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| || ||Neutral Citation Number:  EWCA Civ 549|
| || || Case No: A3/2001/1834|
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL ( CIVIL DIVISION)
ON APPEAL FROM THE QUEEN’S BENCH
DIVISION (COMMERCIAL COURT)
| || ||Royal Courts of Justice|
London, WC2A 2LL
| || ||30 April 2002|
B e f o r e :
LORD JUSTICE THORPE
LORD JUSTICE MANCE
MR JUSTICE NEUBERGER
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
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Andrew Prynne QC, Charles Gibson QC & Geraint Webb (instructed by Messrs Eversheds) for the Appellants
Jonathan Marks QC & Kirsten Houghton (instructed by Osborne Clarke) for the
William Wood QC & Richard Lord QC (instructed by Messrs Covington & Burling) for the Second Respondent
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Lord Justice Mance:
- This appeal by Messer UK Limited (“Messer”) and Terra Nitrogen (UK) Limited (“Terra”) is from a judgment of Tomlinson J dated 12th July 2001 in proceedings brought Bacardi-Martini Limited (“Bacardi”) and Thomas Hardy Packaging Limited (“THP”). It relates to an incident involving the contamination of carbon dioxide by benzene which gave rise to a prior judgment of Tomlinson J. dated 9th May 2001 in separate proceedings (“the Britvic proceedings”) between Britvic Soft Drinks Limited, Bass Brewers Limited, THP and Brothers Drinks Limited as claimants and Messer and Terra as defendants. That judgment has itself been subject to an appeal to this court, in which we have given judgment under the reference  EWCA Civ 548.
- It was agreed before Tomlinson J. in the present proceedings that all his findings in the Britvic proceedings should be treated as binding in the present proceedings, and further that all the evidence given in the Britvic proceedings should stand as evidence in these proceedings. Reference may therefore be made to the judgment delivered on that appeal, as well as Tomlinson J’s two full judgments below, for fuller outlines of the facts.
- In short, however, Terra manufactured the carbon dioxide at its Severnside, Bristol chemical plant, and the cause of contamination was a leak, which enabled benzene to by-pass the reforming section of the plant where the benzene would normally have been removed. Terra supplied Messer, which resold to various customers. After some period during which the contamination went undetected, its discovery led to extensive recalling and destruction of finished drinks supplied to wholesalers and others. Benzene is in sufficiently high quantities a carcinogen, but in the quantities in which it was present in the finished drinks presented no health hazard. Public concern and the need to protect business made the recall necessary. The present proceedings relate to the purchase of carbon dioxide for incorporation into light alcoholic drinks (particularly Bacardi Breezer). THP acquired the carbon dioxide from Messer under a contract subject to Messer’s standard terms, and incorporated it with water into bottled and packaged drinks using alcoholic concentrate, bottles, caps, labelling and printed trays supplied by Bacardi-Martini Limited (“Bacardi”). The judge found that, although THP acquired the carbon dioxide from Messer and had a possessory interest in the manufactured drinks until they were supplied to Bacardi, title to the concentrate, bottles, caps, labelling and trays throughout and in the drinks once manufactured belonged to Bacardi. Bacardi in fact had contractual arrangements with a closely associated firm, Westbay Distributors Limited (“Westbay”), as a result of which Westbay was invoiced with all the manufactured drinks and in the first instance incurred the loss which was suffered when such drinks had to be recalled and destroyed. However, Westbay was indemnified by Bacardi following such recall. The present proceedings were brought to recover loss occasioned by the recall and destruction.
- The present proceedings were brought by Bacardi against THP, by THP against Messer and by Messer against Terra, in each case in contract. They led to claims by THP against Terra in tort and for contribution under the Civil Liability (Contribution) Act 1978, on the basis that, if THP was liable to Bacardi, THP as manufacturer was also liable to Bacardi in respect of the same damage. Finally, with Terra’s encouragement (in order to resolve all potential claims), Bacardi itself made a claim in tort against Terra for its loss.
