[2004] EWHC 525
QBD
The issue before the court was whether the measure of damages for the claimant's breach of the implied warranty of quiet possession in a contract for the sale of sugar was the difference between the value of the sugar when it became available to the defendant and its contract price.
Andrew Smith J
2. The issue is whether the tribunal adopted the correct measure in calculating damages awarded to Reliance. Having held that LD were in breach of a warranty of quiet possession implied into the contract for the sale of sugar under s. 12(2)(b) of the Sale of Goods Act, 1979, the tribunal considered that this was analogous to a breach of warranty of quality and that a similar measure of damage should apply. They then calculated damages by reference to the difference between the value of the sugar when it became available to Reliance and its contract price, which the tribunal accepted, in the absence of other evidence, sufficiently proved the value that the sugar would have if LD had not been in breach so that it was available to Reliance promptly.
17. Profit or loss made by a buyer on a sub-sale is generally irrelevant to the assessment of his damages for breach by a seller of a warranty of quality or a failure to deliver (except, it may be, as evidence of market price). This is an application of general principles governing remoteness of damage, and not an exception to them. If a particular sub-sale is not within the contemplation of the parties when the contract of sale is made, damages are to be assessed without regard to it, and it makes no difference that the parties were aware that the buyer was a merchant dealing in and re-selling such goods: Kwei Tek Chao v. British Traders and Shippers Ltd., [1954] 2 Q.B. 459 at page 489.
18. However, if the parties to a sale contract had within their contemplation when making their contract a particular sub-sale, different considerations can arise. In these circumstance, the buyer might be entitled to have the sub-sale brought into account to increase his damages. Equally, the seller might be entitled to have it brought into account in order to reduce the award against him. As it was put by Mr. Justice Devlin in Biggin & Co. Ltd. v. Permanite Ltd., [1951] 1 K.B. 422 at page 436:
“If. . .a subsale is within the contemplation of the parties, I think that the damages must be assessed by reference to it, whether the plaintiff likes it or not.”
In Koufos v. C. Czarnikow Ltd. (The Heron 2), [1969] 1 A.C. 350, Lord Pearce said at page 416E-F:
“Additional or "special" knowledge. . .may extend the horizon to include losses that are outside the natural course of events. And of course the extension of the horizon need not always increase the damages; it might introduce a knowledge of particular circumstances, e.g. a subcontract, which show that the plaintiff would in fact suffer less damage than a more limited view of the circumstances might lead one to expect.”
19. Bence Graphics v. Fasson Ltd. was a case in which the seller successfully argued in the Court of Appeal that the financial impact of sub-sales was to be brought into account…
20. The buyer in the Bence Graphics case, like Reliance, relied upon the decision of the Court of Appeal in Slater v. Hoyle, [1920] K.B. 11 in order to argue that their damages had been correctly assessed by reference to the difference between the value of the goods as warranted and the value of the goods as and when delivered. In that case, in breach of a contract, a seller had delivered cotton cloth of an inferior quality and it was held that the buyer's sub-sale of part of the cloth was to be left out of account in measuring damages. In Bence Graphics Lord Justice Otton, at page 99B, considered that the decision could be distinguished on the grounds that in Slater the buyer did not know of the contemplated sub-sale, whereas in Bence Graphics the film underwent significant processing by the buyer, and the seller was aware, when making the contract, of the precise use to which the film was to be put. Lord Justice Auld, at pages 102H-103D, expressed doubt as to whether these considerations provided any material distinction between the two cases and cast doubt upon the decision in Slater. Whichever view is preferred, Slater is an authority of the Court of Appeal that has not been overruled and which I must follow unless it is properly distinguishable.
21. However, the facts of this case differ from those of Slater (and indeed of Bence Graphics) in two respects: first, in this case the tribunal found, as I read the award and as I do not understand Mr. Kummins to dispute, that when they entered into the agreement of Aug. 10, 2001, LD and Reliance had within their contemplation the particular sub-sale that had been agreed between Reliance and Boule. Secondly, the terms of the sub-sale were such that Reliance could meet their obligations under it only by delivering sugar that they had bought from LD under the agreement of Aug. 10, 2001, and LD and Reliance appreciated that when they made their contract.
22. The significance of these distinctions is apparent from the judgments in Slater. Lord Justice Scrutton specifically observed at [1920] 2 K.B. 11, 20 that in that case
“Neither sub-contract formed the basis of the original contract; the buyers were under no obligation to deliver the goods of the original contract to the sub-buyer . . .”
He went on to say (at page 20):
“It is well settled that damages for non-delivery or delay in delivery of goods, where there is a market price, do not include damages for the loss of any particular contract unless that contract has been in contemplation of the parties to the original contract.”
Similarly, Lord Justice Warrington said (at page 17):
“The sub-contracts were not for the identical goods, being bleached instead of grey cloth, and they might or might not be performed by delivering the goods the subject of the head contract.”
Lord Justice Bankes (at page 17) distinguished the decision of the Privy Council in Wertheim v. Chicoutimi Pulping Co., [1911] A.C. 301 by observing that in Wertheim the sale and sub-sale were of the "identical article".
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 a 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. This being so, I reject Reliance's argument that principles of remoteness require that the sub-sale be disregarded in assessing their damages or that the sub-sale is to be treated as res inter alios acta. I do not consider that Slater provides any support for Reliance's argument, and my view is, I think, supported by the following passage from the judgment of Mr. Justice Devlin in Kwei Tek Chao v. British Traders and Shippers Ltd. at page 489:
“It is perfectly true that the defendants knew that the plaintiffs were merchants who had bought for re-sale, but everyone who sells to a merchant knows that he bought for re-sale, and it does not, as I understand it, make any difference to the ordinary measure of damage where there is a market. What is contemplated is that the merchant buys for re-sale, but if the goods are not delivered to him he will go out into the market and buy similar goods and honour his contract in that way. If the market has fallen, he has suffered no damage; if the market has risen the measure of damage is the difference in the market price. There are, of course, cases where that prima facie measure of damage is not applicable because something different is contemplated. If, for example, a man sells goods of a special manufacture and it is known that they are to be re-sold, it must also be known that they cannot be bought in the market, being specially manufactured by the seller. In such a case the loss of profit becomes the appropriate measure of damage. Similarly, it may very well be that in the case of string contracts, if the seller knows that the merchant is not buying merely for re-sale generally, but upon a string contract where he will re-sell those specific goods and where he could only honour his contract by delivering those goods and no others, the measure of loss or profit on re-sale is the right measure.”
24. Mr. Kummins argues that a seller may not rely upon a sub-sale in order to reduce the buyer's damages unless (as in Bence Graphics) the parties contemplated that the only possible loss that the buyer might suffer was by way of his liability to his sub-buyer. I cannot accept this. 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...
… In these circumstances, the buyer who has paid to his sub-buyer damages and costs for breach of the undertaking in the first contract of sub-sale (which the sub-buyer claimed from the buyer, as the result of similar payments of compensation between successive sub-buyers down the chain) may recover the amount paid by them to the sub-buyer, together with his own reasonable costs in reasonably defending the sub-buyer's claim against him; and damages and costs paid or incurred by the buyer are taken as the measure of damages for the seller's breach of the original contract…
25. However, it does not follow that, because the financial impact on Reliance of the sale to Boule is not too remote to be brought into account and it is not to be disregarded as res inter alios acta, the tribunal was wrong to assess damages as they did. As was explained by Lord Justice Otton in Bence Graphics, the prima facie measure of damage in a case such as this is the difference between the value of the goods as and when delivered and the value of the goods had the contract been observed..