UK: Loss Of Profits Awarded For Breach Of Collateral Warranty Which Induced Claimant To Arrange Purchase Of Goods From Defendant On Hire Purchase Terms

Last Updated: 4 December 2019
Article by Anna Pertoldi, Maura McIntosh and Jan O'Neill
Most Read Contributor in UK, November 2019

In a recent decision, the High Court has upheld a claim for breach of collateral warranty where the claimant was induced to arrange the purchase of the defendant's laser hair removal devices for use in its business as a result of the defendant's statements about the quality and anticipated performance of the devices. The claimant could not bring a direct claim for breach of contract as the purchase had been made through a third party, a hire purchase company, and so the claim was put on the basis of a breach of collateral warranty: New York Laser Clinic Ltd v Naturastudios Ltd [2019] EWHC 2892 (QB).

The decision is of interest as a relatively rare example of the court awarding damages for breach of a collateral warranty in the three-party scenario. The decision helpfully sets out the requirements for a claim for breach of collateral warranty in such cases, and considers in some detail the requirement that the statement relied on as a warranty was intended to have contractual force. The test is an objective one, to be applied in light of all the circumstances. The decision suggests that a court may be reluctant to find that a warranty was intended to have contractual force where that will enable the claimant to get round an exclusion of liability in the main contract.

The decision also shows that damages for breach of collateral warranty may be available to compensate the claimant for the loss of profits it would have earned had the warranty been true, if that is greater than its wasted expenditure resulting from the breach. The judge draws a distinction, though with some hesitation, between cases where a warranty is given as to the quality and performance of the product in question and those where the warranty is that reasonable care was taken in providing an estimate as to future performance. Only in the former type of case may damages be awarded for loss of profit; in the latter type, damages are limited to wasted expenditure.

In many cases where there is a claim for breach of collateral warranty, the claimant will also have a claim in negligent misstatement – though that does not necessarily follow, as a claim for breach of collateral warranty does not require negligence on the part of the defendant. The decision illustrates that, where both claims are available, the claim for breach of collateral warranty may in some circumstances be more advantageous.

Background

The claimant operated a number of laser hair removal clinics and the defendant was a supplier of laser hair removal devices. The claimant alleged that it had been induced to take delivery of six of the defendant's laser diode devices for use in its clinics as a result of false statements made on behalf of the defendant. The claimant contended that, contrary to those statements, the devices were not fit for purpose and ultimately had to be withdrawn from service.

The claimant had not bought the devices directly from the defendant, but instead arranged for their purchase by hire purchase companies on the claimant's behalf. As there was no contract between the claimant and defendant, the claimant could not bring a standard claim for damages for breach of contract. Instead it brought a claim for breach of collateral warranty, seeking damages of nearly £3.9 million calculated by reference to the profits it said it would have earned if the devices had performed in accordance with the warranties. In the alternative it alleged negligent misstatement, in which case the measure of loss would be the smaller sum of around £400,000 representing wasted expenditure.

Decision

The High Court (Cavanagh J) held that the claimant was entitled to succeed in its claim for breach of collateral warranty and awarded damages in the amount claimed.

The judge said it is clear that a claim can be brought, in an appropriate case, for breach of a collateral warranty – ie a promise or assertion, with contractual force, which leads to a contract being entered into. If the warranty that is relied upon turns out to be false, the person to whom it is made may have a cause of action against the promisor for breach of contract. It is not necessary that the warranty was made fraudulently, or even negligently.

He commented that this cause of action was originally devised to fill a gap that existed before the enactment of the Misrepresentation Act 1967. At that point, there was no remedy in tort for a non-fraudulent representation inducing a claimant to enter into a contract (unless the claimant could establish that the defendant was in breach of a duty of care, in which case a Hedley Byrne-style negligent misstatement claim would be available). A remedy would only be available if the claimant could establish that the representation gave rise to a collateral warranty which had contractual force.

In a number of the classic cases, such as Esso Petroleum Co Ltd v Mardon [1976] QB 801 (CA), the collateral warranty was given by one of the parties to the main contract to the other. However, a collateral warranty can also arise in a "tripartite" situation, where a warranty is given to a third party who causes another party to enter into the main contract. The judge commented that there have been "surprisingly few" reported cases in which such claims have been brought, but there have been some.

