UK: Damages For Breach Of Terms As To Quality - Does The Sale Of Goods Act Limit Such Damages To Depreciation In Value?

Saipol SA v. Inerco Trade SA [2014] EWHC 2211

This sale contract dispute provides a useful refresher with regard to the proper application of the provisions of Sections 53 and 54 of the Sale of Goods Act 1979 (the "SGA") dealing with the determination of the appropriate measure of damages for breach of warranty.

The background facts

Pursuant to a FOB contract (the "Contract"), Inerco Trade SA (the "Seller") agreed to sell and Saipol SA (the "Buyer") agreed to purchase 3,000 MT of Ukrainian crude sunflower oil (the "Product") in bulk, at a price of US$1,275 per MT. Delivery was due to take place at Ilyichevsk, between 15 March and 15 April 2008.

The Seller shipped the Product, as part of a total cargo of about 16,600 MT of Ukrainian crude sunflower seed oil, on board the MT Selandra Swan (the "Vessel") on 16 March 2008. The balance of the cargo loaded onto the Vessel (approximately 13,600 MT) was shipped by four other sellers. Before shipment, all five consignments of cargo had been comingled and the whole cargo was loaded, comingled into the ship's tanks ("the entire cargo").

The entire cargo was discharged at Dunkirk on 31 March 2008. In the weeks following discharge, it had become clear that the entire cargo had been contaminated prior to loading on board the Vessel.

The Buyer's claim

The Buyer pursued a claim for damages against the Seller for breach of S. 13 (sale by description) and S. 14 (implied terms as to quality and fitness) of the SGA. The Seller denied the Buyer's claim and the dispute was referred to FOSFA arbitration.

The Tribunal upheld the Buyer's claim that, in respect of the 3,000 MT of Product sold by the Seller to the Buyer, the Seller was in breach of Sections 13 and 14 of the SGA.

The quantum of the Buyer's claim

The Buyer sought to recover damages from the Seller in respect of:

• the difference in value between sound and contaminated Product;
• costs incurred by the Buyer in respect of storage and financing of the contaminated Product; and
• sums paid by the Buyer to sub-purchasers to whom the contaminated Product had been sold.

The Buyer also contended that it was entitled to damages in respect of the contamination of the entire cargo and not only in respect of the 3,000 MT sold by the Seller.

The law on damages

Not all losses that flow from a breach of contract are necessarily recoverable. As a matter of English law, the recoverability of damages for breach of contract may be restricted on the grounds of remoteness. In this respect, the main principles were laid down in Hadley v. Baxendale [1854] EWHC Exch. J70, which provides that a claimant will only be able to recover:

1. losses arising naturally, according to the normal course of things from the breach of contract (the "first limb"), sometimes referred to as "general" damages; and
2. losses which may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract as a probable result of the breach (the "second limb"), sometimes referred to as "special damages".

So far as relevant for present purposes, the SGA provides as follows:

The Tribunal's award on damages

The Tribunal held that the Buyer was only entitled to (i) damages representing the difference in value between the Product as it was warranted and its actual value and (ii) damages in respect of storage and financing costs of the contaminated Product. The Tribunal held that the Seller's liability was confined to the 3,000 MT it had sold to the Buyer and did not extend to the entire cargo.

The Tribunal's award on quantum was appealed by both the Buyer and the Seller, but the FOSFA Board of Appeal upheld the Tribunal's findings. The Board treated the Buyer's claim in respect of the contamination of the entire cargo as one for special damages and, in rejecting it, said:

On the basis of that conclusion, the Board determined that the Buyer's damages were to be determined under S. 53(3) even though the claim had been advanced under S. 53(2) of the SGA.

The appeal

The Buyer brought an appeal in the Commercial Court (the "Court"), pursuant to S. 69 of the Arbitration Act 1996 (appeal on a point of law) and the main question before it was whether the SGA limited the recoverable damages to the difference in value between sound and defective goods.

The Court's decision

The Court held that the SGA did not limit the recoverable damages to the difference in value between sound and defective goods. It further held that the Board had erred in making its award based on S. 53(3) of the SGA, particularly in circumstances where the Buyer had advanced its case pursuant to S. 53(2) and S. 54 of the SGA.

The Court said that under S. 53(2) of the SGA, there can be, depending of course on the facts of the situation, a claim for "consequential" losses on the basis that such losses are those that will result in the usual course of things i.e. losses that fall under the first limb of Hadley v. Baxendale. In such circumstances, it is not necessary to consider whether the losses claimed were within the special contemplation of the parties, or whether the defending party had assumed responsibility for such losses at the time of contracting (i.e. it is not necessary to consider the second limb of Hadley v Baxendale); the point simply does not arise.

The case was remitted to the Tribunal for further consideration in light of the Court's findings.

Comment

This decision provides a reminder that the measure of damages for breach of warranty in relation to quality in S. 53(3) of the SGA is only a prima facie measure and does not prevent a claimant from claiming any and all loss directly and naturally resulting from the breach, as the claimants did in this case, under S. 53(2) of the SGA.

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.