Pipes NZ Limited v Steel Co Limited
[2014] NZHC 1216
•30 May 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-002266 [2014] NZHC 1216
BETWEEN PIPES NZ LIMITED
Plaintiff
AND
STEEL CO LIMITED Defendant
Hearing: 2 May 2014 Appearances:
G J Kohler QC and J H Whitehead for the Plaintiff
MRT Colthart for the DefendantJudgment:
30 May 2014
JUDGMENT OF THOMAS J
This judgment was delivered by me on Friday, 30 May 2014 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel:
G J Kohler QC, Barrister, Auckland
MRT Colthart, Barrister, Auckland
Solicitors:
Hazelton Law, Wellington
Madison Hardy, Auckland
PIPES NZ LTD v STEEL CO LTD [2014] NZHC 1216 [30 May 2014]
Background
[1] The plaintiff, Pipes NZ Ltd, is a supplier of steel pipe. The defendant, Steel
Co Ltd (the defendant), is a wholesale importer and supplier of steel pipe.
[2] At some time between late December 2011 and the end of January 2012, the plaintiff entered into a contract (“the Esk Contract”) with the defendant for the supply of coated steel pipe. The plaintiff required the coated steel pipe to sell to Trustpower Ltd for installation at the Esk Hydro Facility at the Esk River in Hawke’s Bay (“the Esk Project”).
[3] At some time in late January 2012, the plaintiff entered into a second contract (“the Amethyst Contract”) with the defendant for the supply of coated steel pipe. This batch of coated steel pipe was sold to Westpower Ltd for the Amethyst Hydro Facility located at Hari Hari in the West Coast (“the Amethyst Project”).
Claim
[4] The plaintiff claims that the defendant was aware that the supply of coated steel pipe under the Esk and Amethyst Contracts (“the Contracts”) was required by the plaintiff to sell to Trustpower Ltd and Westpower Ltd for the two projects. Pursuant to s 16 of the Sale of Goods Act 1908 and/or in order to achieve business efficacy, it was an implied term of the Contracts that the goods supplied would be fit for purpose.
[5] The plaintiff claims that the defendant breached the Contracts by supplying pipes that were not fit for purpose.
[6] The plaintiff claims that the coating on the pipes was defective. The first coat had not cured properly so that there was solvent entrapment leading to bubbling and peeling of the coating.
[7] As a consequence of the breach of contract, the plaintiff claims it has suffered loss to the value of $518,171.86 including GST. The plaintiff seeks judgment for this amount against the defendant. The plaintiff has now settled its claim against the
second defendant and, as a result, its claim against the defendant is reduced by the sum of $67,500.
[8] The plaintiff denies that the defendant’s terms and conditions of sale (the Terms and Conditions) formed part of the Contracts. The Terms and Conditions were not incorporated into the Contracts either expressly or by implication as:
(a) The plaintiff purchased the business from a previous owner in August
2009 and neither prior nor subsequent to the purchase were the standard terms and conditions brought to the attention of the plaintiff; and
(b)The Contracts were for indent stock (stock specifically ordered for a project) for which the defendant specifically tendered the price without reference to any standard terms and conditions.
[9] However, if the Terms and Conditions are relevant, they applied to consignment stock only (stock held by the plaintiff but owned by the defendant) and not to indent stock.
Defence
[10] The defence is that the pipes supplied by the defendant were in accordance with the terms of the Contracts. The defendant is not liable for the losses claimed by the plaintiff because the supply of the pipes was completed in accordance with its contractual obligations.
[11] In any event, if there were any liability, the defendant says that the Terms and Conditions which formed part of the Contracts exclude liability for the losses claimed by the plaintiff. If the defendant breached the Contracts by not supplying pipes in compliance with the specification or time requirements, then the Terms and Conditions exclude liability. If the pipes were not fit for purpose or of merchantable quality pursuant to the Sales of Goods Act, the Terms and Conditions exclude statutory warranties. If those warranties were not excluded then the defendant says the requirement of fitness for purpose applies only where the buyer relies on the skill
or judgment of the seller, which was not the case. Furthermore the pipes were of merchantable quality evidenced by the fact that some of the pipes rejected by the plaintiff were sold to another hydropower project.
