Breach Of Warranty

Louis Dreyfus Trading Ltd v Reliance Trading Ltd [2004] 2 Lloyds Rep 243

This case was heard on 4 December 2004 and judgment was given by Mr Justice Andrew Smith on 12 January 2004. It was heard in the Commercial Court which is a specialist court forming part of the Queen's Bench Division of the High Court dealing with complex cases of a commercial nature. It was an appeal by the Claimant sellers Louis Dreyfus Ltd from an arbitration award dated 25 March 2003 by the panel of arbitrators of the Refined Sugar Association. The arbitration decision had been in favour of the Defendant buyers reliance Trading Ltd. Leave to appeal had been granted by Mr Justice Colman. The arbitrators had held, inter alia, that the measure of damages for the breach by the claimant of the implied warranty of quiet possession was the difference between the value of the sugar when it became available to the Defendant and the contract price. Both parties were represented by junior Counsel.

The Facts

The facts appear in the first part of the judgment of Andrew Smith J. The dispute arose under a contract made on 10 August 2001 by which Louis Dreyfus Trading Ltd (LD) sold to Reliance Trading Ltd (Reliance) some 7000 m.t. of white crystal sugar of Brazilian origin. The sale was made on a C&FFO Banjul basis at a price of US $257.43 per m.t. At the time the contract was made, the sugar was on board and already being discharged from a vessel, the m.v. Dawn which was berthed at Banjul, the capital of the Gambia. However, on 20 June 2001, an associated company of Reliance had agreed to sell white crystal sugar to Boule & Co Ltd (Boule) in Banjul. The vessel which had been carrying that sugar was delayed. Reliance learned in early August 2001 that LD had available a parcel of 7000 m.t. of sugar similar to that which Reliance had agreed to sell to Boule. Although reliance only needed 5000 m.t. to fulfill its contract with Boule, LD was only prepared to sell them the whole parcel . However, Boule agreed to purchase 7000 m.t. at a discounted price and to accept delivery from the Dawn rather than the original vessel. There is scope for some doubt as to exactly when this contract was entered into but Andrew Smith J found as fact that it had been concluded by the time LD made their sale contract with Reliance on Aug. 10. The consequence of this is that at the time that Reliance and LD entered into their contract, both parties were aware of what had been agreed between Reliance and Boule and contemplated that the sugar from the Dawn was being delivered to Boule, i.e. Boule were buying the very sugar that LD had agreed to sell to Reliance.

On 17 August 2001, the price under the contract between LD and Reliance was agreed at US $257.43 per m.t. Payment was made for 3000 m.t. by Reliance to LD and by Boule to Reliance. However, discharge of the sugar was then disrupted by a dispute which arose between LD and Shyben Madi & Sons Ltd (Madi). This came about because earlier in 2001 LD had agreed to sell a quantity of sugar to Madi. Madi claimed that this was subject to an exclusivity agreement whereby they were to be the only consignees of sugar from the Dawn in Banjul. By 13 August 2001, Madi's sugar had been discharged but they nonetheless on 29 August 2001 obtained an injunction in the Gambian courts restraining further discharge. This did not recommence until the injunction was lifted on 27 September 2001. This delay meant that it was not until12 October 2001that the vessel had discharged the 3000 m.t. already paid for. At this point, LD asked Reliance to pay for the remaining 4000 m.t. but by this time the price of sugar in Banjul had dropped. A reduced price for this quantity was negotiated but the substitute contract was never performed.

The Tribunal Issue

LD claimed that Reliance were at fault for failing to pay for the 4,000 m.t. and also demurrage. They denied responsibility for the delay in the discharge on the ground that there had never been an exclusivity agreement with Madi and that the injunction was therefore unjustified. Reliance disputed the demurrage claim and asserted that there had indeed been an exclusivity agreement, that LD had therefore been responsible for interference with goods and were consequently in breach of the warranty that goods were free from charge and encumbrance under s.12(2)(a) of the Sale of Goods Act 1979 and breach of the warranty of quiet possession under 12(2)(b) of that Act. Accordingly, Reliance claimed damages calculated on the basis of the difference between the contract price of the goods (US $257.43) and their lower value when they eventually became available (US $224.00).

