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 THE HIGH COURT
QUEEN'S BENCH DIVISION
(HHJ RICHARD SEYMOUR QC)

		Royal Courts of Justice Strand London, WC2
		9 July 2004

1. LORD JUSTICE RIX: This is an application for permission to appeal made by Filobake Limited against the defendants to this claim, Rondo Limited (the first defendant) and Frampton International Limited (the second defendant) who between them sold to Filobake a line to extrude, bake and cool filo pastry for the specific purpose of making samosas.
2. Complications arise from the fact that the necessary equipment was divided between the two defendants, with the second defendant only providing the oven and cooler, and the first defendant providing most, but not all, of the earliest part of the line.
3. The first defendant's contract contained a performance warranty that "the equipment detailed in this specification will be able to produce samosa to the attached recipe as follows ... " and then it specified a certain width, speed and thickness of the pastry and other such elements. A recipe was attached which set out certain proportions of flour, oil, salt and water.
4. The second defendant warranted that its oven "is to be capable of drying pastry of rates at up to 20 metres per minute". That was at a rate 5 metres per minute faster than the performance warranty given in the first defendant's contract.
5. These terms were relied upon by Filobake, as also were implied terms of fitness to purpose, essentially to the same effect, that the respective equipment supplied by each defendant should be capable of producing commercially acceptable samosa pastry, both on the basis of their individual performances and when joined together with one another, which is the way in which they were intended to be used.
6. HHJ Richard Seymour QC had a separate passage of his judgment dealing with the construction of the performance obligation accepted by the first defendant, but did not have a similar passage in his judgment dealing with the contractual obligations of the second defendant. He construed the performance obligation of the first defendant in a narrow way. He considered that that performance warranty did not warrant that the equipment involved could successfully be used to create samosas but merely that the end result would be a pastry of a certain width and thickness, passing along the equipment at a certain rate per minute and so forth.
7. In my judgment, it is arguable and fit for appeal that the judge was wrong in that construction in as much as he paid insufficient regard to those elements of the performance guarantee of the first defendant which warranted the equipment's capacity to produce "samosa to the attached recipe". This was in circumstances where it was agreed by the experts before the court, as referred to at paragraph 72 of the judgment, that:

" ... an essential feature of a samosa pastry is that it should be capable of being folded without cracking so as to make the pastry parcel in which the filling is placed."

8. It was the agreed result of the various experts' considerations and tests of the equipment concerned that the only pastry that the equipment would produce at the required width, thickness and speed was a product which did not meet the longitudinal strength necessary to permit acceptable folding; and, in addition, was not able to achieve a target moisture of 26 per cent. The longitudinal strength is arguably, on the expert evidence before the court, a matter of the extrusion capabilities of the first defendant's equipment, and the target moisture of 26 per cent was a matter of the drying capabilities of the oven.
9. In a paragraph of the agreed report of the experts not cited in the judge's judgment, the experts specifically agreed that:

"Tests undertaken to date are sufficient to form the expert statement and no further tests are necessary."

