Buyer’s Remedies
Cases
BS Brown & Son Ltd v Craiks Ltd
[1970] UKHL 6 [1972] AC 60, 1970 SLT 141, 1970 SC (HL) 51, 54 Cr App R 460, [1970] UKHL 6, [1970] 1 All ER 823, [1970] 3 All ER 97, [1970] 1 WLR 752, [1970] WLR 752, 134 JP 622, [1970] 3 WLR 501
Lord Robertson
In my opinion it is clear on the evidence that there was a basic misunderstanding between the pursuers and the defenders at the time when these contracts were entered into. The pursuers wanted the material for dress purposes, but they did not expressly inform the defenders of this. The defenders were under the impression that the material was required for industrial purposes, and had it manufactured as such. In my opinion the pursuers have failed to prove that the particular purpose for which the goods were required was conveyed to the defenders. They have failed to prove that Mr J. S. Brown, to the knowledge of the defenders, dealt only with the dress trade. It is admitted that the particular purpose for which the goods were required was not expressly made known to the defenders, and in my opinion it has not been proved that this purpose was made known to the defenders by implication. The pursuers’ case under section 14(1) of the Sale of Goods Act, 1893, accordingly fails.
There remains the case under section 14 (2) of the Act. It is fair to say that counsel for the pursuers put this case first in his submissions, and it raises more difficulty than the case under section 14(1). It is admitted by the defenders that the goods were bought and sold by description, and I did not understand it to be disputed by the defenders that they were manufacturers who dealt in goods of that description. It is also not in dispute that the cloth made by the defenders fulfilled the description set out in the contracts. Further, no point arises under the proviso to section 14(2). The important question therefore is whether the goods were or were not of merchantable quality, because that is an implied condition of the contracts under section 14(2). It was submitted by the pursuers that it had been proved that the goods were not of merchantable quality. The question of what is meant by “merchantable quality” has recently been discussed at length in the House of Lords in Hardwick Game Farm v. S.A.P.P.A., [1969] 2 AC 31 (see particularly Lord Reid at pp. 74–9). Lord Reid (at p. 75) defines “merchantable” as “commercially saleable,” and continues:
“If the description is a familiar one it may be that in practice only one quality of goods answers that description—then that quality and only that quality is merchantable quality. Or it may be that various qualities of goods are commonly sold under that description—then it is not disputed that the lowest quality commonly so sold is what is meant by merchantable quality: it is commercially saleable under that description.”
At p. 77 Lord Reid amends the definition of “merchantable quality” given by Lord Wright in Cammell Laird & Co. v. Manganese Bronze and Brass Co . [1934] A.C. 402 (viz. “What sub-s. (2) now means by ‘merchantable quality’ is that the goods in the form in which they were tendered were of no use for any purpose for which such goods would normally be used and hence were not saleable under that description”) to:
“‘What subsection (2) now means by “
merchantable quality” is that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description.’ This is an objective test: ‘were of no use for any purpose…’ must mean ‘would not have been used by a reasonable man for any purpose…’” Lord Reid also approves (at p. 78) a dictum of Lord Wright in Canada Atlantic Grain Export Co. v. Eilers, (1929) 35 L1.L.R. 206, at p. 213, viz.:
“…if goods are sold under a description which they fulfil, and if goods under that description are reasonably capable in ordinary user of several purposes, they are of merchantable quality within Sect. 14 (2) of the Act if they are reasonably capable of being used for any one or more of such purposes, even if unfit for use for that one of those purposes which the particular buyer intended.”
It is admitted by the defenders in their pleadings that the cloth tendered to the pursuers under the contracts was unsuitable for use as dress material. On the evidence this was clearly so (see in particular the evidence of Mr Jones and the Report and Opinion of the Manchester Chamber of Commerce dated 24th February 1966).
But problems arise in the present case out of the fact, which I have already held proved, that the defenders manufactured the cloth for industrial purposes. There is ample evidence that the quality of the cloth was reasonably satisfactory for industrial purposes, and I accept this evidence. Some of the pursuers’ witnesses, including Mr J. S. Brown, expressed the view that the quality of a cloth was either acceptable or not acceptable. A fault was a fault, and if the number of faults in a piece of 100 yards exceeded the normally accepted figure of 8 to 10, then the piece as a whole was faulty and unacceptable. The evidence of the defenders’ witnesses, however, was that a fault is a matter of opinion, relative to the mind of the inspector, who considered the matter from the point of view of the end-use, or purpose, for which the cloth was required. [His Lordship referred to the evidence as to the faults in the cloth, and as to its suitability for various purposes, and continued]—
As already stated, I hold that the quality of the cloth manufactured by the defenders was reasonably satisfactory for industrial use.
But the more difficult question is whether the goods bought and sold under the description in the contracts were commercially saleable in normal user for an industrial purpose.
It was argued by counsel for the pursuers that there was no evidence that in fact this particular construction of cloth had up till the time of the contract ever been used for an industrial purpose, and that this was fatal to the defenders: industrial use was not a normal user of the cloth. But this in my view is too strict a test. The test is whether the cloth was reasonably capable of being used for a purpose other than dress (Canada Atlantic Grain Export Co. v. Eilers, Lord Wright at p. 213). Normal user in my view means a use for which the cloth in its ordinary state was reasonably capable of being used, as opposed to being used for some extraordinary purpose (see Asfar & Co. v. Blundell, [1896] 1 Q.B. 123).
I accept that a normal user of goods bought under the description in the contracts was for making into dresses. [His Lordship referred to the evidence on this point, and continued]—
So far as other users for the cloth are concerned, it is true to say that there was no evidence that cloth answering to the whole of the description had ever been used for any industrial purpose before this contract, although most of the witnesses could see no reason why it could not be so used for a number of different purposes, including industrial user. [His Lordship discussed the evidence as to possible users. This included the evidence of Mr Duke, one of the directors of a company to which the defenders had subcontracted the manufacture of part of the order. Mr Duke deponed that the specification in the contract was close to a British Standard Specification for hose ducks (materials for laminating and reinforcing various types of hose); that he had not manufactured this particular construction of cloth before, though he had manufactured approximately similar fabrics for such end-uses; and that, though this particular construction was a novelty to him, he remembered an example of a rayon cloth very close to this specification being purchased for money bags. His Lordship then continued]—
My conclusion on this evidence is that no actual sale of this particular construction of cloth for an industrial purpose—or indeed for any purpose other than dress—is proved to have occurred before these contracts in the ordinary course of the textile trade. I am also of the opinion that it is proved on a balance of probabilities that, so far as the cloth is concerned, it was reasonably capable of being used, and was saleable, for a number of industrial purposes.
It is of assistance to examine what actually happened to the cloth which had been made, but not disposed of, at the time when the contracts were cancelled. Mr Duke was left with over 300 pieces of the cloth which were not delivered to the defenders. The price he was getting from the defenders for making it was 35¾d. per yard, which he considered a fair price for it as an industrial cloth in 1964. Eventually he sold all the residue of over 300 pieces to various outlets for various different purposes, but the price he received for it is not proved.
Mr Cook, who had, at the time when the contracts were made, considered that the cloth was for industrial purposes, would have quoted a higher price had he realised that the quality of the cloth demanded was for dress goods. When the contracts were cancelled, the defenders were in possession of a considerable quantity of the cloth (approximately 20,000 yards). In September 1966 they sold 5000 yards of it in two batches at 30d. and 29d. per yard to the Wheeler Silk Company, for use as dress material. It was dyed at a price of 12d. per yard at the expense of the defenders, the price of the dyed material accordingly being 42d. and 41d. per yard. Mr J. S. Brown considered that this price was very low and must be taken to have been on the basis that the goods were faulty. According to him Wheelers in the ordinary course could sell the dyed goods at 70d. to 75d. per yard. The defenders have recently sold another 300 yards to A. Nicol & Co., weavers, Arbroath, at 30d. per yard, for an industrial purpose. The defenders also sold 5000 yards at a price of 30d. per yard to Low and Bonar Ltd., Dundee, for industrial purposes (seed bags) in September 1966. The defenders anticipate that in the future they will readily be able to dispose of the residue of the cloth remaining in their hands (about 11,000 yards).
The pursuers, on the other hand, were left with 26,749 yards of cloth when the customers who had ordered it (Treforest Silk Printers Ltd.) cancelled their contract on 3rd December 1965…Thereafter the pursuers made attempts to sell it. Samples of the cloth were given to their salesmen, with instructions to endeavour to sell it. No offers in the neighbourhood of 36d. or 39d. per yard were received. One offer of 12d. per yard was received. Eventually the whole was disposed of in one lot at a price of 15d. per yard to a company called Andrew Mitchell, of Glasgow, who made tents and tarpaulins, on 10th January 1968. Mr J. S. Brown did not think that they could have got a better price, but it is clear from his evidence that they were attempting to sell it as faulty cloth, rather than as reasonably satisfactory industrial cloth. Mr Brown’s efforts to sell were confined to the dress trade. Mr Brown agreed, however, that he and Mr Cook had agreed that it should be offered at between 27d. and 30d. a yard after the contracts had been cancelled. This he regarded as a reasonable price. Mr J. S. Brown agreed that there had been a fall in demand for this construction of cloth in 1964 and early 1965, but later demand had risen.
Mr Ashworth, who dealt only in industrial fabrics, was one of the salesmen who tried to sell the cloth at a price of 27d. to 30d. after it had been rejected. He tried to sell it to a number of customers, probably 25 to 30, for industrial purposes, without success. He thought that the pursuers did more than anyone could do in trying to sell it.
Mr Sommerville also was enlisted to try and sell the rejected cloth, and he made personal efforts to interest various industrial firms in the cloth at a price of 27d. per yard, without success. He thought that the reason for this was because it was a special type of cloth.
In my view, the evidence of the defenders indicates that there was in fact a market for this cloth in its actual state, for industrial purposes at least, at a price of about 30d. per yard from 1966 onwards. I think that the pursuers did not make sufficiently energetic efforts to sell it among customers likely to buy it, and in the end of the day I think that they gave up and sold it in a lump at a much lower price than they might have got for it.
The price which a buyer would have offered in May 1964 for the cloth for industrial purposes is necessarily speculative. [His Lordship considered the evidence of a number of witnesses on this, and concluded]—In my view Mr Garner’s evidence suggests that the price of 36.25d. per yard was a low price for this cloth as a dress fabric, but that as an industrial cloth its value was approximately 30.5d. per yard. This in my opinion gives support to the evidence that it has been sold for industrial purposes since 1966 at 30d. per yard.
There was some evidence that prices of cloth had tended to fall in late 1964 and early 1965, but had recovered since then. I am prepared to accept that from 1966 onwards the prices approximated to those in 1964.
In these circumstances my conclusion is, as I have already said, that the cloth at the time of the contract was reasonably capable of being used, and was saleable, for a number of industrial purposes. The price of 36.25d. per yard was higher than would have been normal for it as an industrial fabric, but not unreasonably high for the defenders constructing it for such a purpose. On the other hand this price of 36.25d. per yard was low for a dress fabric, and the defenders’ price for constructing it as a dress fabric would have been higher.
Taking Lord Wright’s test of “merchantable quality,” as laid down in Canada Atlantic Grain Export Co. v. Eilers, 35 Ll.L.R. 206, at p. 213, prima facie it would appear from this conclusion that the defenders were entitled to succeed. But there is a further question created by the difference in the prices which I have indicated. This question does not seem to have been finally resolved in the cases which deal with “merchantable quality” under section 14(2) of the 1893 Act.
In Jones v. Padgett, (1890) 24 Q.B.D. 650—where the facts appear to have been not unlike the present case—it was left to a jury to decide whether cloth, which was fit to be sold to merchants for various purposes, was unmerchantable because it was unfit for a dress purpose, which was the purpose—not disclosed to the manufacturer—for which the buyer bought the cloth. The question of price was not considered in that case. See also Drummond v. Van Ingen, (1887) 12 App, Cas. 284, especially Lord Herschell at p. 296. In Canada Atlantic Grain Export Co. v. Eilers, 35 Ll.L.R. 206, Lord Wright (at pp. 212–3), in the passage already referred to, said:
“…if goods are sold under a description which they fulfil, and if goods under that description are reasonably capable in ordinary user of several purposes, they are of merchantable quality…if they are reasonably capable of being used for any one or more of such purposes, even if unfit for use for that one of those purposes which the particular buyer intended. No doubt it is too wide to say they must be of use for some purpose, because that purpose might be foreign to their ordinary user. Thus in Asfer v. Blundell, [1896] 1 Q.B. 123…dates were held to be unmerchantable as dates because they had been submerged in the Thames and had become impregnated with sewage, though they were of considerable value for distillation into vinegar.”
In Hardwick Game Farm v. S.A.P.P.A. Lord Reid approved the above opinion of Lord Wright. He says (at p. 77):
“But if the description was so general that goods sold under it are normally used for several purposes, then goods are merchantable under that description if they are fit for any one of these purposes: if the buyer wanted the goods for one of those several purposes for which the goods delivered did not happen to be suitable, though they were suitable for other purposes for which goods bought under that description are normally bought, then he cannot complain. He ought either to have taken the necessary steps to bring subsection (1) into operation or to have insisted that a more specific description must be inserted in the contract.”
Lord Reid says nothing specific about price, but approves with a small reservation (at p. 79) the dictum of Dixon J. in the High Court of Australia in Australian Knitting Mills Ltd. v. Grant, (1933) 50 C.L.R. 387, at p. 418, viz.:
“The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sound order and condition and without special terms.”
(The italics are mine.)
This definition appears to refer more narrowly to goods with a latent defect, rather than to goods with no defect which have more than one purpose.
Lord Morris approves Lord Wright’s dictum in Canada Atlantic Grain Export Co. v. Eilers . Lord Guest, however, at p. 108, doubts the universal application of Lord Wright’s dictum in Cammell Laird Co. v. Manganese Bronze & Brass Co. He says:
“The test put forward by Lord Wright may be one factor or one guide in the determination of merchantability but it cannot be the determining factor since purpose is not the sole test of merchantability and the test omits all reference to price. If the test of unmerchantability is that the article is fit for no use, few goods would be unmerchantable because use can always be found for goods at a price.”
Lord Guest goes on to prefer the test of Dixon J. in Australian Knitting Mills.
Lord Pearce (at pp. 117–9) prefers the test of Dixon J. to that of Lord Wright, because “the suggestion, without more, that goods are merchantable unless they are no use for any purpose for which they would normally be used and hence would be unsaleable under that description may be misleading, if it contains no reference to price. One could not say that a new carpet which happens to have a hole in it or a car with its wings buckled are of no use for their normal purposes and hence would be unsaleable under that description. They would no doubt, if their price was reduced, find a ready market. In return for a substantial abatement of price a purchaser is ready to put up with serious defects, or use part of the price reduction in having the defects remedied. In several classes of goods there is a regular retail market for ‘seconds,’ that is, goods which are not good enough in the manufacturer’s or retailer’s view to fulfil an order and are therefore sold off at a cheaper price. It would be wrong to say that ‘seconds’ are necessarily merchantable.” Lord Pearce indicates (p. 119) that he considers the qualification “without abatement of the price” to be vital.
It seems to me that, when applying section 14(2), there are two classes of case in this line of authority to which different considerations may be applied. There are, on the one hand, the cases like Australian Knitting Mills Ltd. v. Grant and Hardwick Game Farm v. S.A.P.P.A., where there was a latent defect in the quality of the goods sold. In such a case, the test of Dixon J. is appropriate. The defective goods could only be said to be of merchantable quality if some buyers would buy them for some purpose knowing of their defective condition and without abatement of price. If they were saleable only at a price appropriate to defective goods, then they were not of merchantable quality. But there is also the type of case (e.g. Jones v. Padgett ) envisaged by Lord Wright in Canada Atlantic Grain Export Co. v.Eilers, where goods bought under a more general description are reasonably capable in ordinary user of several purposes. It may be that they are reasonably capable of being used for one or more of such purposes, although not fit for that one of those purposes which the particular buyer intended. In such a case it seems to me that in that event they are of merchantable quality under that description, even if the buyer might not have offered such a high price if he had realised that he was only going to be getting goods reasonably capable of being used for a purpose other than that for which he had intended them. Such a price is not a give-away price for defective goods: it is a full price payable for goods under that description, albeit for a different purpose not in the contemplation of the buyer. In such a case I respectfully agree with Lord Reid that the buyer’s remedy was to have taken the necessary steps to bring subsection (1) of section 14 into operation or to have insisted that a more specific description must be inserted in the contract.
In the present case, the cloth was sold by description and fulfilled the description set out in the contracts. It was reasonably capable of being used for one of the purposes for which goods under that description were reasonably capable in ordinary user. The price paid was in the seller’s view appropriate to that use, although the buyer considered the price appropriate to another use. In these circumstances I think that the pursuers have failed to prove that the goods were not of merchantable quality and that their case under section 14(2) fails.
[His Lordship then considered the question of damages. He held that the pursuers’ efforts to find a market for the 26,749 yards of cloth left on their hands had not been sufficient; that, had they made proper efforts to sell it, their loss would have been only 9d. a yard; and accordingly that the damages due, had he found in the pursuers’ favour, would have been £1003.]
The pursuers reclaimed, but on 10th July 1969 the First Division (without Lord Cameron) refused the reclaiming motion.
LORD PRESIDENT (Clyde).—This is an action of damages for breach of a contract of sale by description brought by a firm of merchants in Manchester against a jute and cotton manufacturer in Forfar, from whom the material in question had been ordered. The sole issue in the case now turns upon the meaning and effect, as applied in the circumstances of this case, of the words “merchantable quality” in the Sale of Goods Act, 1893. After a proof the Lord Ordinary has held that the defenders were not in breach of any implied condition regarding the merchantable quality of the material supplied, and he has therefore assoilzied them. Against his interlocutor so doing the pursuers have presented this reclaiming motion.
It is not in dispute between the parties that this is a case of a sale of goods by description, and that the goods in question complied with that description. It is also now established that, although they did not so inform the defenders, the pursuers in fact wanted the material for the manufacture of dresses. The defenders on the other hand understood that the material was required for industrial purposes, and manufactured it as such. This meant that it was less uniformly woven than would have been required if its use was for dresses. There was, therefore, as the Lord Ordinary held, a basic misunderstanding between the parties at the time when the contract was entered into, due to the fact that the pursuers had not disclosed to the defenders the purpose for which they intended to use the material. The case which the pursuers originally sought to make against the defenders under section 14 (1) of the Sale of Goods Act, 1893, has therefore failed. This was not disputed before us. The only case left, therefore, is the case under section 14 (2) of the Act. The material part of that subsection is:
“Where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality…”
To determine whether or not there has been a breach of this subsection it is necessary in the first place to summarise the facts found by the Lord Ordinary in regard to the material in question. This is not a case of a material of such a kind that it can only be used for one purpose, namely dresses. The Lord Ordinary has held that “there is ample evidence that the quality of the cloth” made by the defenders under the contract in question “was reasonably satisfactory for industrial purposes, and I accept this evidence.” And again, after narrating the evidence of the witnesses, he says:
“In these circumstances my conclusion is…that the cloth at the time of the contract was reasonably capable of being used, and was saleable, for a number of industrial purposes.”
As the absence of defects in the weave is much more important in the case where the material is used for dresses than where it is used for one of these industrial purposes, a higher price is to be expected if the purpose is use for dresses. The Lord Ordinary has held that the contract price in this case was low for a dress fabric, but higher than would have been normal for it as an industrial fabric, but not unreasonably high for the defenders constructing it for such a purpose.
In these circumstances in my opinion no breach of section 14 (2) has been established, and the Lord Ordinary reached the correct conclusion on the merchantability of the material. The case fits precisely into the definition of merchantable quality which was expressed by Wright J. (as he then was) in Canada Atlantic Grain Export Co. v. Eilers, 35 Ll.L.R. 206 (at p. 213), and approved by Lord Reid in Hardwick Game Farm v. S.A.P.P.A., [1969] 2 AC 31, at p. 78. Lord Wright says:
“…if goods are sold under a description which they fulfil, and if goods under that description are reasonably capable in ordinary user of several purposes, they are of merchantable quality within Sect. 14 (2) of the Act if they are reasonably capable of being used for any one or more of such purposes, even if unfit for use for that one of those purposes which the particular buyer intended.”
The present case is not an instance of goods sold under a description which is commonly used to identify a high quality of goods usable only for making into dresses (the situation envisaged as a possibility by Lord Reid in Hardwick Game Farm, at p. 77). The present case is one where the description in the contract covers both goods of a high quality suitable for dresses (where unevennesses in the weave should not occur) and also goods of a lower quality suitable for industrial use (where such unevennesses are immaterial). The description of the goods in the contract in question in this case is general enough to cover goods made for either purpose, and if the pursuers desired the goods to be made suitable for use for dress purposes only, they should have taken the necessary steps to bring subsection (1) into operation or have insisted that a more specific description was inserted in the contract so as to acquaint the defenders with the specific use for which they wanted the goods.
The pursuers argued, however, that the normal use of the goods such as those in question was for making up into dresses, and that this use set the standard of merchantable quality. This, however, is not the test approved in the decided cases to which I have just referred in judging of the merchantable quality of goods such as those in question, where the goods described in the contract are reasonably capable of being used for more than one purpose. Capability of being used, and not actual use or normal use, is the test. “Reasonably capable” I take to exclude use as scrap, and to cover in the present case use for making bags or other such industrial purposes. As the Lord Ordinary holds in the course of his opinion, “goods bought and sold under the description in the contracts were commercially saleable in normal user for an industrial purpose.” That is the test of their merchantability.
It was also maintained by the pursuers that there was no evidence that, when the contract was made, such material was used for any industrial purpose. From this it was sought to infer that the article in question was not a dual-purpose article at all. This argument, however, is contrary to the conclusion reached in fact by the Lord Ordinary, who held that goods bought and sold under the description in question were commercially saleable in normal user for industrial purposes. The mere fact that no instance was proved, as at the date of the contract, of use of this particular material for industrial purposes is not a secure basis for the inference that it is therefore not capable of use for any other purpose. Such a test would be far too narrow a criterion.
But, apart from this, the evidence does not support it. The pursuers’ own witness Mr Brown admitted that it might well be possible to use the material for making bags. Mr Jones, the pursuers’ expert in the trade, considered the cloth was not made for any special use, but rather for general textile purposes. The defenders’ witness Mr Cook stated that the firm had made rayon material of a very similar construction for industrial use before. Moreover, after reviewing the rest of the evidence in detail, the Lord Ordinary summarises the matter by holding that there was ample evidence that the quality of the cloth was reasonably satisfactory for a series of industrial purposes.
But, apart from this altogether, the proper test is not whether this particular description of cloth had been proved to have been in fact used for industrial purposes at the date the contract was made. The true test is set out by Lord Reid in Hardwick Game Farm v. S.A.P.P.A., [1969] 2 AC 31, at p. 77. The criterion there laid down for distinguishing merchantable from unmerchantable quality is whether “‘the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description.’ This is an objective test: ‘were of no use for any purpose…’ must mean ‘would not have been used by a reasonable man for any purpose…’” Judged by this standard, these goods were merchantable.
Finally it was argued that in any event the material in question was not of merchantable quality because after the cancellation of the contract certain parcels of it only fetched a price substantially less than a reasonable price for the manufacture of goods answering that description. I am not altogether clear how a matter of price in an article of this character is really in this case relevant to the question of merchantable quality. There was no question of a fixed or standard price for these goods. Indeed, as appears from the Lord Ordinary’s opinion, most cloths manufactured by the defenders were in practice unique in some particular and are seldom repeated. Moreover, the prices obtained for the rejected goods were not just throwaway prices. But however this may be, this issue regarding price does not, as I see it, arise in the present case. The Lord Ordinary has held—and his finding was not challenged on this matter—that the contract price “was higher than would have been normal for it as an industrial fabric, but not unreasonably high for the defenders constructing it for such a purpose. On the other hand, this price…was low for a dress fabric, and the defenders’ price for constructing it as a dress fabric would have been higher.” No assistance, therefore, can be gained by the pursuers from the argument on price. For the contract price was not unreasonable, whatever the purpose for which the goods were being manufactured.
On the whole matter, in my opinion, the Lord Ordinary applied the right test of merchantable quality and arrived at the correct conclusion. His interlocutor should be affirmed.
LORD GUTHRIE .—This is an action of damages at the instance of the purchasers of a quantity of cloth against the sellers. The grounds of action were alleged breaches by the defenders of the implied conditions as to the quality of the goods sold, imposed by section 14(1) and section 14(2) of the Sale of Goods Act, 1893. The Lord Ordinary held, first, that the pursuers had failed to make known to the defenders the particular purpose for which the goods were required, and accordingly that the case under section 14(1) failed. He held, second, that the goods were bought by description from the defenders, who dealt in goods of that description, that the goods complied with the description, and that they were of merchantable quality. He accordingly held that the case under section 14(2) failed. Therefore he assoilzied the defenders. He stated in his opinion that, had he found for the pursuers, he would have assessed damages at £1003. The pursuers reclaimed, and their counsel stated that they did not challenge the Lord Ordinary’s decision on section 14 (1), but that they maintained that he had erred in his conclusion dealing with section 14(2). Both parties agreed that, if the reclaiming motion succeeded, damages should be awarded at the sum assessed by the Lord Ordinary.
The Lord Ordinary’s findings in fact were also accepted by both sides, and accordingly the essential facts for the disposal of the reclaiming motion can be stated fairly briefly. [His Lordship gave the narrative quoted supra, and continued]—
In these circumstances the dispute between the parties is whether the cloth supplied was not of merchantable quality within the meaning of section 14(2), because it was not of a quality suitable for dress manufacture—the only purpose for which such cloth had previously been sold—or whether it was of merchantable quality because it was reasonably capable of being used and was saleable for industrial purposes.
In my opinion the purpose of section 14 (2) is to secure that goods which have been sold by description are of such a quality that, if they have to be disposed of subsequently, they will be saleable in the market at a reasonable price for goods of the description. In Hardwick Game Farm v. S.A.P.P.A., [1969] 2 AC 31, Lord Reid said (at p. 75):
“Merchantable can only mean commercially saleable.”
Accordingly it is an unnecessary and impracticable limitation of the subsection if “merchantable quality” is, as the pursuers contend, confined to quality suitable for such purposes as goods of the description have been used for in the past. It is an impracticable limitation, because it obviously cannot be applied to goods of a novel description, where there has been no previous use. Yet goods of a novel description which are sold by description fall within section 14 (2), and are required by it to be of merchantable quality. Therefore one must give a meaning to “merchantable quality” which will be generally applicable. Moreover, there are no practical considerations requiring the imposition of the limitation contended for by the pursuers even in the case of goods of a description previously bought and sold. If a new use is discovered for such goods and their quality is such that there is a market for goods of that description in then ordinary state for that purpose, then these goods are commercially saleable, and consequently are of merchantable quality. The result of applying these considerations to the present case is that, although the particular cloth sold by description had previously only been sold for the manufacture of dresses, nevertheless, since it was reasonably capable of being used for industrial purposes and was saleable for these purposes at a price held by the Lord Ordinary to be reasonable, it was of merchantable quality. Accordingly I am of opinion that the effect in law of the Lord Ordinary’s findings in fact, which are accepted by the pursuers, is that their case under section 14 (2) has failed, as the Lord Ordinary has decided.