[12] The defendant sought leave to file an amended statement of defence and counterclaim. Advance notice was given to plaintiff on 17 April 2014 and leave was sought on the first morning of the trial. The amendment was to enable the defendant to plead by way of an affirmative defence that the Terms and Conditions excluded any liability for the loss and damage claimed by the plaintiff. By consent the application was considered at the conclusion of the evidence. The plaintiff then accepted that it was not materially prejudiced by the amended statement of defence. That being the case, leave for filing the amended statement of defence was given.
[13] The defendant counterclaimed against the plaintiff on the basis of what it alleged was the wrongful rejection of the pipes thus causing loss to the defendant. However, at the conclusion of the evidence the defendant was granted leave to discontinue the counterclaim.
Issues
[14] The issues to be determined are:
(a) What were the terms of the Amethyst Contract and the Esk Contract? (i) Did the Contracts include the Terms and Conditions?
(b) Did the defendant breach the Contracts?
(i) Did the pipes comply with the specification contained in the
Contracts?
(ii)What is the effect of the contractual term in both Contracts that the pipes were to be inspected by SGS in China prior to shipment?
(iii) Were the pipes fit for purpose and of merchantable quality?
(iv) Were the pipes supplied in accordance with the time requirements in the Contracts?
(c) What loss did the plaintiff suffer and is it recoverable?
(i)Did the plaintiff behave reasonably in mitigating its loss and incurring the claimed damages?
(ii)What is the effect of the inspection of the Amethyst re- supplied pipes in China prior to shipment?
(iii)Is the plaintiff entitled to be reimbursed for the liquidated damages paid to Trustpower and Westpower?
(d) Are any of the losses claimed excluded by the terms of the Contracts?
The facts
[15] In large part the relevant facts were not in dispute.
[16] One hundred and eight pipes were required for the Esk Project, the contractual supply date (considered in more detail below) being sometime between the end of March and the end of April 2012.
[17] Seventy two pipes were required for the Amethyst Project, the contractual supply date (considered in more detail below) being sometime around April 2012.
[18] The Esk pipes arrived in Napier on 23 May 2012 and the Amethyst pipes arrived in Lyttelton on 24 May 2012.
[19] On 1 June 2012 Trustpower advised the plaintiff that there was some obvious visible damage to the Esk pipes. They were inspected on 19 June 2012 on behalf of Trustpower. One of the inspectors was Bill Koelman, an expert witness called by the
plaintiff. Tests were carried out and Mr Koelman concluded that the coating to the pipes had not been correctly applied. The coating rubbed off with the application of solvent. The conclusion was the coating had not cured properly. With the defendant’s agreement attempts were made to solve the problem but they were unsuccessful.
[20] Mr Koelman issued a draft report on 25 June 2012 concluding that the pipes were not fit for purpose. That report was sent to defendants. By the beginning of July 2012 Trustpower had formally notified the plaintiff that the pipes were not fit for purpose. It required pipes meeting the specification to be on site by
21 September 2012. The plaintiff immediately informed the defendant of the position.
[21] Similar problems occurred with the pipes for the Amethyst Project. Mr Koelman inspected them on 9 July 2012. He concluded the Amethyst pipes were not fit for purpose and the plaintiff immediately advised the defendant. Again the problem concerned the curing of the paint to the pipes. Westpower rejected the Amethyst pipes.
[22] The defendant did not formally challenge the rejection of the pipes. The defendant made some enquiries with its agent and the mill in China where the pipes were manufactured. The defendant advised the plaintiff that quality control records from the mill indicated that the humidity was too high at the time of the curing and the mill had experienced some equipment problems resulting in some pipes being coated by hand rather than mechanically.
[23] At this stage all parties were cooperating to try and remedy the problem. A number of options were identified. The two main issues governing evaluation of the options were the cost of rectification and the time implications. Both Trustpower and Westpower had given the plaintiff construction schedules including milestone or critical dates when the pipes, or some of them, would be required.
[24] The plaintiff contacted various New Zealand companies to investigate whether the pipes could be re-coated in New Zealand. That was a very expensive option.
[25] The plaintiff kept the defendant informed. It was clear that the cheapest option was for the pipes to be remanufactured and properly cured in China and for the defective pipes to be replaced. The issue was whether it would be possible to have the pipes available in accordance with Trustpower’s and Westpower’s deadlines.