10. In the light of that material, it is arguable and fit for appeal that, if the judge had concluded that the first defendant's performance obligations went wider than those which he found to have been imposed by contract upon the first defendant, then upon the experts' agreement the first defendant's equipment was not capable of producing a samosa pastry. The judge never considered whether there would be a breach on the basis of the wider performance warranty (express or implied) addressed by Filobake.
11. Turning to the second defendant, the problem there was that, as the experts agreed on the basis of the tests they made and in the light of their agreement that no further tests were necessary, the second defendant's oven could only at the required speed reduce moisture by 4 per cent. That, arguably, would have been enough if the first defendant's equipment could operate to extrude pastry at a moisture content of 30 per cent, which was what was contemplated in the first defendant's contract by reference to the agreed recipe attached to it and referred to in the performance warranty. However, it turned out on the experts' tests that a pastry capable of extrusion, and even one still subject to the longitudinal strength difficulty to which I have referred, could only be produced at a moisture content of 35 per cent. It was submitted that the resultant moisture content of 31 per cent was not a commercially acceptable limitation.
12. The judge under a separate heading did not consider exactly what the second defendant's express or implied contractual obligations were. It is arguable and fit for appeal that at least its implied obligation of fitness for purpose was to provide an oven with a drying capacity capable of working successfully with the first defendant's equipment. That raises the question of who takes the risk of the first defendant's equipment not being capable of operating at a moisture content lower than 35 per cent. That is an interesting question, not I think addressed in the judgment. But it is arguable that, under the concept of an implied term of fitness for purpose, the risk rests upon the supplier and not the buyer.
13. As it was, the judge approached the second defendant's obligations upon the basis simply that there was no specific warranty that the second defendant's equipment should be capable of drying the pastry's moisture content from a specific starting point to a specific finishing point. It may well be that that is a critical omission from the contract between Filobake and the second defendant, but it seems to me that it is arguable and fit for appeal that at least the implied fitness for purpose obligations of the second defendant went further than that.
14. None of this would be of any assistance to Filobake if the judge's conclusion regarding the absence of any damages were itself not capable of being subject to attack on appeal. It seems to me, from my necessarily limited acquaintance with the case, that it is at this point that Filobake have the greatest difficulties. In a detailed section of his judgment the judge concluded that no damages were shown to have been suffered on either basis put forward, either that of lack of profits or of wasted expenditure, with the exception in the latter case of a single item of equipment of about £12,000.
15. However, I am sufficiently persuaded by Mr Marks QC, who has appeared this morning on behalf of Filobake, that the judge's approach on damages, were he to be wrong on the questions of contractual obligations and breach, are worthy of review on appeal. In particular, Mr Marks submits that it is simply inherently unlikely and counter-intuitive that Filobake would undertake the project of putting in an entirely new line if it was not sufficiently satisfied of the commercial prospects of being able to sell the product of that new line to new customers. The judge, however, was not satisfied that, even if there had been a market, which he found there was not, additional product could not have been produced on Filobake's old line. However, in that aspect he seems to have overlooked the case that the old line produced a different quality of pastry and could not, in any event, produce pastry with the automatic efficiency of the new line and therefore at a price to make the new samosa project competitive -- indeed, to be sufficiently competitive so as to undercut the prices of the competition, about which there was evidence before the court.
16. Mr Marks submits that the judge simply imposed upon Filobake an impossibly high standard for proving that, if they had been able to produce samosa of the required quality, they would have been able to sell it to new customers. That was of course a hypothetical question. It seems to me that the argument that the judge imposed too high a standard should be looked at on appeal, particularly against the background of the judge's arguably mistaken scepticism about the whole project in the light of his view about the capability of producing the new samosa pastry upon the old line.
17. As for the alternative claim for wasted expenditure, the short point there is essentially whether the judge should have rejected the evidence of the defendants' own expert accountant, maintained in very large part even after hearing Filobake's evidence being cross-examined, that he accepted an allocation of wasted expenditure in a sum of over £200,000. The judge took the view that the basis of an allocation of wasted expenditure as between old line and new line had been performed by Filobake upon a false basis. That, however, does not appear to have been the view of the defendants' own expert accountant. It seems to me that there is a point there fit for appeal.
18. In sum, and without going further into the grounds relied upon, I would give permission to appeal generally to Filobake. Filobake may need to consider the formulation of its damages in the light of its failure at trial (not itself a matter of appeal) to support the case of rejection of the equipment.
19. A question arises as to the attitude that I should take about the judge's order that a payment on account of costs in the sum of £70,000 be made to the second defendant within two weeks of the judgment. £40,000 of that £70,000 has already been paid. A question arises as to the balance of £30,000. That should have been paid by 5 May (two weeks from the judgment date) pursuant to the judge's order. It was not. That was a serious error on behalf of Filobake and its legal advisers, who seem to have been under the impression that the mere submission of an application to appeal containing within it an application to stay the order for payment on account of costs would be sufficient. It is not. The order should have been complied with unless an emergency application is made to the Court of Appeal, which may be made on paper and which often occurs, for a stay of such an order pending consideration of the application.
20. Nevertheless, the matter is before me now. There is evidence before me that the second defendant is a small company. It is unfortunately caught up in this expensive litigation, which I can quite understand is a matter of regret and concern. On its last accounts it had shareholders' funds of less than £16,000. It has capital of only £1,000. Its solicitors have seen fit in those circumstances to require their client to give them a debenture over its assets to secure their fees. The £30,000 in question would be going, of course, directly to the solicitors. In these circumstances, Mr Marks submits that there should be a stay upon the payment of the £30,000 on account of costs unless the solicitors are willing to undertake to repay that £30,000 in the event that, following a successful appeal, that sum should never have been paid. It seems to me that that is a fair request.
21. I take into account the fact that, up to now, Filobake have been in contempt of court, but it seems to me that that is not so much their fault, as the failure of proper advice to them on the part of their legal team. It seems to me that the fairest way to approach this question, seeing that the solicitors concerned have the best knowledge of their client's ability to repay the sum in due course and are also themselves secured by the debenture which they have taken, is to say that the order for the further payment of £30,000 will be stayed pending the appeal unless the solicitors are willing to undertake to repay the £30,000 in the event that the order of this court on appeal is that that sum should be repaid.

Order: appeal allowed. Case to be heard by a court of three Lord Justices with a time estimate of 2-3 days. Costs in the appeal.