But the pursuers contended that this view cannot stand with the opinions in Hardwick, and in particular with certain dicta of Lord Wright in earlier cases, which were approved by the House of Lords in Hardwick. The passage most discussed in argument was taken from the opinion of Lord Wright (then Wright J.) in Canada Atlantic Grain Export Co. v. Eilers, 35 Ll.L.R. 206, at p. 213. It is in these terms:
“It seems to follow that if goods are sold under a description which they fulfil, and if goods under that description are reasonably capable in ordinary user of several purposes, they are of merchantable quality within Sect. 14 (2) of the Act if they are reasonably capable of being used for any one or more of such purposes, even if unfit for use for that one of those purposes which the particular buyer intended. No doubt it is too wide to say they must be of use for some purpose, because that purpose might be foreign to their ordinary user. Thus in Asfar v. Blundell, [1896] 1 Q.B. 123…dates were held to be unmerchantable as dates because they had been submerged in the Thames and had become impregnated with sewage, though they were of considerable value for distillation into vinegar.”
In Cammell Laird & Co. v. Manganese Bronze, and Brass Co., [1933] AC 402, at p. 430, Lord Wright, as edited by Lord Reid in Hardwick at p. 77, stated that goods would not be of merchantable quality if, in the form in which they were tendered, they were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description. Again in Grant v. Australian Knitting Mills, Ltd. [1936] AC 85, Lord Wright, delivering the judgment of the Privy Council, said (at pp. 99–100):
“…whatever else merchantable may mean, it does mean that the article sold, if only meant for one particular use in ordinary course, is fit for that use.”
Counsel for the pursuers submitted that when Lord Wright referred to “ordinary user” and “any purpose for which goods…would normally be used,” he meant the use to which such goods had habitually been put in the past. Therefore in the present case the goods were not of merchantable quality, because they were not suitable for the only purpose for which such goods had previously been sold, namely, dress manufacture.
It is true that such words as “ordinary user” are capable of more than one meaning, the particular meaning conveyed being dependent on the context. Normal use or ordinary use may mean customary use, as contended for by the pursuers. It may also mean use which is appropriate to the goods in their proper state, as opposed to a “foreign” use, as in Asfar & Co. v. Blundell, or to an abuse. I think that the context shows that Lord Wright used the words under discussion in the latter sense. He spoke about goods being “reasonably capable in ordinary user of several purposes,” which shows that what he had in mind was the use which might be made of the goods and not the purposes to which they had previously been applied. No doubt previous uses are important in considering the uses of which goods are reasonably capable, but Lord Wright does not suggest that such uses are the only ones for consideration.
Then it was submitted by counsel for the pursuers that a passage from Lord Reid’s speech in Hardwick at p. 75 inferred that the extracts from Lord Wright’s opinions were to be given the meaning contended for by them. Lord Reid said:
“If the description is a familiar one it may be that in practice only one quality of goods answers that description—then that quality and only that quality is merchantable quality. Or it may be that various qualities of goods are commonly sold under that description—then it is not disputed that the lowest quality commonly so sold is what is meant by merchantable quality.”
I think that his Lordship was in that passage giving illustrative examples, and that he did not mean to convey by using the phrase “commonly sold,” that only previous practice is to be looked to in deciding whether goods are of merchantable quality. In my opinion the law as laid down by the House of Lords in Hardwick is summarised by Lord Morris of Borth-y-Gest at p. 97 thus:
“If therefore, goods of the contract description are tendered and if the tendered goods though having certain defects are reasonably capable of being put to a use for which a buyer knowing of the defects would be likely to buy them, then they are of merchantable quality.”
If this sentence is applied to the present case, the pursuers must fail. Although the goods supplied by the defenders had certain defects which rendered them unsuitable for use as dress material, they were reasonably capable of industrial use, and in fact buyers were found for the material for such purposes.
Counsel for the pursuers also contended that the goods were not merchantable because the prices received when they were ultimately sold showed that buyers would not accept them except at an abatement of about 6d. per yard on the contract price. The fallacy of this argument is that it assumes that the contract price was the appropriate price for such goods if sold for industrial use. In Hardwick Lord Guest pointed out (at p. 108) that, in considering merchantability, regard must be had to the price which the goods can fetch. The reason is that goods may be sold at a throwaway price for use as scrap, although unmerchantable in the true sense. Approval was also given in the House of Lords to a passage from the opinion of Dixon J. in Australian Knitting Mills Ltd. v. Grant, 50 C.L.R. 387, at p. 418, in which he referred to the price obtainable for the goods as having a bearing on the question of merchantability. But in the present case the Lord Ordinary has held that the goods were capable of realising a price which was not a give-away price for defective goods, but a full price for goods of the description for industrial purposes. Accordingly, although that price was less than the price paid by the pursuers for the goods for the purpose of dress manufacture, the goods were still of merchantable quality for industrial purposes.
In my opinion the Lord Ordinary’s decision is sound, and the reclaiming motion should be refused.
LORD MIGDALE .—[His Lordship narrated the facts and the procedure in the action, quoted section 14(2) of the Sale of Goods Act, 1893, and continued]—
We are not told what was the full description of these goods, but counsel for the pursuers conceded that the goods supplied by the defenders complied with the description. So the only question now before us is whether the goods delivered met the implied condition that they were of merchantable quality.
Much has been said by judges as to the meaning and effect of these words. I will content myself with referring to what Lord Reid said in Hardwick Game, Farm v.S.A.P.P.A., [1969] 2 AC 31, at pp. 74–5:
“If one puts aside for the moment the encrustations of authority their meaning [i.e. of the subsections] appears to me to be reasonably clear. But, if a whole chapter of the law is compressed into one section of a code, one cannot expect its words to apply to unusual cases without expansion or adaptation. That is the task of the court: but it is not in my view legitimate to substitute for the words of the code some general words used by an eminent judge in a particular case and treat them as a test of universal application.”
His Lordship then goes on to deal with section 14(2):
“It applies to all sales by description where the seller deals in such goods. There may be a question whether the sale of a particular article is not really a sale by description but that does not arise here: these are clearly sales by description. Then it is a condition (unless excluded by the contract) that the goods must be of merchantable quality. Merchantable can only mean commercially saleable. If the description is a familiar one it may be that in practice only one quality of goods answers that description—then that quality and only that quality is merchantable quality. Or it may be that various qualities of goods are commonly sold under that description—then it is not disputed that the lowest quality commonly so sold is what is meant by merchantable quality: it is commercially saleable under that description.”
Lord Reid then refers to a sale under a novel description, but counsel assured us that the description given in the present case was not a novel description.
His Lordship at pp. 76 and 77 deals with what Lord Wright said in Cammell Laird & Co. v. Manganese Bronze and Brass Co., [1934] A.C. 402, at p. 430, and rephrases it as follows:
“‘What subsection (2) now means by “
merchantable quality” is that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description.’ This is an objective test: ‘were of no use for any purpose…’ must mean ‘would not have been used by a reasonable man for any purpose…’”
In Canada Atlantic Grain Export Co. v. Eilers, 35 L1.L.R. 206, Lord Wright said (at p. 213):
“…if goods are sold under a description which they fulfil, and if goods under that description are reasonably capable in ordinary user of several purposes, they are of merchantable quality within Sect. 14 (2) of the Act if they are reasonably capable of being used for any one or more of such purposes, even if unfit for use for that one of those purposes which the particular buyer intended.”
The question in the present case is whether the goods as described were reasonably capable of being used for some purpose in addition to making into dresses. The Lord Ordinary’s finding on this question is:
“…it is true to say that there was no evidence that cloth answering to the whole of the description had ever been used for any industrial purpose before this contract, although most of the witnesses could see no reason why it could not be so used for a number of different purposes, including industrial user.”
This finding means that this cloth, as described, was reasonably capable of being used for industrial purposes, and this was verified later by the fact that both the pursuers and the defenders were able to sell the remainder for such uses.
Counsel for the pursuers contended that on this finding the Lord Ordinary was not entitled to conclude, as he did, that the cloth was of merchantable quality because it was reasonably capable of being used, and was saleable, for a number of industrial purposes. There was then no existing market for cloth of that description outside the dress market, which demanded a higher quality of weaving and finishing than was to be found in the cloth supplied. The words “would normally be used” in the speeches of Lord Wright and Lord Reid meant that there must be in existence a market for cloth of viscous thread of lower-grade weave at the time of the sales. In other words, there must be evidence that previous sales of cloth of that description had taken place for industrial purposes. I do not think this is sound. The question is not whether a buyer for rayon cloth in that grade of weave was to be found in a list of “Classified Trades,” but whether in fact someone would buy it for industrial purposes if it was brought to his notice.
On the view which I take—that the words “would normally be used” include a potential market as well as an established one—I think the Lord Ordinary was entitled to find that the cloth sold was reasonably capable of being used for one of the purposes for which goods of that description were reasonably capable of use in ordinary user and so was of merchantable quality. The situation appears to be that there was an established market for cloth of this lower-grade standard of weave and finish for industrial purposes. That cloth had formerly been woven from cotton or jute. The defenders wove this cloth from rayon fibre on the same looms to the same standard. They had not to date sold much for industrial purposes, but when they tried to do so, they found buyers and were able to sell the whole of the orders left on their hands. In other words, there was, at the time when the orders were placed, a potential market for that grade of cloth made from rayon as well as for cloth of the same grade woven from cotton or jute.
The pursuers also contended that the cloth tendered was not of merchantable quality because, when they did sell it, they were only able to get a price for it which was substantially less than they would have got if it had been sold for making into dresses. I think the answer to this lies in a passage in the speech of Lord Reid in the Hardwick Game Farm case to which I have already referred. In [1969] A.C., at p. 77, his Lordship says:
“…if the description was so general that goods sold under it are normally used for several purposes, then goods are merchantable under that description if they are fit for any one of these purposes: if the buyer wanted the goods for one of those several purposes for which the goods delivered did not happen to be suitable, though they were suitable for other purposes for which goods bought under that description are normally bought, then he cannot complain. He ought either to have taken the necessary steps to bring subsection (1) into operation or to have insisted that a more specific description must be inserted in the contract.”
The pursuers’ contention about the price was founded on a statement by Dixon J. in the High Court of Australia in Australian Knitting Mills Ltd. v. Grant, 50 C.L.R. 387, at p. 418:
“The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sound order and condition and without special terms.”
This statement of the meaning of “merchantable quality” adds to the older statement the words “without abatement of the price obtainable for such goods.”
Lord Guest in the Hardwick Game Farm case, [1969] 2 AC 31, at p. 108, says that he prefers this test of merchantable quality to that propounded by Lord Wright. Lord Pearce (at p. 118) expresses the same view. He refers to a buyer who hopes to get a new motor car but is given one with buckled wings. I agree with that, but that is not the position here. A motor car delivered to the buyer with buckled wings would not comply with the description of a new motor car and so would not fulfil the terms of section 13. Here it is conceded that the cloth delivered did comply with section 13 and the Lord Ordinary has found that the description under which it was sold would cover cloth which could be used for a number of different purposes.
I think the Lord Ordinary is right when he says that those words are not relevant where the goods sold are reasonably capable of being used for more than one purpose under the same description. On the other hand they do underline the fact that goods are not of merchantable quality if the only price that can be obtained for them is a “give-away” one. In the present case if the price obtainable for industrial use had been much below the price for dress-making cloth, that factor might have indicated to the seller that it was required for a special purpose and so must be of high grade. That might bring the sale under section 14 (1), but the Lord Ordinary’s ruling against that case is not challenged.
In this case the Lord Ordinary has found that the price for cloth for industrial use was about 30d. per yard and that that price was not unreasonably high. On the other hand the price which the defenders would have charged if they had been selling under section 14(1) would have been higher than 36.25d. per yard. There is no room for the suggestion that 30d. was a “give-away” price.
On the whole matter I am of opinion that the defenders complied with the requirements of section 14(2) and that the Lord Ordinary reached the correct conclusions. I would accordingly refuse the reclaiming motion and assoilzie the defenders.
The pursuers appealed to the House of Lords, before which the case was heard on 21st and 22nd January 1970.
At delivering judgment on 3rd March 1970,—
LORD REID .—My Lords, this case arises out of two orders given by the appellants, who are textile merchants, to the respondents, who are cloth manufacturers. Those orders were for the manufacture of considerable quantities of rayon cloth to a detailed specification. There was a misunderstanding as to the purpose for which the buyers wanted the cloth. They wanted it to fulfil contracts for cloth for making dresses. The sellers thought it was for industrial use. The Lord Ordinary found that they were “astounded” when they first heard, some months after deliveries had commenced, that it was to be used for dresses, and that they would not have accepted the order if they had known that. When the contract was determined, both parties were left with considerable quantities on their hands.
The buyers sue for damages. Admittedly this was a sale by description within the meaning of the Sale of Goods Act, 1893, and the cloth delivered complied with the description. But the buyers alleged breach of the conditions implied by section 14 (1) and (2) of the Act. The Lord Ordinary held there was no breach and assoilzied the defenders. The buyers accepted this decision as regards section 14(1) but reclaimed as regards section 14(2). They accept all the Lord Ordinary’s findings of fact. The First Division adhered to the Lord Ordinary’s interlocutor. The only question now before your Lordships is whether the goods were of merchantable quality within the meaning of section 14 (2), which is as follows:
“Where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality; provided that if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed.”
It is common ground that the cloth, though complying with the contract description, was not suitable for making dresses—apparently because of irregular weaving. But it was suitable for a number of industrial uses, such as making bags. Was it therefore of merchantable quality?
The Lord Ordinary found that the contract price was a low price for cloth of that description for use for making dresses but “higher than would have been normal for it as an industrial fabric, but not unreasonably high for the defenders constructing it for such a purpose.” There is no doubt that cloth of this or very similar description was in common use for making dresses. There was no evidence that cloth of this precise description had been used for industrial purposes, but there is a finding that the respondents “had made rayon material of a very similar construction for industrial use before.” The Lord Ordinary appears to have accepted the evidence of an expert who said that he had never seen this particular construction of cloth before because the material was viscose, not cotton.
It is evident that at the proof the appellants put most weight on their case under section 14 (1), so it is not surprising that the findings of fact with regard to their case under section 14 (2) are not as detailed as one might have desired. Certainly this kind of cloth of the quality delivered was suitable for industrial use, but we do not know why it was not more frequently used for industrial purposes. There is no suggestion in the findings that the manufacturers, as dealers in goods of that description, ought to have known, or even suspected, that these goods were not intended for industrial use.
All the well-known authorities were cited on the proper interpretation of “merchantable quality.” Some importance was attached to what I said in Hardwick Game Farm v. S.A.P.P.A. (at p. 75):
“If the description is a familiar one it may be that in practice only one quality of goods answers that description—then that quality and only that quality is merchantable quality. Or it may be that various qualities of goods are commonly sold under that description—then it is not disputed that the lowest quality commonly so sold is what is meant by merchantable quality: it is commercially saleable under that description.”
I see no reason to alter what I said, but judicial observations can never be regarded as complete definitions: they must be read in light of the facts and issues raised in the particular case. I do not think it is possible to frame, except in the vaguest terms, a definition of “merchantable quality” which can apply to every kind of case. In the Hardwick case no question as to price arose, because the evidence showed that, even when all the facts were known, the market price was the same for tainted and untainted goods. But suppose that the market price for the better quality is substantially higher than that for the lower quality. Then it could not be right that, if the contract price is appropriate for the better quality, the seller should be entitled to tender the lower quality and say that, because the lower quality is commercially saleable under the contract description, he has fulfilled his contract by delivering goods of the lower quality. But I think that the evidence in this case with regard to prices is much too indefinite to support a case on that basis.
The appellants relied mainly on the contention that, whereas cloth of this description had been commonly used for making dresses, there was no evidence that such cloth had ever been put to any industrial use. There is, I think, some ambiguity in saying that goods are of the same description where the contract description is a precise and detailed specification for their manufacture. One may mean of the same precise and detailed description, and that may be novel: or one may mean of the same general description, and that may be common. In most of the authorities the latter meaning seems to have been adopted. Here, as I read the findings of fact, it is not clear whether cloth had commonly been made to this precise specification: but it is clear that cloth of this general description had commonly been used for making dresses and had sometimes been put to an industrial purpose.
Of the various general statements of the law I think that the most applicable to the present case is that of Lord Wright in Cammell Laird & Co. v. Manganese Bronze and Brass Co. In the Hardwick case I suggested (at p. 77) that a slight alteration was necessary and that this statement should read:
“What subsection (2) now means by ‘merchantable quality’ is that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description.”
The question, then, is whether this cloth “would normally be used” for industrial purposes. It was suitable for such use. Moreover, the manufacturers assumed it was for such use and their good faith is not disputed. There is no finding that other skilled and knowledgeable manufacturers would have thought differently. So I cannot find any ground for holding that the cloth delivered would not normally be used for any industrial purpose. And if one is entitled to look at the facts and the statutory condition apart from authority, I would not hold that it had been proved that the cloth delivered was not of merchantable quality. I would therefore dismiss this appeal.
J & H Ritchie Ltd v. Lloyd Ltd (Scotland)
[2007] UKHL 9 [2007] Bus LR 944, [2007] 1 WLR 670, [2007] UKHL 09, [2007] WLR 670, [2007] UKHL 9, [2007] 2 All ER 353, [2007] 1 Lloyd’s Rep 544
Lord Hope
Discussion
The issue which lies at the heart of this case, as Lord Philip observed, is the effect of section 35(6)(a) of the Sale of Goods Act 1979, as amended, on the buyer’s right to reject goods which, on delivery, are materially disconform to the contract. Section 35 as a whole is concerned with when the buyer is, and is not, deemed to have accepted the goods. Subsection (6) provides:
“(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because –
(a) he asks for, or agrees to, their repair by or under an arrangement with the seller, or
(b) the goods are delivered to another under a sub-sale or other disposition.”
Prior to the introduction of that provision into the 1979 Act it was open to question whether asking the seller to have defects in the goods remedied might amount to an implied intimation of acceptance by the buyer or to an inconsistent act which would prevent him from rejecting the goods. This problem was considered by the Law Commission and the Scottish Law Commission. In a joint report on Sale and Supply of Goods (May 1987, Law Com No 160; Scot Law Com No 104) the Commissions said that they had decided not to recommend giving the seller a right to cure the goods: para 5.28. Instead they recommended that the 1979 Act should be amended so as to provide that if the buyer asks for or agrees to attempts being made to repair the goods (whether by the seller or under an arrangement with him), then this does not of itself amount to acceptance of the goods by the buyer: para 5.29:
“There may of course be other things done by the buyer which indicate that he has in fact accepted the goods, but in future he will safely be able to ask for or agree to repairs without reserving his right to reject the goods later. It does not in our view matter whether it is the seller or someone else who will attempt the repair. For example, the seller might repair the goods himself; he may have no repair facilities and send the goods way; or he may suggest that the buyer try some remedy himself (for example, changing a fuse or replacing a battery).”
While the solution which the Commissions recommended to encourage attempts at cure solved one problem, it is apparent from this case that it created another for which no solution was provided. What happens to the right of rejection if the repair which the buyer has asked for or agreed to is carried out? The buyer is not deemed to have accepted the defective goods merely because he asked for or agreed to their repair. But is he bound in every case to accept and pay for the goods simply because they are said by the seller, following their repair, to be conform to the contract? If not, in what circumstances does the buyer lose the right to reject, and in what circumstances does that right remain exercisable? Wisely, as it now appears, the Commissions did not attempt to grapple with this problem. A solution cannot be found in the authorities which were cited to your Lordships, none of which were concerned with it. The problem is not capable of being solved satisfactorily by a pre-ordained code. In the absence of express agreement, the answer to it must depend on what terms, if any, are to be implied into the contract at this stage, bearing in mind that the seller was in breach at the time of delivery and that the buyer retains the right to resile because the goods were not in conformity with the contract.
In William Morton & Co v Muir Brothers & Co, 1907 SC 1211, 1224 Lord McLaren said:
“The conception of an implied condition is one with which we are familiar in relation to contracts of every description, and if we seek to trace any such implied conditions to their source, it will be found that in almost every instance they are founded either on universal custom or in the nature of the contract itself. If the condition is such that every reasonable man on the one part would desire for his own protection to stipulate for the condition, and that no reasonable man on the other part would refuse to accede to it, then it is not unnatural that the condition should be taken for granted in all contracts of the class without the necessity of giving it formal expression.”
In Liverpool City Council v Irwin [1977] AC 239, 258A-C Lord Cross of Chelsea pointed out that there was an important distinction between laying down by this means a prima face rule applicable to all cases of a defined type and cases where what the court was being in effect asked to do was to rectify a particular contract by inserting in it a term which the parties have not expressed. Dealing with the latter kind of case, he said at p. 258B-C:
“Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give – as it is put – ‘business efficacy’ to the contract and that if its absence had been pointed out at the time both parties – assuming them to have been reasonable men – would have agreed without hesitation to its insertion.”
The present context is one where it would, in my opinion, be not at all out of place to resort to an implied term to fill the gap in the statutory code and govern the relationship between the parties when it was arranged that the harrow would be taken back to Kelso. What term, if any, it would be right to imply into the contract of sale at that stage will depend on the circumstances. There may be cases, for example, where the nature of the defect and exactly what needs to be done to correct it, and at what expense to the seller, are immediately obvious to both parties. It may then be said that a buyer who, having been equipped with all that knowledge, allows the seller to incur the expense of repair is under an implied obligation to accept and pay for the goods once the repair has been carried out. His right to resile will be lost when the repair has been completed. The buyer’s protection is the reasonable opportunity to examine the goods after delivery which he is given by section 35(2) of the 1979 Act. Lord Marnoch said in para 14 that the doctrine of personal bar would provide the answer if the buyer claimed the right to reject in such circumstances. But, as we are dealing here with a statutory code and its consequences, I would prefer to find the solution in an implied term.
That however is not this case. The nature of the defect was not immediately obvious and it was not known what, if anything, could be done to correct it. But the underlying principles are the same. The effect of section 35(2)(a) is that, as the buyer is not deemed to have accepted the goods, he retains the right to reject them. That right will, of course, be lost if, at any time, he decides to accept the goods or is deemed to have accepted them. But it is a right of election which the buyer cannot be expected to exercise until he has the information that he needs to make an informed choice. The seller, for his part, cannot refuse to give him the information that he needs to exercise it. As Hale LJ said in Clegg v Andersson t/a Nordic Marine [2003] 2 Lloyd’s Rep 32, 48, para 75:
“… a buyer does not accept the goods simply because he asks for or agrees to their repair: s 35(6). It follows that if a buyer is seeking information which the seller has agreed to supply which will enable the buyer to make a properly informed choice between acceptance, rejection or cure, and if cure in what way, he cannot have lost his right to reject.”
Clegg v Andersson was a case where the buyer had asked for information which the seller agreed to give him and had not yet decided whether or not to ask for, or agree to, remedial works to the defective goods. In this case the appellants took that further step without first obtaining an undertaking from the respondents to provide them with information as to the nature of the defect once the harrow had been inspected and what had been done to repair it. It is plain that they would have been entitled to exercise their right of rejection if, on being asked to give such an undertaking in advance, the respondents had declined to do so. Should the fact that it did not occur to Mr Ritchie to obtain an express undertaking to that effect before the harrow was taken away make any difference?
The harrow was a complex piece of power operated agricultural machinery. Information of the kind that Mr Ritchie was asking for was obviously needed if the appellants were to make a properly informed choice between accepting and rejecting the equipment on being told that the harrow had been repaired to factory gate standard. A condition that the seller would provide this information, if it was asked for, was one which every buyer would seek for his own protection in such circumstances. It was one which no reasonable seller, who was already in breach of contract, could refuse as a condition of being given the opportunity to cure the defect and preserve the contract.
In these circumstances – which cannot be assumed to apply in every case – I would hold that the respondents were under an implied obligation to provide the appellants with the information that Mr Ritchie asked for. As they refused to give them that information the respondents were in breach of that obligation. The appellants were deprived of the information that they needed to make a properly informed choice. In my opinion they were entitled to reject the equipment even although, as it turned out, the respondents were able to prove afterwards that the harrow had been repaired to factory gate standard.
Conclusion
For these reasons I would allow the appeal. I would sustain the appellants’ first and fourth pleas in law and repel the fourth, fifth and seventh pleas in law for the respondents. I would grant decree of declarator in terms of the first crave and decree for payment of the sum sued for in terms of the third crave of the initial writ.
Messer UK Ltd. & Anor v Thomas Hardy Packaging Ltd & Anor
[2002] EWCA Civ 549 [2002] 2 All ER (Comm) 335, [2002] 2 LLR 379, [2002] 2 Lloyd’s Rep 379, [2002] EWCA Civ 549
Mance LJ
The Contractual Claim
The first step in the contractual claim is determined by the judgment which we have given in the Britvic proceedings. In that judgment we held that Messer and Terra had failed to show that clauses 11.1 and 11.2 of Messer’s standard conditions were reasonable within the meaning of the Unfair Contract Terms Act 1977. It follows that Messer’s supplies of the carbon dioxide to THP were subject to implied undertakings of satisfactory quality and fitness for purpose of the carbon dioxide, which, in those circumstances, it is also common ground were broken. The next step requires examination of clauses 12.1 and 12.2 of Messer’s standard terms which were incorporated in its contract for supply to THP and which read as follows:
“12.0 Limitation of Liability
12.1. Subject to any other limitation or exclusion of liability expressed elsewhere in this Contract, the liability of Messer, its employees and Agents to the Customer in respect of personal injury or direct physical damage to property (and losses, costs and expenses directly arising ftom such injury or damage), whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident, except that nothing in this Contract shall restrict Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence.
12.2 Messer, its employees and Agents shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to, loss of profits, loss of use or other consequential loss), or any other loss or damage not covered in Clause 12. 1, unless such loss, cost, expense or damage be caused by Messer supplying Gas that is not of the purity warranted or by failure to deliver or by late delivery of Gas by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer’s liability shall be limited to the value of the quantity of Gas concerned (at Messer’s selling price).”
The critical question is whether THP’s claim against Messer is “in respect of ….. direct physical damage to property” within clause 12.1. If it is, then all losses, costs and expenses directly arising from such damage are also recoverable. Normally, since the terms of clause 12.1 offer a more expanded prospect of recovery than those of clause 12.2, one could expect Bacardi and THP to argue that clause 12.1 is wide enough to cover the present situation, and Messer and Terra to be arguing the contrary. In this case, however, Messer and Terra fear, and the judge held, that clause 12.2 cannot be shown to satisfy the requirement of reasonableness under s.6(3) and 11(2) of the Unfair Contract Terms Act 1977. It is therefore in Messer and Terra’s interests to seek to bring the claim within clause 12.1, which is a provision that the judge considered to be reasonable (a conclusion against which Bacardi and THP do not appeal). In this connection, the judge held, and again there is no appeal on this point, that there was only one “incident” (the “Benzene incident” viewed as a whole) and so that there would be an overall limit of £500,000 to any contractual recovery by THP against Messer. Bacardi and THP nonetheless profess themselves to be relatively neutral on the application of clause 12.1, although suggesting that Messer’s and Terra’s analysis is wrong. Their relative neutrality arises, because, if the claim falls within clause 12.1 (as being “in respect of … direct physical damage”), then Bacardi and THP maintain that Terra is liable to Bacardi in tort and that Bacardi’s tort claim and THP’s contribution claim should succeed on that basis. Messer and Terra deny that this follows, and submit that Bacardi cannot in any event recover in tort damages indemnifying them against contractual liability for loss borne by Westbay.
