England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM TAUNTON COUNTY COURT
(His Honour Judge O'Malley)

		Royal Courts of Justice Strand London WC2 Thursday 16th May, 2002

1. LORD JUSTICE ALDOUS: With permission of this court, SW Tubes Ltd ("Tubes") appeal against the order of His Honour Judge O'Malley of 25th October 2001 which gave judgment for the defendants, Owen Stuart Ltd ("Owen"), with costs to be assessed if not agreed.
2. These proceedings arise out of a contract entered into between Tubes and Owen, whereby Owen agreed to supply machinery for the manufacture of cardboard tubes. It was supplied in accordance with the contract and was paid for by Tubes, but a number of problems became apparent with the result that Tubes sought to reject the machinery and to claim damages.
3. The background facts can be obtained from the judge's judgment. Tubes were and are engaged in the manufacture of cardboard tubes and rolls. Their business was established in 1995 by Mr Robert Seabourne. The company has enjoyed a rapid expansion of about 25% per year since its inception in 1997 and therefore has occupied three successively larger sets of premises. Owen is a small business based in Croydon which imports tube-making machinery from Germany, rebuilds and sells second-hand machinery and designs and manufactures related special purpose equipment. Its two principal operatives are Mr Baker, the proprietor, and Mr Dunning, the engineering manager.
4. In 1996 Mr Seabourne was looking to expand the business of Tubes by acquiring a second production line. Over a period of several months in 1996 he consulted Owen with a view that they would obtain for him second-hand components which with certain new components would make up the new production line. In due course a proposal evolved that Owen would refurbish and supply a second-hand piece of equipment called a core winder and a second-hand saw for cutting the newly-made tube, and that they would manufacture or supply other machinery that was needed, namely a reel stand and a glue bath.The defendants issued two invoices to the claimants dated 9th September 1996, the first for £7,000 in respect of the acquisition "for rebuild on your behalf" of the winder and the saw. The second was for £10,000 as a stage payment in respect of rebuilding the winder and the saw and supplying the reel stand and glue bath. These invoices were paid by Tubes in September and November 1996 respectively. On 8th November 1996 Owen sent a written quotation to Tubes, listing the components to be supplied which totalled a sum of about £40,000.
5. The reel stand was delivered to Tubes' premises in Bridgwater in January 1997 and the rest of the machinery, with the exception of the saw, in February 1997. There was no hurry to install the machinery as Tubes was planning to move to new premises. The saw was delivered at the end of September 1997 with certain other items.
6. After several postponements, Tubes moved to their new premises on 1st May 1998. In mid-May Mr Baker and Mr Dunning attended in order to install the production line which had been moved there from storage with the claimants.
7. The saw was a used one which had previously been in operation in another factory where it had been driven by rubber belts. Owen decided to convert the drive from belt-drive to flexible rotating drive. The flexible drive was obtained from specialist manufacturers, SS White Ltd, who had also advised on its specification. On 18th May 1998 when the saw was started up at Tubes' factory, the flexible drive buckled and its casing shattered. Owen were puzzled as to why this had happened. They had in mind that it might have been caused by rust and they took it away for examination by SS White Ltd. A replacement drive was obtained which was slightly shorter in length so as to increase rigidity and a further attempt was made to operate the saw on 8th June 1998. Owen was not happy that it was working properly. As Mr Dunning said in cross-examination, he stopped the machine before it failed. He did not know why it had failed. He proposed to remove it for further modifications. Mr Seabourne was present on this occasion and was exasperated. He repeatedly asked Mr Dunning how long it would take to get the line running. Mr Dunning, as he admitted, said "I don't know, ask Mystic Meg!". Mr Seabourne was incensed at that reply. However, Mr Baker offered to replace the entire saw unit while further tests were carried out, but this was not acceptable to Mr Seabourne. The saw and the drive were then taken to SS White, who were amazed as to what had happened but did not know what the cause was.
8. On 10th June 1998 Tubes' solicitors wrote to the defendants complaining that, amongst other things, the machinery was not fit for its purpose and was not of appropriate quality. They purported to reject the machinery and to repudiate the contract. They sought the removal of the machinery within seven days and threatened legal proceedings. This provoked a response from Owen's solicitors. They asserted that the problems with the flexible drive did not entitle Tubes to repudiate the contract. In their letter of 23rd June 1998 Owen's solicitors said:

