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Breach Warranty | LawTeacher

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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.

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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):

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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.

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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)

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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

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