England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE NO: QBENF 97/0233/C

(ALLIOTT J )

Royal Courts of Justice

Strand

London WC2

Wednesday 8th October 1997

B e f o r e :

LORD JUSTICE EVANS

LORD JUSTICE ALDOUS

-and-

LORD JUSTICE WALLER

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BRITISH SUGAR PLC

(Respondents/Plaintiffs)

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NEI POWER PROJECTS LIMITED & ANR

(Appellants/Defendants)

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Computer Aided Transcript of the Stenograph Notes of

Smith Bernal Reporting Limited

180 Fleet Street, London EC4A 2HD

Telephone No: 0171-831 3183 Fax No: 0171-404 1424

(Official Shorthand Writers to the Court)

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MR TIM ELLIOTT QC (instructed by Messrs Rowe & Maw, London EC3) appeared on behalf of the Appellants

MR IAN GLICK QC and MR WILLIAM WOOD (instructed by Messrs Herbert Smith, London EC2) appeared on behalf of the Respondents

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J U D G M E N T

( As approved by the Court )

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Crown Copyright

Wednesday 8th October 1997

LORD JUSTICE WALLER: This is an appeal from the judgment of Alliott J by which he determined on a preliminary issue that the words seeking to place a limitation on liability for damages in relation to "consequential loss" did not apply to loss flowing directly and naturally from a breach. The judge relied on two Court of Appeal authorities and on a first instance decision which appeared to support the view he took. He rejected a submission based on an analysis in Macgregor on Damages (15th Edition) (where the editor seeks to draw a distinction between "normal" and "consequential" damages), that some damages which flowed directly and naturally from a breach of contract can also be "consequential" and the subject of limitation. The question which arises on this appeal is whether the judge was right.

It is common ground that the contract between the plaintiffs and defendants was for the design, supply, delivery, testing and commissioning of electrical equipment by the defendants. The ultimate contract price, we are told, was about £106,585. The plaintiffs allege that the equipment was poorly designed and badly installed, which resulted in breakdowns in the power supply. The damages claimed are over £5 million, and consist mainly of increased production costs and loss of profits due to breakdowns.

In the negotiation of the terms of the contract the plaintiffs provided in their invitation to quote their standard terms which included Clause 6, which reads as follows:

"(i) The Seller warrants that the goods are new and free from defects.

(ii) If within 12 months from the date the goods are put in use (but not exceeding 18 months from the date of delivery) the Purchaser notifies the Seller of a defect (being a fault in workmanship, material or design or a discrepancy from the contract description or specification) the Seller will repair or replace the defective goods at the Seller's expense (including packing and carriage). The repaired or replacement goods shall be subject to a like warranty.

(iii) If within 7 days of such notification the Seller does not undertake to effect such repair or replacement and complete the same within a reasonable time the Purchaser may do so and the costs and expenses incurred will be recoverable from the Seller.

(iv) The Seller will be liable for any loss, damage, cost or expense incurred by the Purchaser arising from the supply by the Seller of any such faulty goods or materials or any goods or materials not being suitable for the purpose for which they are required."

It is accepted that on a true analysis of the offer made by the defendants and the counter-offer of the plaintiffs and then acceptance of the defendants, the contract as originally concluded included the above term. It also included a term much relied on by Mr Elliott QC to the following effect:

"Damages for Delay

If delivery of equipment to site or installation on site is delayed beyond the dates stipulated in the Order, then British Sugar shall be entitled to Liquidated Damages of 0.5% of the total Order value for each week or part week thereof of delay subject to a maximum of ten weeks."

However, the defendants were unhappy about their apparent unlimited liability other than for delay, and accordingly there commenced negotiations between the plaintiffs and defendants in relation to some limitation of liability. The negotiations were examined by the judge and have been examined before us without objection, albeit there must be some doubt as to how far they can assist ultimately in the question of construction. The defendants initially wanted an overall limitation of liability by reference to the order value (see their letter of 26th March 1990, page 86). This was not acceptable to the plaintiffs, who proposed a limitation expressed as "liability for consequential loss under Clause 6(iv) will be limited to a maximum of £200,000" (see their letter of 30th March, page 90). The defendants rejected that proposal in these terms:

"Limitation of Liability

The Company's terms for business trading is that our liability is limited to the value of the contract and as such we cannot depart from this policy. We reject therefore that we cannot accept your proposal for consequential loss."