- These proceedings led to judgment being given in favour of Bacardi against THP (by consent subject to the outcome of the appeal in the prior proceedings) for damages to be assessed, later agreed as £2,125,000 plus interest. The resolution of the appeal in the prior proceedings leaves this judgment untouched. Tomlinson J went on to give judgments in contract for THP against Messer and for Messer against Terra in the like sums. He dismissed THP’s contribution claim and (although this does not appear expressly in the order as drawn up) Bacardi’s tort claim against Terra. These claims were (as will appear) essentially alternative claims which the judge indicated that he would have accepted, had Messer succeeded in its defence to THP’s contractual claim. We were told that THP was at the time uninsured and is unlikely to be able to carry loss to the extent claimed by Bacardi, unless this can in turn be passed on to Messer or Terra. Messer and Terra are both represented by Mr Andrew Prynne QC and have made common cause before the judge and before us.
The Contractual Claim
- The first step in the contractual claim is determined by the judgment which we have given in the Britvic proceedings. In that judgment we held that Messer and Terra had failed to show that clauses 11.1 and 11.2 of Messer’s standard conditions were reasonable within the meaning of the Unfair Contract Terms Act 1977. It follows that Messer’s supplies of the carbon dioxide to THP were subject to implied undertakings of satisfactory quality and fitness for purpose of the carbon dioxide, which, in those circumstances, it is also common ground were broken. The next step requires examination of clauses 12.1 and 12.2 of Messer’s standard terms which were incorporated in its contract for supply to THP and which read as follows:
“12.0 Limitation of Liability
12.1. Subject to any other limitation or exclusion of liability expressed elsewhere in this Contract, the liability of Messer, its employees and Agents to the Customer in respect of personal injury or direct physical damage to property (and losses, costs and expenses directly arising ftom such injury or damage), whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident, except that nothing in this Contract shall restrict Messer's liability to an injured person or his personal representatives for personal injury or death resulting from negligence.
12.2 Messer, its employees and Agents shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to, loss of profits, loss of use or other consequential loss), or any other loss or damage not covered in Clause 12. 1, unless such loss, cost, expense or damage be caused by Messer supplying Gas that is not of the purity warranted or by failure to deliver or by late delivery of Gas by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer's liability shall be limited to the value of the quantity of Gas concerned (at Messer's selling price).”
- The critical question is whether THP’s claim against Messer is “in respect of ….. direct physical damage to property” within clause 12.1. If it is, then all losses, costs and expenses directly arising from such damage are also recoverable. Normally, since the terms of clause 12.1 offer a more expanded prospect of recovery than those of clause 12.2, one could expect Bacardi and THP to argue that clause 12.1 is wide enough to cover the present situation, and Messer and Terra to be arguing the contrary. In this case, however, Messer and Terra fear, and the judge held, that clause 12.2 cannot be shown to satisfy the requirement of reasonableness under s.6(3) and 11(2) of the Unfair Contract Terms Act 1977. It is therefore in Messer and Terra’s interests to seek to bring the claim within clause 12.1, which is a provision that the judge considered to be reasonable (a conclusion against which Bacardi and THP do not appeal). In this connection, the judge held, and again there is no appeal on this point, that there was only one “incident” (the “Benzene incident” viewed as a whole) and so that there would be an overall limit of £500,000 to any contractual recovery by THP against Messer. Bacardi and THP nonetheless profess themselves to be relatively neutral on the application of clause 12.1, although suggesting that Messer’s and Terra’s analysis is wrong. Their relative neutrality arises, because, if the claim falls within clause 12.1 (as being “in respect of … direct physical damage”), then Bacardi and THP maintain that Terra is liable to Bacardi in tort and that Bacardi’s tort claim and THP’s contribution claim should succeed on that basis. Messer and Terra deny that this follows, and submit that Bacardi cannot in any event recover in tort damages indemnifying them against contractual liability for loss borne by Westbay.
- THP’s pleaded contribution claim is that there was direct physical damage to the mixed drinks, e.g. the Breezer, whereas Bacardi pleads that there was damage to the mixed drinks, the product, and/or to the ingredients. The judge considered both possibilities. He rejected the former, on the ground that direct physical damage involves harm to some existing property. Here, all that happened was that THP created a defective end product, containing benzene, principally (on the evidence) as a result of mixing the defective carbon dioxide into a pre-existing mix of water and concentrate. As to the alternative possibility, it seemed to him artificial to think in terms of damage to the other pre-existing ingredients, consisting of the mix resulting from the admixture of THP’s water to Bacardi’s concentrate. Anyway, he pointed out, even if the ingredients could properly be said to have been damaged by the admixture, it was not because of damage to the ingredients that the loss was suffered. The loss arose from uselessness of the finished drinks, and the need for their recall.
