
to some degree, and must be taken to have contemplated that loss could result
from such onward sales if the cloth was not of the required quality. The fact
that the seller in this case had more detailed knowledge of the use to which
the buyer would put the film is not a material distinction in determining the
measure of damages as distinct from their precise calculation.
Second,
as to what happened to the goods, the buyer in
Slater
did in fact process them before selling them on; he bleached the unbleached
pieces of cloth. That does not seem to me to be materially different for this
purpose from incorporating the goods in a manufactured product for onward sale.
The
Court of Appeal in
Slater
had to reason around two decisions to the effect that where there has been
delivery of goods to the buyer his onward sale may be taken into account in the
assessment of damages. The first was a decision of the Privy Council,
Wertheim
v. Chicoutimi Pulp Co
.
[1911] A.C.301, where their Lordships held that the damages for late delivery
should take account of the price actually obtained by the buyer in his onward
sale. Lord Atkinson, giving the judgment of the Board, said at 307-308:
"...
it is the general intention of the law that, in giving damages for breach of
contract, the party complaining should, so far as it can be done by money, be
placed in the same position as he would have been in if the contract had been
performed ... That is a ruling principle. It is a just principle. The rule
which prescribes as a measure of damages the difference in market prices at the
respective times above mentioned is merely designed to apply this principle and
... it generally secures a complete indemnity to the purchaser. But it is
intended to secure only an indemnity. The market value is taken because it is
presumed to be the true value of the goods to the purchaser. In the case of
non-delivery, where the purchaser does not get the goods he purchased, it is
assumed that these would be worth to him, if he had them, what they would fetch
in the open market; and that, if he wanted to get others in their stead, he
could obtain them in that market at that price. In such a case, the price at
which the purchaser might in anticipation of delivery have resold the goods is
properly treated, where no question of loss of profit arises, as an irrelevant
matter:
Rodocanachi
v. Milburn
... The purchaser not having got his goods should receive by way of damages
enough to enable him to buy similar goods in the open market. Similarly, when
the delivery of goods purchased is delayed, the goods are presumed to have been
at the time they should have been delivered worth to the purchaser what he
could then sell them for, or buy others like them for, in the open market, and
when they are in fact delivered they are similarly presumed to be, for the same
reason, worth to the purchaser what he could then sell for in that market, but
if in fact the purchaser, when he obtains possession of the goods, sells them
at a price greatly in advance of the then market value, that presumption is
rebutted and the real value of the goods to him is proved by the very fact of
this sale to be more than market value, and the loss he sustains must be
measured by that price, unless he is, against all justice, to be permitted to
make a profit by the breach of contract, be compensated for a loss he never
suffered, and be put, as far as money can do it, not in the same position in
which he would have been if the contract had been performed, but in a much
better position."
Lord
Atkinson's reasoning in that case, in particular the distinction between cases
of non-delivery and late delivery and the relevance of the onward sale price in
the latter case, was approved and re-stated by Lord Dunedin in the House of
Lords in
Williams
Bros. v. Ed. T. Agius Ltd
[1914] AC 510, a case of non-delivery. He said, at 522:
"...
It is certain that Lord Atkinson, who delivered the judgment in that case, did
not think that he was going against
Rodocanachi's
Case, for he says so in terms. Nor, in my mind, is there any discrepancy
between the two judgments.
Wertheim's
Case was a case, not of delivery withheld, but of delivery delayed. The buyer,
therefore, got the goods, and the only damage he had suffered was in delay.
Now, delay might have prejudiced him; but the amount of prejudice was no longer
a matter of speculation, it had been put to the test by the goods being
actually sold; and he was rightly, as I think, only held entitled to recover
the difference between the market price at the date of due delivery and the
price he actually got. But when there is no delivery of the goods the position
is quite a different one. The buyer never gets them, and he is entitled to be
put in the position in which he would have stood if he had got them at the due
date. That position is the position of a man who has goods at the market price
of the day - and barring special circumstances, the defaulting seller is
neither mulct in damages for the extra profit which the buyer would have got
owing to a forward resale at over the market price ..., nor can he take benefit
of the fact that the buyer has made a forward resale at under the market price."
See
also per Lord Atkinson at 529, and the unusual case of
Pagnan
& Fratelli v. Corbisa Industrial Agropacyarua Limitada
[1970] 1 W.L.R. 1306, CA, where a buyer, having initially rejected goods
because of their defective quality, later accepted them after negotiating a
reduced price which was less than the market price for similar goods at the
date of the seller's breach. The Court of Appeal held that the prima facie
market price rule in section 53(3) did not apply because the buyer had suffered
no loss.