"Mr Dunning's apparent flippancy is regrettable. It occurred at a time of mutual concern and after he had explained several times that before consulting with SS White Limited, the manufacturer of the flexible drive, he was unable to give any reliable explanation or solution to the problem. Our client has now been informed by the supplier that they have identified and resolved the problem and expect to supply a replacement drive in 10 to 14 day's time. We trust that this is sufficiently precise and certain. Our client has meanwhile located an operational target saw which can be delivered on temporary loan within 2 working days, for use until your client shares the confidence of ours in the function and operation of the unit already supplied. The unit offered on temporary loan features a "boat style" cam and a belt/pulley spindle drive instead of flexible drive. In summary therefore our client is in a position to ensure the satisfactory operation of the line within 2 working days and we would be obliged for your immediate confirmation that your client will allow ours to proceed in the suggested manner."

9. The claimants had in the meanwhile commissioned a report on the entire production line from Strange, Strange and Gardner, Forensic Consulting Engineers. Their Mr Hobson, who gave evidence, made a number of criticisms, particularly in relation to the inadequacy of the guards to the saw. He acknowledged however that the installation of the machinery had not been completed, and that accordingly his examination did not disclose whether the machinery would function properly.
10. On 1st July 1998 Owen's solicitors wrote to say that Owen had resolved the problem with the flexible drive and that Owen wished to install it on Friday 3rd July. Tubes' solicitors agreed to allow access, but only on the basis that Owen would commission the production line using its own raw materials "as is normal custom and practice". They also pointed out that the factory was shut down at 2pm on Friday afternoons. Mr Dunning duly attended on 3rd July and fitted the drive, this time with a slow start mechanism. Owen's solicitors wrote on 3rd July disputing that there was any contractual obligation on Owen to commission the machinery.
11. The correspondence continued between the solicitors on the issue of whether Owen was obliged to commission the machinery and as to the terms upon which an inspection by an expert for Owen could take place. Eventually Tubes' solicitors advised Tubes that it should try to commission the machinery. On 12th September 1998 Tubes commenced a trial production run, but experienced what was believed to be a further failure of the flexible drive to the saw. A letter from Tubes' solicitors followed demanding removal of the machinery and a refund of the purchase price.
12. On 2nd October 1998 an inspection of the saw at Tubes' premises was carried out by SS White. They subsequently produced a report dated 30th October 1998. The report pointed out that the flexible drive and coupling (at the saw blade end) had been unscrewed completely from the flexdrive casing to expose the disengaged flexible shaft. The end coupling was still attached to the saw blade drive shaft. The flexible shaft protruded from the flexdrive casing by approximately 50mm. The squared end of the flexible shaft appeared to be undamaged.
13. The probable cause was stated in the report to be:

"The most probable cause of failure was an excessive torque load produced by the saw blade cutting action through the cardboard tube. However, there are two anomalies, referred to in comments 3 and 4 below, which suggest other factors may be responsible. There was no opportunity to discount these anomalies. ie by removing the flexdrive for close inspection or by observing the machine in operation. Therefore, SSW cannot say with certainty failure was attributable to the above stated cause."

14. Later the report stated:

"Furthermore, SSW would not be confident in recommending a solution until the value of this parameter [the excessive torque] is determined. SSW consider the most reliable way to determine its value is by empirical means."

15. The conclusions and recommendations were as follows:

"SSW conclude the operating torque exceeded the limit for the flexdrive. This excessive torque probably, but not certainly, resulted from the cutting action through the cardboard tube. SSW therefore accept the original selection was inappropriate. The selection of this flexdrive was based on information provided by our customer OSLTS. Using this information the appropriate flexdrive was selected. SSW are surprised, given the flexdrive was supplied in April 1997, this problem did not come to light at a much earlier date. Further, the maximum operating torque is still unknown.