- This last observation is related to the make-up of the loss totalling £2,175,000 set out in the judge’s judgment:
|“Bulk liquid and packaging: ||£1,339,093|
|Production bottling fee: ||£192,440|
|Storage costs: ||£36,473|
|Bacardi staff time: ||£40,251|
|Destruction costs: ||£79,050|
|Consultants fees: ||£32,353|
|Central Risks Group Fee: ||£7,353|
|Laboratory Fees: ||£9,856|
|Faxes, stationery and sundry: ||£7,291|
|Hotel, travel and temporary labour: ||£3,712|
|Customer withdrawal expenses: ||£326,955|
|Retrieval haulage: ||£37,557|
|Loss of profits:||NIL"|
- These items self-evidently relate to the whole of the finished drinks, rather than to any individual components which could be said to have been damaged by any admixture of carbon dioxide. Further, although, as the judge said, it might be possible to speak of the mix of Bacardi’s concentrate and THP’s own water as having been “damaged” by being admixed with benzene contaminated carbon dioxide, the more natural view is that the mix of concentrate and water itself ceased (as always intended) to exist and the finished product came into existence at the moment of such admixture. What resulted was not damaged concentrate and water, but a defective new product. As to other components of the finished product embraced within the above list, if (as one might presume) the item for bulk liquid included the value of the carbon dioxide, that could certainly not be said to have damaged itself. It would certainly stretch language to speak of the bottles, caps, trays or packaging as having been damaged. What happened was that they were rendered valueless or less valuable by being used to wrap defective product, which had to be recalled and scrapped. Had any loss of profit been incurred (which the judge found as a fact that it had not been), it would not have related to any individual element, but to the finished product. It would in these circumstances seem to me artificial and wrong to try to separate out any particular loss as arising from damage to Bacardi’s concentrate or mix of concentrate and water.
- The judge carefully examined the structure of clauses 12.1 and 12.2 for clues as to the proper approach to the present unusual situation. As he observed, clause 12.1 deals with personal injury and direct physical damage to property (and losses, costs, and expenses directly arising therefrom), while clause 12.2 specifically covers “other loss or damage not covered in Clause 12.1” including any such other “loss … or damage … caused by Messer supplying Gas that is not of the purity warranted”. The judge noted that the only express reference to the typical situation that might result from supply of defective carbon dioxide was to be found in clause 12.2. He also regarded a claim for the costs associated with the recall and destruction of a defective product as essentially a claim for economic loss, rather than for direct physical damage to property. I would agree. This conclusion does not seem to me to be altered by the consideration that during the process of creation of the defective product, concentrate belonging to Bacardi might be described as having been “damaged” and rendered valueless upon its mixture with the contaminated carbon dioxide. As I have said, the concentrate or mix of concentrate and water was never intended to retain its identity, and the more natural description of events is simply that a defective product resulted, leading, as the judge said, to an overall economic loss suffered through the recall.
- There was disagreement between the parties as to the extent to which any assistance might be obtained in the construction of clause 12.1 from authorities considering the circumstances in which damage may be said to have occurred sufficient to found a claim in tort. Mr Prynne referred the judge to a decision of my own in Losinjska Plovidba v. Transco Overseas Ltd. (The “Orjula”)  2 Ll.R. 395, but before us he submitted that tort authorities were really of no assistance. In my view there are obvious undertones of tort thinking behind the identification and description of the types of harm falling within both clauses 12.1 (“personal injury” and “direct physical damage”) and 12.2 (“losses …. of a purely financial or economic nature”). That is not to say that clause 12.1 contemplates that a customer like THP could bring, or that either the customer or Messer as supplier could be liable for, a claim in tort. The clause simply distributes between Messer and its customer the risk in respect of certain types of harm. Its reference to “liability … to the Customer in respect of personal injury or direct physical damage” is wide enough to embrace personal injury or direct physical damage whether the customer suffers this himself or itself or incurs liability for it to a third party. The exception at the end of clause 12.1, relating to “Messer’s liability to an injured person or his personal representatives for personal injury or death resulting from negligence”, would in contrast only appear apt if the customer were himself an individual and was injured; and the reason for such an exception is no doubt to be found in s.2(1) of the 1977 Act. Clause 12.1 also refers twice to potential liability for negligence. Physical injury is the typical occasion for a tortious claim based on negligence; and a duty of care has been said to be more likely to arise in tort in respect of “direct physical damage” or loss than in relation to indirect physical damage: Marc Rich & Co. AG v. Bishop Rock Marine Co. Ltd.  1 AC 211, 237D-G, per Lord Steyn.