THP’s pleaded contribution claim is that there was direct physical damage to the mixed drinks, e.g. the Breezer, whereas Bacardi pleads that there was damage to the mixed drinks, the product, and/or to the ingredients. The judge considered both possibilities. He rejected the former, on the ground that direct physical damage involves harm to some existing property. Here, all that happened was that THP created a defective end product, containing benzene, principally (on the evidence) as a result of mixing the defective carbon dioxide into a pre-existing mix of water and concentrate. As to the alternative possibility, it seemed to him artificial to think in terms of damage to the other pre-existing ingredients, consisting of the mix resulting from the admixture of THP’s water to Bacardi’s concentrate. Anyway, he pointed out, even if the ingredients could properly be said to have been damaged by the admixture, it was not because of damage to the ingredients that the loss was suffered. The loss arose from uselessness of the finished drinks, and the need for their recall.
This last observation is related to the make-up of the loss totalling £2,175,000 set out in the judge’s judgment:
“Bulk liquid and packaging: £1,339,093
Production bottling fee: £192,440
Haulage: £12,617
Storage costs: £36,473
Bacardi staff time: £40,251
Destruction costs: £79,050
Consultants fees: £32,353
Central Risks Group Fee: £7,353
Laboratory Fees: £9,856
Faxes, stationery and sundry: £7,291
Hotel, travel and temporary labour: £3,712
Customer withdrawal expenses: £326,955
Retrieval haulage: £37,557
Loss of profits: NIL”
These items self-evidently relate to the whole of the finished drinks, rather than to any individual components which could be said to have been damaged by any admixture of carbon dioxide. Further, although, as the judge said, it might be possible to speak of the mix of Bacardi’s concentrate and THP’s own water as having been “damaged” by being admixed with benzene contaminated carbon dioxide, the more natural view is that the mix of concentrate and water itself ceased (as always intended) to exist and the finished product came into existence at the moment of such admixture. What resulted was not damaged concentrate and water, but a defective new product. As to other components of the finished product embraced within the above list, if (as one might presume) the item for bulk liquid included the value of the carbon dioxide, that could certainly not be said to have damaged itself. It would certainly stretch language to speak of the bottles, caps, trays or packaging as having been damaged. What happened was that they were rendered valueless or less valuable by being used to wrap defective product, which had to be recalled and scrapped. Had any loss of profit been incurred (which the judge found as a fact that it had not been), it would not have related to any individual element, but to the finished product. It would in these circumstances seem to me artificial and wrong to try to separate out any particular loss as arising from damage to Bacardi’s concentrate or mix of concentrate and water.
The judge carefully examined the structure of clauses 12.1 and 12.2 for clues as to the proper approach to the present unusual situation. As he observed, clause 12.1 deals with personal injury and direct physical damage to property (and losses, costs, and expenses directly arising therefrom), while clause 12.2 specifically covers “other loss or damage not covered in Clause 12.1” including any such other “loss … or damage … caused by Messer supplying Gas that is not of the purity warranted”. The judge noted that the only express reference to the typical situation that might result from supply of defective carbon dioxide was to be found in clause 12.2. He also regarded a claim for the costs associated with the recall and destruction of a defective product as essentially a claim for economic loss, rather than for direct physical damage to property. I would agree. This conclusion does not seem to me to be altered by the consideration that during the process of creation of the defective product, concentrate belonging to Bacardi might be described as having been “damaged” and rendered valueless upon its mixture with the contaminated carbon dioxide. As I have said, the concentrate or mix of concentrate and water was never intended to retain its identity, and the more natural description of events is simply that a defective product resulted, leading, as the judge said, to an overall economic loss suffered through the recall.
There was disagreement between the parties as to the extent to which any assistance might be obtained in the construction of clause 12.1 from authorities considering the circumstances in which damage may be said to have occurred sufficient to found a claim in tort. Mr Prynne referred the judge to a decision of my own in Losinjska Plovidba v.Transco Overseas Ltd. (The “Orjula”) [1995] 2 Ll.R. 395, but before us he submitted that tort authorities were really of no assistance. In my view there are obvious undertones of tort thinking behind the identification and description of the types of harm falling within both clauses 12.1 (“personal injury” and “direct physical damage”) and 12.2 (“losses …. of a purely financial or economic nature”). That is not to say that clause 12.1 contemplates that a customer like THP could bring, or that either the customer or Messer as supplier could be liable for, a claim in tort. The clause simply distributes between Messer and its customer the risk in respect of certain types of harm. Its reference to “liability … to the Customer in respect of personal injury or direct physical damage” is wide enough to embrace personal injury or direct physical damage whether the customer suffers this himself or itself or incurs liability for it to a third party. The exception at the end of clause 12.1, relating to “Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence”, would in contrast only appear apt if the customer were himself an individual and was injured; and the reason for such an exception is no doubt to be found in s.2(1) of the 1977 Act. Clause 12.1 also refers twice to potential liability for negligence. Physical injury is the typical occasion for a tortious claim based on negligence; and a duty of care has been said to be more likely to arise in tort in respect of “direct physical damage” or loss than in relation to indirect physical damage: Marc Rich & Co. AG v. Bishop Rock Marine Co. Ltd. [1996] 1 AC 211, 237D-G, per Lord Steyn.
In The “Orjula” I held a vessel to have been damaged by contamination by hydrochloric acid, which required her to be cleaned by specialist contractors before she could again be used. In Hunter v. Canary Wharf Ltd. [1997] AC 655 the Court of Appeal considered that dust could in certain circumstances cause damage to property, for example when trampled into a carpet so as to lessen the value of the fabric. In Blue Circle Industries plc v. Ministry of Defence [1999] Ch 289 land was held to be physically damaged by the admixture with the topsoil of radioactive material, which required the expenditure of money to remove. I agree that none of these authorities is of real assistance in the present case. In each case pre-existing property was damaged and was useless or depreciated, at least unless money was spent to restore it to its former state. The difficulties which arise in the present case were not present.
In Murphy v. Brentwood D.C. [1991] 1 AC 398 the House of Lords held that the purchaser of a defectively constructed house had no tortious claim against a local authority whose negligence had allowed the defective construction to occur, in circumstances where the defect was discovered before any injury to person or health or damage to property other than the defective house had been done. The loss suffered was regarded as pure economic loss, which was in the circumstances recoverable, if at all, only in contract. Lord Keith at page 465F approved the proposition that:
“…. there is no liability in tort upon a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture. The loss is economic. It is difficult to draw a distinction in principle between an article which is useless or valueless and one which suffers from a defect which would render it dangerous in use but which is discovered by the purchaser in time to avert any possibility of injury. The purchaser may incur expense in putting right the defect, or, more probably, discard the article.”
It also appears to me of some interest to note the discussion in Murphy regarding the “complex structure theory” which Lords Bridge and Oliver had mooted in earlier speeches in D. & F. Estates v. Church Commissioners [1989] AC 177. Relevant passages appear in the speeches of Lord Keith at page 470C-G, Lord Bridge at pages 476B-479C, Lord Oliver at page 484D-F and Lord Jauncey at page 497A-E. Lords Mackay, Brandon and Ackner agreed with Lord Keith. Lords Mackay and Ackner also agreed with Lord Bridge and Lord Ackner further agreed with Lords Oliver and Jauncey. Lord Bridge referred to an American case, Quackenbush v. Ford Motor Co. 153 NYS 131, in which the plaintiff recovered tort damages from the manufacturer for damage to her motor car caused by an accident attributable to faulty manufacture of the brakes. Lord Bridge at page 476E thought it “highly doubtful” if the reasoning in this case could now be supported consistently with the unanimous opinion of the US Supreme Court in East River Steamship Corporation v. Transamerica Delaval Inc. (1986) 106 S.Ct. 2295, that a manufacturer incurs no liability in tort for damage occasioned by a defect in a product which injures itself. He went on at page 476H-477A and page 477D-E to indicate that Quackenbush was in any event no authority for the proposition that, once a defect in a complex chattel is discovered, there is a remedy in tort against the manufacturer on the ground that the cost of repairing the defect was necessarily incurred in order to prevent further damage to other parts of the chattel, and that the position was no different where repair was necessary to prevent harm to some other person or chattel, since “…once a chattel is known to be dangerous it is simply unusable”.
At pages 466F-467A, Lord Bridge addressed the argument that a tort claim might lie in respect of damage caused by subsidence caused by inadequate foundations. He rejected the theory that it could as “quite unrealistic”:
“The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure. Therefore any defect in the structure is a defect in the quality of the whole and it is quite artificial, in order to impose a legal liability which the law would not otherwise impose, to treat a defect in an integral structure, so far as it weakens the structure, as a dangerous defect liable to cause damage to ‘other property’.”
At page 478E-G, he then said:
“A critical distinction must be drawn here between some part of a complex structure which is said to be a ‘danger’ only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated. Thus, if a defective central heating boiler explodes and damages a house or defective electrical installation malfunctions and sets the house on fire, I see no reason to doubt that the owner of the house, if he can prove that the damage was due to the negligence of the boiler manufacturer in the one case or the electrical contractor in the other, can recover damages in tort on Donoghue v Stevenson principles. But the position in law is entirely different where, by reason of the inadequacy of the foundations of the building to support the weight of the superstructure, differential settlement and consequent cracking occurs. Here, once the first cracks appear, the structure as a whole is seen to be defective and the nature of the defect is known. Even if, contrary to my view, the initial damage could be regarded as damage to other property caused by a latent defect, once the defect is known the situation of the building owner is analogous to that of the car owner who discovers that the car has faulty brakes. He may have a house which, until repairs are effected, is unfit for habitation, but, subject to the reservation I have expressed with respect to ruinous buildings at or near the boundary of the owner’s property, the building no longer represents a source of danger and as it deteriorates will only damage itself.”
A similar distinction was also adopted, without reference to Murphy, in my judgment in Skanska Construction Ltd. v. Eggar (Barony) Ltd. [2002] EWCA Civ 310, paragraphs 30-33.
Lord Keith at page 470C-G and Lord Jauncey at page 497A-D thought that it would be quite unrealistic to treat a building, the whole of which had been erected and equipped by the same contractor, as divisible into parts, so that damage caused to one part by a hidden defect in another might be regarded as damage to “other property” for the purpose of grounding a claim in tort. Lord Keith at page 467A-468C cited with approval a passage from Deane J. in the Australian case of Council of Sutherland v. Heyman 157 CLR 424: “The building itself could not be said to have been subjected to “material, physical damage” by reason merely of the inadequacy of its foundations since the building never existed otherwise than with its foundations in that state.” Both Lords Keith and Jauncey recognised that a tortious claim might be possible if a defective part (e.g. wiring) had been installed by a separate subcontractor, and had, for example, caused damage by fire to other parts.
Clearly there may be borderline cases of this nature. The interesting discussion and difference of opinion between Lloyd LJ and Nicholls LJ (as they were) in M/S Aswan Engineering Est. Co. v. Lupdine Ltd. [1987] 1 WLR 1 does not help to resolve these, particularly when it preceded Murphy and occurred when the star of Junior Books Ltd. v. Veitchi Co. Ltd. [1983] 1 AC 520 was still high in the sky. The present case may also be regarded as close to the border, as Mr Jonathan Marks QC for THP acknowledged. But I consider that the answer is reasonably clear. To recapitulate, carbon dioxide of separate manufacture was acquired by THP, which had in its possession concentrate and other items owned by Bacardi. THP mixed the concentrate with water of THP’s supply (so as to create a mix which Bacardi owned), and at this stage (substantially) further mixed in carbon dioxide so as to create liquid Bacardi Breezer mix, owned by Bacardi. This was the product that THP then bottled and packaged, before delivering the whole finished product to Bacardi. Although there were ingredients owned by Bacardi which were separate from the defective carbon dioxide and water supplied by THP, THP’s activity involved creating a new product by mixing all these elements. The new product was not damaged, but merely defective from the moment of its creation. The alternative and more persuasive way of justifying any tort claim on Bacardi’s behalf seems to me to be to argue that damages can be claimed for the spoiling of the (without doubt valuable) concentrate that Bacardi supplied. But this concentrate did not survive, and was never intended to survive, as such. It was always going to be merged in the finished Breezer. The real complaint relates to the finished product. The loss which is claimed is also not by reference to the value of the concentrate (or with reference to losses consequential upon its spoiling), but by reference to the value of the finished product and losses consequential upon the need to recall it. Accordingly, the tort cases (which are in my view of some assistance) tend to confirm the conclusion that I would anyway favour without them.
Mr Prynne observed that, on the construction that Messer and Terra advance, clause 12 overall operates (in terms) less restrictively. He submits therefore, rightly in my view,that clause 12.1 falls in case of real doubt to be construed in the way which he submits. That principle is no less applicable, if clause 12.2 is held unreasonable and so ineffective under the Unfair Contract Terms Act 1977. The effect of the Act must be ignored in deciding what the language of clause 12 purports to achieve. Moreover, much of the argument that clause 12.2 is unreasonable turns on its extreme width of application. If clause 12.1 has the meaning that Mr Prynne submits, then the scope of clause 12.2 is considerably diminished, and a different conclusion might be reached on its reasonableness. For that reason too, it is necessary to consider the scope of both parts of clause 12 before addressing any question whether either is unreasonable. In my opinion, however, the principle that any exemption clause should in case of real doubt be construed in the less restrictive sense is not determinative of this case. We are concerned with a relatively confined situation, in relation to which it is in my view possible to reach a sufficiently clear conclusion regarding the intentions behind and proper sphere of application of each part of clause 12. There is therefore no scope for the application of the principle.
The application of the Unfair Contract Terms Act to clause 12.2
The judge considered that Messer had failed to satisfy the onus upon it, under ss. 6 and 11 of the 1977 Act, to show that the terms of clause 12.2 were reasonable. I remind myself of the proper approach to review of a judge’s decision upon such a point, as laid down by the House of Lords in Mitchell (George) (Chesterfield) Ltd. v. Finney Lock Seeds Ltd. [1983] 2 Ac 803, 815-6 per Lord Bridge:
“It may, therefore, be appropriate to consider how an original decision as to what is “fair and reasonable” made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55 (5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.”
Mr Prynne submitted before us that the judge’s (now unchallenged) conclusion that clause 12.1 was not unreasonable could not be squared with his further conclusion that clause 12.2 was not shown to be reasonable. The judge, Mr Prynne submits, failed in the latter context to identify or place any or sufficient weight on the effective equality of bargaining power and on the availability (although THP chose not to take this out until late 1999) of product recall insurance, both of which factors influenced him in the former context. The judge was, however, considering the reasonableness of clause 12.1 on a hypothesis which he (and now I) reject, namely that it offered at least the prospect of recovery of up to £500,000 in respect of any one incident of “damage” arising from the contamination of any end product into which defective carbon dioxide was added.
Clause 12.2 by contrast operates as a blanket exemption, both in respect of losses of a “purely financial or economic nature” and in respect of “any other loss or damage not covered in Clause 12.1”. Mr Prynne seeks to justify this as no more than an exemption in respect of losses falling within the second head in Hadley v. Baxendale (1854) 9 Ex 341, in other words losses which would be outside the scope of ordinary contemplation, unless special circumstances were made known. He points to the preservation of liability in respect of supplies of gas “not of the purity warranted”, referring to failure to meet the requirements of BS 4105 which he submits represents the only type of deficiency that the parties could have foreseen. He points to clause 8.7.1 which provides for the customer to determine suitability, so that any claim could be put forward within the five day period specified in the exception to clause 12.2. The limitation of liability under the concluding part of that exception to the value of the quantity of gas concerned on this submission also corresponds with the amount of loss that the parties could foresee, if the contract operated as provided.
One difficulty about these submissions, as the judge pointed out, is that they do not correspond with the reality of the parties’ expected behaviour. The carbon dioxide supplied by Messer to THP was supplied into equipment (storage vessels with associated vaporising and/or other equipment) which Messer provided to THP under a separate agreement. Those tanks were never allowed to be less than 40% full. Accordingly, any defective carbon dioxide supplied would necessarily contaminate a considerably greater quantity of carbon dioxide, quite apart from any effect as and when gas from the relevant tank was later admixed with Bacardi concentrate. Further, no-one in reality ever expected THP to test the quality of carbon dioxide supplied into such tanks, whether for compliance with BS 4105, which Messer warranted, or for absence of other contaminating substances, which Terra’s manufacturing and Messer’s delivery process should have avoided. The judge actually found, in the light of the process of delivery and admixture, that “compliance with the five day notice period would be impractical and to all intents and purposes impossible”; but, even if one simply describes such compliance as “unrealistic” and “not to be expected”, the implications for the reasonableness of clause 12.2 seem to me the same.
I turn to Mr Prynne’s argument that no-one would have foreseen that carbon dioxide matching the requirements of BS 4105 would be contaminated by some other substance, not mentioned in that standard; and so that it was reasonable to include clause 12.2. Before the judge, he carried this argument to the length of a submission that, because the drafters cannot have had such contamination in mind, therefore clause 12.2 or at least its five day notice requirement could not apply in such a case at all. The difficulty about this argument is that clause 12.2 is in absolute terms. The exception only applies to loss, etc. caused by supplying “Gas that is not of the purity warranted”, which must in turn refer back to Messer’s standard and so to BS 4105. Once one concludes, as we have concluded on the appeal in the Britvic proceedings, that neither Messer’s standard conditions nor BS 4105 contain any express undertaking regarding freedom from contamination by other substances not specified by BS 4105, it follows that clause 12.2 purports to exclude all liability for any such other contamination.
Mr Prynne’s submissions at this point mirror some of those mounted in respect of clause 11 in the Britvic appeal. He argues that, since no-one foresaw other contamination, a clause which does not foresee it or therefore allow any claim in respect of it should be regarded as reasonable. He submits that clause 12.2 does attempt to deal (fairly, he submits) with matters which could be foreseen, such as failure to comply with BS 4105, failure to deliver or late delivery. These submissions must be rejected in my judgment for reasons paralleling those which we expressed in the course of our judgment on the Britvic appeal. The fact that no-one would have conceived of other contamination by some entirely extraneous elements (whether benzene or a poison) is because all concerned would have assumed that Terra’s manufacturing process (and, so far as material, Messer’s delivery service) would have been operated efficiently in such a way as to make it impossible. Far from justifying an exclusion of responsibility if extraneous contamination occurred, this to my mind demonstrates the unreasonableness of any clause purporting to exempt Messer from liability in respect of such contamination.
In these circumstances, the judge’s conclusion that clause 12.2 was unreasonable is in my judgment unassailable. It is unassailable in relation to the very situation which has arisen. But, as the judge pointed out, even if the unreasonableness had only related to potential circumstances, rather than those actually before the court, present authority in this court suggests that the clause would have to be regarded as unreasonable for all purposes: see Stewart Gill Ltd. v. Horatio Myer and Co. Ltd. [1992] QB 600, 608-9 per Stuart-Smith LJ. I have some reservations about this proposition, which I expressed in Skipskreditforeningen v. Emperor Navigation [1998] 1 Ll.R. 66, 75, but they do not arise for consideration on this appeal. Mr Prynne sought, however, to derive assistance from accepting the proposition and relying on the warning which I attached in Skipskreditforeningen that, if the clause as a whole was to be judged either valid or invalid, then courts “should not be too ready to focus on remote possibilities or to accept that a clause fails the test by reference to relatively uncommon or unlikely situations”. I was speaking there in the context of an exclusion of set-off which would in terms cover any cross-claim for alleged fraud. I stand by the warning, but I do not consider that the exemption provided by the terms of clause 12.2, viewed as a whole, can in any way be regarded as referring only to relatively uncommon or unlikely situations. The delivery of gas complying with BS 4105 and of suitable quality is one of the main subjects that it covers. An exemption that would, in practice (since no-one expected THP to test even for compliance with BS 4105), operate as a blanket exemption in respect of matters which the parties would have regarded as fundamental to each supply is a quite different exemption to that which I was addressing in Skipskreditforeningen.
I therefore agree both with the judge’s reasoning and with his conclusion that clause 12.2 was not shown to be reasonable, and that, under s.6 of the Unfair Contract Terms Act 1977, it cannot therefore be relied on to exclude Messer’s contractual liability for breach of the implied undertakings as to satisfactory quality and fitness for purpose, which, it is now accepted, were broken by Messer’s supplying of benzene-contaminated carbon dioxide to THP. The result is that the present appeals fail.
…..
Overall Conclusion
The appeals against Tomlinson J’s judgment in the present proceedings therefore fail for reasons which, although I have set them out at some length, mirror, almost in their entirety, those which Tomlinson J himself expressed in his meticulous judgment.
Mr Justice Neuberger:
For the reasons given by Mance LJ, I also would dismiss this appeal.
36. I would dismiss the appeal.
Giedo Van Der Garde BV & Anor v Force India Formula One Team Ltd
[2010] EWHC 2373 (QB)
Stadlen J
…..
In considering these competing submissions the starting point is the general principle formulated by the editors of Goff and Jones in these terms: “The case law holds that a restitutionary claim, based on failure of consideration, will, therefore, succeed only if the failure is total.” (ibid 19-009). Although the doctrine is commonly referred to as failure of consideration it is, as appears from the extract from Goff and Jones cited earlier in this judgment, based on a failure not of consideration but of performance: “In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act – I am excluding contracts under seal – and thus, in the law relating to the formation of contract, the promise to do a thing may often be the consideration, but when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails the inducement which brought about the payment is not fulfilled.” (Fibrosa Spolka Akeyjna v Fairbairn Lawson Combe Barbour Limted [1943] AC 32 per Viscount Simon LC at page 48).
In Fibrosa the House of Lords held that money paid on a total failure of consideration can be recovered. “What is being now decided is that the application of an old-establised principle of the common law does enable a man who has paid money and received nothing for it to recover the money so expended.” (Per Lord Atkin at page 55). There were also obiter dicta supporting the proposition that money cannot be recovered in the event of mere partial failure of consideration. “Nor could moneys paid before frustration be recovered if the person making the payment has received some part of the consideration moving from the other party for which the payment was made.” (Per Lord Russell of Killowen page 56). (The position in the case of frustration was reversed by the Law Reform (Frustrated Contracts) Act 1943) “…Money had and received to the plaintiff’s use can undoubtedly be recovered in cases where the consideration has wholly failed, but unless the contract is divisible into separate parts it is the whole money not part of it, which can be recovered. If a divisible part of the contract has wholly failed and part of the consideration can be attributed to that part, that portion of the money so paid can be recovered, but unless this be so there is no room for restitution under a claim in indebitatus assumpsit. A partial failure of consideration gives rise to no claim for recovery of part of what has been paid. Indeed, the contrary has not been contended.” (Per Lord Porter at page 77). Thus at the same time as denying the existence of a right to recover in the event of partial failure of consideration Lord Porter recognised the possibility of applying the doctrine of total failure of consideration in a case where even though there has been some performance under a contract there has been total failure to perform a divisible part of it provided that part of the consideration or money paid can be attributed to that part of the contract. There is thus in this dictum support for the concept of apportionment as a means by which the full rigour of the general principle may be mitigated. Lord Porter did not however indicate what he meant by divisible and in particular by what means it is to be decided whether a contract is divisible. Is it dependent on an express or implied term of the contract or is there some additional basis on which the court can decide that a contract is divisible?
Stocznia was a case in which it was assumed by both parties that the asserted right to recover moneys paid depended on whether there had been a total failure of consideration. Lord Goff of Chieveley stated the test as being “not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.” (Page 588 D). On its face this supports the proposition that performance of even a part of the relevant contractual duties will disentitle the claimant from restitution. However that begs the question of what are the contractual duties in respect of which the payment is due. Where it is possible to apportion different parts of a contractual price to the performace of different contractual duties under a contract it is not in my judgment inconsistent with the proposition that there may be a total failure to perform contractual duties in respect of which payment is due that there has been performance of part or all of contractual duties in respect of which the payment is not due.
I note in passing that Mr Tregear relied on this dictum of Lord Goff as holding that the question whether there has been total or partial failure of consideration is to be assessed by reference not to benefits received by the claimant but by reference to contractual performance by the defendant. In my judgment the dictum does not support so wide a proposition. Stocznia was a case in which under the contracts in question the shipyard was bound not merely to deliver and transfer the property in vessels when built to the buyers but in addition to design and build them. They were thus not contracts of sales simpliciter, but “contracts for work and materials”. It was in my view for that reason that Lord Goff held: “I start from the position that failure of consideration does not depend upon the question of whether the promisee has or has not received anything under the contract, like for example the property in the ships being built under contracts one and two in the present case. Indeed if that were so, in cases in which the promisor undertakes to do work or render services which confer no direct benefit on the promisee, for example where he undertakes to paint the promisee’s daughter’s house, no consideration would ever be furnished for the promisee’s payment.” (Page 588 C-D). Having stated the test mentioned above Lord Goff continued: “The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter under which the consideration for the price would be the passing of the property in the goods (or land). (page 588 D-E).(emphasis added). Lord Goff thus appeared to contemplate that in an appropriate case the test could be stated by reference to the receipt of a benefit by the claimant rather than by reference to contractual performance by the defendant. Put another way the focus of enquiry is the receipt by the promisee of a benefit under the contract which may be established in an appropriate case where the promisee has not directly received anything the benefit in such a case consisting of the performance by the promisor of an obligation whose performance is in some other way of advantage to the promisee. Support for this analysis is in my view to be found in the judgment of Kerr LJ in Rover International to which I refer below.
In Whincup v Hughes Bovill CJ held: “The general rule of law is that where a contract has been in part performed no part of the money paid under such contract can be recovered back.” (page 81). However to this general rule he held that there are exceptions. “There may be some cases of partial performace which form exceptions to this rule, as for instance, if there were a contract to deliver ten sacks of wheat and six only were delivered, the price of the remaining four might be recovered back. But there the consideration is clearly severable…The contract having been in part performed it would seem that the general rule must apply unless the consideration be in its nature apportionable. I am at a loss to see on what principle such apportionment could be made. It could not properly be made with reference to the proportion which the period during which the apprentice was instructed bears to the whole term. In the early part of the term the teaching would be most onerous and the services of the apprentice of little value; as time went on his services would probably be worth more and he would require less teaching. There appears to be no instance of a similar nature to the present in which an action for the return of a part of the premium has been brought.” (Page 81). Montague Smith J referred to a “rule of law that an action for money had and received can only be brought when there is a total failure of consideration with the exception of a few cases which on being analysed hardly proved to be exceptions…Moreover it appears to me clear that the action for money received cannot lie where the contract has been partly performed on both sides. To ascertain the amount which in equity in such a case requires to be returned it would be necessary to go into a great variety of considerations, the relevant weight of which it would be almost impossible correctly to estimate: e.g. the value of the service lost to the master, and the degree to which the apprentice had profited by the instruction. It would be impossible to take merely the proportion of the time which had elapsed to the whole term as the standard of measurement.” (page 85-86). While restating the general rule the court in Whincup v Hughes expressly contemplated the existence of exceptions where the consideration is “in its nature apportionable” or “severable”. On the facts of that case the reason why the consideration was held to be not in its nature apportionable was that the benefits and burdens to the parties varied over time. In principle no such problem would arise in the case of delivery of six out of ten sacks of wheat.