In
Slater
all the members of the Court were disinclined to extend the decision in
Wertheim to a claim for breach of warranty of quality. Bankes LJ, at 15,
confined it in any event to a sub-sale of the identical goods, relying on
reasoning of Lord Dunedin in that case at 523 about the difficulty of
establishing damages based on the terms of a sub-sale in a non-delivery case.
Warrington LJ, at 17-18, appears to have been of the view - though he did not
explain why - that section 53(3) of the 1893 Act [corresponding to section
53(3) of the 1979 Act] was the right principle governing delivery of inferior
goods to those provided for by the contract and that what the buyer did with
the goods was irrelevant. Scrutton LJ, at 22, expressed the view that the
Rodocanachi
principle as to non-delivery applied equally to delivery of inferior goods,
because if the buyer fulfils his sub-contract by buying in the market, he is
left with the inferior goods at their market value against the market value of
sound goods. Alternatively, if he applies the inferior goods to a sub-sale the
damages he may have to pay to his buyer may be calculable differently from
those in the contract with his seller. He acknowledged that, on this
approach, the buyer may recover more than his true loss, but he cited examples
of the same principle resulting in a recovery of less than the true loss.
With
respect to the Court of Appeal in that case, and to the authors of the
supporting comments in McGregor on Damages, 15th ed., para. 774, at p [502] and
Chitty on Contracts, 27th ed. Vol. 2, para. 41-300, note 91, it seems to me
that they wrongly:
1. overlooked
the basic rule in section 53(2) as to what would have been in the ordinary and
natural contemplation of the parties in a commercial contract such as it was,
namely, that the buyer could well be prejudiced in his onward dealing with the
goods if they were defective;
2. disregarded
the reasoning of the Privy Council in
Wertheim
as approved and re-stated by Lords Dunedin and Atkinson in
Williams
v. Agius
that where there has been delivery in a mercantile contract and it can be seen
what the buyer has done with the goods, it is possible and proper to measure
his actual loss by reference to that outcome;
3. had
too much regard to practicality at the expense of principle in relying on
possible difficulties of estabishing causation and assessment where the goods
sold have been subjected to some process or where the terms of the contract and
sub-contract may for that or some other reason be different; and
4. were
seemingly content to award a buyer more than the evidence clearly showed he had
lost.
As
Devlin J made plain in his consideration in
Biggin
v. Permanite
,
[1951] 1 KB 422, at 436, of the supposed two rules in
Hadley
v. Baxendale
,
the critical matter in determining the earlier question as to the applicability
or not of the prima facie rule in section 53(3) is the contemplation of the
parties:
"...
there is only one area of indemnity to be explored, and that is what is within
the prevision of the defendant as a reasonable man in the light of the
knowledge, actual or implied, which he has at the time of the contract. It has
often been held ... that the profit actually made on a subsale which is outside
the contemplation of the parties cannot be used to reduce the damages measured
by a notional loss in market value. If, however, a subsale is within the
contemplation of the parties I think that the damages must be assessed by
reference to it, whether the plaintiff likes it or not. ...if it is the
plaintiff's liability to the ultimate user that is contemplated as the measure
of damage and if in fact it is used without injurious results so that no such
liability arises, the plaintiff could not claim the difference in market value,
and say that the subsale must be disregarded."
The
judge, at page 6E of the transcript of his judgment, directed himself broadly
to the question of the notional contemplation of the parties in the event of a
latent defect in the film putting the buyer in breach of his contract to the
container manufacturers. However, apart from a brief summary, at page 11C-E,
of the relevant circumstances and, at pages 16F-17D, posing a series of
unanswered questions about uncertainties as to the extent of the damages if
calculated on that basis, he has not made a reasoned finding as to their
notional contemplation. His approach, at pages 17E-18D, was a paraphrase of a
passage in paragraph 264 of McGregor, op cit, relating to contracting parties'
knowledge of "special circumstances". He asked whether there were "special
circumstances" known at the time to the buyer which he should be taken as
having accepted so as to restrict his claim "(by reduction from the prima facie
measure)" or by which the seller should have contemplated exposing himself to
an "open-ended liability" of indemnity.
In
my view, that was a wrong approach. This was not a "special circumstances"
case or one where the possible damages were so remote or open-ended as not to
have been within the parties' contemplation. It was eminently a case in which
they would have contemplated that, in the event of a breach by the seller
discovered only after the decals had been in use, the buyer might wish to pass
on to it claims for damages from dissatisfied customers.
I
add a few words about chain contracts. In
Dexters
Ltd. v. Hill Crest Oil Co. (Bradford) Ltd
.