- In The “Orjula” I held a vessel to have been damaged by contamination by hydrochloric acid, which required her to be cleaned by specialist contractors before she could again be used. In Hunter v. Canary Wharf Ltd.  AC 655 the Court of Appeal considered that dust could in certain circumstances cause damage to property, for example when trampled into a carpet so as to lessen the value of the fabric. In Blue Circle Industries plc v. Ministry of Defence  Ch 289 land was held to be physically damaged by the admixture with the topsoil of radioactive material, which required the expenditure of money to remove. I agree that none of these authorities is of real assistance in the present case. In each case pre-existing property was damaged and was useless or depreciated, at least unless money was spent to restore it to its former state. The difficulties which arise in the present case were not present.
- In Murphy v. Brentwood D.C.  1 AC 398 the House of Lords held that the purchaser of a defectively constructed house had no tortious claim against a local authority whose negligence had allowed the defective construction to occur, in circumstances where the defect was discovered before any injury to person or health or damage to property other than the defective house had been done. The loss suffered was regarded as pure economic loss, which was in the circumstances recoverable, if at all, only in contract. Lord Keith at page 465F approved the proposition that:
“…. there is no liability in tort upon a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture. The loss is economic. It is difficult to draw a distinction in principle between an article which is useless or valueless and one which suffers from a defect which would render it dangerous in use but which is discovered by the purchaser in time to avert any possibility of injury. The purchaser may incur expense in putting right the defect, or, more probably, discard the article.”
- It also appears to me of some interest to note the discussion in Murphy regarding the “complex structure theory” which Lords Bridge and Oliver had mooted in earlier speeches in D. & F. Estates v. Church Commissioners  AC 177. Relevant passages appear in the speeches of Lord Keith at page 470C-G, Lord Bridge at pages 476B-479C, Lord Oliver at page 484D-F and Lord Jauncey at page 497A-E. Lords Mackay, Brandon and Ackner agreed with Lord Keith. Lords Mackay and Ackner also agreed with Lord Bridge and Lord Ackner further agreed with Lords Oliver and Jauncey. Lord Bridge referred to an American case, Quackenbush v. Ford Motor Co. 153 NYS 131, in which the plaintiff recovered tort damages from the manufacturer for damage to her motor car caused by an accident attributable to faulty manufacture of the brakes. Lord Bridge at page 476E thought it “highly doubtful” if the reasoning in this case could now be supported consistently with the unanimous opinion of the US Supreme Court in East River Steamship Corporation v. Transamerica Delaval Inc. (1986) 106 S.Ct. 2295, that a manufacturer incurs no liability in tort for damage occasioned by a defect in a product which injures itself. He went on at page 476H-477A and page 477D-E to indicate that Quackenbush was in any event no authority for the proposition that, once a defect in a complex chattel is discovered, there is a remedy in tort against the manufacturer on the ground that the cost of repairing the defect was necessarily incurred in order to prevent further damage to other parts of the chattel, and that the position was no different where repair was necessary to prevent harm to some other person or chattel, since “…once a chattel is known to be dangerous it is simply unusable”.
- At pages 466F-467A, Lord Bridge addressed the argument that a tort claim might lie in respect of damage caused by subsidence caused by inadequate foundations. He rejected the theory that it could as “quite unrealistic”:
“The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure. Therefore any defect in the structure is a defect in the quality of the whole and it is quite artificial, in order to impose a legal liability which the law would not otherwise impose, to treat a defect in an integral structure, so far as it weakens the structure, as a dangerous defect liable to cause damage to ‘other property’.”
At page 478E-G, he then said:
“A critical distinction must be drawn here between some part of a complex structure which is said to be a ‘danger’ only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated. Thus, if a defective central heating boiler explodes and damages a house or defective electrical installation malfunctions and sets the house on fire, I see no reason to doubt that the owner of the house, if he can prove that the damage was due to the negligence of the boiler manufacturer in the one case or the electrical contractor in the other, can recover damages in tort on Donoghue v Stevenson principles. But the position in law is entirely different where, by reason of the inadequacy of the foundations of the building to support the weight of the superstructure, differential settlement and consequent cracking occurs. Here, once the first cracks appear, the structure as a whole is seen to be defective and the nature of the defect is known. Even if, contrary to my view, the initial damage could be regarded as damage to other property caused by a latent defect, once the defect is known the situation of the building owner is analogous to that of the car owner who discovers that the car has faulty brakes. He may have a house which, until repairs are effected, is unfit for habitation, but, subject to the reservation I have expressed with respect to ruinous buildings at or near the boundary of the owner’s property, the building no longer represents a source of danger and as it deteriorates will only damage itself.”