[26] Representatives from the plaintiff and the defendant met on 20 July 2012. What exactly was said at the meeting is the subject of some dispute. The plaintiff’s position is that the defendant accepted that the pipes were not to specification and required replacement. The defendant maintains that its position was that the pipes did meet specification but that it was prepared to work with the plaintiff to find an acceptable solution. At the meeting on 20 July 2012 the plaintiff provided the defendant with the resupply schedule it had agreed with Trustpower and Westpower for the re-supply of the pipes.
[27] By the start of August 2012 Trustpower and Westpower had accepted the plaintiff’s remedial proposal concerning staggered provision of the pipes by specified times.
[28] The defendant placed orders with the mill in China for replacement of all of the pipes.
[29] Notwithstanding the critical dates imposed by Trustpower and Westpower there was some delay in the manufacture of the replacement pipes in China. As a consequence the plaintiff decided to have some of the original pipes recoated in New Zealand. Initially it was estimated that four Esk pipes would need to be recoated in New Zealand and the defendant was made aware of that. As it transpired the plaintiff arranged for an additional 23 pipes to be recoated in New Zealand (a total of
27 pipes). The defendant was able to halt the reproduction of the initial four pipes only.
[30] The defendant received 104 recoated Esk pipes from China between
22 October and 21 November 2012, outside the critical dates. Of those 104 pipes, 81 were re-supplied to the plaintiff and Trustpower. The defendant required the plaintiff to pay the full balance of the purchase price of the pipes before it would release the pipes. The plaintiff did so. The defendant retained the balance of 23 pipes.
[31] The plaintiff and defendant agreed that 51 of the original Esk pipes could be sold to a third party and Trustpower agreed to purchase two of the originally rejected pipes. The defendant uplifted the original pipes and retained possession of them.
[32] In relation to the Amethyst Project it was originally anticipated that six of the pipes would need to be recoated in New Zealand with the balance manufactured and coated in China. The defendant was aware of that. Ongoing delays with the supply meant that, in order to comply with Westpower’s critical dates, the plaintiff arranged for an additional 21 pipes to be recoated in New Zealand.
[33] The replacement Amethyst pipes arrived in New Zealand between the 11 and
18 October 2012. Again the defendant required the full balance of the contract price to be paid prior to delivery of the replacement pipes. As it delivered the replacement pipes the defendant uplifted the original pipes and took them into stock.
[34] There were two problems with the replacement pipes. First, the Amethyst pipes were to have had the paint striped back from the ends. This did not occur. The plaintiff’s inspector who was present in China prior to shipment noted the problem and advised the plaintiff. The plaintiff decided to authorise the shipment without having the paint removed from the ends. The plaintiff had advised Westpower of the position but, at the time shipping was authorised, had yet to hear from Westpower whether the situation was acceptable or not. The plaintiff claims the cost of having to have the paint removed from the ends.
[35] Secondly, some of the Esk pipes required the welds to be ground, the plaintiff says, in order to comply with the specification. The plaintiff claims the cost of rectification of this problem. The defence position is that grinding of the welds was not part of the defendant’s contractual obligations.
[36] Those two issues were relatively minor. The main problem associated with the replacement pipes was the date of their supply.
[37] The plaintiff claims losses for breach of contract for the cost of recoating of the original pipes in New Zealand including transport and storage costs, repairing the re-supplied pipes and liquidated damages.
[38] Pursuant to its contracts with Trustpower and Westpower the plaintiff was liable to pay liquidated damages for the late supply of the pipes. Both Trustpower and Westpower claimed liquidated damages. The plaintiff claims those in turn from the defendant.
What were the terms of the Amethyst Contract and the Esk Contract?
[39] Both the Esk Contract and the Amethyst Contract were formed during email exchanges between the parties. There is no single document for either Contract. The parties are however agreed as to what constitutes the contractual documents in respect of both Contracts.
Esk
[40] The relevant documents are the defendant’s “final offer” dated
13 December 2011, the plaintiff’s “purchase order” dated 23 December 2011 and the defendant’s “Order Acknowledgement” dated 17 January 2012 which was signed on behalf of the plaintiff on 26 January 2012.