[1926] 1 K.B. 348, CA, Bankes, Warrington and Scrutton LJJ expressed the view,
obiter, that all the contracts in a chain must be the same if recoverable
damages are to be passed along the chain. However, as the editors of Chitty,
op cit, Vol. 2, at para. 815, observe, that approach is "a little too strict".
The matter was considered by Devlin J in
Biggin
v. Permanite
.
He said, at 433, that he agreed with the reasoning that lay behind the view,
namely that material variations in contracts down the line could lead to
contractual claims for damages not contemplated by the original seller.
However, he clearly regarded the matter as one of fact for determination in
each case, not as a rigid principle of law that all contracts in the chain must
be in the same terms. He said, at 433-434:
" I
respectfully adopt this principle, but I have still to determine how it should
be applied in this case, and also what degree of variation in descriptions
breaks the chain. ... To understand the application of the principle it is
necessary to understand its basis. Like every principle in this branch of the
law, it stems from the broad rule that the damage is to be measured by those
consequences of the breach which the parties as reasonable men would, if they
had thought about it, have foreseen and accepted as natural and probable. If
the variation to a description is such that it is impossible to say whether the
injury that ultimately results would have flowed from the breach of the
original warranty, the parties must as reasonable men be presumed to have put
the liability for the injury outside their contemplation as a measure of
compensation. If this is, as I believe, the nature of the principle, it must
be applied very differently according to whether the injury for which the
defendant is being asked to pay is a market loss or physical damage. In the
former case (which I think is what the Lords Justices were considering in
Dexters
...) any variation that is more than a matter of words is likely to be fatal,
because there is no way of telling its effect on the market value. In the
latter case the nature of the physical damage will show whether the variation
was material or not."
As
Mr Stephen Grime QC submitted on behalf of the seller, the point is essentially
one of causation, namely whether there is sufficient similarity between the
sale contract and the subsequent contract(s) to enable a finding that breach by
the seller of the sale contract has in fact caused the breach of the subsequent
contract(s). Clearly, as he also submitted, a substantial change to goods sold
as a result of the buyer subjecting them to a manufacturing process may break
the chain of causation between the breach of the contract sued upon and any
claim arising under a subsequent contract. However, that is unlikely on the
facts of this case - a five-year film life without deterioration was stipulated
by the container owner, the container manufacturer and the decal manufacturer,
the buyer, in the contracts into which they respectively entered along the
chain.
I,
therefore, conclude, as Otton LJ has done, that this is plainly a case in which
the parties must be taken as having contemplated that any latent defect in the
vinyl film at the time of delivery or at the time of conversion by the buyer
into the decals might when later discovered render the buyer vulnerable to
claims for damages which it would wish to pass back to the seller. On the
material before the judge, there appears to have been no material differences
between the contracts in the chain which would have put damage claimed at any
point in the chain outside the imputed contemplation of the buyer and seller,
given their knowledge that the vinyl film and the decals into which it was
converted were required to serve their purpose for a minimum of five years. I
am accordingly of the view that the appeal should be allowed and that there
should be an order in the terms stated by Otton LJ.
LORD
JUSTICE THORPE: Where a contract is breached the natural objective of the
legal system is to compensate the injured party fairly. Where a manufacturer
supplies a defective product to his customers as a consequence of the use
within the process of a raw material that did not possess the qualities
warranted by the supplier the manufacturer is fairly compensated by recovering
from the supplier the cost of settling claims made by his customers together
with the profit lost on those sales, and perhaps prospective sales.
Compensation so calculated would in the vast majority of cases considerably
exceed the price that the manufacturer paid for the raw materials. I make
those generalisations to illustrate the conclusion that the facts underlying
this appeal are exceptional.
The
condition governing the supply of the product to the plaintiff dealt with
liability under paragraph 11 in these terms:
"(c) The
seller's aggregate liability to the purchaser whether for negligence breach of
contract misrepresentation or otherwise shall in no circumstances exceed the
cost of the defective, damaged or undelivered goods determined by net price
invoiced to the buyer in respect of any occurrence or series of occurrences.
(d) The
seller's prices are determined on the basis of the limits of liability set out
in this condition. The purchaser may by written notice to the seller request
the seller to agree a higher limit of liability provided insurance cover can be
obtained therefore."
Thus
the parties must be taken to have contemplated the consequence of possible
future breach within the terms of those sub paragraphs.