A similar distinction was also adopted, without reference to Murphy, in my judgment in Skanska Construction Ltd. v. Eggar (Barony) Ltd.  EWCA Civ 310, paragraphs 30-33.
- Lord Keith at page 470C-G and Lord Jauncey at page 497A-D thought that it would be quite unrealistic to treat a building, the whole of which had been erected and equipped by the same contractor, as divisible into parts, so that damage caused to one part by a hidden defect in another might be regarded as damage to “other property” for the purpose of grounding a claim in tort. Lord Keith at page 467A-468C cited with approval a passage from Deane J. in the Australian case of Council of Sutherland v. Heyman 157 CLR 424: “The building itself could not be said to have been subjected to “material, physical damage” by reason merely of the inadequacy of its foundations since the building never existed otherwise than with its foundations in that state.” Both Lords Keith and Jauncey recognised that a tortious claim might be possible if a defective part (e.g. wiring) had been installed by a separate subcontractor, and had, for example, caused damage by fire to other parts.
- Clearly there may be borderline cases of this nature. The interesting discussion and difference of opinion between Lloyd LJ and Nicholls LJ (as they were) in M/S Aswan Engineering Est. Co. v. Lupdine Ltd.  1 WLR 1 does not help to resolve these, particularly when it preceded Murphy and occurred when the star of Junior Books Ltd. v. Veitchi Co. Ltd.  1 AC 520 was still high in the sky. The present case may also be regarded as close to the border, as Mr Jonathan Marks QC for THP acknowledged. But I consider that the answer is reasonably clear. To recapitulate, carbon dioxide of separate manufacture was acquired by THP, which had in its possession concentrate and other items owned by Bacardi. THP mixed the concentrate with water of THP’s supply (so as to create a mix which Bacardi owned), and at this stage (substantially) further mixed in carbon dioxide so as to create liquid Bacardi Breezer mix, owned by Bacardi. This was the product that THP then bottled and packaged, before delivering the whole finished product to Bacardi. Although there were ingredients owned by Bacardi which were separate from the defective carbon dioxide and water supplied by THP, THP’s activity involved creating a new product by mixing all these elements. The new product was not damaged, but merely defective from the moment of its creation. The alternative and more persuasive way of justifying any tort claim on Bacardi’s behalf seems to me to be to argue that damages can be claimed for the spoiling of the (without doubt valuable) concentrate that Bacardi supplied. But this concentrate did not survive, and was never intended to survive, as such. It was always going to be merged in the finished Breezer. The real complaint relates to the finished product. The loss which is claimed is also not by reference to the value of the concentrate (or with reference to losses consequential upon its spoiling), but by reference to the value of the finished product and losses consequential upon the need to recall it. Accordingly, the tort cases (which are in my view of some assistance) tend to confirm the conclusion that I would anyway favour without them.
- Mr Prynne observed that, on the construction that Messer and Terra advance, clause 12 overall operates (in terms) less restrictively. He submits therefore, rightly in my view, that clause 12.1 falls in case of real doubt to be construed in the way which he submits. That principle is no less applicable, if clause 12.2 is held unreasonable and so ineffective under the Unfair Contract Terms Act 1977. The effect of the Act must be ignored in deciding what the language of clause 12 purports to achieve. Moreover, much of the argument that clause 12.2 is unreasonable turns on its extreme width of application. If clause 12.1 has the meaning that Mr Prynne submits, then the scope of clause 12.2 is considerably diminished, and a different conclusion might be reached on its reasonableness. For that reason too, it is necessary to consider the scope of both parts of clause 12 before addressing any question whether either is unreasonable. In my opinion, however, the principle that any exemption clause should in case of real doubt be construed in the less restrictive sense is not determinative of this case. We are concerned with a relatively confined situation, in relation to which it is in my view possible to reach a sufficiently clear conclusion regarding the intentions behind and proper sphere of application of each part of clause 12. There is therefore no scope for the application of the principle.