[41] Although arguably there was a concluded contract when the plaintiff placed the order on 23 December 2011, both parties are of the view that the Order Acknowledgement is a contractual document. On receipt of the plaintiff’s order the defendant immediately responded seeking clarification of the paint to be used and the cost associated with that. The defendant also sought clarification as to whether the pipes were to be inspected prior to shipment to China by SGS, an international company. The defendant placed its order with the mill in China for the manufacture of the pipes on 23 December 2011, further evidence that the plaintiff and defendant formed the contract on that same date. I accept, however, that the Order
Acknowledgement does form part of the contract, whether as evidence the contract was finally formed when the Order Acknowledgement was signed by the plaintiff or as a variation to the contract formed on 23 December 2011. In any event it makes little difference as both the plaintiff and defendant clearly intended the Order Acknowledgement to form part of the contract between them. The Order Acknowledgement confirms the specific terms of the order including the coating selection and SGS inspection details.
Amethyst
[42] Again the parties are in agreement as to what constitutes the contractual documents. Both parties include the defendant’s offer of 19 December 2011. In my assessment however this was superseded by the defendant’s offer of 24 January 2012 which contains the details of the December 2011 offer but with different prices and a confirmed exchange rate. Again however this matters little as the plaintiff accepted the offer of 24 January 2012 by its “purchase order” dated 24 January 2012. The contract was varied in early March 2012 when the requirement of inspection by SGS was added.
[43] Both Contracts set out a specification for the pipes, price and timing requirements. These are addressed in more detail below.
Did the Contracts include the Terms and Conditions?
[44] The defendant claims that the Terms and Conditions were incorporated into the Esk Contract and the Amethyst Contract as a result of a course of dealing between the defendant and the plaintiff and its predecessor, a company called Pipes NZ Ltd (“Pipes”).
[45] The plaintiff purchased the business of Pipes in 2009. It did not purchase the company. The defendant had a business relationship with Pipes going back some years. That business involved a profit sharing arrangement concerning consignment stock. Under the arrangement the defendant’s existing stock was sold by Pipes and the profits were divided between Pipes and the defendant. It appears that the
business dealings between Pipes and the defendant related mainly to sales of consignment stock. There were also business dealings between them relating to indent sales, that is, items specifically ordered by Pipes and made to order.
[46] As a general proposition:1
Although the party receiving the document knows it contains conditions, if the particular condition relied on is one which is a particularly onerous or unusual term or is one which involves the abrogation of a right given by statute, the party tending the document must show that it has been brought fairly and reasonably to the other’s attention.
[47] As Denning LJ put it in Harling v Eddy:2
The principle which underlies these cases is this:
If a person wishes to exempt himself from a liability which the common law imposes on him, he can only do it by an express stipulation brought home to the party affected and assented to by him as part of the contract. The party who is liable at law cannot escape liability by simply putting up a printed notice, or issuing a printed catalogue, containing exempting conditions. He must go further and show affirmatively that it is a contractual document and accepted as such by the party affected...
[48] In this case the defendant relies on the Terms and Conditions to limit its liability to the plaintiff and to exclude statutory liability. The defendant acknowledges that the Terms and Conditions were not specifically referred to in any of the email exchanges and contractual documents between the parties in relation to either Contract. The defendant’s case is that the plaintiff had notice of the exclusion clauses because they were incorporated into both Contracts as a result of a course of dealing between the parties.
[49] In McCutcheon v David MacBrayne Ltd, Lord Pearce said:3
It is the consistency of a course of conduct which gives rise to the implication that in similar circumstances a similar contractual result will follow. When the conduct is not consistent, there is no reason why it should still produce an invariable contractual result.
1 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2013) vol 2 at [12-
015].
2 Harling v Eddy [1951] 2 KB 739 at 748.
3 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 (HL) at 138.
[50] Although there was some reference by the defendant’s witnesses to the Terms and Conditions relied on by the defendant being standard in the steel industry, that issue was neither neither pleaded nor relied on by the defendant.
[51] The onus is on the defendant to establish that the Terms and Conditions were incorporated into the Contracts.