The Tribunal Decision

The tribunal held that LD were entitled to demurrage. However, they also found that there had been an exclusivity agreement. It followed that the injunction resulted from LD's breach of that agreement and that LD were therefore in breach of the warranty of quiet possession. LD's claim for damages for breach of contract was rejected on the grounds that their losses flowed from their own breach. Reliance's counterclaim for breach of contract was upheld. These findings were not subsequently appealed. However, on the issue of quantum of damages, the tribunal held:

Reliance are entitled to damages for breach of the warranty of quiet possession. Under s.53(3) of the Sale of Goods Act 1979, in the case of a breach of warranty of quality [emphasis supplied] a prima facie measure of damages is the difference between the value of the goods at the time of their delivery to the buyer, and the value they would have if they had fulfilled the contract. We regard the breach of warranty of quiet possession as being analogous to the breach of warranty of quality and such a measure of damages should apply.

The Arguments on Appeal

It was common ground that the quantum of the counterclaim was an issue before the tribunal but it had not been the subject of detailed argument at that stage. LD asserted that the tribunal had wrongly applied the measure of damages contained in s.53 which provides:

(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of their delivery to the buyer and the value they would have had if they had fulfilled the warranty.

Counsel for LD argued that while the analogy drawn by the tribunal was reasonable as a starting point, it is no more than a prima facie measure. It was argued that the tribunal had wrongly ignored the sub-sale to Boule and that when this was taken into account the assumption was displaced. Reliance argued that any profit made on the sub-sale to Boule was a collateral benefit and therefore irrelevant to the question of damages. Both parties made reference to the decision in Bence Graphics International Ltd v Fasson UK Ltd. LD adopted a broad interpretation of this decision arguing that it made it appropriate to take the sub-sale into account. Reliance argued for a restrictive interpretation, namely that it only applied I situations in which the parties contemplated that the only possible loss a buyer might suffer was the potential liability to a sub-buyer.

The Decision of Andrew Smith J.

His Lordship held (at para.17) that as a result of the application of the principles of remoteness of damage, profit or loss made by a buyer on a sub-sale is generally irrelevant in an assessment of damages for breach of warranty. If a particular sale was not within the contemplation of the parties at the time of the making of the agreement, damages are to be assessed without reference to it even if the seller is aware that the buyer is in the business of reselling such goods (Kwei Tek Chao v British Traders and Shippers Ltd). However, if a particular sub-sale was in contemplation of the parties, either party might be entitled to raise it in relation to adjusting the quantum of damages in either direction (Biggin & Co Ltd v Permanite Ltd). It was necessary to consider in some detail the case of Bence Graphics. This was a case in which a seller successfully argued in the Court of Appeal that the impact of sub-sales should be taken into account. The buyer was passing on to his customers vinyl film for use in their manufacturing processes. Defects in such vinyl would in all probability only be discovered when utilised by the end-user. In such circumstances, it was clear that the buyer would wish to recover from the seller any loss incurred as a result of claims against him by his customers. His Lordship rejected the remoteness argument (at para.23):

I consider that in a case such as the present, where the parties had in their contemplation when making their contract that the buyer was committed to deliver the same goods to a sub-buyer under a specific contract, principles of remoteness do not require that the sub-sale be disregarded in assessing the buyer's damages. It is to be taken to have been within the parties' reasonable contemplation, as a serious possibility or consequence not unlikely to result from LD being in breach of their obligations, that the loss suffered by Reliance might depend upon the impact of the sub-sale to Boule.

He rejected the argument that for the impact of a sub-sale to be taken into account this should be the only possible loss envisaged by the parties (at para.24):

Principles of remoteness look to consequences of a breach that the parties are to be taken to have contemplated as serious possibilities or not unlikely results, and not to inevitabilities [emphasis supplied].

However, it did not follow that because the financial impact on Reliance of the sale to Boule is not too remote to be brought into account, the tribunal was in fact wrong to assess damages in the way that they did. As had been held in Bence Graphics, the difference between the value of goods as delivered and their value if the contract had been observed is only the prima facie measure of damages. If either the buyer or seller would have the court depart from that assumption, the evidential burden is upon that party to rebut it. It was open to LD to demonstrate to the tribunal on the evidence that the impact of the sub-sale was such as to render the prima facie measure of damages inappropriate in this particular case on the basis that its application does not result in Reliance being compensated for the loss which they actually suffered. Had they done so?