The application of the Unfair Contract Terms Act to clause 12.2
- The judge considered that Messer had failed to satisfy the onus upon it, under ss. 6 and 11 of the 1977 Act, to show that the terms of clause 12.2 were reasonable. I remind myself of the proper approach to review of a judge’s decision upon such a point, as laid down by the House of Lords in Mitchell (George) (Chesterfield) Ltd. v. Finney Lock Seeds Ltd.  2 Ac 803, 815-6 per Lord Bridge:
“It may, therefore, be appropriate to consider how an original decision as to what is "fair and reasonable" made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55 (5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.”
- Mr Prynne submitted before us that the judge’s (now unchallenged) conclusion that clause 12.1 was not unreasonable could not be squared with his further conclusion that clause 12.2 was not shown to be reasonable. The judge, Mr Prynne submits, failed in the latter context to identify or place any or sufficient weight on the effective equality of bargaining power and on the availability (although THP chose not to take this out until late 1999) of product recall insurance, both of which factors influenced him in the former context. The judge was, however, considering the reasonableness of clause 12.1 on a hypothesis which he (and now I) reject, namely that it offered at least the prospect of recovery of up to £500,000 in respect of any one incident of “damage” arising from the contamination of any end product into which defective carbon dioxide was added.
- Clause 12.2 by contrast operates as a blanket exemption, both in respect of losses of a “purely financial or economic nature” and in respect of “any other loss or damage not covered in Clause 12.1”. Mr Prynne seeks to justify this as no more than an exemption in respect of losses falling within the second head in Hadley v. Baxendale (1854) 9 Ex 341, in other words losses which would be outside the scope of ordinary contemplation, unless special circumstances were made known. He points to the preservation of liability in respect of supplies of gas “not of the purity warranted”, referring to failure to meet the requirements of BS 4105 which he submits represents the only type of deficiency that the parties could have foreseen. He points to clause 8.7.1 which provides for the customer to determine suitability, so that any claim could be put forward within the five day period specified in the exception to clause 12.2. The limitation of liability under the concluding part of that exception to the value of the quantity of gas concerned on this submission also corresponds with the amount of loss that the parties could foresee, if the contract operated as provided.
- One difficulty about these submissions, as the judge pointed out, is that they do not correspond with the reality of the parties’ expected behaviour. The carbon dioxide supplied by Messer to THP was supplied into equipment (storage vessels with associated vaporising and/or other equipment) which Messer provided to THP under a separate agreement. Those tanks were never allowed to be less than 40% full. Accordingly, any defective carbon dioxide supplied would necessarily contaminate a considerably greater quantity of carbon dioxide, quite apart from any effect as and when gas from the relevant tank was later admixed with Bacardi concentrate. Further, no-one in reality ever expected THP to test the quality of carbon dioxide supplied into such tanks, whether for compliance with BS 4105, which Messer warranted, or for absence of other contaminating substances, which Terra’s manufacturing and Messer’s delivery process should have avoided. The judge actually found, in the light of the process of delivery and admixture, that “compliance with the five day notice period would be impractical and to all intents and purposes impossible”; but, even if one simply describes such compliance as “unrealistic” and “not to be expected”, the implications for the reasonableness of clause 12.2 seem to me the same.
- I turn to Mr Prynne’s argument that no-one would have foreseen that carbon dioxide matching the requirements of BS 4105 would be contaminated by some other substance, not mentioned in that standard; and so that it was reasonable to include clause 12.2. Before the judge, he carried this argument to the length of a submission that, because the drafters cannot have had such contamination in mind, therefore clause 12.2 or at least its five day notice requirement could not apply in such a case at all. The difficulty about this argument is that clause 12.2 is in absolute terms. The exception only applies to loss, etc. caused by supplying “Gas that is not of the purity warranted”, which must in turn refer back to Messer’s standard and so to BS 4105. Once one concludes, as we have concluded on the appeal in the Britvic proceedings, that neither Messer’s standard conditions nor BS 4105 contain any express undertaking regarding freedom from contamination by other substances not specified by BS 4105, it follows that clause 12.2 purports to exclude all liability for any such other contamination.