SSW are confident a flexdrive can still be used for this application. Two actions are recommended as follows.

1. Determination of the torque load produced by the cutting operation to enable correct selection of flexdrive size/type.

2. As a consequence of the first action a review of the flexdrive support system will probably be required."

16. Mr Seabourne took the view that he was "simply not in a position to allow further extensive testing". He continued to insist on the removal of the machinery and a refund of the purchase price. There followed these proceedings on 28th November, claiming some £24,000 as the cost of remedying the alleged deficiencies of the machinery and £85,000 for loss of profit on lost production.
17. A number of issues had to be decided by the judge. First, it was Owen's case that the winder and saw were purchased by them as agents for Tubes and that they only contracted to refurbish them and to manufacture a reel stand and glue bath for incorporation into the production line to be installed. The judge concluded that there were two successive contracts of sale, and that when Owen acquired the machinery they were not acting as agents for Tubes.
18. Second, a question arose as to whether the original contract included an obligation on the part of Owen to commission the machinery at Tubes' premises. The judge concluded that there was no obligation implied into the contract that Owen would commission the production line.
19. Third, it was contended by Owen that their standard terms and conditions were incorporated into the contract. The judge rejected that argument and therefore did not have to deal with the submission of Tubes that the exclusion clause relied on was void.
20. Fourth, there was a dispute as to whether certain parts had in fact been supplied. The judge concluded that it was more likely than not that the items had been delivered, but had become subsequently mislaid.
21. Fifth, Tubes alleged faulty manufacture of certain parts. In particular, complaint was made as to the stability of the reel stand, the strength of the glue pipes and the quality of certain welds. The judge accepted the evidence given on behalf of Owen and concluded that the machinery itself was of satisfactory quality.
22. Sixth, Tubes alleged that the saw with its drive was not of appropriate quality or fit for the required purpose. The judge held that the saw did not work as required and that on the balance of probabilities the flexible drive from the motor to the blade was of inadequate strength. He concluded that Owen were in breach of the implied term as to quality and fitness.
23. Seventh, there were criticisms by Tubes of the omission of guards on the saw. They contended that the supply of the saw contravened the Sale of Goods Act 1979 (as amended). The judge held that Tubes had not established their case on this point.
24. The result was that Tubes had only established a breach of contract relating to the failure of the saw due to the defective drive mechanism. The judge went on to consider whether Tubes had mitigated its loss. He concluded that Mr Seabourne ought to have taken up Owen's offer to install an alternative saw. Had Mr Seabourne done that, then production would have been operational without any significant loss of time. The judge went on to hold that the fact that Tubes waited for so long before attempting to commission the machinery showed that the need to get into production was not an immediate priority. The judge concluded that Tubes' objective at that time was to get out of the contract if it could and to recover its outlay.
25. The case before the judge was concerned with the issue of liability alone. Even so, the parties dealt with the question of mitigation. However, after handing down his written judgment, the proceedings were restored to decide what order should be made and who should pay the costs. For Owen it was contended that the judge's conclusion had effectively disposed of Tubes' case and that accordingly it should be dismissed. Tubes contended that they had succeeded in establishing a breach of contract and therefore was entitled to judgment and to their costs with damages to be assessed.
26. The judge concluded that by the time the production line had been installed, Tubes were reluctant to put it into operation and that it had seized on the non-operation of the saw as an excuse for rejecting the goods. Tubes had no substantial claim for damages for breach of contract. Thus, notwithstanding the technical finding of breach of contract, Tubes had failed in the proceedings and therefore he ordered that there should be judgment for Owen with costs to be assessed if not agreed.
27. On the appeal, Tubes support the judge's conclusion that Owen was in breach of contract by supplying the defective drive to the saw, but contend that he had wrongly concluded that it had failed to mitigate its damage. Second, Tubes contend that Owen were in breach of contract by failing to provide appropriate guards for the saw. Third, they submitted the judge was wrong to make the order that he did. The correct order was to award them the costs with damages to be assessed. They contended that they had established a breach of contract and there was no evidence upon which the judge could have concluded that the damages were nominal. They were therefore entitled at least to an order for damages to be assessed. Further, the order for costs should have reflected the matters upon which they had succeeded.
28. Owen served a respondent's notice in which they sought to challenge the judge's conclusion that they were in breach of contract by supplying the particular drive to the saw. Owen asserted in their notice that the flexible drive was "of satisfactory quality and fit for the purpose" and there was insufficient evidence upon which the judge could have concluded that the particular drive was not satisfactory for the particular type of use for which the contract was made. In particular, Owen asserted that the drive was of adequate strength and, in any case, was adequate for the contracted purpose. Owen also contended that there was no deficiency of guards; also that they had not agreed to supply them. They also contend that if the judge should have given judgment for Tubes, the damages were nominal and that in any event he should have ordered Tubes to pay Owen's costs of the proceedings.
29. Mr Baker appeared for Owen. He addressed us with courtesy and his explanation of the machinery and what happened has helped me to understand the evidence in this case. However, he accepted that the flexible drive supplied was not adequate to power the saw. He therefore did not pursue any challenge to the judge's judgment that there had been a breach of contract.
30. It follows that this appeal, as argued before us, is concerned with the issues of mitigation, the guards, the order and costs. I will deal with them in that order.