In Minister of Sound (Ireland) Limited v World Online Limited [2003] EWHC 2178, Ch, [2003] 2 All ER (Com) 823 Nicholas Strauss QC sitting as a deputy judge of the High Court stated: “Whilst the traditional view is that a party to a contract (whether the innocent party or the contract-breaker) can only recover payments made under it where there has been a total failure of consideration, the dictum of Lord Goff in Goss v Chilcott referred to at [42], above, suggests that this may no longer be so, and recent authority suggests that there may be circumstances in which recovery for partial failure may be allowed: See DO Ferguson v Sohl [1992] 62 BLR 95 in which as the editorial note indicates, Hirst LJ “robustly” described as a total failure of consideration what might more conventionally have been seen as a partial failure. See also White Arrow Express Limited v Lamey’s Distribution Limited [1995] NLJR 1504 and Baltic Shipping Co. v Dillon the Michael Lermontov [1993] 176 CLR 344.” (845 B-E). Referring to those dicta and in particular their reliance on Lord Goff’s dictum in Goss v Chilcott the editors of Goff and Jones point out that it was made in the hypothetical context of facts where the borrowers had repaid part of the capital sum and expressed the view that “what is more doubtful is whether a restitutionary claim will lie if there has been a partial failure and the counter-performance is not the payment of money but the rendering of services.”
As already mentioned the editors of Goff and Jones regard the general rule as regrettable. They refer to welcome indications that English Courts are more ready to interpret the doctrine of total failure of consideration more sympathetically and to allow recovery in restitution even though the claimant has received a momentary benefit from the defendant and even, exceptionally, if the benefit received is services rendered (See Ferguson v Sohl). For present purposes the question is not whether recovery for partial failure should be permissible but rather whether by reference to authority including that cited by Mr Strauss QC the recognised exceptions and qualifications to the rule are broad enough to be applicable in the present case.
In considering the extent to which the general rule may be departed from or qualified as to its scope and extent, courts have tended to focus on two separate but sometimes related questions: (1) apportionment and (2) whether for the purpose of deciding whether there has been total or partial failure of consideration certain benefits received by the claimant can be disregarded.
On the second question perhaps the leading English authority is the decision of the Court of Appeal in Rover International. In that case the Court of Appeal allowed a restitutionary claim for return of instalments paid under a contract, holding that there had been a total failure of consideration notwithstanding that the plaintiff had received some benefit under the contract and the defendant had performed some part of the contract. Under the contract EMI (who were later taken over by Cannon, the defendant) were to supply master Prints of films to the plaintiff for dubbing and distributing in Italy. The gross receipts were to be split in agreed proportions. Prints were duly delivered by EMI and Rover commenced the work of dubbing and paid five instalments of pre-payments due to EMI as an advance under the contract. Harman J at first instance rejected the claim for repayment of the five instalments on the ground that the consideration had not failed at all. Rover had had several films and distributed them in Italy “for payment no doubt of substantial sums”. To allow it to get back the monies which it paid to Cannon would be grossly unjust. He held that there was no claim in law for monies had and received to the use of Rover.
Allowing Rover’s appeal Kerr LJ held: “The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract”. (923 G). Central to Kerr LJ’s decision was his conclusion that in order to defeat a claim of total failure of consideration is it not sufficient to show that the promisee has received any benefit or even any benefit due under the contract. What must be proved is receipt of “any part of the benefit bargained for under the contract or purported contract”. In reaching this conclusion Kerr LJ relied on a passage from Chitty on Contracts, 5th Ed (1983) Vol , pp 1091-1092, para 1964 and the authorities there cited. It is striking that although one of the passages from Chitty cited by Kerr LJ included the quotation from Viscount Simon LC in Fibrosa to which I have referred to the effect that “when one is considering the law of failure of consideration…it is generally speaking…the performance of the promise”, the editors of Chitty emphasised that failure of consideration is judged from the point of view of the payer. “In that context failure of consideration occurs where the payer has not enjoyed the benefit of any part of what he bargained for. Thus, the failure is judged from the payer’s point of view…the failure has to be total…thus any performance of the actual thing promised, as determined by the contract, is fatal to recovery under this heading. The role of the contractual specification means that it is not true to say that there can be a total failure of consideration only where the payer received no benefit at all in return for the payment. The concept of total failure of consideration can ignore real benefits received by the payer if they are not the benefits bargained for…”
This latter point was also emphasised in the majority judgment of Mason CJ, Deane J, Toohey J, Gaudaron J and McHugh J in the decision of the High Court of Australia in David Securities PTY Limited v Commonwealth Bank of Australia 175 CLR 353 at 382: “So, in the context of failure of consideration, the failure is judged from the perspective of the payer.” [Reference was then made to Kerr LJ’s test in Rover International]. In the immediately preceding passage of their judgment the majority arguably went further than the Court of Appeal in Rover in holding that the question of failure is judged not just from the perspective of the payer but by reference to the subjective understanding of the payer as to what it thought it was receiving as consideration.
“The respondent, taking a different view of the contractual arrangements, asserts that all its pre-contractual statements concerning payment of withholding tax simply took the form of a contractual offer, which the appellants were at liberty to accept or to reject. Viewed from the angle of contract formation between equal and experienced parties, this is undoubtedly true. But we are not concerned in this case with what a hypothetical, experienced commercial person believed he/she was contracting for; in order to decide whether the appellants in this case have received consideration for payment of the additional moneys, we must ask what these particular appellants, in all the circumstances, thought they were receiving as consideration. In this context, consideration means the matter considered in forming the decision to do the act, “the state of affairs contemplated as the basis or reason for the payment.” And, as we have stated, the “state of affairs” existing in the appellants’ minds was that the withholding tax was their liability.” (381-382). (emphasis added).
On its face there is a tension, if not an apparent inconsistency, between on the one hand the approach of Kerr LJ (with whose reasoning Nicholls LJ agreed), in Rover International and of the majority of the High Court in David Securities and on the other hand the dictum of Lord Goff in Stocznia to which I have referred that: “In truth the test is not whether the promise has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.” Mr Tregear suggested that the two approaches are reconcilable on the basis that if the promisor has provided some performance, prima facie there is no total failure of consideration. If however the performance which has been provided is, judged from the perspective of the promisee, not what he really bargained for so that it is collateral then it is still possible for there to be total failure of consideration. In my view if there is a real inconsistency between the two sets of dicta then there is some force in Mr Tregear’s suggested way of reconciling the two. However I am not convinced that the inconsistency is real rather than apparent. Although on Lord Goff’s test the question is whether the promisor has performed any part of the contractual duties in respect of which the payment is due, that leaves open the question of how the court is to identify the contractual duties in respect of which the payment is due. If, as held by the Court of Appeal in Rover International and the High Court in David Securities, the answer to that question is to be determined by reference to identifying “the benefit bargained for under the contract or purported contract” and ignoring real benefits received by the payer if they are not the benefit bargained for, there is no inconsistency between the dicta of the Court of Appeal and the High Court on the one hand and Lord Goff’s test on the other.
In support of his conclusion that receipt of benefits which are merely incidental to the performance of a contract is not inconsistent with total failure of consideration Kerr LJ in Rover International cited the cases of Rowland v Divall [1923] 2 KB 500 and Warman v Southern Counties Car Finance Corporation Limited.
“In Rowland v Divall [1923] 2K.B 500 the plaintiff bought a car from the defendants. He had the use of it for several months but then discovered that the seller had no title, with the result that he had to surrender the car to the true owner. He sued for the return of the price on the ground that there had been a total failure of consideration. The defendant denied this, pointing out that the plaintiff had had the use of the car for a substantial time. This contention succeeded at first instance, leaving the plaintiff only with a claim for damages, but this court unanimously upheld the plaintiff’s claim. The consideration for which he had bargained was lawful possession of the car and a good title to it, neither of which he got. Although the car had been delivered to him pursuant to the contract and he had had its use and enjoyment for a considerable time, there was a total failure of consideration because he had not got any part of what he had bargained for.
The decision of Finnemore J in Warman v Southern Counties Car Finance Corporation Ltd [1949] 2 KB 576 was to the same effect. The plaintiff was buying a car on hire purchase when he became aware that a third party was claiming to be the true owner of the car. But he nevertheless went on paying the remaining instalments and then the necessary nominal sum to exercise his option to purchase. When the true owner then claimed the car he surrendered it and sued the finance company for the return of everything he had paid. He succeeded on the ground that there had been a total failure of consideration. He had not bargained for having the use of the car without the option to purchase it.
The position of Rover in the present case is a fortiori to these cases. Admittedly, as the judge said, they had several films from Cannon. But the possession of the films was merely incidental to the performance of the contract in the sense that it enabled Rover/Monitor to render services in relation to the films by dubbing them, preparing them for release on the Italian market and releasing them. These were onerous incidents associated with the delivery of the films to them. And delivery and possession were not what Rover had bargained for. The relevant bargain, at any rate for present purposes, was the opportunity to earn a substantial share of the gross receipts pursuant to clause 6 of the schedule, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.
….
In the context of the recovery of money paid on the footing that there has been a total failure of consideration, it is the performance of the defendant’s promise, not the promise itself, which is the relevant consideration. In that context, the receipt and retention by the plaintiff of any part of the bargained-for benefit will preclude recovery, unless the contract otherwise provides or the circumstances give rise to a fresh contract. So in Whincup v Hughes, the plaintiff apprenticed his son to a watchmaker for six years for a premium which was paid. The watchmaker died after one year. No part of the premium could be recovered. That was because there was not a total failure of consideration. A qualification to this general rule, more apparent than real, has been introduced in the case of contracts where a seller is bound to vest title to chattels or goods in a buyer and the buyer seeks to recover the price paid when it turns out that the title has not been passed. Even if the buyer has had the use and enjoyment of chattels or goods purportedly supplied under the contract for a limited time, the use and enjoyment of the chattels or goods has been held not to amount to the receipt of part of the contractual consideration. Where the buyer is entitled under the contract to good title and lawful possession but receives only unlawful possession, he or she does not receive any part of what he or she bargained for. And thus, it is held, there is a total failure of consideration. As this Court stated in David Securities Pty v Commonwealth Bank of Australia: “the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact.””
In one of the passages cited Mason CJ referred to any part of the bargained for benefit whereas in another he referred to any substantial part of the benefit expected under the contract. No explanation was given as to why he used these two different formulations, whether he considered them to be the same and if not which of them he considered to be the true test. It is not difficult to imagine circumstances in which the difference could assume significance.
Mr Tregear submitted that the reference to substantial part of the benefit expected was not intended to introduce a quantitave qualification such that receipt of a small proportion of the bargained-for benefit is not a bar to restitution. Rather he submitted it was intended to exclude as a bar to restitution receipt of a benefit which was merely incidental to the benefit bargained for such as the receipt by Rover of the film prints. The reason the Court of Appeal held that receipt of the prints did not disentitle Rover from seeking restitution was not that it formed a small part of the benefit bargained for under the contract but rather because it did not form any part of the bargained for benefit.
This analysis reinforces the central importance in the test of identifying the essential purpose of the contract. Thus a contract may confer the right to receive and impose an obligation to provide a number of benefits. The test as to whether receipt of any one or more of those benefits is inconsistent with total failure of consideration is not whether they are large or small in the context of the entirety of the benefits to be conferred but whether they are the whole or part of the main benefit expected or bargained for or merely incidental or collateral thereto. It is no doubt for that reason that the High Court in David Securities and Baltic Shipping and the Court of Appeal in Rowland v Divall and Rover International held that the answer to that question is to be approached from the perspective of the payer rather than the payee. It is normally the payer who has entered into the contract in order to obtain certain benefits. The payee’s objective is normally just to receive payment. In considering whether a particular benefit to which the payer is entitled under the contract is part of the essential bargain contracted for or merely incidental or collateral thereto there is a logic to addressing that question from the prespective of the payer and identifying what was his purpose in entering the contract. That raises the further issue as to whether the question of what was the essential purpose of the contract or more accurately which of the benefits were the essential bargain contracted for is to be answered by an objective process of the court drawing inferences from the nature of the transaction and the language of the contract or whether evidence as to the payer’s subjective purpose or motive for entering the contract is admissible. In Rowland v Divall, Rover International and Warman the court appeared to have approached the question as a matter of objective analysis without reference to the subjective purpose or motive of the payer. In David Securities on the other hand the High Court, as mentioned above, appears to have approached the question by reference to the state of mind and purpose of the payer.
Under ordinary principles of construing a written agreement the normal rule is that evidence of the subjective intentions of either or both parties is inadmissible. Does it make a difference that the exercise in which the court is engaged is one of considering whether one party to the contract is entitled to restitution rather than any question of the rights of either party to relief by way of enforcing the contract or damages for breach of it? There does not seem to be an obvious answer to this question. On the one hand it could be said that in answering the question of what is the essential bargain contracted for the court is necessarily involved in a process of construing the agreement and the presumed intentions of the parties thereto. On the other hand the reason the court is asking the question is not for the purpose of enforcing the agreement but in order to decide whether the payer is entitled to return of money had and received on principles of unjust enrichment. On balance in my view although the question is to be answered from the perspective of the payer in the sense of identifying the essential bargain for which he contracted or, to use the language of the majority in David Securities, the matter considered in forming the decision to do the act and the state of affairs comtemplated as the basis or reason for the payment it is a question be answered objectively rather than by reference to evidence of his subjective motives. However that is not to say that evidence of the payer’s subjective motive or purpose for entering the agreement is inadmissible if those intentions or motives were communicated to the payee before the contract was entered into. Applying that distinction to the facts of this case I do not think that Mr Van der Garde’s evidence that as far as he was concerned the main or only benefit of the Service Agreement was testing kilometres rather than the possibility of Friday morning testing would be admissible unless that purpose had been communicated to Spyker by him or by Mr Boekhoorn on his behalf prior to the agreement, which it was not.
Against Mr Tregear’s suggested analysis of the significance of Mason CJ’s reference to substantial benefit as distinct from any benefit is the fact that the distinction between the essential bargain contracted for and benefits which are merely incidental thereto was already made by Mason CJ’s reference to “part of the benefit expected under the contract.” While that is undoubtedly a difficulty in Mr Tregear’s suggested analysis, in my view the difficulty disappears when one considers the fact that in a separate passage in the extract of his judgment Mason CJ referred to the receipt and retention of any part of the bargained-for benefit. Moreover and in any event the introduction into the test of a quantitave element would in my view be inconsistent with Lord Goff’s formulation of the test in Stocznia which refers to whether the promisor has performed any part of the contractual duties in respect of which the payment is due. Given that the very nature of the rule is that there must be total and not merely partial failure of consideration it is difficult to see how a de minimis exception could be reconciled with the rule. As Lord Ellenborough CJ said in Hunt v Silk “if the plaintiff might occupy the premise two days beyond the time when the repairs were to have been done and the lease executed, and yet rescind the contract, why might he not rescind it after a 12 month on the same account. This objection cannot be gotten rid of: the parties cannot be put in statu quo.” (Page 1144). Although that was said in the context of rescission rather than total failure of consideration the logic is in my viewequally applicable to the latter.
However given the existence of the collateral or incidental benefit exception to the rule it may be that in an appropriate case the receipt of a small benefit may be held not to be a bar to restitution, not by reference to a de mininis principle but on the basis that properly analysed it is a collateral or incidental benefit.
A good illustration of the collateral benefit exception to the rule appears in the judgment of Deane J and Dawson J in Baltic Shipping:
“There can be circumstances in which there is, for relevant purposes, a complete failure of consideration under a contract of transportation notwithstanding that the carrier has provided sustenance, entertainment and carriage of the passenger during part of the stipulated journey. For example, the consideration for which the fare is paid under a contract for the transportation of a passenger by air from Sydney to London would, at least prima facie, wholly fail if, after dinner and the inflight film, the aircraft were forced to turn back due to negligent maintenance on the part of the carrier and if the passenger were disembarked at the starting-point in Sydney and informed that no alternative transportation would be provided. Thus in Heywood v Wellers [a firm] [1976] QB 446 at pp 458-459, Lord Denning MR regarded it as self evident that, in some circumstances where a part of a journey had been completed, money paid to the carrier or “driver” was recoverable “as of right” for the reason that it was “money paid on a consideration which had wholly failed”.”(page 378).
Although the meal and the in flight film formed part of the benefits to which the passenger was entitled under his contract with the carrier, viewed from the prespective of the passenger it was merely an incidental or collateral benefit and not a part, even a small part, of “the consideration for which the fare is paid”. The essential bargain contracted for was transportation to London. This is to be contrasted with the essential bargain contracted for in Baltic Shipping itself, which was a 14 day cruise. In the context of rejecting an alternative submission that the advance payment of the cruise fare created in the shipping company no more than a right to retain the payment conditional upon its complete performance of its entire obligations under the contract, Mason CJ held:
“As the contract called for performance by the appellant of its contractual obligations from the very commencement of the voyage and continuously thereafter, the advance payment should be regarded as the provision of consideration for each and every substantial benefit expected under the contract. It would not be reasonable to treat the appellant’s right to retain the fare as conditional upon complete performance when the appellant is under a liability to provide substantial benefit to the respondent during the course of the voyage. After all, the return of the respondent to Sydney at the end of the voyage, though an important element in the performance in the appellant’s obligations, was but one of many elements. In order to illustrate the magnitude of the step which the respondent asks the court to take, it is sufficient to pose two questions, putting to one side clause 9 of the printed ticket terms and conditions. Would the respondent be entitled to a return of the fare if, owing to failure of the ship’s engines, the ship was unable to proceed on the last leg of the cruise to Sydney and it became necessary to airlift the respondent to Sydney? Would the fare be recoverable if, owing to a hurricane the ship was compelled to omit a visit to one of the schedules ports of call? The answer in each case must be a resounding negative.” (Page 353).
In short whereas the only essential bargain contracted for by the air passenger in Deane and Dawson JJ’s hypothetical example was transportation to London, and in flight food and entertainment was only incidental thereto, return to Sydney was not the sole or essential bargain contracted for by the purchaser of the cruise and the on-ship services such as food and entertainment and any port stop offs during the voyage were integral parts of the essential bargain contracted for.
Before leaving Baltic Shipping I draw attention to the fact that as recorded in the head note, four and possibly five of the judges held that a claim for restitution can only succeed as an alternative to a claim for damages for breach of contract and that the two claims cannot both succeed. On its face this view is inconsistent with the decision of the Court of Appeal in Ferguson v Sohl in which the court held that the employer who overpaid the builder for works to his house was entitled both to restitution of the amount overpaid on the basis of total failure of consideration and nominal damages in the amount of £1 for breach of the building contract. Had the point been live before me I would have considered myself bound by the decision of the Court of Appeal to hold that it is open to me to award both restitution and at least nominal damages for breach of contract. However the claims for damages for breach of contract are pleaded in this case only as alternatives to the primary claim for restitution and, as I have mentioned, Mr de Garr Robinson expressly confirmed that the Claimants put the claims forward as alternatives and do not seek an award of damages as well as an order for restitution.
In relation to apportionment it was common ground between the parties that the authorities show that there is a principle by reference to which performance of even a non-incidental or non-collateral obligation under a contract by a payee may in certain circumstances not be inconsistent with an entitlement on the part of the payer to restitution on the basis of total failure of consideration. Where they differed was as to the nature and ambit of the circumstances in which the principle is engaged.
…..In the present case however, although no part of the principal sum had been repaid by the defendants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advanced was not total. Their Lordships do not think so. The function of the interest payments was to pay for the use of the capital sum over the period for which the loan was outstanding, which was separate and distinct from the obligation to repay the capital sum itself. In these circumstances it is, in their Lordships’ opinion, both legitimate and appropriate for present purposes to consider the two separately. In the present case, since it is unknown when the mortgage instrument was altered, it cannot be known whether, in particular, the second interest instalment was due before the defendants were discharged from their obligations under the instrument. Let it be supposed however that both interest payments had fallen due before the event occurred. In such circumstances, there would have been no failure of consideration in respect of the interest payments rendering them recoverable by the defendants; but that would not affect the conclusion that there had been a total failure of consideration in respect of the capital sum, so that the latter would be recoverable by the company in full on that ground. Then let it be supposed instead that the second interest payment did not fall due until after the avoidance of the instrument. In such circumstances the consideration for that interest payment would have failed (at least if it was payable in advance), and it would prima facie be recoverable by the defendants on the ground of failure of consideration; but that would not affect the conclusion that the capital sum would be recoverable by the company also on that ground. In such a case, therefore, the capital sum would be recoverable by the lender, and the interest payment would be recoverable by the borrower; and doubtless judgment would, in the event, be given for the balance with interest at the appropriate rate: see Westdeutsche Landesbank Girozentrale vIslington London Borough Council [1994] 1 W.L.R 938. In either event, therefore, the amount of the loan would be recoverable on the ground of failure of consideration. In the present case, since no part of the capital sum had been repaid, the failure of consideration for the capital sum would plainly have been total. But even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out with difficulty, the law will allow partial recovery on this ground: see David Securities Pty. Ltd. v Commonwealth Bank of Australia [1992] 175 C.L.R 353,383.”
Mr Tregear accepted that the ratio in Goss v Chilcott was that there was a total failure of consideration as to the discrete part of the contract being sued upon namely the advance of the capital which had not been repaid in whole or part. On its face there is nothing in Lord Goff’s judgment to suggest that the contract itself severed the defendant’s obligations to repay the advance and to pay interest instalments or that it apportioned the former to the advance of the loan and the latter to the use of the loan. To that extent it does not support Mr Tregear’s submission that apportionment is possible only where the parties have impliedly acknowledged that the consideration may be apportioned by the structure of the transaction.
Moreover Lord Goff’s obiter dictum that even if part of the capital sum had been repaid the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration was not expressed to be conditional upon the existence in the hypothetical contract in this example of express or implied terms stipulating separate obligations to advance and repay each distinct instalment of the loan advanced. This perhaps suggests that it was not Lord Goff’s view that apportionment is permissible only where it is expressly or impliedly provided for in the contract. Indeed his conclusion that the law will allow partial recovery at least in those cases in which apportionment can be carried out without difficulty suggests, in my view, that the question whether apportionment can be carried out turns not on whether apportionment is provided for either expressly or even by implication by the contract but rather on whether as a matter of practical common sense the court considers that it is able to apportion on objective analysis of the nature of the contract and the consideration.
Mr Tregear submitted that Lord Goff’s conclusion that there would have been a total failure of consideration even if there had been repayments of capital was not only obiter but, as a decision of the Privy Council, does not necessarily represent a binding statement of English law. If it were to be taken to be representative of English law it would mean that the doctrine of total failure of consideration is effectively extinct. That would be inconsistent with the decision of the House of Lords in Stocznia in which the doctrine was affirmed.
It must of course be right that if there is an irreconcilable difference between Lord Goff’s obiter dictum in Goss v Chilcott and the affirmation of the requirement of total failure of consideration as a condition for restitution by the House of Lords in Stocznia the latter would prevail and would certainly be binding on me. It is however striking that the allegedly inconsistent dicta both appeared in respectively a speech and a judgment of Lord Goff, the decision in Goss v Chilcott having been handed down in May 1996 not much more than a year before the hearing in June 1997 in Stocznia. Although Goss v Chilcott was not referred to either in the speeches or in argument in Stocznia, it is hardly to be supposed that Lord Goff had forgotten what he said in Goss v Chilcott and it would be suprising if he had changed his mind on a significant aspect of the doctrine of total failure of consideration between the two cases without saying so and explaining his reasons. Particularly when read against that background in my view there is no inconsistency between the two dicta. As I have already indicated in my view the test formulated by Lord Goff in Stocznia “whether the promisor has performed any part of the contractual duties in respect of which the payment is due” leaves open the question of how the court identifies the contractual duties in respect of which the payment is due. In a case where, to use Lord Goff’s language in Goss v Chilcott, apportionment can be carried out without difficulty there is no reason why the court cannot conclude that, even where contractual duties have been performed by the payee, they are not contractual duties in respect of which the relevant payment is due. That is not to say that it follows that the House of Lords in Stocznia approved the obiter dictum in Goss v Chilcott but merely that the latter is not inconsistent with the decision in the former.
In David Securities, to which Lord Goff in Goss v Chilcott referred as supporting the proposition that at least in those cases in which apportionment can be carried out without difficulty the law will allow partial recovery on the ground of failure of consideration, the majority judgment did not specifically address the question of what is the test as to whether for these purposes consideration can be apportioned. However there is in my view a flavour of the court approaching this as a matter of common sense rather than regarding it as dependent on an express or implied agreement in the contract that different parts of a purchase price are referable to different contractual obligations. Thus the majority held:
“In cases where consideration can be apportioned or where counter-restitution is relatively simple, insistence on total failure of consideration can be misleading or confusing. In the present case for instance it is relatively simple to relate the additional amounts paid by the appellants to the supposed obligation under clause 8(b) of the loan agreements. The appellants were told that they were required to pay withholding tax and the payments that they made were predicated on the fact that, by so doing, they were discharging their obligation…In this case the bank must prove that the appellants are not entitled to restitution because they received consideration for the payments which they seek to recover. It does not avail the bank to argue that the appellants were provided with the loan moneys agreed. Indeed the severability of the loan agreement into its relevant parts seems to be accepted by the bank for it is admitted that the appellants’ consideration for agreeing to pay the additional amounts under clause 8(b) was the bank’s agreement not to charge a higher interest rate. In circumstances where both parties have impliedly acknowledged that the consideration can be “broken up” or apportioned in this way, any rationale for adhering to the traditional rule requiring total failure of consideration disappears.” (Page 383).
In my view the majority in the High Court was not saying that it is only in cases where the parties have impliedly acknowledged that the consideration may be apportioned by the structure of the transaction that apportionment will be possible. It merely noted that in that particular case the parties had so acknowledged, not in the sense that such a term was to be implied into the contract but merely in the very different sense that they so acknowledged in their submissions.
In Baltic Shipping v Dillon a passenger on a cruise vessel suffered injury when the vessel sank 10 days into a 14 day cruise. The High Court of Australia held that the passenger was not entitled to a refund of the fare because there had not been a total failure of consideration. Mason CJ held:
“I have come to the conclusion in the present case that the respondent is not entitled to recover the cruise fare on either of the grounds just discussed. The consequence of the respondent’s enjoyment of the benefits provided under the contract during the first eight full days of the cruise is that the failure of consideration was partial, not total. I do not understand how, viewed from the perspective of failure of consideration, the enjoyment of those benefits was “entirely negated by the catastrophe which occurred upon depature from Pickon” to repeat the words of the primary judge.” (Page 353).
Although Mason CJ in an earlier part of his judgment referred to the case of Whincup v Hughes, he did not elaborate on his reasons for reaching his conclusion. In particular he did not address the question whether it was possible to apportion the cruise fare between the benefits which were conferred during the first 8 or 10 days of cruise and the benefits which were not conferred after the ship sank. Mr Tregear submitted that even if the ship owner had calculated the cost of providing the cruise on a dollar per day basis it would not follow from that that the contract could be severed or that the fare could be apportioned between benefits to be conferred on a daily basis.