- Mr Prynne’s submissions at this point mirror some of those mounted in respect of clause 11 in the Britvic appeal. He argues that, since no-one foresaw other contamination, a clause which does not foresee it or therefore allow any claim in respect of it should be regarded as reasonable. He submits that clause 12.2 does attempt to deal (fairly, he submits) with matters which could be foreseen, such as failure to comply with BS 4105, failure to deliver or late delivery. These submissions must be rejected in my judgment for reasons paralleling those which we expressed in the course of our judgment on the Britvic appeal. The fact that no-one would have conceived of other contamination by some entirely extraneous elements (whether benzene or a poison) is because all concerned would have assumed that Terra’s manufacturing process (and, so far as material, Messer’s delivery service) would have been operated efficiently in such a way as to make it impossible. Far from justifying an exclusion of responsibility if extraneous contamination occurred, this to my mind demonstrates the unreasonableness of any clause purporting to exempt Messer from liability in respect of such contamination.
- In these circumstances, the judge’s conclusion that clause 12.2 was unreasonable is in my judgment unassailable. It is unassailable in relation to the very situation which has arisen. But, as the judge pointed out, even if the unreasonableness had only related to potential circumstances, rather than those actually before the court, present authority in this court suggests that the clause would have to be regarded as unreasonable for all purposes: see Stewart Gill Ltd. v. Horatio Myer and Co. Ltd.  QB 600, 608-9 per Stuart-Smith LJ. I have some reservations about this proposition, which I expressed in Skipskreditforeningen v. Emperor Navigation  1 Ll.R. 66, 75, but they do not arise for consideration on this appeal. Mr Prynne sought, however, to derive assistance from accepting the proposition and relying on the warning which I attached in Skipskreditforeningen that, if the clause as a whole was to be judged either valid or invalid, then courts “should not be too ready to focus on remote possibilities or to accept that a clause fails the test by reference to relatively uncommon or unlikely situations”. I was speaking there in the context of an exclusion of set-off which would in terms cover any cross-claim for alleged fraud. I stand by the warning, but I do not consider that the exemption provided by the terms of clause 12.2, viewed as a whole, can in any way be regarded as referring only to relatively uncommon or unlikely situations. The delivery of gas complying with BS 4105 and of suitable quality is one of the main subjects that it covers. An exemption that would, in practice (since no-one expected THP to test even for compliance with BS 4105), operate as a blanket exemption in respect of matters which the parties would have regarded as fundamental to each supply is a quite different exemption to that which I was addressing in Skipskreditforeningen.
- I therefore agree both with the judge’s reasoning and with his conclusion that clause 12.2 was not shown to be reasonable, and that, under s.6 of the Unfair Contract Terms Act 1977, it cannot therefore be relied on to exclude Messer’s contractual liability for breach of the implied undertakings as to satisfactory quality and fitness for purpose, which, it is now accepted, were broken by Messer’s supplying of benzene-contaminated carbon dioxide to THP. The result is that the present appeals fail.
The Contribution and Tort Claims
- The tort and contribution claims against Terra do not in these circumstances arise for consideration. Moreover, it is difficult to consider them, when their foundation is an assumption that damage has been suffered which could be actionable in tort. The question immediately presents itself, in the light of the above discussion under clause 12.1: what damage, suffered when and by whom?
- The judge nonetheless addressed the subject on a hypothesis (contrary to his actual view) that there was physical damage to property (viz. either the finished product or, perhaps, Bacardi’s concentrate or mix of concentrate and water) of which (a) THP had possession and (b) Bacardi had ownership. Mr Prynne submitted that, even if there was direct physical damage for the purposes of clause 12.1, still it did not follow that there was any such damage for the purposes of a tort claim by either THP or Bacardi against Terra as manufacturer. That would in my view be a most unattractive halfway stopping point. Clause 12 has, as I have said, undertones of tortious thinking, and, as regards the type of damage covered, it marches hand in hand with the type of damage which one would expect to be actionable at the suit of a claimant with ownership or possession at the relevant time.
- Mr Prynne submits, however, that there are limits on the scope of any tortious duty, or at least on the scope of any permissible recovery in tort. Even though there was physical damage, the loss actually claimed falls, in his submission, outside those limits. In particular, THP is by its own tort claim seeking, in substance, to recover from Terra an indemnity in respect of its liability to Bacardi, while any claim by Bacardi in tort is to recover from Terra an effective indemnity in respect of Bacardi’s liability to Westbay. The latter proposition requires some small qualification, in so far as the items of loss making up the claim which I have set out in paragraph 9 above include “Bacardi staff time”, and one or two of the other items may also represent or include loss directly borne by Bacardi itself. But that is a minor qualification.