However, the plaintiffs insisted and responded to that letter -- it is unclear whether there was any conversation which preceded it -- by their letter of 10th April, which said as follows:

"Liability for Liability

In respect of the above contract NEI's [the defendants] liability for consequential loss is limited to the value of the contract."

That letter concluded the negotiations, and the defendants accepted its terms by continuing with the contract thereafter. It is accepted that its effect was as found by the judge to amend Clause 6(iv), which thus, as amended, would read as set out at the top of page 56 of the judge's judgment:

"(iv) The Seller will be liable for any loss, damage, cost or expense incurred by the Purchaser arising from the supply by the Seller of any such faulty goods or materials or any goods or materials not being suitable for the purposes for which they are required save that the Seller's liability for consequential loss is limited to the value of the contracts ."

It is worth noting in passing that this is a case where it is the plaintiffs in one sense who were imposing their term on the defendants as opposed to the defendants putting into the contract an exclusion clause, although it can be said against that that the plaintiffs were only doing so on an insistence from the defendants that some limitation should be accepted. But in the result what is clear is that the Court is dealing with a contract negotiated between businessmen and not a contract simply on standard terms. Secondly, it can also be seen that the effect of amending Clause 6(iv) would appear to reflect the negotiation, that is to say the plaintiffs were not prepared to accept an overall limit on all damages, but were drawing a distinction between consequential damages and others and were prepared to accept a limit on consequential loss only.

The clause accordingly as amended seems on its face to place on the defendants an obligation to pay any damages which would normally be recoverable for a breach of contract, but provides for some limitation only so far as consequential losses are concerned. The question is what limitation is placed upon the damages by use of the words "consequential loss", and that obviously depends on the meaning of the word "consequential".

The appellants suggest that any reasonable businessman would understand that, for example, loss of profits would be "consequential". They rely on those authorities which suggest that it is important to ascertain in the context of a commercial contract what reasonable businessmen would have intended placed in the situation of the parties. They then rely on Macgregor on Damages (15th Edition) paras 25 to 27 and say that the analysis of the editor there coincides with what a reasonable businessman would understand, albeit Mr Elliott developed this part of his submission on this contract a little further, as I shall explain.

The key passage in Macgregor is again set out in the judge's judgment at page 57:

"...in contract, where pecuniary losses are nearly ubiquitous, another distinction is taken and built upon. This is the useful and important division between normal and consequential losses. The normal loss is that loss which every Plaintiff in a like situation will suffer, the consequential loss is that loss which is special to the circumstances of the particular Plaintiff. In contract the normal loss can generally be stated as the market value of the property, money or services that the Plaintiff should have received under the contract less either the market value of what he does receive or the market value of what he would have transferred but for the breach. Consequential losses are anything beyond this normal measure, such as profits lost or expenses incurred through the breach, and are recoverable if not too remote."

Mr Elliott submitted that in the instant case he was not suggesting that difference in value was the "normal" and everything else consequential. He submitted that the true analysis in this case was:

First, that delay had been dealt with by a separate clause, so that could be left on one side;

Second, that Clause 6(ii) and (iii) were dealing with the remedying of defects and that thus the scheme of the contract was to place damages relating to remedying defects in the "normal" bracket and anything else in the "consequential" bracket. He at one time in his argument appeared to accept that that construction might leave no room for any damages to be recovered under the opening words of Clause 6(iv) as amended.

The respondents rely primarily on two Court of Appeal decisions: Millar's Machinery v David Way (1935) 40 Com Cas 204 and Croudace Construction Limited v Cawoods Concrete Products Limited (1978) 2 Lloyd's 55, and also on an intervening decision at first instance of Saint Line Limited v Richardson [1940] 2 KB 99.

I should deal with each of those authorities:

First, taking Millar's Machinery v David Way . What the Court of Appeal in that case had to consider was a term under which the sellers stated:

"We do not give any other guarantee and we do not accept responsibility for consequential damages."

In that case in the result the purchaser recovered the deposit paid towards the price of a machine prior to delivery and also a further sum paid for the supply of a replacement machine at short notice. The Court of Appeal held that the plaintiffs' right to recover those damages was unaffected by the wording of the contract. Maugham LJ is reported as putting it this way - everybody accepting that the report is not very full, but it not being seriously doubted that it accurately reflects what he did say:

"On the question of damages, the word 'consequential' had come to mean 'not direct', but damages recovered by the Defendants on the Counterclaim arose directly from the Plaintiffs' breach of contract under section 51(2) of the Sale of Goods Act 1893."