In Whincup v Hughes Bovill CJ explicitly held that there may be some cases of partial performance which form exceptions to the general rule that where a contract has been in part performed no part of the money paid under the contract can be recovered back “as for instance if there were a contract to deliver 10 sacks of wheat and 6 only were delivered, the price of the remaining 4 might be recovered back. But there the consideration is clearly severable.” (Page 81) (emphasis added). In my view that conclusion does not support Mr Tregear’s submission that a finding to the effect that there has been a total failure of consideration could only be correct in this case if the contract had provided for payments for kilometres in instalments referable to tranches of distance. Bovill CJ’s formulation left it open whether in the hypothetical example the contract provided an overall price for the delivery of 10 sacks or specified the delivery of 10 sacks at a specific price per sack. It follows in my view that his conclusion that in such a case the consideration is clearly severable was not dependent on there being in the contract a specified price per sack of wheat rather than a global price for all 10 sacks. In this case there is the complication that as well as the minimum of 6,000 kilometres which Spyker were obliged to provide there were other contractual obligations. I consider below whether they can be disregarded by reference to one or more of Mr de Garr Robinson’s other submissions. But in a hypothetical case where the contract had been confined to an obligation on the part of Spyker to provide 6,000 kilometres of which only, for the sake of simplicity, 2,000 had been made available, it does not seem to me that the question whether there had been total failure of consideration would necessarily turn on whether the Service Agreement had specified an overall price of $3 million or a rate of $500 per kilometre.
Later in his judgment Bovill CJ used a different expression. He said: “The contract having been in part performed, it would seem that the general rule must apply unless the consideration be in its nature apportionable.” (Page 81) (emphasis added.) The question whether in any case the consideration is in its nature apportionable is one to which, in my view, the definitive answer is not necessarily supplied by any express stipulation in the contract. In a straightforward contract to deliver 10 sacks of wheat the nature of the obligation, namely to deliver sacks of wheat, would in my view prima facie, be apportionable. Each bag of wheat being the same as the others and the delivery of it involving the seller in no greater or lesser burden than the others, there is no reason why the obligation to deliver one bag of wheat cannot be apportioned to the arithmetically appropriate portion of the purchase price. That remains the case whether the purchase price is expressed as £10 for the delivery of 10 sacks of wheat or 10 sacks at £1 per sack.
In Fibrosa Lord Porter said that “unless the contract is divisible into separate parts it is the whole money, not part of it, which can be recovered. If a divisible part of the contract has wholly failed and part of the consideration can be attributed to that part, that portion of the money so paid can be recovered…” (Page 77). Lord Porter gave no guidance as to how the court is to determine whether a contract is divisible into separate parts or whether part of the consideration can be attributed to the divisible part which has failed. However it seems to me implicit in his posing the question whether part of the consideration can be attributed to a divisible part of the contract that it is open to a court to hold that part of the consideration can be so attributed even if such attribution is not spelled out expressly in the contract itself. That again in my view supports the proposition that in the hypothetical example the mere fact that the contract specified a global fee of $3 million for 6,000 kilometres rather than $500 per kilometre would not mean that where 4,000 kilometres have not been provided part of the $3 million consideration cannot be attributed to the part of the contract under which those 4,000 kilometres were required to be made available. In my view the question whether consideration is in its nature apportionable may turn on an analysis of the nature of the subject matter of the consideration and the circumstances in which it is to be delivered or performed rather than just on whether or not the contract allocates it to a particular part of the purchase price.
….
Nourse LJ’s rhetorical question: “If the basis of his right to retain the £22,065.75 is that he has done work to that value, by what possible right can he claim to retain £4,673 for work which, in breach of contract, he has not done?” is an eloquent statement of the rationale for the doctrine of restitution in the event of failure of consideration. Indeed it no doubt explains why the rule requiring total failure of consideration has been subjected to sustained criticism at the highest judicial and academic levels. As the editors of Goff and Jones third edition put it in a passage quoted in the commentary in Ferguson v Sohl: “To allow the defendant to retain the whole or part of the contract price on the ground that the plaintiff had made a losing contract would be to allow him to retain a benefit which he is in a position to restore and to profit from his breach of contract. Furthermore, for similar reasons, even if the consideration for the innocent party’s payment has only partially failed, he should, in our view, be entitled to restitution, although an allowance should be given for any benefit received from the party in breach. However, at common law the innocent party is, at present, denied recovery in these circumstances…” (Page 99).
Given the accepted constraint of the requirement to show a total rather than partial failure of consideration, apportionment is a necessary tool to enable the court to find that the payee has no right to retain the sum claimed for work which, in breach of contract, he has not done. In my view for work done one could equally substitute goods delivered and/or services provided.
There may of course be cases where it is clear on the evidence that there has been some maybe even very considerable overpayment for which there has been no consideration but it is impossible because of difficulties of apportionment to identify the precise amount of the payment for which there has been no consideration. So for example in this case if the Claimants are right on all their collateral benefit arguments but it were held that part of the $3 million consideration in the Fee Agreement was attributable to Friday testing as a freestanding contingent right to which the parties attributed a modest but unquantified value when striking their bargain, it might in practice be difficult if not impossible to apportion a fixed sum to the 6,000 kilometres of testing or in consequence to the 2,004 kilometres actually provided. It would in those circumstances be plain that if Spyker were to retain the entire $3 million prepaid by the Claimants there would be some unidentifiable part thereof for which Spyker had provided no services. That would be the part of the $3 million referable to the balance of testing kilometres not provided by Spyker. On the current state of the law it would appear that because of the difficulty of apportionment the court would be powerless to order restitution notwithstanding the probability if not certainty that for some and possibly a large proportion of the money retained by Spyker there had been a total failure of consideration. It would be for consideration whether in such circumstances the court should have the power to identify some portion of the sum paid in respect of which even on a view most favourable to the payee it could not seriously be denied that there had been a total failure of consideration because it represented the minimum amount of the overall consideration specified in the contract which is attributable to the services which were not provided.
Clegg v Olle Andersson (t/a Nordic Marine)
[2003] EWCA Civ 320
Vice Chancellor
Did the Cleggs lose their right to reject the Yacht before 6th March 2001?
It is not disputed that the result of my conclusion in respect of s.14(2) is that the Cleggs were, initially, entitled to reject the Yacht. The question is whether by their subsequent conduct they lost that right on or before 6th March 2001. This issue depends on the proper application to the facts of this case of s.35 Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994. The material provisions are:
(1) The buyer is deemed to have accepted the goods subject to subsection (2) below –
(a) when he intimates to the seller that he has accepted them, or
(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the purpose –
(a) of ascertaining whether they are in conformity with the contract, …
(3) Where the buyer deals as consumer…., the buyer cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.
(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains them without intimating to the seller that he has rejected them.
(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2) above.
(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because –
(a) he asks for, or agrees to, their repair by or under an arrangement with the seller,…”
The terms of s.35 pose three questions, namely (1) did the Cleggs intimate to Mr Andersson that they accepted the Yacht? (2) did the Cleggs do any act in relation to the Yacht which was inconsistent with the ownership of Mr Andersson ? and (3) had a reasonable time elapsed by 5th March 2001 in which the Cleggs retained the Yacht without intimating to Mr Andersson that they had rejected it? The judge answered each of the first two questions in the affirmative. He indicated that had it arisen he would have answered the third question in the affirmative too.
In paragraphs 43 to 47 the judge dealt with a number of authorities on which Counsel for Mr Andersson had relied before him relating to the application of s.35(4). In paragraph 54 the judge explained why he preferred the evidence of Mr Andersson to that of Mr Clegg but pointed out that the differences between them on relevant matters were small and ultimately probably not crucial.
The judge’s conclusion on the first two questions to which I have referred in paragraph 51 above is set out in paragraph 55 of his judgment. He said:
“I find that Mr. Clegg was told on 12 August 2000 that the Yacht was overweight, that there seemed to be some 607 kilogrammes excess weight in the keel, and that Mr. Andersson and Malo would put that right. Even on Mr. Clegg’s evidence he knew on 16 August 2000 that the keel was overweight. With that knowledge he took his family on a cruise to Falmouth and Alderney over eight days or so. In the light of that experience he decided that he liked the Yacht as it was and told Mr.Andersson so. That, in my judgment, was an intimation that he accepted the Yacht, knowing of the condition of the keel and that Mr. Andersson considered that it should be corrected and was prepared to have the necessary work done. Mr. Clegg’s concern in his letter dated 28 August 2000 in relation to the keel was not whether its condition was such that he might want to reject the Yacht, but simply whether the remedial work proposed by Mr. Andersson was absolutely necessary. In my judgment by 28 August 2000, in the light of his experience of sailing the Yacht, it had not occurred to Mr. Clegg not to keep the Yacht. He was simply interested in whether he should have the remedial work done or not. The fact that he indicated to Mr. Andersson that he considered that it was his, Mr. Clegg’s, decision whether the remedial work should be done or not was a further intimation that he had accepted the Yacht. The giving by Mr. Clegg of an instruction in his letter dated 5 September 2000 to Mr. Andersson that remedial work should not be undertaken on the keel was, in my judgment, an act inconsistent with the continuing ownership of the Yacht by Mr. Andersson. In informing Mr. Andersson in his letter dated 13 January 2001 that he intended to move the Yacht to Portugal or Gibraltar in early May 2001 it seems to me Mr. Clegg was intimating that he had accepted the Yacht. I also consider that by leaving his personal possessions on the Yacht between August 2000 and the end of March 2001 Mr. Clegg was intimating that he had accepted the Yacht. His action in insuring the Yacht was inconsistent with ownership of the Yacht remaining with Mr. Andersson and amounted to the assertion by Mr. Clegg that he had an insurable interest in the Yacht. Contrary to his evidence to me, he would not have had such an interest unless he had accepted the Yacht. Mr. Clegg’s attempt to register the Yacht in his and his wife’s names was also inconsistent with ownership of the Yacht remaining with Mr. Andersson. For all these reasons in my judgment Mr. and Mrs. Clegg had lost the right to reject the Yacht, if, contrary to my findings, they would otherwise have had such right, well before the letter dated 6 March 2001 was written by Messrs. Blake-Turner & Co. Indeed, the tenor of the correspondence between Mr. Clegg and Mr. Andersson up to the letter dated 6 March 2001 does not in any way foreshadow the terms of that letter, which came rather out of the blue. I reject Mr. Clegg’s evidence that he was moved to give instructions for the letter to be written by a realisation from the terms of Mr. Andersson’s letter dated 14 February 2001 that significant work would be necessary to remedy the Yacht. I find it difficult to avoid the conclusion that the writing of the letter dated 6 March 2001 was in fact prompted by a desire to seek to manoeuvre Mr. and Mrs. Clegg into a better position to extract substantial compensation from Mr. Andersson. Certainly something about which I can only speculate appears to have happened at the beginning of March 2001 to cause Mr. Clegg to wish to adopt a much more confrontational stance as against Mr. Andersson than that which had been adopted up to that point.”
The intimations on which the judge relied in relation to the first question were (a) Mr Clegg, with knowledge and experience of the overweight keel, telling Mr Andersson in late August 2000 that he liked the Yacht, (b) Mr Clegg’s letter of 28th August 2000 indicating that the decision whether any and, if so, what remedial work should be done was for Mr Clegg, (c) Mr Clegg’s letter of 13th January 2001 informing Mr Andersson that the Cleggs intended to move the Yacht to Portugal or Gibraltar in early May 2001 and (d) the action of the Cleggs in leaving personal possessions on the Yacht from August 2000 until March 2001.
In my view intimations (a) and (b) should be considered together, not least because the terms of the letter of 28th August 2000 (paragraph 11 above) show the sense in which Mr Clegg’s statement should be regarded. He refers to the overweight keel as a fundamental point. He asks for a revised specification and measurements. He questions the effect on EU weight requirements and on a resale and asks for the appointment of an independent surveyor because he does not have the relevant expertise. I do not read this as an intimation of acceptance; rather Mr Clegg was asking for information so that he might then determine whether or not he should accept the Yacht. That this was his position is, in my view, made plain by the correspondence passing between him and Mr Andersson between 28th August and 8th September 2000 (paragraphs 12 to 16 above). The information he sought was not in fact supplied until 15th February 2001.
Mr Clegg’s letter of 13th January 2001 (paragraph 17 above) cannot be read as an intimation that Mr Clegg had, or then, accepted the Yacht. He was concerned to get the information for which he had previously asked. Had it proved to be satisfactory then, no doubt, he would wish to move the Yacht to Portugal or Gibraltar in early May. That would depend on the sailing/testing he wished to carry out in March/April. I do not read that letter as intimating an intention to move the Yacht to Portugal if the information or the result of the testing was not satisfactory. Until at least the information was received Mr Clegg was not in a position to decide whether to accept the Yacht or not. No doubt the Cleggs had left personal effects in the Yacht but, given the outstanding request for further information, that action cannot be regarded as an intimation of acceptance either. For these reasons I am unable to agree with the judge’s conclusion on the basis of any or all the intimations he referred to in paragraph 55 of his judgment.
The inconsistent acts on which the judge relied in relation to the second question were (a) the letter dated 5th September 2000 from Mr Clegg to Mr Andersson directing him that remedial work should not be done, (b) insuring the Yacht and (c) attempting to register the Yacht. I am unable to agree with the judge in respect of any or all of these acts either.
By s.35(6)(a) a buyer is not deemed to have accepted goods if he asks for or agrees to their repair by the seller. The circumstances existing on 5th September 2000 were that Mr Clegg had sought but had not yet been provided with the information required by him to decide whether or not to accept remedial works to the Yacht. If he had agreed to their repair that would not have amounted to acceptance. In my view Mr Clegg’s indication that he did not agree to any remedial works unless and until he had been provided with the information he sought is also incapable of amounting to acceptance of the Yacht.
In Kwei Tek Chao v British Traders and Shippers [1954] 2 QB 459, 487 Devlin J explained that in cases where, as in this case, property in the goods has passed to the buyer the ownership of the seller with which the buyer must not act inconsistently is the reversionary interest of the seller which remains in him arising from the contingency that the buyer may reject the goods. As property in the Yacht had passed to the Cleggs they had an insurable interest in it whether or not they subsequently rejected it. The act of Mr Clegg in insuring the Yacht in August 2000 was not in any way inconsistent with the reversionary interest of Mr Andersson. Moreover, as the judge recorded in paragraph 28 of his judgment, one reason why Mr Clegg insured the Yacht was because the loan agreement under which he borrowed the money to buy the Yacht required him to do so. In my view the judge was wrong to regard the act of insuring the Yacht as in any way inconsistent with the ownership of Mr Andersson.
The third act on which the judge relied was Mr Clegg’s attempt to register the Yacht in the name of his wife and himself. In cross-examination Mr Clegg said that he had applied through an agent to register the Yacht in Guernsey. From the context I infer that this was done before or at the time of delivery in August 2000. In paragraph 7 of his supplemental witness statement he indicated that he was required to do so by the terms of the loan agreement. I am unable to see how this act can amount to an act inconsistent with the reversionary interest of Mr Andersson to which I have referred.
Accordingly I am unable to accept that the three acts relied on by the judge, either alone or together, are capable of amounting to acts inconsistent with the ownership of Mr Andersson. With regard to the third question in paragraph 57 of his judgment the judge said
“Subject to the need to have regard to the provision made by Sale of Goods Act 1979 s. 35(4), which was introduced after his decision in Bernstein v. Pamson Motors (Golders Green) Ltd., I respectfully agree with the conclusion of Rougier J. that, on proper construction, Sale of Goods Act 1979 s.35(4) is not concerned with what defects existed in goods in any particular case and how easy they in fact were to discover. What it is concerned with is how long would objectively be a reasonable time on the facts of the particular case to retain goods without intimating a rejection. In applying that objective test what is important, it seems to me, is what opportunities there in fact were to examine the goods to see whether they conformed with the contract requirements, not with whether those opportunities were actually taken. On the facts of the present case Mr. and Mrs. Clegg had ample opportunity, had they chosen to take it, to evaluate whether the Yacht was in conformity with the Contract. Had it been necessary, therefore, I should have held that they had lost any right to reject the Yacht by lapse of time.”
In Bernstein v. Pamson Motors (Golders Green) Ltd [1987] 2 AER 220 Rougier J was concerned with a case in which the car had been delivered to the buyer three weeks before the purported rejection. In the interval the purchaser had driven it 140 miles. At p.230 Rougier J said
“In my judgment, the nature of the particular defect, discovered ex post facto, and the speed with which it might have been discovered, are irrelevant to the concept of reasonable time in s 35 as drafted. That section seems to me to be directed solely to what is a reasonable practical interval in commercial terms between a buyer receiving the goods and his ability to send them back, taking into consideration from his point of view the nature of the goods and their function, and from the point of view of the seller the commercial desirability of being able to close his ledger reasonably soon after the transaction is complete. The complexity of the intended function of the goods is clearly of prime consideration here. What is a reasonable time in relation to a bicycle would hardly suffice for a nuclear submarine.”
As the judge acknowledged that decision has been criticised (104 LQR 18). Further it was based on the terms of s.35 before amendment by the Sale and Supply of Goods Act 1994. It is unnecessary to express a view as to whether the decision of Rougier J was correct before the amendment to s.35 effected by Sale and Supply of Goods Act 1994. In my view it does not represent the law now. As originally enacted s.35(1) provided that a buyer was deemed to have accepted goods, inter alia, “when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them”. S.59 provided then, as it does now, that what is a reasonable time is a question of fact. The material difference arises from the removal of that part of subsection (1) to subsection (4) and the addition of subsections (5) and (6). Thus subsection (5) provides that whether or not the buyer has had a reasonable time to inspect the goods is only one of the questions to be answered in ascertaining whether there has been acceptance in accordance with subsection (4). Subsection (6)(a) shows that time taken merely in requesting or agreeing to repairs, and, I would hold, for carrying them out, is not to be counted.
In these circumstances I consider that time taken to ascertain what would be required to effect modification or repair is to be taken into account in resolving the question of fact which arises under subsection (4). In the light of the undisputed fact that Mr Clegg did not receive the information he had sought in August and September 2000 until 15th February 2001 I consider that the three weeks which elapsed thereafter until the letter of rejection dated 6th March 2001 did not exceed a reasonable time for the purposes of s.35(4) Sale of Goods Act 1979.
In the concluding sentences of paragraph 55 the judge speculated on why Mr Clegg determined to reject the Yacht when he did. He rejected the evidence of Mr Clegg and considered that he sought to manoeuvre his wife and himself into a better bargaining position with regard to Mr Andersson. In my view the reason why the Cleggs rejected the Yacht when they did is irrelevant if, as I consider, they had the right to do so.
Although Mr Andersson had not served a respondent’s notice we gave him permission to rely on the letters dated 16th and 25th March 2001 (paragraph 21 above). Counsel for Mr Andersson submitted to us, as she had done to the judge, that these letters vitiated the rejection effected by the letter of 6th March. The judge rejected that submission and so do I. If the letter of 6th March 2001 was effective to reject the Yacht there is nothing in the subsequent letters to rob it of that effect. In particular they do not constitute a withdrawal of the rejection or a contract or estoppel not to enforce it.
Damages
Having concluded that the overweight keel constituted the breach of a condition under s.14(2) and that the Cleggs had validly rejected the Yacht by their solicitor’s letter dated 6th March 2001 this issue is to be approached on a different basis from that adopted by the judge. It is not disputed that the Cleggs are entitled to the return of the price and other acquisition costs they incurred. This is quantified at £251,718.49. In addition they are entitled to compensation for consequential losses. These have been formally verified and quantified in the sum of £37,750 under a number of heads. I understood both parties to agree that we should refer the matter to a Master for the assessment of those damages. So that there shall be no doubt what the Master is expected to do I should briefly mention certain issues relating to damages to which the judge referred.
In paragraph 60 of his judgment the judge indicated that there was no claim for damages pleaded in the particulars of claim if the Cleggs had no right to reject the Yacht. Given that the Cleggs did have the right to reject the Yacht and had properly exercised it the pleading point goes. In paragraph 61 the judge concluded that the refusal of the Cleggs to permit Malo to carry out remedial work to the keel in September 2000 constituted a failure by them to mitigate their loss so as to deprive them of damages to reflect that cost. That issue also does not arise in the circumstances that the Cleggs were entitled to and did reject the Yacht in March 2001. The overpayment, but not the berthing charge, referred to by the judge in paragraph 62 of his judgment does still arise and is a factor to be taken into account by the Master in assessing the damages to be paid to the Cleggs.
Conclusion
For all these reasons I would allow the appeal, discharge the order of the judge and refer the assessment of the damages to be paid by Mr Andersson to the Cleggs to the Master. It follows that the order for costs made by the judge is discharged also with the consequence that the issue of whether the costs he ordered the Cleggs to pay to Mr Andersson should be assessed on the indemnity basis does not arise and the matters referred to in paragraph 22 above cease to have any relevance.
Lady Justice Hale:
I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant purchaser should have taken up one of the options which they advised. If it is established that the seller is in breach of a condition of the contract, however, the choice does not lie with him.
There is an implied term, in English Law a condition, that goods sold in the course of a business must be of satisfactory quality: s 14(2) and (6). There are no implied terms as to quality in a sale of goods contract other than those implied by sections 14(2) and (3) and 15 of the Sale of Goods Act 1979 (and any other enactment): see s 14(1). This means that in the great majority of consumer sales the buyer has to rely upon section 14. If he does not have a remedy under section 14 he has no remedy at all. It so happens that the goods in this case did not comply with the express term of the contract that they be in accordance with the manufacturer’s specification. But if there had been no such term, it would have been a surprising result indeed if the buyer had no legal remedy for a state of affairs which the seller himself considered unacceptable. Mr Andersson only thought the boat acceptable because they could put it right. That is not the point. Seller and buyer often agree to try and put defects right but neither is obliged to do so. The fact that the remedy supplied by English law may be thought disproportionate by some is irrelevant to a consideration of whether the implied term has been broken.
The test is whether a reasonable person would think the goods satisfactory, taking into account their description, the price (if relevant) and all other relevant circumstances: see s 14(2A). The question, as the joint Report of the Law Commission and the Scottish Law Commission explained, is “not whether the reasonable person would find the goods acceptable; it is an objective comparison of the state of the goods with the standard which a reasonable person would find acceptable” (1987, Law Com No 160, Sale and Supply of Goods, para 3.25) The amendments made to section 14 by the Sale and Supply of Goods Act 1994 also make it clear that fitness for purpose and satisfactory quality are two quite different concepts. In some cases, such as a high priced quality product, the customer may be entitled to expect that it is free from even minor defects, in other words perfect or nearly so.
A reasonable person is not an expert. If a reasonable person had been told in September 2000 that the seller himself had realised that a very large quantity of lead would have to be removed in some as yet unspecified way from the keel of a brand new boat costing nearly a quarter of a million pounds with as yet unspecified consequences for its safety and performance he or she would have had little difficulty in concluding that the boat could not be of satisfactory quality. Had he been told that the seller would later recommend the removal of different quantities of lead, he would have had no difficulty. The seller knew that it was unsatisfactory, hence his commendable attempts to get it put right as quickly as possible.
In English law, however, the customer has a right to reject goods which are not of satisfactory quality. He does not have to act reasonably in choosing rejection rather than damages or cure. He can reject for whatever reason he chooses. The only question is whether he has lost that right by accepting the goods: s 11(4). Once again, amendments made in the 1994 Act were designed to strengthen the buyer’s right to reject by restricting the circumstances in which he might be held to have lost it. In particular, the Commissions thought that informal attempts at cure should be encouraged: para 5.28.
The buyer loses the right to reject if he informs the seller that he has accepted the goods, or if he acts inconsistently with the seller’s reversionary interest in the goods, or if he leaves it too long before telling the seller that he rejects them: s 35(1), (4). The first two of these are subject to his having a reasonable opportunity of examining the goods to ascertain whether they conform to the contract, including the implied terms in section 14; whether he has had such an opportunity is also relevant to the third: s 35(2), (5). And a buyer does not accept the goods simply because he asks for or agrees to their repair: s 35(6). It follows that if a buyer is seeking information which the seller has agreed to supply which will enable the buyer to make a properly informed choice between acceptance, rejection or cure, and if cure in what way, he cannot have lost his right to reject.
This was a buyer who was told very early on that something was not right with his brand new boat and given one suggestion for curing it. When he sought time and information to reflect upon the best way forward the sellers agreed to supply the information required. When they eventually produced this, they not only made it clear that there was no ‘do nothing’ option, but presented two very different options for putting it right, each different from the one they had originally proposed. In my view, time only began to run then and the three weeks it took the buyer to inform the seller that he was rejecting the boat were not more than a reasonable time.
Lord Justice Dyson
I agree with both judgments.
Giedo Van Der Garde BV & Anor v Force India Formula One Team Ltd
[2010] EWHC 2373 (QB) (
Stadlen J
…..
In considering these competing submissions the starting point is the general principle formulated by the editors of Goff and Jones in these terms: “The case law holds that a restitutionary claim, based on failure of consideration, will, therefore, succeed only if the failure is total.” (ibid 19-009). Although the doctrine is commonly referred to as failure of consideration it is, as appears from the extract from Goff and Jones cited earlier in this judgment, based on a failure not of consideration but of performance: “In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act – I am excluding contracts under seal – and thus, in the law relating to the formation of contract, the promise to do a thing may often be the consideration, but when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails the inducement which brought about the payment is not fulfilled.” (Fibrosa Spolka Akeyjna v Fairbairn Lawson Combe Barbour Limted [1943] AC 32 per Viscount Simon LC at page 48).
In Fibrosa the House of Lords held that money paid on a total failure of consideration can be recovered. “What is being now decided is that the application of an old-establised principle of the common law does enable a man who has paid money and received nothing for it to recover the money so expended.” (Per Lord Atkin at page 55). There were also obiter dicta supporting the proposition that money cannot be recovered in the event of mere partial failure of consideration. “Nor could moneys paid before frustration be recovered if the person making the payment has received some part of the consideration moving from the other party for which the payment was made.” (Per Lord Russell of Killowen page 56). (The position in the case of frustration was reversed by the Law Reform (Frustrated Contracts) Act 1943) “…Money had and received to the plaintiff’s use can undoubtedly be recovered in cases where the consideration has wholly failed, but unless the contract is divisible into separate parts it is the whole money not part of it, which can be recovered. If a divisible part of the contract has wholly failed and part of the consideration can be attributed to that part, that portion of the money so paid can be recovered, but unless this be so there is no room for restitution under a claim in indebitatus assumpsit. A partial failure of consideration gives rise to no claim for recovery of part of what has been paid. Indeed, the contrary has not been contended.” (Per Lord Porter at page 77). Thus at the same time as denying the existence of a right to recover in the event of partial failure of consideration Lord Porter recognised the possibility of applying the doctrine of total failure of consideration in a case where even though there has been some performance under a contract there has been total failure to perform a divisible part of it provided that part of the consideration or money paid can be attributed to that part of the contract. There is thus in this dictum support for the concept of apportionment as a means by which the full rigour of the general principle may be mitigated. Lord Porter did not however indicate what he meant by divisible and in particular by what means it is to be decided whether a contract is divisible. Is it dependent on an express or implied term of the contract or is there some additional basis on which the court can decide that a contract is divisible?
Stocznia was a case in which it was assumed by both parties that the asserted right to recover moneys paid depended on whether there had been a total failure of consideration. Lord Goff of Chieveley stated the test as being “not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.” (Page 588 D). On its face this supports the proposition that performance of even a part of the relevant contractual duties will disentitle the claimant from restitution. However that begs the question of what are the contractual duties in respect of which the payment is due. Where it is possible to apportion different parts of a contractual price to the performace of different contractual duties under a contract it is not in my judgment inconsistent with the proposition that there may be a total failure to perform contractual duties in respect of which payment is due that there has been performance of part or all of contractual duties in respect of which the payment is not due.