- The judge rejected Mr Prynne’s submission, taking the view that, once damage to property (was assumed to have) occurred, foreseeable losses consequent thereon were recoverable. Thus, in Lambert v. Lewis  1 AER 978, suppliers were held liable to purchasers of a defective towing coupling for liability incurred to persons injured when a trailer being towed became unhitched; the suppliers were unable to identify the stockist who had sold them the hitch and so sued the manufacturers direct in tort; their tort claim for an indemnity failed, despite its background in the physical damage suffered by the injured party. In contrast, there is ample authority that a claimant whose property is lost or suffers direct physical damage may recover not merely the value of the property lost or the cost of its repair or diminution in value, but also foreseeable consequential loss. In Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd.  1 QB 27, damage was negligently inflicted by the defendants on the power line which they knew to be the direct electricity supply to the plaintiff’s factory. The plaintiff recovered damages for depreciation in value of one spoiled melt, plus consequential loss of profit on that melt, but could not recover for their “pure” loss of profit in being unable to undertake four further melts. Secondly, in Leigh & Sillavan Ltd. v. Aliakmon Shipping Co. Ltd.  2 AER 44 (affirmed  AC 785), Oliver LJ spoke in this court at page 61b of the “simple case of economic loss consequential on physical damage to the plaintiff’s person or property”. He said that “Such loss is and has always been recoverable” and (at page 62f) that there was “nothing very novel about this”. I refer to McGregor on Damages (16th ed.) paragraphs 1333 et seq. and 1367 et seq. In the context of personal injury by negligence or physical damage, e.g. to a working chattel like a ship, claims for consequential losses are common-place.
- Mr Prynne seeks to distinguish the principle identified in paragraph 31, on the ground that, here, THP’s and (at least for the most part) Bacardi’s tort claims were for an indemnity in respect of liabilities incurred to a third party. The judge did not accept the relevance of that distinction. In his view, a claim for an indemnity in respect of foreseeable loss was as recoverable as any other consequential loss, once it was shown to have flowed foreseeably from loss of or damage to the claimant’s person or property in which the claimant has a proprietary or possessory interest. In my view, the judge was right. The consequences of Mr Prynne’s submission are highlighted by the position as between Bacardi and Westbay. Westbay operated effectively an arm of Bacardi. If Bacardi had supplied the trade itself, it would have borne the costs of recall directly. As it is, it transferred finished product to Westbay for distribution, the transfers being reflected by no more than accounting entries. When the defective nature of the product was discovered, the goods were recalled, and Westbay simply held Bacardi responsible for the defective product that it had received from Bacardi by debiting Bacardi on the same basis. If Bacardi had retained and marketed the finished product itself, there could be no doubt about the recovery of the consequential loss suffered through the recall and writing off of the product. It cannot sensibly matter that Bacardi has had to meet the same loss by indemnifying Westbay for it. Likewise, once it is assumed that there was actionable damage to the finished product in THP’s possession, I do not think that it makes any difference to any right of THP to claim in tort that THP parted with possession of the finished product to Bacardi after such damage. The recall flowed naturally from the damage, to whomsoever possession had passed, and if THP had to bear the cost of recall it should be entitled to recover any such foreseeable cost as loss consequential on the damaging of the product in its possession. (I would add, although we were not referred to this in argument, that this court’s decision in H. L. Motorworks v. Alwahbi  RTR 276, referred to in McGregor at paragraph 1334, appears to relate to such a situation. Indeed, in that case, it would appear from this court’s findings as to responsibility for the accident caused by the defendant, that the plaintiff garage, as bailee, may well not even have had any legal liability to indemnify the car’s owner for the costs of hiring a similar car following the accident. Here, there is no doubt about THP’s contractual liability to Bacardi and Bacardi’s to Westbay.)
- For these reasons, if it had arisen, I would arrived at the same conclusion as the judge on the tort and contribution claims. Accordingly, if the quantum of THP’s contract claim against Messer had been limited to £500,000 under clause 12.1, the shortfall in recovery by THP would in my view have been made up by a recovery by THP in tort and by way of contribution (and, although there could be no duplication of recovery, by Bacardi in tort) against Terra.
- The appeals against Tomlinson J’s judgment in the present proceedings therefore fail for reasons which, although I have set them out at some length, mirror, almost in their entirety, those which Tomlinson J himself expressed in his meticulous judgment.
Mr Justice Neuberger:
- For the reasons given by Mance LJ, I also would dismiss this appeal.
Lord Justice Thorpe:
- I agree.
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