Recovering the Costs of Product Recalls

INTRODUCTION

A recent judgment in the benzene litigation provides a useful guide to how a court will assess a claim for the costs of recalling a defective product. In this case, two manufacturers of fizzy drinks, which were found to have been contaminated with benzene, sought to recover the costs of recall from the supplier of the defective ingredient. The case is particularly pertinent to the standard by which the reasonableness of a recall will be judged and to the losses that will be recoverable by the party who carried out the recall.

In 1989, Perrier was about as synonymous with fizzy water as Biro with ballpoint pens or Hoover with vacuum cleaners: it had 60% of the UK mineral water market. These days it has 9%. Increased competition in the sector aside, its downturn lies to a large extent in the well-publicised incident in 1990 in which Perrier water was found to be contaminated with benzene, an aromatic hydrocarbon and genotoxic carcinogen. The cost to the company of withdrawing its product from the market was reputed to be in the region of £150 million.

It is against this background that Britvic and Bass, UK manufacturers of soft and alcoholic carbonated drinks respectively, took action against their supplier of bulk liquid carbon dioxide when it was found in May 1998 that drinks they had made contained detectable levels of benzene. Britvic and Bass, sister companies under the control of Bass plc, both purchased their CO₂ from Messer, a member of the Hoechst group of companies, which in turn purchased it from Terra Nitrogen (UK) Limited ("Terra"), which manufactured the CO₂ at its Severnside plant near Bristol.

Bass was alerted by Messer to the possible contamination on 20 May 1998 and Britvic by the British Soft Drinks Association (BSDA) on 28 May 1998. It took some time to track down which factories and deliveries of CO₂ were affected. Tests conducted on behalf of Britvic on 30 and 31 May 1998 revealed levels of benzene in the range from less than 10 parts per billion ("ppb") to 20ppb. At that time, there were no UK guidelines in force for recommended levels of benzene in any food or drink. Following the incident, however, the BSDA concluded that product with benzene levels greater than 10ppb should be recalled, while the Ministry of Agriculture, Fisheries and Food (MAFF) advised a recall of product with levels in excess of 15-20ppb. The World Health Organisation was found to have set limits of 10ppb in drinking water, based on lifetime exposure. Britvic recalled from supermarkets and large wholesalers all products manufactured in the affected plant during the relevant period with a benzene level of 10ppb or more. A second recall was directed at those products with levels above 15-20ppb. Bass recalled its products with levels of benzene above 20ppb.

On 1 June 1998, the contamination received widespread news coverage on television and radio and in the national newspapers. In fact, the risk to health was negligible. MAFF noted that a person would have to drink 40 litres of mineral water contaminated with 10-20ppb of benzene in order to replicate one day's exposure to benzene from urban air.

Britvic and Bass suffered losses as a result of the measures taken to address the risk and to reassure the public that they were dealing responsibly with the discovery of benzene in their products. They sought to recover these losses from Messer, alleging breach of contract in supplying for a food application CO₂ that was contaminated by benzene. Messer claimed over against Terra, alleging that Terra supplied CO₂ that did not conform to the agreed specification. Both Messer and Terra denied any breach of contract.

Each delivery by Messer to Britvic or Bass took place on the footing that the gas supplied complied with BS4105 (the British Standard Specification for Liquid CO₂ Industrial). This Standard, however, makes no reference to benzene and tests conducted according to BS4105 would not detect benzene. The judge interpreted a reference to suitability for food use in the title of BS4105 as a requirement in addition to the criteria contained in the standard. He found that if CO₂ were supplied that met the specific criteria of BS4105, but nevertheless had some wholly unexpected characteristic which was undetected by the prescribed test methods but rendered the CO₂ unsuitable for use in food, then the CO₂ would not conform to BS4105. He concluded that the claimants were entitled to succeed against Messer for breach of contract on this basis alone. He did, however, then consider the relevant provisions of the Sale of Goods Act 1979 (as amended), concluding that the claimants would be equally entitled to succeed on the broader basis of breach of the statutory implied terms, as the CO₂ was not of satisfactory quality and it was unfit for the purpose.

As between Messer and Terra, the latter undertook to supply CO₂ conforming to a Technical Specification of "total hydrocarbons (measured as methane) less than 10ppm". It transpired that Terra could not be certain whether its CO₂ conformed to this specification. Evidence suggested that a considerable amount of CO₂ supplied between March and May 1998 had been out of specification and thus breaching the contract, thereby sustaining Britvic's and Bass's claims against Messer and upholding Messer's claim against Terra for indemnification in respect of that liability. The judge stated that Messer had no need to resort to the statutory implied terms in order to establish its case against Terra.

The judge noted that, on being informed of the high levels of benzene in drinks manufactured by Britvic and Bass, Messer had appreciated instantly that the product that it had supplied was of unsatisfactory quality and unsuitable for a food application, its intended purpose. If Britvic and Bass had not taken steps to satisfy the public that all reasonable measures were being taken to recall the batches of production affected, all of their production would very quickly have become unsaleable – in the real sense that no consumer would knowingly buy them and Britvic and Bass, as responsible manufacturers, could not be seen to attempt to sell them, despite the fact that there had been no recall directly from consumers.

The judge therefore decided that Britvic was justified in carrying out its recall and retrieval programme, given in particular the scale on which contaminated CO₂ was supplied over the relevant period. The question to be determined was therefore one of the extent to which Britvic acted reasonably in mitigation of its loss. He reminded the parties of the law's tender approach to those who have been placed in a predicament by a breach of contract, quoting Lord Macmillan in Banco de Portugal –v- Waterlow [1932 AC 452 at 506]: -

• "Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."

Britvic's losses fell under several broad heads:

• There was no doubt that the defendants should be liable to pay for destroyed product which, when tested, had revealed levels of benzene greater than 10 ppb. There was some argument, however, in respect of whether they should pay either for destroyed product which contained less benzene than the recall level or for recalled product which was destroyed without testing. The judge concluded that Britvic had acted entirely reasonably. To return previously recalled product with less than 10ppb benzene to customers after the media scare would have been to risk a reaction potentially more damaging than the initial publicity, so Britvic had been left with no alternative but to destroy that portion of recalled product. A small proportion of the claim under this head was disallowed as pertaining to CO₂ delivered before 1 March 1998.

• Destruction costs were allowed subject to the same proportional disallowance as above.
• Britvic's distribution costs incurred in relation to the incident were allowed in full.
• Britvic did not succeed in its claim for the cost of product destroyed by retailers themselves as this was deemed to be covered under the first head above. Its payments to Tesco and Waitrose supermarkets were allowed however, because they had played an important part in maintaining good trading relationships, which it was judged reasonable for Britvic to do.
• Loss of profit was the largest element of Britvic's claim (stated as over £6 million). It was disallowed in full. After a lengthy evaluation of the soft drinks market for that period of 1998 and the performance of its competitors, Britvic had not come sufficiently close to demonstrating that the publicity surrounding the benzene incident had any measurable impact on the demand for its products. In fact, the judge noted from the outset that the claim for loss of profit did not seem to sit comfortably with Britvic's by then successful claim that it had been entitled to act as it did in instituting an immediate product recall in order to protect its market position.

Britvic's claims (exclusive of the lost profit claim) amounted to £2,271,473 of which £2,077,195 was allowed.

Bass's claim eventually amounted to £115,000, of which 30% was attributable to claims assigned to Bass by two other customers of Messer. Messer's contracts with these other customers included warranties that the CO₂ supplied would conform to BS4105 and it was therefore clear that these claims, together with Bass's own claim, should succeed.

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.