I note in passing that Mr Tregear relied on this dictum of Lord Goff as holding that the question whether there has been total or partial failure of consideration is to be assessed by reference not to benefits received by the claimant but by reference to contractual performance by the defendant. In my judgment the dictum does not support so wide a proposition. Stocznia was a case in which under the contracts in question the shipyard was bound not merely to deliver and transfer the property in vessels when built to the buyers but in addition to design and build them. They were thus not contracts of sales simpliciter, but “contracts for work and materials”. It was in my view for that reason that Lord Goff held: “I start from the position that failure of consideration does not depend upon the question of whether the promisee has or has not received anything under the contract, like for example the property in the ships being built under contracts one and two in the present case. Indeed if that were so, in cases in which the promisor undertakes to do work or render services which confer no direct benefit on the promisee, for example where he undertakes to paint the promisee’s daughter’s house, no consideration would ever be furnished for the promisee’s payment.” (Page 588 C-D). Having stated the test mentioned above Lord Goff continued: “The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter under which the consideration for the price would be the passing of the property in the goods (or land). (page 588 D-E).(emphasis added). Lord Goff thus appeared to contemplate that in an appropriate case the test could be stated by reference to the receipt of a benefit by the claimant rather than by reference to contractual performance by the defendant. Put another way the focus of enquiry is the receipt by the promisee of a benefit under the contract which may be established in an appropriate case where the promisee has not directly received anything the benefit in such a case consisting of the performance by the promisor of an obligation whose performance is in some other way of advantage to the promisee. Support for this analysis is in my view to be found in the judgment of Kerr LJ in Rover International to which I refer below.
In Whincup v Hughes Bovill CJ held: “The general rule of law is that where a contract has been in part performed no part of the money paid under such contract can be recovered back.” (page 81). However to this general rule he held that there are exceptions. “There may be some cases of partial performace which form exceptions to this rule, as for instance, if there were a contract to deliver ten sacks of wheat and six only were delivered, the price of the remaining four might be recovered back. But there the consideration is clearly severable…The contract having been in part performed it would seem that the general rule must apply unless the consideration be in its nature apportionable. I am at a loss to see on what principle such apportionment could be made. It could not properly be made with reference to the proportion which the period during which the apprentice was instructed bears to the whole term. In the early part of the term the teaching would be most onerous and the services of the apprentice of little value; as time went on his services would probably be worth more and he would require less teaching. There appears to be no instance of a similar nature to the present in which an action for the return of a part of the premium has been brought.” (Page 81). Montague Smith J referred to a “rule of law that an action for money had and received can only be brought when there is a total failure of consideration with the exception of a few cases which on being analysed hardly proved to be exceptions…Moreover it appears to me clear that the action for money received cannot lie where the contract has been partly performed on both sides. To ascertain the amount which in equity in such a case requires to be returned it would be necessary to go into a great variety of considerations, the relevant weight of which it would be almost impossible correctly to estimate: e.g. the value of the service lost to the master, and the degree to which the apprentice had profited by the instruction. It would be impossible to take merely the proportion of the time which had elapsed to the whole term as the standard of measurement.” (page 85-86). While restating the general rule the court in Whincup v Hughes expressly contemplated the existence of exceptions where the consideration is “in its nature apportionable” or “severable”. On the facts of that case the reason why the consideration was held to be not in its nature apportionable was that the benefits and burdens to the parties varied over time. In principle no such problem would arise in the case of delivery of six out of ten sacks of wheat.
In Minister of Sound (Ireland) Limited v World Online Limited [2003] EWHC 2178, Ch, [2003] 2 All ER (Com) 823 Nicholas Strauss QC sitting as a deputy judge of the High Court stated: “Whilst the traditional view is that a party to a contract (whether the innocent party or the contract-breaker) can only recover payments made under it where there has been a total failure of consideration, the dictum of Lord Goff in Goss v Chilcott referred to at [42], above, suggests that this may no longer be so, and recent authority suggests that there may be circumstances in which recovery for partial failure may be allowed: See DO Ferguson v Sohl [1992] 62 BLR 95 in which as the editorial note indicates, Hirst LJ “robustly” described as a total failure of consideration what might more conventionally have been seen as a partial failure. See also White Arrow Express Limited v Lamey’s Distribution Limited [1995] NLJR 1504 and Baltic Shipping Co. v Dillon the Michael Lermontov [1993] 176 CLR 344.” (845 B-E). Referring to those dicta and in particular their reliance on Lord Goff’s dictum in Goss v Chilcott the editors of Goff and Jones point out that it was made in the hypothetical context of facts where the borrowers had repaid part of the capital sum and expressed the view that “what is more doubtful is whether a restitutionary claim will lie if there has been a partial failure and the counter-performance is not the payment of money but the rendering of services.”
As already mentioned the editors of Goff and Jones regard the general rule as regrettable. They refer to welcome indications that English Courts are more ready to interpret the doctrine of total failure of consideration more sympathetically and to allow recovery in restitution even though the claimant has received a momentary benefit from the defendant and even, exceptionally, if the benefit received is services rendered (See Ferguson v Sohl). For present purposes the question is not whether recovery for partial failure should be permissible but rather whether by reference to authority including that cited by Mr Strauss QC the recognised exceptions and qualifications to the rule are broad enough to be applicable in the present case.
In considering the extent to which the general rule may be departed from or qualified as to its scope and extent, courts have tended to focus on two separate but sometimes related questions: (1) apportionment and (2) whether for the purpose of deciding whether there has been total or partial failure of consideration certain benefits received by the claimant can be disregarded.
On the second question perhaps the leading English authority is the decision of the Court of Appeal in Rover International. In that case the Court of Appeal allowed a restitutionary claim for return of instalments paid under a contract, holding that there had been a total failure of consideration notwithstanding that the plaintiff had received some benefit under the contract and the defendant had performed some part of the contract. Under the contract EMI (who were later taken over by Cannon, the defendant) were to supply master Prints of films to the plaintiff for dubbing and distributing in Italy. The gross receipts were to be split in agreed proportions. Prints were duly delivered by EMI and Rover commenced the work of dubbing and paid five instalments of pre-payments due to EMI as an advance under the contract. Harman J at first instance rejected the claim for repayment of the five instalments on the ground that the consideration had not failed at all. Rover had had several films and distributed them in Italy “for payment no doubt of substantial sums”. To allow it to get back the monies which it paid to Cannon would be grossly unjust. He held that there was no claim in law for monies had and received to the use of Rover.
Allowing Rover’s appeal Kerr LJ held: “The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract”. (923 G). Central to Kerr LJ’s decision was his conclusion that in order to defeat a claim of total failure of consideration is it not sufficient to show that the promisee has received any benefit or even any benefit due under the contract. What must be proved is receipt of “any part of the benefit bargained for under the contract or purported contract”. In reaching this conclusion Kerr LJ relied on a passage from Chitty on Contracts, 5th Ed (1983) Vol , pp 1091-1092, para 1964 and the authorities there cited. It is striking that although one of the passages from Chitty cited by Kerr LJ included the quotation from Viscount Simon LC in Fibrosa to which I have referred to the effect that “when one is considering the law of failure of consideration…it is generally speaking…the performance of the promise”, the editors of Chitty emphasised that failure of consideration is judged from the point of view of the payer. “In that context failure of consideration occurs where the payer has not enjoyed the benefit of any part of what he bargained for. Thus, the failure is judged from the payer’s point of view…the failure has to be total…thus any performance of the actual thing promised, as determined by the contract, is fatal to recovery under this heading. The role of the contractual specification means that it is not true to say that there can be a total failure of consideration only where the payer received no benefit at all in return for the payment. The concept of total failure of consideration can ignore real benefits received by the payer if they are not the benefits bargained for…”
This latter point was also emphasised in the majority judgment of Mason CJ, Deane J, Toohey J, Gaudaron J and McHugh J in the decision of the High Court of Australia in David Securities PTY Limited v Commonwealth Bank of Australia 175 CLR 353 at 382: “So, in the context of failure of consideration, the failure is judged from the perspective of the payer.” [Reference was then made to Kerr LJ’s test in Rover International]. In the immediately preceding passage of their judgment the majority arguably went further than the Court of Appeal in Rover in holding that the question of failure is judged not just from the perspective of the payer but by reference to the subjective understanding of the payer as to what it thought it was receiving as consideration.
“The respondent, taking a different view of the contractual arrangements, asserts that all its pre-contractual statements concerning payment of withholding tax simply took the form of a contractual offer, which the appellants were at liberty to accept or to reject. Viewed from the angle of contract formation between equal and experienced parties, this is undoubtedly true. But we are not concerned in this case with what a hypothetical, experienced commercial person believed he/she was contracting for; in order to decide whether the appellants in this case have received consideration for payment of the additional moneys, we must ask what these particular appellants, in all the circumstances, thought they were receiving as consideration. In this context, consideration means the matter considered in forming the decision to do the act, “the state of affairs contemplated as the basis or reason for the payment.” And, as we have stated, the “state of affairs” existing in the appellants’ minds was that the withholding tax was their liability.” (381-382). (emphasis added).
On its face there is a tension, if not an apparent inconsistency, between on the one hand the approach of Kerr LJ (with whose reasoning Nicholls LJ agreed), in Rover International and of the majority of the High Court in David Securities and on the other hand the dictum of Lord Goff in Stocznia to which I have referred that: “In truth the test is not whether the promise has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.” Mr Tregear suggested that the two approaches are reconcilable on the basis that if the promisor has provided some performance, prima facie there is no total failure of consideration. If however the performance which has been provided is, judged from the perspective of the promisee, not what he really bargained for so that it is collateral then it is still possible for there to be total failure of consideration. In my view if there is a real inconsistency between the two sets of dicta then there is some force in Mr Tregear’s suggested way of reconciling the two. However I am not convinced that the inconsistency is real rather than apparent. Although on Lord Goff’s test the question is whether the promisor has performed any part of the contractual duties in respect of which the payment is due, that leaves open the question of how the court is to identify the contractual duties in respect of which the payment is due. If, as held by the Court of Appeal in Rover International and the High Court in David Securities, the answer to that question is to be determined by reference to identifying “the benefit bargained for under the contract or purported contract” and ignoring real benefits received by the payer if they are not the benefit bargained for, there is no inconsistency between the dicta of the Court of Appeal and the High Court on the one hand and Lord Goff’s test on the other.
In support of his conclusion that receipt of benefits which are merely incidental to the performance of a contract is not inconsistent with total failure of consideration Kerr LJ in Rover International cited the cases of Rowland v Divall [1923] 2 KB 500 and Warman v Southern Counties Car Finance Corporation Limited.
“In Rowland v Divall [1923] 2K.B 500 the plaintiff bought a car from the defendants. He had the use of it for several months but then discovered that the seller had no title, with the result that he had to surrender the car to the true owner. He sued for the return of the price on the ground that there had been a total failure of consideration. The defendant denied this, pointing out that the plaintiff had had the use of the car for a substantial time. This contention succeeded at first instance, leaving the plaintiff only with a claim for damages, but this court unanimously upheld the plaintiff’s claim. The consideration for which he had bargained was lawful possession of the car and a good title to it, neither of which he got. Although the car had been delivered to him pursuant to the contract and he had had its use and enjoyment for a considerable time, there was a total failure of consideration because he had not got any part of what he had bargained for.
The decision of Finnemore J in Warman v Southern Counties Car Finance Corporation Ltd [1949] 2 KB 576 was to the same effect. The plaintiff was buying a car on hire purchase when he became aware that a third party was claiming to be the true owner of the car. But he nevertheless went on paying the remaining instalments and then the necessary nominal sum to exercise his option to purchase. When the true owner then claimed the car he surrendered it and sued the finance company for the return of everything he had paid. He succeeded on the ground that there had been a total failure of consideration. He had not bargained for having the use of the car without the option to purchase it.
The position of Rover in the present case is a fortiori to these cases. Admittedly, as the judge said, they had several films from Cannon. But the possession of the films was merely incidental to the performance of the contract in the sense that it enabled Rover/Monitor to render services in relation to the films by dubbing them, preparing them for release on the Italian market and releasing them. These were onerous incidents associated with the delivery of the films to them. And delivery and possession were not what Rover had bargained for. The relevant bargain, at any rate for present purposes, was the opportunity to earn a substantial share of the gross receipts pursuant to clause 6 of the schedule, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.
….
In the context of the recovery of money paid on the footing that there has been a total failure of consideration, it is the performance of the defendant’s promise, not the promise itself, which is the relevant consideration. In that context, the receipt and retention by the plaintiff of any part of the bargained-for benefit will preclude recovery, unless the contract otherwise provides or the circumstances give rise to a fresh contract. So in Whincup v Hughes, the plaintiff apprenticed his son to a watchmaker for six years for a premium which was paid. The watchmaker died after one year. No part of the premium could be recovered. That was because there was not a total failure of consideration. A qualification to this general rule, more apparent than real, has been introduced in the case of contracts where a seller is bound to vest title to chattels or goods in a buyer and the buyer seeks to recover the price paid when it turns out that the title has not been passed. Even if the buyer has had the use and enjoyment of chattels or goods purportedly supplied under the contract for a limited time, the use and enjoyment of the chattels or goods has been held not to amount to the receipt of part of the contractual consideration. Where the buyer is entitled under the contract to good title and lawful possession but receives only unlawful possession, he or she does not receive any part of what he or she bargained for. And thus, it is held, there is a total failure of consideration. As this Court stated in David Securities Pty v Commonwealth Bank of Australia: “the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact.””
In one of the passages cited Mason CJ referred to any part of the bargained for benefit whereas in another he referred to any substantial part of the benefit expected under the contract. No explanation was given as to why he used these two different formulations, whether he considered them to be the same and if not which of them he considered to be the true test. It is not difficult to imagine circumstances in which the difference could assume significance.
Mr Tregear submitted that the reference to substantial part of the benefit expected was not intended to introduce a quantitave qualification such that receipt of a small proportion of the bargained-for benefit is not a bar to restitution. Rather he submitted it was intended to exclude as a bar to restitution receipt of a benefit which was merely incidental to the benefit bargained for such as the receipt by Rover of the film prints. The reason the Court of Appeal held that receipt of the prints did not disentitle Rover from seeking restitution was not that it formed a small part of the benefit bargained for under the contract but rather because it did not form any part of the bargained for benefit.
This analysis reinforces the central importance in the test of identifying the essential purpose of the contract. Thus a contract may confer the right to receive and impose an obligation to provide a number of benefits. The test as to whether receipt of any one or more of those benefits is inconsistent with total failure of consideration is not whether they are large or small in the context of the entirety of the benefits to be conferred but whether they are the whole or part of the main benefit expected or bargained for or merely incidental or collateral thereto. It is no doubt for that reason that the High Court in David Securities and Baltic Shipping and the Court of Appeal in Rowland v Divall and Rover International held that the answer to that question is to be approached from the perspective of the payer rather than the payee. It is normally the payer who has entered into the contract in order to obtain certain benefits. The payee’s objective is normally just to receive payment. In considering whether a particular benefit to which the payer is entitled under the contract is part of the essential bargain contracted for or merely incidental or collateral thereto there is a logic to addressing that question from the prespective of the payer and identifying what was his purpose in entering the contract. That raises the further issue as to whether the question of what was the essential purpose of the contract or more accurately which of the benefits were the essential bargain contracted for is to be answered by an objective process of the court drawing inferences from the nature of the transaction and the language of the contract or whether evidence as to the payer’s subjective purpose or motive for entering the contract is admissible. In Rowland v Divall, Rover International and Warman the court appeared to have approached the question as a matter of objective analysis without reference to the subjective purpose or motive of the payer. In David Securities on the other hand the High Court, as mentioned above, appears to have approached the question by reference to the state of mind and purpose of the payer.
Under ordinary principles of construing a written agreement the normal rule is that evidence of the subjective intentions of either or both parties is inadmissible. Does it make a difference that the exercise in which the court is engaged is one of considering whether one party to the contract is entitled to restitution rather than any question of the rights of either party to relief by way of enforcing the contract or damages for breach of it? There does not seem to be an obvious answer to this question. On the one hand it could be said that in answering the question of what is the essential bargain contracted for the court is necessarily involved in a process of construing the agreement and the presumed intentions of the parties thereto. On the other hand the reason the court is asking the question is not for the purpose of enforcing the agreement but in order to decide whether the payer is entitled to return of money had and received on principles of unjust enrichment. On balance in my view although the question is to be answered from the perspective of the payer in the sense of identifying the essential bargain for which he contracted or, to use the language of the majority in David Securities, the matter considered in forming the decision to do the act and the state of affairs comtemplated as the basis or reason for the payment it is a question be answered objectively rather than by reference to evidence of his subjective motives. However that is not to say that evidence of the payer’s subjective motive or purpose for entering the agreement is inadmissible if those intentions or motives were communicated to the payee before the contract was entered into. Applying that distinction to the facts of this case I do not think that Mr Van der Garde’s evidence that as far as he was concerned the main or only benefit of the Service Agreement was testing kilometres rather than the possibility of Friday morning testing would be admissible unless that purpose had been communicated to Spyker by him or by Mr Boekhoorn on his behalf prior to the agreement, which it was not.
Against Mr Tregear’s suggested analysis of the significance of Mason CJ’s reference to substantial benefit as distinct from any benefit is the fact that the distinction between the essential bargain contracted for and benefits which are merely incidental thereto was already made by Mason CJ’s reference to “part of the benefit expected under the contract.” While that is undoubtedly a difficulty in Mr Tregear’s suggested analysis, in my view the difficulty disappears when one considers the fact that in a separate passage in the extract of his judgment Mason CJ referred to the receipt and retention of any part of the bargained-for benefit. Moreover and in any event the introduction into the test of a quantitave element would in my view be inconsistent with Lord Goff’s formulation of the test in Stocznia which refers to whether the promisor has performed any part of the contractual duties in respect of which the payment is due. Given that the very nature of the rule is that there must be total and not merely partial failure of consideration it is difficult to see how a de minimis exception could be reconciled with the rule. As Lord Ellenborough CJ said in Hunt v Silk “if the plaintiff might occupy the premise two days beyond the time when the repairs were to have been done and the lease executed, and yet rescind the contract, why might he not rescind it after a 12 month on the same account. This objection cannot be gotten rid of: the parties cannot be put in statu quo.” (Page 1144). Although that was said in the context of rescission rather than total failure of consideration the logic is in my viewequally applicable to the latter.
However given the existence of the collateral or incidental benefit exception to the rule it may be that in an appropriate case the receipt of a small benefit may be held not to be a bar to restitution, not by reference to a de mininis principle but on the basis that properly analysed it is a collateral or incidental benefit.
A good illustration of the collateral benefit exception to the rule appears in the judgment of Deane J and Dawson J in Baltic Shipping:
“There can be circumstances in which there is, for relevant purposes, a complete failure of consideration under a contract of transportation notwithstanding that the carrier has provided sustenance, entertainment and carriage of the passenger during part of the stipulated journey. For example, the consideration for which the fare is paid under a contract for the transportation of a passenger by air from Sydney to London would, at least prima facie, wholly fail if, after dinner and the inflight film, the aircraft were forced to turn back due to negligent maintenance on the part of the carrier and if the passenger were disembarked at the starting-point in Sydney and informed that no alternative transportation would be provided. Thus in Heywood v Wellers [a firm] [1976] QB 446 at pp 458-459, Lord Denning MR regarded it as self evident that, in some circumstances where a part of a journey had been completed, money paid to the carrier or “driver” was recoverable “as of right” for the reason that it was “money paid on a consideration which had wholly failed”.”(page 378).
Although the meal and the in flight film formed part of the benefits to which the passenger was entitled under his contract with the carrier, viewed from the prespective of the passenger it was merely an incidental or collateral benefit and not a part, even a small part, of “the consideration for which the fare is paid”. The essential bargain contracted for was transportation to London. This is to be contrasted with the essential bargain contracted for in Baltic Shipping itself, which was a 14 day cruise. In the context of rejecting an alternative submission that the advance payment of the cruise fare created in the shipping company no more than a right to retain the payment conditional upon its complete performance of its entire obligations under the contract, Mason CJ held:
“As the contract called for performance by the appellant of its contractual obligations from the very commencement of the voyage and continuously thereafter, the advance payment should be regarded as the provision of consideration for each and every substantial benefit expected under the contract. It would not be reasonable to treat the appellant’s right to retain the fare as conditional upon complete performance when the appellant is under a liability to provide substantial benefit to the respondent during the course of the voyage. After all, the return of the respondent to Sydney at the end of the voyage, though an important element in the performance in the appellant’s obligations, was but one of many elements. In order to illustrate the magnitude of the step which the respondent asks the court to take, it is sufficient to pose two questions, putting to one side clause 9 of the printed ticket terms and conditions. Would the respondent be entitled to a return of the fare if, owing to failure of the ship’s engines, the ship was unable to proceed on the last leg of the cruise to Sydney and it became necessary to airlift the respondent to Sydney? Would the fare be recoverable if, owing to a hurricane the ship was compelled to omit a visit to one of the schedules ports of call? The answer in each case must be a resounding negative.” (Page 353).
In short whereas the only essential bargain contracted for by the air passenger in Deane and Dawson JJ’s hypothetical example was transportation to London, and in flight food and entertainment was only incidental thereto, return to Sydney was not the sole or essential bargain contracted for by the purchaser of the cruise and the on-ship services such as food and entertainment and any port stop offs during the voyage were integral parts of the essential bargain contracted for.
Before leaving Baltic Shipping I draw attention to the fact that as recorded in the head note, four and possibly five of the judges held that a claim for restitution can only succeed as an alternative to a claim for damages for breach of contract and that the two claims cannot both succeed. On its face this view is inconsistent with the decision of the Court of Appeal in Ferguson v Sohl in which the court held that the employer who overpaid the builder for works to his house was entitled both to restitution of the amount overpaid on the basis of total failure of consideration and nominal damages in the amount of £1 for breach of the building contract. Had the point been live before me I would have considered myself bound by the decision of the Court of Appeal to hold that it is open to me to award both restitution and at least nominal damages for breach of contract. However the claims for damages for breach of contract are pleaded in this case only as alternatives to the primary claim for restitution and, as I have mentioned, Mr de Garr Robinson expressly confirmed that the Claimants put the claims forward as alternatives and do not seek an award of damages as well as an order for restitution.
In relation to apportionment it was common ground between the parties that the authorities show that there is a principle by reference to which performance of even a non-incidental or non-collateral obligation under a contract by a payee may in certain circumstances not be inconsistent with an entitlement on the part of the payer to restitution on the basis of total failure of consideration. Where they differed was as to the nature and ambit of the circumstances in which the principle is engaged.
…..In the present case however, although no part of the principal sum had been repaid by the defendants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advanced was not total. Their Lordships do not think so. The function of the interest payments was to pay for the use of the capital sum over the period for which the loan was outstanding, which was separate and distinct from the obligation to repay the capital sum itself. In these circumstances it is, in their Lordships’ opinion, both legitimate and appropriate for present purposes to consider the two separately. In the present case, since it is unknown when the mortgage instrument was altered, it cannot be known whether, in particular, the second interest instalment was due before the defendants were discharged from their obligations under the instrument. Let it be supposed however that both interest payments had fallen due before the event occurred. In such circumstances, there would have been no failure of consideration in respect of the interest payments rendering them recoverable by the defendants; but that would not affect the conclusion that there had been a total failure of consideration in respect of the capital sum, so that the latter would be recoverable by the company in full on that ground. Then let it be supposed instead that the second interest payment did not fall due until after the avoidance of the instrument. In such circumstances the consideration for that interest payment would have failed (at least if it was payable in advance), and it would prima facie be recoverable by the defendants on the ground of failure of consideration; but that would not affect the conclusion that the capital sum would be recoverable by the company also on that ground. In such a case, therefore, the capital sum would be recoverable by the lender, and the interest payment would be recoverable by the borrower; and doubtless judgment would, in the event, be given for the balance with interest at the appropriate rate: see Westdeutsche Landesbank Girozentrale vIslington London Borough Council [1994] 1 W.L.R 938. In either event, therefore, the amount of the loan would be recoverable on the ground of failure of consideration. In the present case, since no part of the capital sum had been repaid, the failure of consideration for the capital sum would plainly have been total. But even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out with difficulty, the law will allow partial recovery on this ground: see David Securities Pty. Ltd. v Commonwealth Bank of Australia [1992] 175 C.L.R 353,383.”
Mr Tregear accepted that the ratio in Goss v Chilcott was that there was a total failure of consideration as to the discrete part of the contract being sued upon namely the advance of the capital which had not been repaid in whole or part. On its face there is nothing in Lord Goff’s judgment to suggest that the contract itself severed the defendant’s obligations to repay the advance and to pay interest instalments or that it apportioned the former to the advance of the loan and the latter to the use of the loan. To that extent it does not support Mr Tregear’s submission that apportionment is possible only where the parties have impliedly acknowledged that the consideration may be apportioned by the structure of the transaction.
Moreover Lord Goff’s obiter dictum that even if part of the capital sum had been repaid the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration was not expressed to be conditional upon the existence in the hypothetical contract in this example of express or implied terms stipulating separate obligations to advance and repay each distinct instalment of the loan advanced. This perhaps suggests that it was not Lord Goff’s view that apportionment is permissible only where it is expressly or impliedly provided for in the contract. Indeed his conclusion that the law will allow partial recovery at least in those cases in which apportionment can be carried out without difficulty suggests, in my view, that the question whether apportionment can be carried out turns not on whether apportionment is provided for either expressly or even by implication by the contract but rather on whether as a matter of practical common sense the court considers that it is able to apportion on objective analysis of the nature of the contract and the consideration.
Mr Tregear submitted that Lord Goff’s conclusion that there would have been a total failure of consideration even if there had been repayments of capital was not only obiter but, as a decision of the Privy Council, does not necessarily represent a binding statement of English law. If it were to be taken to be representative of English law it would mean that the doctrine of total failure of consideration is effectively extinct. That would be inconsistent with the decision of the House of Lords in Stocznia in which the doctrine was affirmed.
It must of course be right that if there is an irreconcilable difference between Lord Goff’s obiter dictum in Goss v Chilcott and the affirmation of the requirement of total failure of consideration as a condition for restitution by the House of Lords in Stocznia the latter would prevail and would certainly be binding on me. It is however striking that the allegedly inconsistent dicta both appeared in respectively a speech and a judgment of Lord Goff, the decision in Goss v Chilcott having been handed down in May 1996 not much more than a year before the hearing in June 1997 in Stocznia. Although Goss v Chilcott was not referred to either in the speeches or in argument in Stocznia, it is hardly to be supposed that Lord Goff had forgotten what he said in Goss v Chilcott and it would be suprising if he had changed his mind on a significant aspect of the doctrine of total failure of consideration between the two cases without saying so and explaining his reasons. Particularly when read against that background in my view there is no inconsistency between the two dicta. As I have already indicated in my view the test formulated by Lord Goff in Stocznia “whether the promisor has performed any part of the contractual duties in respect of which the payment is due” leaves open the question of how the court identifies the contractual duties in respect of which the payment is due. In a case where, to use Lord Goff’s language in Goss v Chilcott, apportionment can be carried out without difficulty there is no reason why the court cannot conclude that, even where contractual duties have been performed by the payee, they are not contractual duties in respect of which the relevant payment is due. That is not to say that it follows that the House of Lords in Stocznia approved the obiter dictum in Goss v Chilcott but merely that the latter is not inconsistent with the decision in the former.