LD had argued that they had discharged this burden by pointing to the agreement between Reliance and Boule and the payments made by Boule for 3000 m.t. of sugar. However, His Lordship pointed out that this did not necessarily mean that the true quantum of Reliance's loss was not in fact still the difference between the market value of the sugar as warranted and its value when in fact delivered. Although reliance were contractually obliged to deliver to Boule sugar from the Dawn it does not follow that Boule insisted upon that obligation being observed or could properly have done so while still discharging their duty to mitigate their loss. Similarly, if the sale by LD to Reliance and the onward sale by Reliance to Boule were on substantially similar terms it may well have been that the true damage as properly calculated was still the difference between the value warranted and the value as delivered. It had been argued o behalf of Reliance that these factors meant that LD had not succeeded in establishing that the presumption had been displaced. Andrew Smith J stated (at para.27) that he had initially been attracted by this reasoning. It is easy to see why: if the effect of displacing the presumption and allowing consideration of the effect of the sub-sale was, in the particular circumstances of the case, to allow in evidence of the effect of the sub-sale to Boule and if a consideration of the actual effect of that sub-sale were to arrive at precisely the same result as the application of the presumption in the first place, what would be the point of undertaking the exercise. It has to be admitted that on the particular facts of this case, the effect of rebutting the presumption might have been otiose. The object of displacing the presumption is to ensure that a party is not unjustly enriched by its application. The object of damages is to place a party in the same position that they would have occupied had the breach not occurred. While in the majority of cases, the true measure of loss will be that incurred as a result of the difference between the value as warranted and the value as delivered, it is possible to envisage circumstances in which the effect of a particular sub-sale is such as to mean that the claimant has not in fact suffered as much loss as would be calculated on this basis and may even, if he were particularly commercially acute and fortunate, have profited. Therefore, the blanket application of the principle might mean that at best the claimant had not been sufficiently required to mitigate his loss and at worst (from the perspective of the Defendant might be placed in a position of actual advantage. Accordingly, Andrew Smith J resisted the initial temptation of concluding that it was appropriate to say that the presumption had not been displaced because, had it been and the different measure of damages applied, it would have made no difference to the end result and opted instead for the logically more rigorous approach of examining whether the presumption ought to be displaced irrespective of the perceived end result of doing so.

Having established that this was the correct approach, His Lordship proceeded to consider whether it had been followed by the tribunal. He concluded that it had not (at para.27):

The tribunal proceeded upon the erroneous basis that the approach that they should adopt to the assessment of Reliance's damages was uncontroversial. Although they expressed the view that it was appropriate in principle to assess damages by adopting by analogy the measure set out in subs.53(3) of the 1979 Act, they do not appear to have considered whether or not LD had rebutted the presumption that this measure should be adopted.

The judge concluded by expressing sympathy for the tribunal: although this issue had become the subject of the instant appeal, the issue of the measure in damages in general and the issue of whether the presumption should be rebutted had been raised so faintly that it was understandable that the tribunal had not grasped that this was an issue of real significance between the parties. Accordingly, the appeal was allowed.