[52] The starting point for the defendant was the course of dealing between it and Pipes. Its evidence was that there had been some dealings between the two companies before the defendant decided to impose standard conditions of sale in all its contracts. It then sent the Terms and Conditions to most of its customers including Pipes. Whether or not that was the case, the issue is whether the plaintiff, being a different legal entity from Pipes, was aware of the Terms and Conditions.
[53] The evidence showed that in 2009, when Pipes was in the process of selling the business, it wrote to the defendant seeking confirmation that the defendant would supply stock to the new company on the same basis as it had done previously. The query specifically related to consignment stock. The defendant replied by letter confirming that it would continue the arrangement of supplying consignment stock to the new company. It enclosed a copy of Pipes’ letter. The defendant’s letter was faxed to Pipes and the Terms and Conditions were not attached. The defendant maintains that a hard copy of the letter was also posted and that the Terms and Conditions were included. I am not satisfied on the evidence that that indeed occurred. There was no reference in the letter to the Terms and Conditions and defendant’s filing system does not assist its position.
[54] In any event, subsequent to that letter the defendant’s general manager wrote to Pipes about the terms of trade for consignment stock. The email set out the arrangement between the parties noting that the terms and conditions could be altered by mutual agreement only. There was no reference to the Terms and Conditions.
[55] Then in July 2011, after the sale of the business to the plaintiff, the plaintiff asked for a copy of the “agreement”. The defendant says that the Terms and Conditions were posted in response.
[56] The plaintiff’s position is that, even if it was sent a copy of the Terms and Conditions, they governed the supply of consignment stock only and would not be incorporated in any contract for indent stock.
[57] The defendant has not established that the Terms and Conditions were expressly incorporated into the Contracts. Furthermore, I am not satisfied on the evidence that there was a course of dealing consistent to the extent required to produce the invariable contractual result sought by the defendant. At best, in my assessment, the Terms and Conditions were relevant to consignment stock only. The evidence was that transactions involving consignment stock were the usual course of business between the parties. That is emphasised by the evidence of what happened when the plaintiff purchased the business of Pipes, that is, both the plaintiff and defendant discussed the contractual provisions governing the supply of consignment stock.
[58] The position is reinforced by the fact that none of the documents forming the Contracts refer to the Terms and Conditions. The defendant cannot show affirmatively that they were contractual documents and accepted as such by the plaintiff. In the case of the Esk contract, the order confirmation which the defendant required the plaintiff to sign makes no reference to the Terms and Conditions. Indeed it specially records:
This order is accepted under the above conditions and every reasonable effort will be made to fulfil our obligations as above. However Force Majeure applies, and is defined as any forces beyond the control of Steel Co Ltd that impact on the successful completion of this contract.
[59] The fact that the defendant specifically incorporated this provision, on an objective assessment indicates that the Order Acknowledgement is intended to include all of the provisions of the Contract. That provision is inconsistent with the Terms and Conditions being part of the Contract.
[60] The situation is analogous to Engineering Dynamics Ltd v Norgren Matonair (NZ) Ltd (IMI Norgren Ltd)4 where the Court of Appeal allowed an appeal on the ground that, although there was a course of dealing between the parties, the particular transaction did not follow the previous pattern. It was in the nature of a one off arrangement, and the evidence did not confirm that the appellants knew of the course in question.
[61] The Esk Contract and the Amethyst Contract both contained different provisions. This emphasises that each transaction was a “one off” despite the fact that both Contracts were for the supply of pipes to be used in hydro schemes and that both were supplied to the same customer, the plaintiff.
[62] For the reasons given, I am not satisfied to the required standard that the
Terms and Condition were incorporated in the Contracts.
Did the defendant breach the Contracts?
Did the pipes comply with the specification contained in the Contracts?
[63] The defendant says that the pipes were to specification. They complied with the technical specifications and dimensions and were coated with the correct paint. Although there was some issue with the thickness of the internal lining of the coating, that was not, in the defendant’s submission, the real reason for rejection of the pipes. Mr Colthart described it as a red herring.
[64] The plaintiff says that this is more than a case of the pipes needing to comply with description because they were to be produced to a detailed specification and they did not comply with that. The distinction the plaintiff sought to draw was between a product supplied by way of general description, for example a Ford motorcar, and a product to be supplied in accordance with a detailed description of the component parts. In Mr Kohler’s submission this case falls into the second
category.