In David Securities, to which Lord Goff in Goss v Chilcott referred as supporting the proposition that at least in those cases in which apportionment can be carried out without difficulty the law will allow partial recovery on the ground of failure of consideration, the majority judgment did not specifically address the question of what is the test as to whether for these purposes consideration can be apportioned. However there is in my view a flavour of the court approaching this as a matter of common sense rather than regarding it as dependent on an express or implied agreement in the contract that different parts of a purchase price are referable to different contractual obligations. Thus the majority held:
“In cases where consideration can be apportioned or where counter-restitution is relatively simple, insistence on total failure of consideration can be misleading or confusing. In the present case for instance it is relatively simple to relate the additional amounts paid by the appellants to the supposed obligation under clause 8(b) of the loan agreements. The appellants were told that they were required to pay withholding tax and the payments that they made were predicated on the fact that, by so doing, they were discharging their obligation…In this case the bank must prove that the appellants are not entitled to restitution because they received consideration for the payments which they seek to recover. It does not avail the bank to argue that the appellants were provided with the loan moneys agreed. Indeed the severability of the loan agreement into its relevant parts seems to be accepted by the bank for it is admitted that the appellants’ consideration for agreeing to pay the additional amounts under clause 8(b) was the bank’s agreement not to charge a higher interest rate. In circumstances where both parties have impliedly acknowledged that the consideration can be “broken up” or apportioned in this way, any rationale for adhering to the traditional rule requiring total failure of consideration disappears.” (Page 383).
In my view the majority in the High Court was not saying that it is only in cases where the parties have impliedly acknowledged that the consideration may be apportioned by the structure of the transaction that apportionment will be possible. It merely noted that in that particular case the parties had so acknowledged, not in the sense that such a term was to be implied into the contract but merely in the very different sense that they so acknowledged in their submissions.
In Baltic Shipping v Dillon a passenger on a cruise vessel suffered injury when the vessel sank 10 days into a 14 day cruise. The High Court of Australia held that the passenger was not entitled to a refund of the fare because there had not been a total failure of consideration. Mason CJ held:
“I have come to the conclusion in the present case that the respondent is not entitled to recover the cruise fare on either of the grounds just discussed. The consequence of the respondent’s enjoyment of the benefits provided under the contract during the first eight full days of the cruise is that the failure of consideration was partial, not total. I do not understand how, viewed from the perspective of failure of consideration, the enjoyment of those benefits was “entirely negated by the catastrophe which occurred upon depature from Pickon” to repeat the words of the primary judge.” (Page 353).
Although Mason CJ in an earlier part of his judgment referred to the case of Whincup v Hughes, he did not elaborate on his reasons for reaching his conclusion. In particular he did not address the question whether it was possible to apportion the cruise fare between the benefits which were conferred during the first 8 or 10 days of cruise and the benefits which were not conferred after the ship sank. Mr Tregear submitted that even if the ship owner had calculated the cost of providing the cruise on a dollar per day basis it would not follow from that that the contract could be severed or that the fare could be apportioned between benefits to be conferred on a daily basis.
In Whincup v Hughes Bovill CJ explicitly held that there may be some cases of partial performance which form exceptions to the general rule that where a contract has been in part performed no part of the money paid under the contract can be recovered back “as for instance if there were a contract to deliver 10 sacks of wheat and 6 only were delivered, the price of the remaining 4 might be recovered back. But there the consideration is clearly severable.” (Page 81) (emphasis added). In my view that conclusion does not support Mr Tregear’s submission that a finding to the effect that there has been a total failure of consideration could only be correct in this case if the contract had provided for payments for kilometres in instalments referable to tranches of distance. Bovill CJ’s formulation left it open whether in the hypothetical example the contract provided an overall price for the delivery of 10 sacks or specified the delivery of 10 sacks at a specific price per sack. It follows in my view that his conclusion that in such a case the consideration is clearly severable was not dependent on there being in the contract a specified price per sack of wheat rather than a global price for all 10 sacks. In this case there is the complication that as well as the minimum of 6,000 kilometres which Spyker were obliged to provide there were other contractual obligations. I consider below whether they can be disregarded by reference to one or more of Mr de Garr Robinson’s other submissions. But in a hypothetical case where the contract had been confined to an obligation on the part of Spyker to provide 6,000 kilometres of which only, for the sake of simplicity, 2,000 had been made available, it does not seem to me that the question whether there had been total failure of consideration would necessarily turn on whether the Service Agreement had specified an overall price of $3 million or a rate of $500 per kilometre.
Later in his judgment Bovill CJ used a different expression. He said: “The contract having been in part performed, it would seem that the general rule must apply unless the consideration be in its nature apportionable.” (Page 81) (emphasis added.) The question whether in any case the consideration is in its nature apportionable is one to which, in my view, the definitive answer is not necessarily supplied by any express stipulation in the contract. In a straightforward contract to deliver 10 sacks of wheat the nature of the obligation, namely to deliver sacks of wheat, would in my view prima facie, be apportionable. Each bag of wheat being the same as the others and the delivery of it involving the seller in no greater or lesser burden than the others, there is no reason why the obligation to deliver one bag of wheat cannot be apportioned to the arithmetically appropriate portion of the purchase price. That remains the case whether the purchase price is expressed as £10 for the delivery of 10 sacks of wheat or 10 sacks at £1 per sack.
In Fibrosa Lord Porter said that “unless the contract is divisible into separate parts it is the whole money, not part of it, which can be recovered. If a divisible part of the contract has wholly failed and part of the consideration can be attributed to that part, that portion of the money so paid can be recovered…” (Page 77). Lord Porter gave no guidance as to how the court is to determine whether a contract is divisible into separate parts or whether part of the consideration can be attributed to the divisible part which has failed. However it seems to me implicit in his posing the question whether part of the consideration can be attributed to a divisible part of the contract that it is open to a court to hold that part of the consideration can be so attributed even if such attribution is not spelled out expressly in the contract itself. That again in my view supports the proposition that in the hypothetical example the mere fact that the contract specified a global fee of $3 million for 6,000 kilometres rather than $500 per kilometre would not mean that where 4,000 kilometres have not been provided part of the $3 million consideration cannot be attributed to the part of the contract under which those 4,000 kilometres were required to be made available. In my view the question whether consideration is in its nature apportionable may turn on an analysis of the nature of the subject matter of the consideration and the circumstances in which it is to be delivered or performed rather than just on whether or not the contract allocates it to a particular part of the purchase price.
….
Nourse LJ’s rhetorical question: “If the basis of his right to retain the £22,065.75 is that he has done work to that value, by what possible right can he claim to retain £4,673 for work which, in breach of contract, he has not done?” is an eloquent statement of the rationale for the doctrine of restitution in the event of failure of consideration. Indeed it no doubt explains why the rule requiring total failure of consideration has been subjected to sustained criticism at the highest judicial and academic levels. As the editors of Goff and Jones third edition put it in a passage quoted in the commentary in Ferguson v Sohl: “To allow the defendant to retain the whole or part of the contract price on the ground that the plaintiff had made a losing contract would be to allow him to retain a benefit which he is in a position to restore and to profit from his breach of contract. Furthermore, for similar reasons, even if the consideration for the innocent party’s payment has only partially failed, he should, in our view, be entitled to restitution, although an allowance should be given for any benefit received from the party in breach. However, at common law the innocent party is, at present, denied recovery in these circumstances…” (Page 99).
Given the accepted constraint of the requirement to show a total rather than partial failure of consideration, apportionment is a necessary tool to enable the court to find that the payee has no right to retain the sum claimed for work which, in breach of contract, he has not done. In my view for work done one could equally substitute goods delivered and/or services provided.
There may of course be cases where it is clear on the evidence that there has been some maybe even very considerable overpayment for which there has been no consideration but it is impossible because of difficulties of apportionment to identify the precise amount of the payment for which there has been no consideration. So for example in this case if the Claimants are right on all their collateral benefit arguments but it were held that part of the $3 million consideration in the Fee Agreement was attributable to Friday testing as a freestanding contingent right to which the parties attributed a modest but unquantified value when striking their bargain, it might in practice be difficult if not impossible to apportion a fixed sum to the 6,000 kilometres of testing or in consequence to the 2,004 kilometres actually provided. It would in those circumstances be plain that if Spyker were to retain the entire $3 million prepaid by the Claimants there would be some unidentifiable part thereof for which Spyker had provided no services. That would be the part of the $3 million referable to the balance of testing kilometres not provided by Spyker. On the current state of the law it would appear that because of the difficulty of apportionment the court would be powerless to order restitution notwithstanding the probability if not certainty that for some and possibly a large proportion of the money retained by Spyker there had been a total failure of consideration. It would be for consideration whether in such circumstances the court should have the power to identify some portion of the sum paid in respect of which even on a view most favourable to the payee it could not seriously be denied that there had been a total failure of consideration because it represented the minimum amount of the overall consideration specified in the contract which is attributable to the services which were not provided.
Clegg v Olle Andersson (t/a Nordic Marine)
[2003] EWCA Civ 320
Vice Chancellor
Did the Cleggs lose their right to reject the Yacht before 6th March 2001?
It is not disputed that the result of my conclusion in respect of s.14(2) is that the Cleggs were, initially, entitled to reject the Yacht. The question is whether by their subsequent conduct they lost that right on or before 6th March 2001. This issue depends on the proper application to the facts of this case of s.35 Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994. The material provisions are:
(1) The buyer is deemed to have accepted the goods subject to subsection (2) below –
(a) when he intimates to the seller that he has accepted them, or
(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the purpose –
(a) of ascertaining whether they are in conformity with the contract, …
(3) Where the buyer deals as consumer…., the buyer cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.
(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains them without intimating to the seller that he has rejected them.
(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2) above.
(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because –
(a) he asks for, or agrees to, their repair by or under an arrangement with the seller,…”
The terms of s.35 pose three questions, namely (1) did the Cleggs intimate to Mr Andersson that they accepted the Yacht? (2) did the Cleggs do any act in relation to the Yacht which was inconsistent with the ownership of Mr Andersson ? and (3) had a reasonable time elapsed by 5th March 2001 in which the Cleggs retained the Yacht without intimating to Mr Andersson that they had rejected it? The judge answered each of the first two questions in the affirmative. He indicated that had it arisen he would have answered the third question in the affirmative too.
In paragraphs 43 to 47 the judge dealt with a number of authorities on which Counsel for Mr Andersson had relied before him relating to the application of s.35(4). In paragraph 54 the judge explained why he preferred the evidence of Mr Andersson to that of Mr Clegg but pointed out that the differences between them on relevant matters were small and ultimately probably not crucial.
The judge’s conclusion on the first two questions to which I have referred in paragraph 51 above is set out in paragraph 55 of his judgment. He said:
“I find that Mr. Clegg was told on 12 August 2000 that the Yacht was overweight, that there seemed to be some 607 kilogrammes excess weight in the keel, and that Mr. Andersson and Malo would put that right. Even on Mr. Clegg’s evidence he knew on 16 August 2000 that the keel was overweight. With that knowledge he took his family on a cruise to Falmouth and Alderney over eight days or so. In the light of that experience he decided that he liked the Yacht as it was and told Mr.Andersson so. That, in my judgment, was an intimation that he accepted the Yacht, knowing of the condition of the keel and that Mr. Andersson considered that it should be corrected and was prepared to have the necessary work done. Mr. Clegg’s concern in his letter dated 28 August 2000 in relation to the keel was not whether its condition was such that he might want to reject the Yacht, but simply whether the remedial work proposed by Mr. Andersson was absolutely necessary. In my judgment by 28 August 2000, in the light of his experience of sailing the Yacht, it had not occurred to Mr. Clegg not to keep the Yacht. He was simply interested in whether he should have the remedial work done or not. The fact that he indicated to Mr. Andersson that he considered that it was his, Mr. Clegg’s, decision whether the remedial work should be done or not was a further intimation that he had accepted the Yacht. The giving by Mr. Clegg of an instruction in his letter dated 5 September 2000 to Mr. Andersson that remedial work should not be undertaken on the keel was, in my judgment, an act inconsistent with the continuing ownership of the Yacht by Mr. Andersson. In informing Mr. Andersson in his letter dated 13 January 2001 that he intended to move the Yacht to Portugal or Gibraltar in early May 2001 it seems to me Mr. Clegg was intimating that he had accepted the Yacht. I also consider that by leaving his personal possessions on the Yacht between August 2000 and the end of March 2001 Mr. Clegg was intimating that he had accepted the Yacht. His action in insuring the Yacht was inconsistent with ownership of the Yacht remaining with Mr. Andersson and amounted to the assertion by Mr. Clegg that he had an insurable interest in the Yacht. Contrary to his evidence to me, he would not have had such an interest unless he had accepted the Yacht. Mr. Clegg’s attempt to register the Yacht in his and his wife’s names was also inconsistent with ownership of the Yacht remaining with Mr. Andersson. For all these reasons in my judgment Mr. and Mrs. Clegg had lost the right to reject the Yacht, if, contrary to my findings, they would otherwise have had such right, well before the letter dated 6 March 2001 was written by Messrs. Blake-Turner & Co. Indeed, the tenor of the correspondence between Mr. Clegg and Mr. Andersson up to the letter dated 6 March 2001 does not in any way foreshadow the terms of that letter, which came rather out of the blue. I reject Mr. Clegg’s evidence that he was moved to give instructions for the letter to be written by a realisation from the terms of Mr. Andersson’s letter dated 14 February 2001 that significant work would be necessary to remedy the Yacht. I find it difficult to avoid the conclusion that the writing of the letter dated 6 March 2001 was in fact prompted by a desire to seek to manoeuvre Mr. and Mrs. Clegg into a better position to extract substantial compensation from Mr. Andersson. Certainly something about which I can only speculate appears to have happened at the beginning of March 2001 to cause Mr. Clegg to wish to adopt a much more confrontational stance as against Mr. Andersson than that which had been adopted up to that point.”
The intimations on which the judge relied in relation to the first question were (a) Mr Clegg, with knowledge and experience of the overweight keel, telling Mr Andersson in late August 2000 that he liked the Yacht, (b) Mr Clegg’s letter of 28th August 2000 indicating that the decision whether any and, if so, what remedial work should be done was for Mr Clegg, (c) Mr Clegg’s letter of 13th January 2001 informing Mr Andersson that the Cleggs intended to move the Yacht to Portugal or Gibraltar in early May 2001 and (d) the action of the Cleggs in leaving personal possessions on the Yacht from August 2000 until March 2001.
In my view intimations (a) and (b) should be considered together, not least because the terms of the letter of 28th August 2000 (paragraph 11 above) show the sense in which Mr Clegg’s statement should be regarded. He refers to the overweight keel as a fundamental point. He asks for a revised specification and measurements. He questions the effect on EU weight requirements and on a resale and asks for the appointment of an independent surveyor because he does not have the relevant expertise. I do not read this as an intimation of acceptance; rather Mr Clegg was asking for information so that he might then determine whether or not he should accept the Yacht. That this was his position is, in my view, made plain by the correspondence passing between him and Mr Andersson between 28th August and 8th September 2000 (paragraphs 12 to 16 above). The information he sought was not in fact supplied until 15th February 2001.
Mr Clegg’s letter of 13th January 2001 (paragraph 17 above) cannot be read as an intimation that Mr Clegg had, or then, accepted the Yacht. He was concerned to get the information for which he had previously asked. Had it proved to be satisfactory then, no doubt, he would wish to move the Yacht to Portugal or Gibraltar in early May. That would depend on the sailing/testing he wished to carry out in March/April. I do not read that letter as intimating an intention to move the Yacht to Portugal if the information or the result of the testing was not satisfactory. Until at least the information was received Mr Clegg was not in a position to decide whether to accept the Yacht or not. No doubt the Cleggs had left personal effects in the Yacht but, given the outstanding request for further information, that action cannot be regarded as an intimation of acceptance either. For these reasons I am unable to agree with the judge’s conclusion on the basis of any or all the intimations he referred to in paragraph 55 of his judgment.
The inconsistent acts on which the judge relied in relation to the second question were (a) the letter dated 5th September 2000 from Mr Clegg to Mr Andersson directing him that remedial work should not be done, (b) insuring the Yacht and (c) attempting to register the Yacht. I am unable to agree with the judge in respect of any or all of these acts either.
By s.35(6)(a) a buyer is not deemed to have accepted goods if he asks for or agrees to their repair by the seller. The circumstances existing on 5th September 2000 were that Mr Clegg had sought but had not yet been provided with the information required by him to decide whether or not to accept remedial works to the Yacht. If he had agreed to their repair that would not have amounted to acceptance. In my view Mr Clegg’s indication that he did not agree to any remedial works unless and until he had been provided with the information he sought is also incapable of amounting to acceptance of the Yacht.
In Kwei Tek Chao v British Traders and Shippers [1954] 2 QB 459, 487 Devlin J explained that in cases where, as in this case, property in the goods has passed to the buyer the ownership of the seller with which the buyer must not act inconsistently is the reversionary interest of the seller which remains in him arising from the contingency that the buyer may reject the goods. As property in the Yacht had passed to the Cleggs they had an insurable interest in it whether or not they subsequently rejected it. The act of Mr Clegg in insuring the Yacht in August 2000 was not in any way inconsistent with the reversionary interest of Mr Andersson. Moreover, as the judge recorded in paragraph 28 of his judgment, one reason why Mr Clegg insured the Yacht was because the loan agreement under which he borrowed the money to buy the Yacht required him to do so. In my view the judge was wrong to regard the act of insuring the Yacht as in any way inconsistent with the ownership of Mr Andersson.
The third act on which the judge relied was Mr Clegg’s attempt to register the Yacht in the name of his wife and himself. In cross-examination Mr Clegg said that he had applied through an agent to register the Yacht in Guernsey. From the context I infer that this was done before or at the time of delivery in August 2000. In paragraph 7 of his supplemental witness statement he indicated that he was required to do so by the terms of the loan agreement. I am unable to see how this act can amount to an act inconsistent with the reversionary interest of Mr Andersson to which I have referred.
Accordingly I am unable to accept that the three acts relied on by the judge, either alone or together, are capable of amounting to acts inconsistent with the ownership of Mr Andersson. With regard to the third question in paragraph 57 of his judgment the judge said
“Subject to the need to have regard to the provision made by Sale of Goods Act 1979 s. 35(4), which was introduced after his decision in Bernstein v. Pamson Motors (Golders Green) Ltd., I respectfully agree with the conclusion of Rougier J. that, on proper construction, Sale of Goods Act 1979 s.35(4) is not concerned with what defects existed in goods in any particular case and how easy they in fact were to discover. What it is concerned with is how long would objectively be a reasonable time on the facts of the particular case to retain goods without intimating a rejection. In applying that objective test what is important, it seems to me, is what opportunities there in fact were to examine the goods to see whether they conformed with the contract requirements, not with whether those opportunities were actually taken. On the facts of the present case Mr. and Mrs. Clegg had ample opportunity, had they chosen to take it, to evaluate whether the Yacht was in conformity with the Contract. Had it been necessary, therefore, I should have held that they had lost any right to reject the Yacht by lapse of time.”
In Bernstein v. Pamson Motors (Golders Green) Ltd [1987] 2 AER 220 Rougier J was concerned with a case in which the car had been delivered to the buyer three weeks before the purported rejection. In the interval the purchaser had driven it 140 miles. At p.230 Rougier J said
“In my judgment, the nature of the particular defect, discovered ex post facto, and the speed with which it might have been discovered, are irrelevant to the concept of reasonable time in s 35 as drafted. That section seems to me to be directed solely to what is a reasonable practical interval in commercial terms between a buyer receiving the goods and his ability to send them back, taking into consideration from his point of view the nature of the goods and their function, and from the point of view of the seller the commercial desirability of being able to close his ledger reasonably soon after the transaction is complete. The complexity of the intended function of the goods is clearly of prime consideration here. What is a reasonable time in relation to a bicycle would hardly suffice for a nuclear submarine.”
As the judge acknowledged that decision has been criticised (104 LQR 18). Further it was based on the terms of s.35 before amendment by the Sale and Supply of Goods Act 1994. It is unnecessary to express a view as to whether the decision of Rougier J was correct before the amendment to s.35 effected by Sale and Supply of Goods Act 1994. In my view it does not represent the law now. As originally enacted s.35(1) provided that a buyer was deemed to have accepted goods, inter alia, “when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them”. S.59 provided then, as it does now, that what is a reasonable time is a question of fact. The material difference arises from the removal of that part of subsection (1) to subsection (4) and the addition of subsections (5) and (6). Thus subsection (5) provides that whether or not the buyer has had a reasonable time to inspect the goods is only one of the questions to be answered in ascertaining whether there has been acceptance in accordance with subsection (4). Subsection (6)(a) shows that time taken merely in requesting or agreeing to repairs, and, I would hold, for carrying them out, is not to be counted.
In these circumstances I consider that time taken to ascertain what would be required to effect modification or repair is to be taken into account in resolving the question of fact which arises under subsection (4). In the light of the undisputed fact that Mr Clegg did not receive the information he had sought in August and September 2000 until 15th February 2001 I consider that the three weeks which elapsed thereafter until the letter of rejection dated 6th March 2001 did not exceed a reasonable time for the purposes of s.35(4) Sale of Goods Act 1979.
In the concluding sentences of paragraph 55 the judge speculated on why Mr Clegg determined to reject the Yacht when he did. He rejected the evidence of Mr Clegg and considered that he sought to manoeuvre his wife and himself into a better bargaining position with regard to Mr Andersson. In my view the reason why the Cleggs rejected the Yacht when they did is irrelevant if, as I consider, they had the right to do so.
Although Mr Andersson had not served a respondent’s notice we gave him permission to rely on the letters dated 16th and 25th March 2001 (paragraph 21 above). Counsel for Mr Andersson submitted to us, as she had done to the judge, that these letters vitiated the rejection effected by the letter of 6th March. The judge rejected that submission and so do I. If the letter of 6th March 2001 was effective to reject the Yacht there is nothing in the subsequent letters to rob it of that effect. In particular they do not constitute a withdrawal of the rejection or a contract or estoppel not to enforce it.
Damages
Having concluded that the overweight keel constituted the breach of a condition under s.14(2) and that the Cleggs had validly rejected the Yacht by their solicitor’s letter dated 6th March 2001 this issue is to be approached on a different basis from that adopted by the judge. It is not disputed that the Cleggs are entitled to the return of the price and other acquisition costs they incurred. This is quantified at £251,718.49. In addition they are entitled to compensation for consequential losses. These have been formally verified and quantified in the sum of £37,750 under a number of heads. I understood both parties to agree that we should refer the matter to a Master for the assessment of those damages. So that there shall be no doubt what the Master is expected to do I should briefly mention certain issues relating to damages to which the judge referred.
In paragraph 60 of his judgment the judge indicated that there was no claim for damages pleaded in the particulars of claim if the Cleggs had no right to reject the Yacht. Given that the Cleggs did have the right to reject the Yacht and had properly exercised it the pleading point goes. In paragraph 61 the judge concluded that the refusal of the Cleggs to permit Malo to carry out remedial work to the keel in September 2000 constituted a failure by them to mitigate their loss so as to deprive them of damages to reflect that cost. That issue also does not arise in the circumstances that the Cleggs were entitled to and did reject the Yacht in March 2001. The overpayment, but not the berthing charge, referred to by the judge in paragraph 62 of his judgment does still arise and is a factor to be taken into account by the Master in assessing the damages to be paid to the Cleggs.
Conclusion
For all these reasons I would allow the appeal, discharge the order of the judge and refer the assessment of the damages to be paid by Mr Andersson to the Cleggs to the Master. It follows that the order for costs made by the judge is discharged also with the consequence that the issue of whether the costs he ordered the Cleggs to pay to Mr Andersson should be assessed on the indemnity basis does not arise and the matters referred to in paragraph 22 above cease to have any relevance.
Lady Justice Hale:
I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant purchaser should have taken up one of the options which they advised. If it is established that the seller is in breach of a condition of the contract, however, the choice does not lie with him.
There is an implied term, in English Law a condition, that goods sold in the course of a business must be of satisfactory quality: s 14(2) and (6). There are no implied terms as to quality in a sale of goods contract other than those implied by sections 14(2) and (3) and 15 of the Sale of Goods Act 1979 (and any other enactment): see s 14(1). This means that in the great majority of consumer sales the buyer has to rely upon section 14. If he does not have a remedy under section 14 he has no remedy at all. It so happens that the goods in this case did not comply with the express term of the contract that they be in accordance with the manufacturer’s specification. But if there had been no such term, it would have been a surprising result indeed if the buyer had no legal remedy for a state of affairs which the seller himself considered unacceptable. Mr Andersson only thought the boat acceptable because they could put it right. That is not the point. Seller and buyer often agree to try and put defects right but neither is obliged to do so. The fact that the remedy supplied by English law may be thought disproportionate by some is irrelevant to a consideration of whether the implied term has been broken.
The test is whether a reasonable person would think the goods satisfactory, taking into account their description, the price (if relevant) and all other relevant circumstances: see s 14(2A). The question, as the joint Report of the Law Commission and the Scottish Law Commission explained, is “not whether the reasonable person would find the goods acceptable; it is an objective comparison of the state of the goods with the standard which a reasonable person would find acceptable” (1987, Law Com No 160, Sale and Supply of Goods, para 3.25) The amendments made to section 14 by the Sale and Supply of Goods Act 1994 also make it clear that fitness for purpose and satisfactory quality are two quite different concepts. In some cases, such as a high priced quality product, the customer may be entitled to expect that it is free from even minor defects, in other words perfect or nearly so.
A reasonable person is not an expert. If a reasonable person had been told in September 2000 that the seller himself had realised that a very large quantity of lead would have to be removed in some as yet unspecified way from the keel of a brand new boat costing nearly a quarter of a million pounds with as yet unspecified consequences for its safety and performance he or she would have had little difficulty in concluding that the boat could not be of satisfactory quality. Had he been told that the seller would later recommend the removal of different quantities of lead, he would have had no difficulty. The seller knew that it was unsatisfactory, hence his commendable attempts to get it put right as quickly as possible.
In English law, however, the customer has a right to reject goods which are not of satisfactory quality. He does not have to act reasonably in choosing rejection rather than damages or cure. He can reject for whatever reason he chooses. The only question is whether he has lost that right by accepting the goods: s 11(4). Once again, amendments made in the 1994 Act were designed to strengthen the buyer’s right to reject by restricting the circumstances in which he might be held to have lost it. In particular, the Commissions thought that informal attempts at cure should be encouraged: para 5.28.
The buyer loses the right to reject if he informs the seller that he has accepted the goods, or if he acts inconsistently with the seller’s reversionary interest in the goods, or if he leaves it too long before telling the seller that he rejects them: s 35(1), (4). The first two of these are subject to his having a reasonable opportunity of examining the goods to ascertain whether they conform to the contract, including the implied terms in section 14; whether he has had such an opportunity is also relevant to the third: s 35(2), (5). And a buyer does not accept the goods simply because he asks for or agrees to their repair: s 35(6). It follows that if a buyer is seeking information which the seller has agreed to supply which will enable the buyer to make a properly informed choice between acceptance, rejection or cure, and if cure in what way, he cannot have lost his right to reject.
