This decision illustrates how a supplier or distributor can be liable to a customer even where the goods in question were bought by the customer from a third party. The distributor's exposure to the customer can be high in this scenario because, without a written contract with the customer, it lacks the protections commonly found in its standard terms and conditions of sale.
In this case, the customer was able to bring a negligent misstatement action against the distributor for “sales talk”. Yet it choose to bring its primary action against the distributor for breach of collateral warranty. The respective damages calculations show why. Having successfully argued breach of collateral warranty (a contract claim) the customer was awarded ten years of lost profits, totalling nearly GBP4 million. Damages for the, arguably more straightforward, claim in tort totalled a (relatively speaking) mere GBP400,000, a figure which represented the customer’s wasted expenditure in buying the sub-standard goods and subsequently dealing with its own unhappy clients.
The dispute turned upon statements made to the customer by the UK distributor of hair removal lasers in sales meetings, statements which were repeated in sales brochures.
The customer owned and ran hair removal clinics. Hair removal by laser is a relatively slow process. It also works best when there is a strong contrast between skin colour and hair colour - making it unsuitable for those with tanned or dark skin. The UK distributor for an Israeli manufacturer told the customer that its new laser worked on tanned and darker skin and that it removed hair much faster than other lasers. Both claims were compelling business factors for the customer who bought six lasers from the third party finance company on hire purchase terms. However the lasers did not perform as promised, in fact they burnt the skin of some of the customer’s clients.
As the lasers had been bought by the customer from the finance company there were no standard T&Cs of sale between the distributor and the customer. In some ways this worked to the customer's advantage. It certainly made a contract claim more difficult. But if the customer could prove that a collateral warranty nevertheless arose, and that it had been breached, the distributor would not benefit from the contractual protections ordinarily seen in T&Cs.
A collateral warranty is a promise or assertion, with contractual force, which leads to a contract being entered into. If false, the person to whom it is made may be able to bring a breach of contract claim. The promise does not need to have been made fraudulently or even negligently (in this case, the distributor was negligent but not fraudulent). Claims for breach of collateral warranties are relatively unusual, if only because the supplier and customer typically go on to enter a written contract (typically the contract will expressly include the promise that the customer relied upon and exclude claims relating to sales talk).
The circumstances of this dispute, however, involved three parties and no distributor/customer written contract. The customer successfully argued that “tripartite” collateral warranties had arisen regarding the performance and qualities of the lasers and that it had relied upon these warranties. The consideration which is necessary to establish a collateral warranty had been provided by the customer’s deposit to the finance company.
Because the collateral warranty concerned the quality and performance of the laser the customer was able to recover its lost profits. (Had the collateral warranty been one of “reasonable care” the customer’s lost profits would not have been taken into account. The judge comments that he doesn't quite follow the logic in this distinction but that this is how case law has developed). Ten years of lost profits represented the expected life of the lasers. Interestingly the near £GBP million that was awarded was calculated regardless of the fact that, in the real world, this profit would never have been achievable - no laser currently operates as the distributor had claimed.
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.