Requirements for collateral warranty claim in tripartite case

Having analysed the authorities, the judge listed the requirements for a claim for breach of a collateral warranty in a "tripartite" case as follows:

  1. A warranty (ie a statement) was given to a third party by one of the parties to the main contract, in advance of the main contract being entered into;
  2. The warranty was not a mere representation but was intended to have contractual force;
  3. The third party provided consideration to the party which gave the warranty;
  4. In reliance upon the warranty, the third party caused another party to enter into the main contract with the party who gave the warranty;
  5. The warranty was inaccurate;
  6. The third party suffered financial loss as a result; and
  7. There are no relevant exclusion clauses.

It is not necessary that the person who gave the warranty knew that it was false, or was fraudulent or even negligent.

Warranty intended to have contractual force

With regard to the second requirement listed above, that the warranty was intended to have contractual force, the judge said it is clear the test is an objective one, to be applied in light of all the circumstances. The person giving the warranty does not have to state in terms that it is intended to have contractual effect, but it should be clear to that person that the recipient will rely on the warranty in entering into, or causing someone else to enter into, a contract with that person, and the warranty must be given to that end.

The judge noted that, in the two party situation, there is a concern expressed in the case law that a collateral warranty might be used to override the detailed written terms that are subsequently agreed, such as an exclusion of liability which covers the subject matter of the statement. As a result, if the giver and recipient of the warranty both know that their eventual agreement will be set down in a detailed written contract, the court will ordinarily find that the warranty was not intended to have contractual force.

The judge said the position is not so straightforward in a "tripartite" collateral warranty case. In those circumstances, the giver of the warranty may initially expect to enter into a direct contract with the recipient and only later be told that the recipient will make use of a hire purchase arrangement, and so the position may be as in the two party situation. Alternatively, the giver of the warranty may know from the outset that the recipient will use hire purchase, but may also know its contract with the hire purchase company will contain relevant exclusions – if so, should the recipient be entitled to side-step the effect of those exclusions by relying on a collateral warranty? These complications did not, however, arise on the evidence in the present case, as there was no relevant exclusion of liability in the contract between the defendant and the hire purchase company.

In terms of who bears the burden of proof of establishing a lack of intention to create legal relations, the judge rejected the claimant's submission that the burden rests with the defendant. Statements to that effect in Chitty on Contracts, which the claimant relied on, were not made in the context of collateral warranties. The burden was on the claimant to show not only that the statements were made but that, in all the circumstances, they were intended to have contractual force.

Remedy for breach of collateral warranty

Having reviewed the relevant authorities, the judge concluded that loss of profits can be awarded in a case concerning breach of collateral warranty about the quality, or anticipated performance, of the thing to be supplied. In such a case, the claimant can elect to recover damages calculated by reference to the higher of loss of profit or wasted expenditure. However, if there was no warranty as to the quality or performance, but only a warranty that reasonable care was taken, damages are available only on the wasted expenditure basis.

Having reached that conclusion based on the authorities, the judge commented that he did "not entirely follow the logic behind having different approaches to remedy" depending on whether the warranty was about quality or performance, or that reasonable care had been taken, since in both types of case the result is the same. However, he considered himself bound to proceed on that basis as a result of the case law, in particular the Court of Appeal judgments in Cullinane v British "Rema" Manufacturing Co Ltd [1954] QB 292 (CA) and in Esso v Mardon (referred to above).

The judge commented that, as a claim for breach of collateral warranty can give rise to an entitlement to profits exceeding anything the claimant could realistically have earned, the courts "should be cautious about finding that there is an enforceable collateral warranty, and should examine the facts with care before doing so".

Conclusions in this case

The judge held that the claimant had established each of the ingredients of a claim for breach of collateral warranty, as listed above.

With regard to the question of contractual intention, each of the statements was given in clear and unequivocal terms about the performance of, and results that would be achieved by, the devices. They were given in the expectation and hope that they would induce the claimant to arrange for the purchase of the devices from the defendant. The defendant was much better placed than the claimant to satisfy itself that the statements were accurate; indeed, the claimant had no real alternative but to rely upon the statements made by the defendant. The court was satisfied that they were intended to have contractual force.

Further, the statements were not merely warranties that the defendant had taken reasonable care in the estimate that it had given of the way that the devices would perform, and the results that could be obtained. The claimant was therefore entitled to damages calculated by reference to its loss of profits, rather than merely wasted expenditure.

The judge also held that the claimant succeeded on its alternative case of negligent misstatement. However, he did not award any damages for that cause of action, as the claimant's losses were subsumed within the losses for breach of collateral warranty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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