This was a buyer who was told very early on that something was not right with his brand new boat and given one suggestion for curing it. When he sought time and information to reflect upon the best way forward the sellers agreed to supply the information required. When they eventually produced this, they not only made it clear that there was no ‘do nothing’ option, but presented two very different options for putting it right, each different from the one they had originally proposed. In my view, time only began to run then and the three weeks it took the buyer to inform the seller that he was rejecting the boat were not more than a reasonable time.
Lord Justice Dyson
I agree with both judgments.
British Fermentation Products Ltd v. Compair Reavell Ltd
[1999] EWHC Technology 227 (8th June, 1999)
Construction of the contract
11. The burden of proof is on the defendants to show that the claims sought to be excluded come within the exclusion of liability condition on its true construction: The Glendarroch [1894] P 226 at 231 per Lord Esher M.R.
12. Condition 11 of the General Conditions has to be construed in the context of the contract and of the conditions as a whole. Particularly important parts of the context are to be found in conditions 4 and 5.
13. Condition 4 provides for testing on delivery:
“4(i) Before delivering any goods the Vendor shall inspect and test the same for compliance with the Contract and, if so requested, shall supply to the Purchaser a certificate of the results of the test.
(ii) Where the Contract provides that the goods shall pass any prescribed tests or shall give a specified performance they shall be tested by the Vendor before delivery for compliance with the prescribed tests or for performance or for both as the case may be …
(iii) If on a test made pursuant to Sub-Condition (ii) of this condition the goods or any part thereof fail to pass the prescribed tests or to give the specified performance such goods or part thereof shall, if the Vendor so desires, be tested again or the Vendor may submit for test other goods in their place. If the goods or the said other goods shall fail to pass the test or to give the specified performance, the Purchaser shall be entitled by notice in writing to reject the goods or such part thereof as shall have failed as aforesaid.
That condition gave the claimants an important right. The compressor was tested in accordance with the condition and failed to give the specified performance. The claimants did not exercise their right under this condition to reject the compressor, although they did consider doing so, and they did consider buying a substitute compressor from another supplier.
14. Condition 5 gave to the claimants another right:
“5. (i) The Purchaser shall be entitled, by notice in writing given within a reasonable time after delivery, to reject goods delivered which are not in accordance with the contract.
(ii) When goods have been rejected, either under Condition 4 (Tests) or Sub-Condition (i) of this condition, the Purchaser shall be entitled, provided he does so without undue delay, to replace the goods so rejected. There shall be deducted from the Contract Price that part thereof which is properly apportionable to the goods rejected. The Vendor shall pay to the Purchaser any sum by which the expenditure reasonably incurred by the Purchaser in replacing the rejected goods exceeds the sum deducted. All goods obtained by the Purchaser to replace rejected goods shall comply with the contract and shall be obtained at reasonable prices and, when reasonably practicable, under competitive conditions. Where goods have been rejected as aforesaid the vendor shall not be under any liability to the purchaser except as provided in this condition and as may arise under condition 7 (Time for Delivery).”
1. Efforts were made after delivery to make the compressor meet its specification but those efforts failed and the claimants did not exercise their right to reject under this condition.
15. It is in the context of having taken the decisions not to exercise those rights that the claimants claim damages for breaches of express conditions and warranties as to the specification of the compressor. I have given permission for amendments of the Statement of Claim in that regard including an amendment to plead condition 11(i).
16. In response, the defendants rely on the whole of condition 11.
17. As amended, condition 11 of the General Conditions is in the following terms:
“(11) (i) If within 12 months after delivery there shall appear in the goods any defect which shall arise under proper use from faulty materials, workmanship, or design (other than a design made, furnished, or specified by the Purchaser for which the Vendor had disclaimed responsibility), and the Purchaser shall give notice thereof in writing to the Vendor, the Vendor shall, provided that the defective goods or defective parts thereof have been returned to the Vendor if he shall have so required, make good the defects either by repair or, at the option of the Vendor, by the supply of a replacement. The Vendor shall refund the cost of carriage on the return of the defective goods or parts and shall deliver any repaired or replacement goods or parts as if Condition 6 (Place of delivery) applied.
(ii) The Vendor’s liability under this condition or under Condition 5 (Rejection and Replacement) shall be accepted by the Purchaser in lieu of any warranty or condition implied by law as to the quality or fitness for any particular purpose of the goods and save as provided in this condition the Vendor shall not be under any liability to the Purchaser (whether in contract, tort or otherwise) for any defects in the goods or for any damage, loss, death or injury (other than death or personal injury caused by the negligence of the Vendor as defined in Section 1 of the Unfair Contract Terms Act 1977) resulting from such defects or from any work done in connection therewith.”
18. No doubt considerable care and attention has been given to the drafting of this Model Form of contract. An historical note printed in the Form states that a Form was first published by the Institution of Electrical Engineers in 1924 and revised in 1940. Then after consultation between the Institutions of Mechanical Engineers and Electrical Engineers, “the scope of the Model Form was enlarged to make it suitable for both the electrical and mechanical engineering industries” and the Model Form was published jointly by the two Institutions as Model Form 1956 Edition, later replaced by the 1975 edition. Following the enactment of the Unfair Contract Terms Act, 1977 some amendments were made. Those amendments were incorporated in the Form used by the parties.
19. In construing the words of the Model Form, I bear in mind the words of Lord Hoffman in Investor’s Compensation Scheme Limited v. West Bromwich Building Society [1998] 1 WLR 898 at 913:
“I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240–242, [1971] 1 WLR 1381 at 1384–1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows.
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:
‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’
20. The claimants also rely on certain statements of general principle in Chitty on Contracts 27th edition paragraphs 14-005 to 14-018. In particular, the claimants rely on the well known general principle that the court will be reluctant to ascribe to an exemption condition a meaning which effectively absolves one party from all duties and liabilities: Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361 at 482.
…..
Finding on Issue 1
28. Because of the amendment which I allowed to the Statement of Claim immediately before embarking on the trial of these preliminary issues, the argument before me and my decision go beyond the issues as originally envisaged.
29. I hold that condition 11 of the General Conditions is apt to exclude liability where the claimant claims for breach of an express term of the agreement as to the compressor’s guaranteed performance level in circumstances where the defendant has been unable to remedy the defect and that exclusion of liability also excludes any similar liability alleged to arise from any duty imposed by condition 11(i).
Charter v Sullivan
[1957] EWCA Civ 2 [1957] 2 QB 117, [1957] 2 WLR 528, [1957] EWCA Civ 2, [1957] 1 All ER 809
Jenkins LJ
The Hillman Minx car is a product of the motor manufacturing organisation known as the Rootes Group, and the Plaintiff is an area dealer for this organisation, covering the North Hampshire area.
In accordance with what is now a usual practice la the trade, the retail price at which these cars may be sold is fixed by the manufacturers, and it follows that (subject to any revision by the manufacturers of the wholesale or permitted retail price which is not is question hare) the profit realisable by a dealer on the sale of a new car of any given model (as is the present case a Hillman Minx deluxe saloon) remains constant.
No point was made on either aide of the fact that the Defendant was to give another vehicle la part exchange, nor was any distinction drawn between the car itself and the extra items (a relatively small matter). The sale to the Plaintiff can therefore be treated wholly as a sale for cash and although different considerations might apply to the extras as compared with the car itself, I propose for simplicity to treat £773. l7s. as the fixed retail price simply of the car as supplied by the manufacturers and £97. l5s. as the profit resulting from a sale of the car at that price. This indeed was the footing on which the case was argued before us*
I have new, I think, sufficiently stated what I take to be the undisputed facts. Passing over at this stage certain evidence bearing upon the state of the Plaintiff’s business in cars of the relevant description, and the effect (if any) upon that business of the Defendant’s rejection of the car he agreed to bay, which was the subject of some controversy at the hearing before us, and to which I will later revert, I turn now to consider what, on the undisputed facts of the case, is is the eye of the law the true measure of the damages, if any, over and above merely nominal damages, which the Plaintiff has suffered through the Defendant’s failure to take and pay for the car he agreed to buy.
Consideration of this question must inevitably begin with a reference to Section 50 of the sale of Goods Act 1893:
“(1) Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance.
(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.
(3) Where there is an available market for the goods in question the measure of damages is prima facie, to be ascertained by the difference between the contract price and the market price or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept.”
Mr. Collard, for the Defendant, argued that in the present case there was an available market for Hillman Minx deluxe saloon cars within the meaning of Section 30(3) of the Act, and accordingly that the measure of damages ought, in accordance with the prima facie rule laid down by that sub-section to be ascertained by the difference between the contract price and the market or current price at the time of the Defendant’s refusal to perform his contract.
The result of this argument, if accepted, would be that the Plaintiff could claim no more than nominal damages, because the market or current price could only be the fixed retail price, which was necessarily likewise the price at which he sold to the Defendant and re-sold to Wigley.
But the Plaintiff is a motor car dealer whose trade for the present purpose can be described as consisting in the purchase of recurrent supplies of cars of the relevant description from the manufacturers, and selling the cars so obtained, or as many of them as ha can, at the fixed retail price. He thus receives, on each sale he is able to effect, the predetermined profit allowed by the fixed retail price, and it is obviously in his interest to sell as many cars as he can obtain from the manufacturers. The number of sales he can effect, and consequently the amount of profit he makes, will be governed, according to the state of trade, either by the number of cars he is able to obtain from the manufacturers, or by the number of purchasers he is able to find. In the former case demand exceeds supply, so that the default of one purchaser involves him is no loss, for he sells the same number of cars as he would have sold if that purchaser had not defaulted. In the latter case supply exceeds demand, so that the default of one purchaser may be said to have lost him one sale.
Accordingly, it seems to me that even if there was within the meaning of Section 50(3) an available market for cars of the description is question, and even if the fixed retail price was the market or current price within the meaning of the same sub-section, the prime facie rule which it prescribes should be rejected in favour of the general rule laid down by sub-section (2); for it does not by any means necessarily follow that, because the Plaintiff sold at the fixed retail price to Mr. Wigley the car which the Defendant had agreed to buy at the selfsame fixed retail price, but refused to fake, therefore the Plaintiff suffered no “loss directly and naturally resulting, in the ordinary course of events” from the Defendant’s breach of contract.
This makes it strictly unnecessary to decide whether there was in the present case an available market for cars of the description in question within the meaning of Section 50(3). But I would find it difficult to hold that there was. Given default by some purchaser of one of his cars of the relevant description, the Plaintiff’s only alternative mode of disposal would be to sell it at the fixed retail price to some other purchaser. He could endeavour to find another purchaser by displaying the car in his saleroom, circularising or canvassing old customers or the public at large, and advertising by posters or in newspapers. The car would obviously be of interest to retail customers only (i.e. the car-using public as distinct from the trade) and any purchaser he might succeed in finding would necessarily have to be a purchaser at the fixed retail price. At that price there might be no takers, in which case the Plaintiff would be left with the car on his hands* Section 50(3) seems to me to postulate a market in which there is a market or current price, i.e. a price fixed by supply and demand at which (be it more or less than the contract price) a purchaser can be found* If the only price at which a car can be sold is the fixed retail price and no purchaser can be found at that price, I do not think it can reasonably be said that there is a market or current price or that there is an available market. If the state of the trade were such that the Plaintiff could sell at the fixed retail price all the cars he could get, so that the Defendants* default did not result is the Plaintiff effecting one sale less than he would otherwise have effected, it may well be that the Plaintiff could not make out his claim to anything more than nominal damages. I am however inclined to think that this would not be on account of the necessary equality of the contract price and the fixed retail price at which alone the car could be sold, taken for the present purpose as the market or current price within the meaning of Section 50(3), but because en an application of the general principle laid down by Section 50(2) the Plaintiff would be found to have suffered no damage.
In Thompson (W.L.) Ltd. -v- Robinson (Gunmakers) Ltd. 1955 Chancery, page 177, Mr. Justice Upjohn had before him a claim for damages in a case resembling the present case to the extent that the damages were claimed in respect of the Defendants’ refusal to perform a contract with the Plaintiffs for the purchase from the Plaintiffs of a car (in that instance a Standard Vanguard ear) which like the car in the present case could only be sold by the Plaintiffs at a fixed retail price. It la, however, important to note that the case to which I am now referring proceeded on certain admissions, including an admission to the effect that in the relevant district at the date of the contract (which was also the date of the breach) “there was no shortage of Vanguard models to meet all immediate demands in the locality”, which I take to mean (in effect) that the supply of such cars exceeded the demand. In these circumstances the Plaintiffs by agreement with their suppliers rescinded their contract with then, and returned the ear. In the ensuing action the Plaintiffs claimed from the Defendants damages amounting to the profit the Plaintiffs would have made on the sale of the car to the Defendants if the Defendants had duly completed their purchase of it, and the learned Judge held them entitled to those damages, The Defendants raised the same argument as has been raised by the Defendant in the present ease, viz that there was an available market for a car of the kind in question, within the meaning of Section 50(3), that there was a market or current price in the shape of the fixed retail price, and that as the fixed retail price was the same as the contract price the Plaintiffs had suffered no damage. In the course of his judgment Mr. Justice Upjohn referred to Lord Justice James’ definition of a market in Dunkirk Colliery Co. -v- Lever, 9 Chancery Division, page 20 at pagea 24 and 28. Lord Justice James said this at page 24: “under those circumstances the only thing that we can do is to send it back to the referee with an intimation that we are of opinion upon the facts (agreeing with the Master of the Rolls in that respect), that the facta do not warrant the application of the principle mentioned in the award, namely, that there was what may be properly called a market. What I understand by a market in such a case as this la, that when the Defendant refused to take the 300 tons the first week or the first month, the Plaintiffs might have sent it in waggons somewhere else, where they could sell it, just as they sell corn on the Exchange, or cotton at Liverpool: that is to say, that there was a fair market where they could have found a purchaser either by themselves or through some agent at some particular place. That is my notion of the meaning of a market under those circumstances.” Mr. Justice Upjohn also referred to the Scottish case of Marshall & Co. -v- Nicoll & Son 1919 Session Cases (House of Lords) page 129, where it was held in the Court of Session that there was an available market within the meaning of section 51(3) of the Sale of Goods Act, 1893, for annealed steel sheets although they were not kept in stock and were not purchaseable in the open market, In the House of Lords the decision was affirmed but their Lordships would seem to have been equally divided on the question whether there was an available market for the goods. In this state of the authorities, the learned Judge felt himself bound by Dunkirk Collieries Co. -v-Lever. supra, and held (in effect) that Lord Justice James’s definition in that case prevented him from holding that in the case then before his there was an available market within the meaning of section 50(3}.
Mr. Justice Upjohn went on to propound a more extended meaning for the phrase “available market” in these terms (at page 187 of 1955 Chancery Division)
“Had the matter been res integra I think that I should have found that an ‘available market’ merely means that the situation in the particular trade in the particular area was such that the particular goods could freely be sold, and that there was a demand sufficient to absorb readily all the goods that were thrust on it, so that if a purchaser defaulted, the goods in question could readily be disposed of.”
He went on to say (in effect) that in the case then before him there was no available market because the supply of Vanguard cars at the material time exceeded the demand.
I doubt if Lord Justice James’ observations in Dunkirk Collieries Co. -v- Lever supra, should be literally applied as an exhaustive definition of an available market in all cases. On the other hand I do not find Mr. Justice Upjohn’s definition entirely satisfactory. I will not however attempt to improve upon it, but will content myself with the negative proposition that I doubt if there can be an available market for particular goods in any sense relevant to section 50(3} of the Sale of Goods Act, 1893 unless those goods are available for sale in the market at the market or current price in the sense of the price, whatever it may be, fixed by reference to supply and demand as the price at which a purchaser for the goods in question can be found, be it greater or less than or equal to the contract price. The language of Section 50(3) seems to me to postulate that in the cases to which it applies there will, or may, be a difference between the contract price and the market or current price, which cannot be so where the goods can only be sold at a fixed retail price.
Accordingly I am of opinion that whether there was in this case “an available market” within the meaning of Section 50(3) or not, it is a case in which Section 50(2) should be applied to the exclusion of Section 50(3).
It remains therefore to ascertain the loss (if any) “naturally resulting in the ordinary course of events” from the Defendant’s breach of contract, and the measure of that loss must in my opinion be the amount (if any) of the profit he has lost by reason of the Defendant’s failure to take and pay for the car he agreed to buy. This accords with the view taken by Mr. Justice Upjohn in Thompson (W.L) -v- Robinson (Gunmakers) Ltd., supra. and else with the principle stated in In re Vic Mill Ltd. 1913 1 Chancery, page 468, which Mr. Justice Upjohn followed and applied.
Dampskibsselskabet “Norden” A/S v Andre & CIE. S.A
[2003] EWHC 84 (Comm) [2003] 1 Lloyd’s Rep 287, [2003] 1 LLR 287, [2003] EWHC 84 (Comm)
Toulson J
If there was an available market at or within a reasonable time after the date of termination of the contract, is Norden’s loss prima facie to be measured by reference to the price differential?
At the end of the trial both parties agreed that the answer to this question is yes. However, it is necessary to consider the reasons in order to pave the way for consideration of the next question.
The principles can conveniently be considered by referring to the decision of Robert Goff J in the Elena D’Amico [1980] 1 Lloyd’s Rep 75 and the authorities which he cited. The case involved the premature wrongful repudiation of a time charter by the owners. The judge held that if there was at the time of termination an available market for chartering in a substitute vessel, damages would normally be assessed on the basis of the difference between the contract rate for the balance of the charter period and the market rate for a substitute charter. He arrived at this result by analogy with cases of sale of goods or shares in which either the seller failed to deliver or the buyer failed to accept delivery: Jamal v Moolla Dawood Sons & Co [1916] 1 AC 175 and Campbell Mostyn (Provisions) Limited v Barnett Trading Co [1954] 1 Lloyd’s Rep 65.
The broad principle deducible from the Elena D’Amico and the authorities there considered is that where a contract is discharged by reason of one party’s breach, and that party’s unperformed obligation is of a kind for which there exists an available market in which the innocent party could obtain a substitute contract, the innocent party’s loss will ordinarily be measured by the extent to which his financial position would be worse under the substitute contract than under the original contract.
The rationale is that in such a situation that measure represents the loss which may fairly and reasonably be considered as arising naturally, i.e. according to the usual course of things, from the breach of contract (Hadley v Baxendale (1854) 9 Exch 341, 354). It is fair and reasonable because it reflects the wrong for which the guilty party has been responsible and the resulting financial disadvantage to the innocent party at the time of the breach. The guilty party has been responsible for depriving the innocent party of the benefit of performance under the original contract (and the innocent party is simultaneously released from his own unperformed obligations). The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction. Whether the innocent party thereafter in fact enters into a substitute contract is a separate matter. He has, in effect, a second choice whether to enter the market – similar to the choice which first existed at the time of the original contract, but at the new prevailing rate instead of the contract rate (the difference being the basis of the normal measure of damages). The option to stay out of the market arises from the breach, but it does not follow that there is a causal nexus between the breach and a decision by the innocent party to stay out of the market, so as to make the guilty party responsible for that decision and its consequences. The guilty party is not liable to the innocent party for the effect of market changes occurring after the innocent party has had a free choice whether to re-enter the market, nor is the innocent party required to give credit to the guilty party for any subsequent market movement in favour of the innocent party.
Part of this process of reasoning, emphasised in the judgment of Lord Wrenbury in Jamal v Moolla Dawood Sons & Co, at p 179, is that damages for breach of contract such as a contract of sale are normally to be assessed as at the date of the breach.
However, as was recognised by Lord Wilberforce in Johnson v Agnew [1980] AC 367, 400-401, this is not an absolute rule: if to follow it will give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances.
Robert Goff J similarly stressed in the Elena D’Amico that the normal rule as to measure of damages applied by him in that case was (as in sale of goods cases under s.50 (3) and s.51 (3) of the Sale of Goods Act 1979) only a prima facie rule.
Mr Gruder QC for Norden accepted (rightly in my view) that he could not distinguish the present case from the Elena D’Amico by reference to the nature of the contract. But he submitted that there were particular reasons on the facts of this case which would make it unjust to apply the normal measure of damages which I have been considering.
Are there particular reasons in the present case not to adopt the price differential measure?
Although the normal rule is only a prima facie rule, it is not sufficient in order to displace it merely to show that it was reasonable from the innocent party’s view point not to enter into a replacement contract; for that would be contrary to authority and to the reasoning which underlies the rule. (If it were otherwise, I would accept that Norden’s decision not to enter a replacement contract was reasonable.)
In Campbell Mostyn (Provisions) Limited v Barnett Trading Company, at p 70-71, Romer LJ considered the proposition that “if there was a market, the measure of damages is only prima facie to be ascertained by the difference between contract price and market price; and that if it was reasonable for the sellers to hold off from the market and sell at a later date, and that is what they in fact did, then the actual price which the goods fetched becomes the test”. He rejected this as irreconcilable with the decision of the Privy Council in Jamal v Moolla Dawood. It had there been held that where a buyer of shares wrongly failed to complete the contract and the seller retained the shares after the breach, the speculation as to the way the market would subsequently go was the speculation of the seller, and its consequences were irrelevant in determining the amount of the loss caused by the buyer’s default.
Similarly, in the Elena D’Amico the arbitrator found as a fact that if one considered only the interest of the charterers (who, incidentally, had no obligation to consider anybody’s interest other than their own) their decision not to charter in a substitute vessel was reasonable, but the argument that the charterers’ loss should therefore be calculated by reference to how events turned out was rejected.
In that case Robert Goff J recognised that the normal measure of damages was subject to the governing principle associated with Hadley v Baxendale (and applied in the law of sale of goods by s 50(2) and s 51(2) of the 1979 Act), and therefore that a plaintiff might recover damages beyond the normal measure if those damages fell within the governing principle. He gave as an example a case where the damages might be enhanced by the known impecuniosity of the plaintiff.
Accordingly, in order to displace the normal rule, the innocent party must show that to limit the damages to those recoverable under the normal measure would contravene the governing principle and so work injustice.
Mr Mortensen set out in his witness statement a number of commercial reasons for not entering into a replacement FFA. First, there was the possibility that Andre or its administrator might sue Norden successfully under the original contract. Norden’s exposure to possible loss would be increased if it had in the meantime entered into a replacement FFA. Second, there was serious doubt whether Andre would be able to pay any damages which might be awarded against it. Third, the Panamax market in the first quarter of 2001 had held up quite well. Under a replacement contract Norden might have to make payments to the counterparty (without any guarantee of recovery from Andre) and, if the market continued to hold up, there would be no need to hedge the “Talisman” charter party.
In cross-examination Mr Mortensen denied that the last factor, ie that the market had held up, was any part of his thinking.
He was cross-examined about the level of Panamax cover which he maintained in March 2001 and the following months. The point was put to him that he was content to see a fall in Norden’s level of cover because of the view which he took of the market. Mr Mortensen rejected this suggestion and pointed out that he had increased the cover on the Handymax part of Norden’s fleet. This increase, he said, was partly to cover its Panamax position. It was suggested to him that he would not normally balance one with the other, but his answer (which I accept) was that when he considered Norden’s portfolio he had to look at the overall portfolio. In re-examination he reaffirmed that he viewed the Handymax cover as affecting the whole portfolio risk.
Mr Gruder submitted that the normal measure of damages should not be applied because of the combined effect on Norden of uncertainty as to (1) the validity of its termination of the original contract and (2) the ability of Andre to pay any award of damages.
Neither factor was exceptional. As to the first, Mr Mortensen said in his witness statement that he was confident that Norden was entitled to terminate the contract, but mindful of the risk that a court might find otherwise. I would have thought that the likelihood of Andre suing Norden was very remote, as was the likelihood that it would have succeeded, but I accept that it was a possibility in the mind of Mr Mortensen, although not one which I believe would have caused him serious concern. If he was concerned for Norden to have a hedge against the “Talisman” charter, the fact that it no longer did so would have been a much more serious matter. I recognise that there may be circumstances in which a dispute over the validity of the termination of a contract may affect the availability of an alternative market. For example, there might be a bona fide issue as to the ownership of goods the subject of the contract, which might hamper the innocent party’s freedom to enter a substitute contract. But that is not the present case. I do not see in this case why, as a matter of logic or justice, once Norden took the decision to terminate the contract, its perception of the risk that it was not entitled to have done so should affect the measure of damages for its loss.
As to the second factor, the possible inability of the guilty party to pay damages would have been a neutral factor in a logical consideration by Norden whether to replace the contract. I have concluded that the cost to Norden of a replacement contract at 19 March, compared with the original contract, would have been $700 per day ($10,675 – $9,975), amounting over 275 days to $192,500. If the normal measure of damages applies, Norden had an entitlement to recover that sum from Andre, which was not conditional on it entering into a substitute contract. Whether it chose to enter into a replacement contract would depend critically on its judgment of the commercial merits, which would be no greater or less according to whether or not Norden could enforce its right to damages against Andre.
Mr Gruder emphasised that Norden’s uncertainty regarding the status of the contract and Andre’s ability to pay damages were not to be looked at in isolation from each other, and that it was important to consider their joint effect. By the same token those two factors were only two among others. Overall Norden was faced with a commercial decision to make having regard to the state of the market and Norden’s exposure to potential loss. It was not a one ship company and, as Mr Mortensen made plain, he kept Norden’s entire portfolio of risk under regular review.
On the evidence I conclude as a matter of fact that, while Mr Mortensen welcomed the idea of attempting to re-negotiate the Andre contract (unsurprisingly since Norden was “in money” on it by the difference between the contract rate and the market rate at the time of its termination), he did not consider it commercially expedient to replace it because, without a replacement contract, he was content with Norden’s overall level of coverage. If he had considered that the termination of the Andre contract left Norden’s portfolio over-exposed as a matter of commercial judgment, I have no doubt that he would have taken appropriate steps to increase Norden’s cover, and that he would not have been deterred from doing so either by the unlikely risk of being Norden sued successfully by Andre or by doubts about the enforceability of any damages awarded against Andre.
However, whether or not that conclusion is factually sound, I am not persuaded as a matter of law that the application of the normal measure of damages in this case would contravene the governing principle on which it is based.
At what date should the price differential measure be applied?
Mr Gruder submitted that the date should be 30 March because Norden was entitled to a reasonable time after the termination on 19 March in which to consider its position and explore the market, and also because until 30 March there was a possibility of the contract being renegotiated.
When Norden terminated the contract on 19 March, Mr Mortensen had to decide whether to replace it. In his witness statement he set out the considerations which led him not to do so. His witness statement contained no suggestion that he decided to defer the question until he had seen whether the contract could be renegotiated. Indeed, his witness statement made no reference to the subject of renegotiation. Mr Mortensen referred to the subject in his oral evidence, and this led to some additional disclosure of documents, the effect of which I have summarised in setting out the history of events. Although the evidence is imprecise, it does not appear that Mr Mortensen was involved in any talk about renegotiating the contract until on or shortly before 29 March. At that stage the suggestion of the possibility of a renegotiation appears to have come from Andre’s side, although without the authority of the court appointed administrator.
I see no reason why Norden was not in a position to decide whether it wanted to replace the contract at the time of its termination or within a day or so thereafter. On the evidence of Mr Martini, it would not have taken long to arrange a substitute contract. In those circumstances, I conclude that the damages should be assessed at the date of termination.
Conclusion
In the result, I assess Norden’s damages excluding interest at $192,500.