When
problems of discolouration and disintegration of the decals arose in the summer
of 1985 the plaintiffs did not know the cause but the defendants did. The
defendants took steps to remedy the deficiency in future supplies, concealing
its realisation and its reaction from the plaintiff. When the plaintiffs
subsequently asserted the true cause of the defect the defendants refuted the
assertion by spurious reliance on test results that were not germane. Despite
this unmeritorious history the defendants vigorously contested the issue of
liability. The plaintiffs' managing director gave lengthy evidence. On the
sixth day the defendants made substantial admissions. On the seventh day they
added the admission that all the material supplied to the plaintiff between
1980-1985 inclusive was defective in that by reason of its lack of ultra violet
stabiliser it had a tendency to discolour or degrade within the five year
period for which it was warranted durable. The defendants were therefore left
with the issue of quantum of the resultant damage. The statement of claim
sought the return of the contract price of £564,328.54. By subsequent
amendment it sought an indemnity in respect of all claims made or to be made
against the plaintiffs caused by or attributable to the supply by the
defendants of defective film. But the defendants' endeavour to persuade the
judge to assess damages on the alternative basis pleaded by amendment had to be
weighed not only in the light of the concessions but also upon the evidence of
the plaintiff alone, since the defendant elected to call no evidence. In the
course of his evidence Mr Bence for the plaintiffs had asserted that the
defective film supplied was worthless, since it lacked the essential
durability, and that accordingly the plaintiffs were entitled to the return of
the price paid.
Of
course the reality was that he had had no conception that the material was
defective until 1985 and had processed it to supply decals to manufacturers
whose ultimate dissatisfaction had only given rise to modest claims. Despite
that reality the judge was entitled to find that the product was worthless for
want of durability and that finding has always been accepted by the defendants.
But that is simply an unusual feature of the developments post the defendants'
breach and it is the consequence of the latent character of the defect.
The
issue fought by the defendant following the concessions on the sixth and
seventh days had to be resolved by the application of sections 53 and 54 of the
Sale of Goods Act 1979 to the contract from formation to breach. By the terms
of section 53(3) the plaintiff had a prima facie entitlement to the return of
the contract price. At trial Mr Heaton mounted an argument under section 54 or
the second limb in
Hadley
v Baxendale
.
Throughout this appeal Mr Grime has contended under the first limb and section
53 that the plaintiff's prima facie entitlement is displaced by the party's
exclusive contemplation of an alternative measure of damages. Mr Grime
criticises with justification the use of the word 'remedy' at page 6e of the
judgment. But in the end the judge made a finding which in my judgment is
decisive of this appeal. His ultimate conclusion at 18c was in these terms:
"The
defendants have failed to satisfy me on the balance of probabilities that
having regard to all the circumstances in which the contract was made the
parties must be taken to have contemplated that the section 53(3) measure of
damages was displaced."
That
was a finding of fact made on the evidence of the plaintiffs. I accept Mr
Moran's submission that that finding is unassailable in this court. The
consequence of the finding was judgment for damages equivalent to the price
paid for the defective goods. The plaintiffs accepts that the judgment is
comprehensive of all claims arising from the breach and that should they face
future claims from those they supplied they cannot look to the defendants for
indemnity or any other contribution.
Before
reaching his essential contribution Morland J reviewed the relevant authorities
at some length. As the sophisticated argument in this appeal demonstrates this
is not an easy field of case law to summarise or to reconcile. But in my
judgment Mr Moran is right to emphasise the distinction between authorities
which determine cases involving a string of contracts and cases involving the
supply of a raw material to a manufacturer or processor who converts the
material to, or incorporates it within, some other product for supply to his
customers. As Mr Moran submits, in the former class of case the buyer changes
role and becomes himself the seller, the self same goods passing along a
conduit of contracting parties on identical terms save as to price. In such
cases (exemplified by
Hall
v Pim (Junior) & Co
(1928) 30 Ll l Reps 159) the exclusive contemplation of the parties is very
different in the event of breach of a quality warranty. In the latter type of
case the contemplation of the supplier and the manufacturer is less confined
and will depend upon all the circumstances of the case. Here the judge decided
the contemplation of the parties on the evidence of the plaintiff alone.
Although
the arguments have ranged wide over authority which as my lord, Auld L.J.
demonstrates is difficult if not impossible to reconcile, I would dismiss this
appeal on the simple ground that the judge's conclusion was justified on the
evidence and no sufficiently substantial misdirection in law has been
demonstrated.
Order:
Appeal
allowed with costs; case be dealt with in Mercantile Court, Manchester, for
assessment of further damages and costs plus interest of hearing below.
Further
proceedings stayed until repayment of £800,000 (excluding order as to
costs); payment to be made within 28 days.
Balance
of judgment sum plus interest accrued be paid to defendant's solicitors.
Leave
to appeal to the House of Lords allowed.
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