Mitigation

31. Although the machinery was delivered during 1997 it was not installed until 18th May 1998 because of Tubes' intended move to new premises, which occurred on 1st May 1998. On 18th May 1998 the drive failed. We now know that the drive was not appropriate for the job. Mr Virgo, who appeared for Tubes, suggested that the breach of contract happened on delivery, but accepted that for practical purposes it occurred on 18th May 1998. The saw was tried again on 8th June 1998. It was switched off before it failed; but it certainly, on the evidence, would have failed. It was on this occasion that Mr Baker offered the replacement saw. No doubt it would have taken a few days to find and install. That offer was repeated in the letter of 23rd June 1998 in the passage which I have already read. From that letter it seems that the new saw might not have been available until 25th June or thereabouts.
32. The judge held that Tubes had failed to mitigate their damage. He said:

"It is a fundamental rule of contract law that a claimant in respect of a breach of contract cannot recover damages for any part of his loss which he could have avoided by taking reasonable steps. In the present case it is contended by the defendants that the claimant should have accepted their offer to supply an alternative saw until the problems with the original one were rectified. Mr Seabourne said that he did not accept the offer because he had lost confidence in the defendants following the remark about Mystic Meg. Whether that is indeed the case, which I doubt, I have come to the conclusion that Mr Seabourne ought reasonably to have taken up the defendants' offer. The saw was only one of several components making up the production line and the flexible drive was only a small part of the saw. It cost less than £200 and had been obtained from the most reputable of suppliers. The problem was therefore a technical one which the suppliers, together with the defendants, themselves also a leading company in their field, could be relied upon to solve in due course. Had Mr Seabourne taken up the defendants' offer the production line would have been operational without any significant loss of time. The fact that the claimants waited for so long before attempting to commission the machine themselves shows, at the very least, that getting into production with the line was not an immediate priority. On the contrary, as I find, the claimants' objective at that time was to get out of the contract if they could and to recover their outlay."

33. Mr Virgo criticised that part of the judgment. He accepted that Tubes had to act reasonably to recover damages and in legal terms had to mitigate their loss, but he submitted it was unreasonable to expect Tubes to accept the offer as there had been two failed attempts to make the saw work. Owen did not know how to put it right and did not appear to Tubes to be taking the matter seriously. All that was offered was a loan. It followed, he submitted, that Tubes were within their rights to treat the breach as a repudiation and to reject the machinery.
34. I cannot accept those submissions. The saw with its drive was a small part of the line. It was a standard piece of equipment and there was no suggestion that the offered saw would not have worked perfectly satisfactorily, with the result that the line could be used pending resolution of the problem with the flexible drive. To accept the offer cost nothing and would have prevented further damage. In the circumstances I believe the judge was right to conclude that Tubes, acting reasonably, should have accepted the offer. Tubes in my view failed to act reasonably when they rejected it, with the result that the claim for damages should be limited to the period ending with the date when the replacement saw would have been installed.