Then Roche LJ is reported as agreeing that the damages recovered by the defendants on the counterclaim are not merely "consequential" but resulted directly and naturally from the plaintiffs' breach of contract.

In date order, as it were, the next is the Saint Line case (supra). That was a decision of Atkinson J. The clause he had to consider was a clause excluding liability for "any indirect or consequential damages or claims whatsoever". The claims in that case included a claim for loss of profit, and the question was whether that type of claim was excluded by that clause. In the course of his judgment Atkinson J said:

"What does one mean by 'direct damage'? Direct damage is that which flows naturally from the breach without other intervening causes and independently of special circumstances, while indirect damage does not so flow. The breach certainly has brought it about, but only because of some supervening event or some special circumstances unknown to the seller ... In my judgment, the words 'indirect or consequential' do not exclude liability for that which is prima facie recoverable; that is, do not exclude liability for damages which are the direct and natural result of breaches complained of."

The second Court of Appeal decision is that in Croudace (supra). The clause in that case was a clause which provided:

"We are not under any circumstances to be liable for any consequential loss or damage caused or arising by reason of late supply or any fault, failure or defect in any material or goods supplied by us or by reason of the same not being of the quality or specification ordered or by any other matter whatsoever."

Megaw LJ gave the leading judgment, but the other two Lord Justices agreed with it. He said this:

"... To my mind the decision of this Court in Millar's Machinery v David Way is a decision, the ratio decidendi of which is directly applicable to the present case and which is binding on this Court.

In these circumstances the references which Mr Neill gave us to passages in textbooks, and in other cases not directly concerned with the issue with which we are concerned, are not really of assistance. It is clear that the word 'consequential' can be used in different and varying senses. It may be difficult to be sure in come contexts precisely what it does mean. But I think the meaning given to the word in Millar's case is applicable to the present case. It is binding on us in this case. Even if strictly it were not binding, we ought to follow it. That case was decided in the year 1934. It has stood, therefore, now for more than 43 years. So far as I know it has never been adversely commented upon. It is referred to in a number of textbooks, including some of those to which we were referred by Mr Neill; it is referred to in Halsbury's Laws (4th Edition) Vol 12 under the title of Damages at paragraph 113...

I would add that, if I had taken a different view about that and had regarded it as not being binding upon this Court I would have felt very great difficulty in accepting that the alternative meaning as put forward by Mr Neill in his very ingenious and interesting argument was one that would be preferable or even acceptable in the context of the clause in this case.

Accordingly, taking the view that I do, that Parker J was right to hold that the word 'consequential' does not cover any loss which directly and naturally results in the ordinary course of events from late delivery, I would dismiss the appeal."

In my view the major difficulties in the defendants way in seeking to persuade this Court that the judge was wrong in the view he took are as follows:

First, Croudace was dealing with a clause which in that case happened to relate to delay. But I do not for my part find that a material distinction. Both the Millar case and the Croudace case were construing the word "consequential" in a very similar context to that which appears in this case. With Court of Appeal authority construing a phrase in a very similar context, and another Court of Appeal saying that the view previously expressed is binding in yet another similar context, it would take some radical difference in language or a radical difference in context to persuade yet a further Court of Appeal not to construe the phrase the same way. Despite Mr Elliott's efforts I am quite unpersuaded that there is that radical difference or indeed any material difference in context in the instant case;

Second, in any event once a phrase has been authoritatively construed by a court in a very similar context to that which exists in the case in point, it seems to me that a reasonable businessman must more naturally be taken to be having the intention that the phrase should bear the same meaning as construed in the case in point. It would again take very clear words to allow a court to construe the phrase differently;

Thirdly and finally, the construction suggested by the appellants, in my view, gives very little effect to the words at the commencement of Clause 6(iv). On a proper reading of that clause, an obligation was being placed on the defendants to pay such damages as flowed naturally and directly from any supply by the defendants of faulty goods or materials, with the limitation being imposed in relation to some other type of loss which did not flow so directly, for example, damage which might flow from special circumstances and come within the second limb in Hadley v Baxendale .

It seems to me that the judge was right and that on the true construction of this contract the parties simply agreed to limit the defendants' liability for loss and damage not directly and naturally resulting from the defendants' breach of contract to an amount equal to the value of the contract.

I would for my part dismiss the appeal.

LORD JUSTICE ALDOUS: I agree.

LORD JUSTICE EVANS: I also agree.

Order: Appeal dismissed with costs.