The Effect of the Decision

The procedural consequence of the appeal was that the award of damages was remitted to the tribunal for reconsideration. The actual effect of the ruling is perhaps more significant in terms of that which it did not achieve. It must be clearly appreciated that it has not been held that the true measure of damages in cases of breaches of the warranty of quiet enjoyment is the actual loss suffered by the buyer having regard to the onward fate of the goods and the profit to be derived from such further transactions. On the contrary, the approach of the tribunal in holding that the measure of damages is analogous to that which is applied in cases of breach of warranty of quality has been endorsed - but only insofar as this has been held to be the correct prima facie approach. In such cases, following Bence Graphics, where further sub-sales are involved and a party contends that the actual effect of such sales being concluded is such as to render the prima facie measure of damages inappropriate, consideration must be given to whether the presumption has been rebutted. The case therefore represents useful guidance as to the correct approach to the question of assessing the measure of damages in cases of breach of the warranty of quiet enjoyment implied by s.53(2) of the 1979 Act. However, to what extent is it influential? By virtue of the operation of the doctrine of precedent, the decision of the High Court in Louis Dreyfus Trading is binding upon tribunals such as that to which the award of damages was remitted for reconsideration. It will be followed by the High Court to the extent that to do so is not contrary to decisions of the Court of Appeal. It is incapable of overruling Bence Graphics being a decision of a superior court but it does not in fact purport to do so. The case provides a useful refinement of the decision in Bence Graphics which although making clear the fact that the difference between the value of goods as warranted and the value of goods as delivered was only a prima facie rule, left open the question of the extent to which the presumption was departed from in cases involving sub-sales. Thus it was still possible for Reliance to argue that such a departure must be restricted to cases in which the loss incurred upon a sub-sale could only become the appropriate measure of damages when this was the only loss contemplated by the parties. This will no longer be possible as a result of the rejection by Andrew Smith J that this was the correct application of the rules relating to remoteness of damage. It would be interesting to know the outcome of reconsideration by the tribunal of the award: as predicted upon appeal, the result may well have been the same in that particular case but may well now be different in others where their specific facts warrant it.

Method

I began by obtaining a copy of [2004] 2 Lloyds Rep and looking up the case report beginning at page 243. I disregarded the head note since this is merely the law reporter's summary of the facts and interpretation of the ratio decidendi of the case. For this reason, head notes taken alone can be misleading and sometimes even wrong.

For the purpose of the first part of the article it was necessary to identify the material facts of the case and to reproduce such of these as are necessary for an understanding of the issue which falls to be determined. For this reason, it was not necessary to reproduce full details of, for example, the issue between LD and Madi save that it was necessary to understand the argument in relation to the exclusivity clause since this was the subject of a finding of fact by the tribunal.

It was then necessary briefly to consider the issues before the tribunal in order to identify and isolate that which became the subject of appeal, namely the correct measure of damages.

Because the argument turned upon the alleged analogy between the quantum of damages appropriate in the case of the breach of covenant of quiet enjoyment and that which applied to breach of warranty, I read s.53 of the Sale of Goods Act 1979. As a result of their use in argument and the ruling of Andrew Smith J, I read Kwei Tek Chao, Biggin and Bence Graphics.

For a comparison of s.12(2)(b) and s.53(3) of the 1979 Act, I consulted Treitel (p.793), Poole (p.213), and Bradgate (pp.363-4). I located a useful commentary on the approach to measure of damages under s.53(3) in McKendrick (pp.505 et seq). Although this text predates the decision in Louis Dreyfus Trading, it contains a helpful discussion of Bence Graphics.

Turning to electronic sources, I first sought to establish by means of searches under the case name in Westlaw and LexisNexis Butterworths (LNB) whether there had been any subsequent decisions in which Louis Dreyfus Trading had been considered. This search proved negative save that it did, of course, yield references to reports of the case itself.

I then searched the same databases under their respective articles indexes using the case name the keyword. A large number of hits were upon wholly unrelated cases which happened also to contain the name 'Louis Dreyfus'! Where hits were successful they related to articles such as SL Rev 2005, 44, (Spr), 8-10 and Buyer 2004, Oct., 3-6 which were merely case notes of the type called for in this article. Accordingly, I did not rely upon them having regard to the plagiarism rules.

In structuring the article, I considered it important not merely to rehearse the facts and judgment but to draw attention to the competing arguments advanced on behalf of LD and Reliance. The effect of the case was of particular interest since although it clarifies the point at issue and provides guidance for the future, a consideration of the application of the doctrine of precedent was necessary in order to draw attention to the limitations upon the effect of the decision.

Bibliography

Bradgate, R., Commercial Law, (3rd Ed., 2003)

McKendrick, E., (Ed.), Sale of Goods, (2000)

Poole, J., textbook on Contract Law, (7th Ed., 2004)

Treitel, G., The Law of Contract, (11th Ed., 2003)

LexisNexis Butterworths (LNB)

Westlaw

Cases cited in text