The judge's order

35. The conclusion that Tubes failed to mitigate their damage does not mean that they were not entitled to an order for damages to be assessed. The hearing took place to determine liability and evidence had not been directed to whether Tubes suffered more than nominal damages between 18th May and 8th June or some time around 25th June. Certainly no evidence was put before us upon which the judge could have concluded that damages were not substantial. The judge should, in my view, not have given judgment for Owen. Tubes had established a breach of contract and were entitled to judgment with an order that damages, if any, should be assessed.

The guards

36. It is not disputed that the saw supplied did not have guards, despite the fact that it had a continuously rotating blade, and moved from side to side and back and forth. Mr Virgo conceded before us that as the saw was second-hand it did not come within the 1992 Regulations. He submitted that the saw was not of merchantable quality as required by section 14 of the Sale of Goods Act 1979. The relevant parts of that section are as follows:

"14(1) Except as provided by this section and section 15 below and subject to any other enactment, there is no implied term about the quality or fitness for any particular purpose of goods supplied under a contract of sale.

(2A) Where the seller sells goods in the course of business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

...

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods-

...

(d) safety, ..."

37. The evidence as to guards was given by Mr Hobson of Strange, Strange and Gardner. He said:

"It is necessary to have some part of a circular saw blade exposed to allow it to function. However, in the situation in question it is practicable to design and construct an enclosure to nullify the dangers of the cutting head. It would also be reasonably practicable to arrange safety switches on the front and rear cabinet panels. The arrangement we saw appears to allow these panels to be easily removed without affecting the saw cycle."

38. Mr Hobson believed that operation of the saw without guards would be likely to make Tubes liable under the Health and Safety Regulations and at common law. However, he accepted that that was a decision for legal opinion.
39. Mr Baker emphasised that the saw was second-hand and that it had been operated in the past without guards. But that does not mean that it was safe. In my view it was not safe to operate the saw without guards. That conclusion is supported by the photograph on page 106 of the bundle which shows guards on an old machine. The sort of guards involved are simple structures. As safety is an aspect of quality under the 1979 Act, I conclude that the saw was not of satisfactory quality and its supply breached the term implied by section 14 of the 1979 Act.

Costs

40. The conclusion to which I have come means that the judge's order has to be set aside and it will be necessary to hear the parties as to what is the appropriate costs order in respect of the costs below and in this court. Even if I had not come to the conclusions I have, I would have set aside the judge's order as to costs. Owen lost before the judge on two substantial issues, namely whether they acted as agents and whether their standard conditions applied and were enforceable. On any view it cannot have been right that Tubes should have been made to pay Owen's costs relating to those issues.
41. For the reasons that I have given, I would allow this appeal.
42. SIR CHRISTOPHER SLADE: I agree and would only add these observations.
43. In a dispute such as this, after the judge's judgment had `revealed the obvious strengths and weaknesses in the cases of both sides, I think it regrettable that the parties were not able to settle the outstanding issues by agreement before the appeal came before this court. I venture to express the earnest hope that they may perhaps be able to reach agreement in regard to any outstanding issues in regard to damages, before they embark on an expensive assessment.
44. LORD JUSTICE ALDOUS: I agree with what my Lord has said.
ORDER: Appeal allowed; the order of the judge will be set aside; judgment for Tubes; damages to be assessed if not agreed; each side to pay their own costs in the court below; Owen to pay 75% of Tubes' costs of the appeal, to include the cost of the respondent's notice; detailed assessment of costs; interim award of costs in the sum of £3,000 to be paid within 21 days from today. (Order not part of approved judgment)