4 Engineering Dynamics Ltd v Norgren Matonair (NZ) Ltd (IMI Norgren Ltd) (1996) 7 TCLR 369 (CA).
[65] Chitty on Contracts notes:5
Once it is established that a given contract of sale is a sale by description, the test applied by the Courts to determine whether or not the goods correspond with the description is a strict one. If the goods do not correspond with the description, it is not enough for the seller to show that they were of satisfactory quality, or fit for the particular purpose for which they were required.
[66] The case of Arcos Ltd v Ea Ronaasen and Son6 is analogous. The contract in that case stipulated the length, breadth and thickness of timber to be supplied. The goods were rejected by the buyer on the ground that they did not conform to the description as to the required thickness. Lord Atkin put it as follows:7
If the written contract specifies conditions on weight, measurement and the like, those conditions must be complied with. A ton does not mean about a ton, or a yard about a yard. Still less when you descend to minute measurements does ½ inch mean about ½ inch.
[67] And at 480 he stated:
If a condition is not performed the buyer has a right to reject.
[68] The only expert evidence was called by the plaintiff. Mr Koelman spoke to the reports he prepared at the time in respect of all the pipes, wherein he concluded that they were not fit for purpose. His tests revealed that the coating could easily be removed showing him that the coating was soft and not properly cured. He concluded that the only remedial option was to completely remove the coating from the pipes before preparing the surfaces and reapplying the coating. It was his opinion that the coating would never cure and would fail if put into service.
[69] The defence did not call any expert evidence. Its witness, Mr Roberts, agreed in cross-examination that the paint had to harden properly in order to perform its function as a coating.
[70] It is clear that neither the Esk pipes nor the Amethyst pipes conformed to the specification because they were to be coated to a minimum specified thickness. That
5 Chitty on Contracts, above n 1, at [42-076].
6 Arcos Ltd v EA Ronaasen and Son [1993] AC 470 (HL).
7 At 479.
requirement must mean they had to be properly coated so that the coating adhered to the pipes. It did not. The plaintiff was entitled to reject them on that basis.
What is the effect of the contractual term in both Contracts that the pipes were to be inspected by SGS in China prior to shipment?
[71] The defence position appears to be that the pipes did comply with the Contracts because they were inspected and approved by SGS prior to shipment in accordance with the plaintiff’s requirements. The defence says the fact that Trustpower and Westpower rejected the pipes is not relevant in a determination as to whether or not the defendant discharged its obligations to supply pipe to the plaintiff in accordance with the Contracts.
[72] It is plain that if a contract requires a product to be coated with a specific product, the requirement is not met if the product does not cure or adhere to the surface.
[73] The Order Acknowledgement in respect of the Esk Project provided the following:
SGS inspection
- Visual inspection of all lengths
- 25 lengths to be selected at random
- Inspection of dimensions to API standard
- Inspection of Bell Ends to meet required tolerance
- Inspection of lining and coating. Visual paint finish and thickness
- Shipment to be held awaiting SGS approval.
[74] Mr Koelman’s evidence was that a simple thumb nail test would have revealed that the paint had not properly cured. In other words, pressing a thumb nail on the surface would have shown that the paint was not hard. Relevant is the fact that the inspection of the lining and coating is stated to be “visual”. Mr Roberts, the
defendant’s trading manager who negotiated the contracts, accepted that the
inspection to be carried out by SGS was “extremely limited”.
[75] While the requirement for inspection might have been imposed by Trustpower and Westpower, SGS was contracted by the defendant. Recourse to SGS for any failure there might have been to perform its role adequately is therefore a matter for the defendant.
[76] In any event the contractual obligation for inspection by SGS does not relieve the defendant of its liability under the Contract to supply pipes which conformed to the specification. The fact of an inspection cannot relieve the defendant from its contractual obligations to supply coated pipe. The obligation was not to supply pipes that met with SGS’s approval. The purpose of the inspection was to provide reassurance but did not operate to relieve the defendant of liability.
[77] The same considerations apply to the Amethyst contract.
Were the pipes fit for purpose and of merchantable quality?
[78] For the reasons set out above I am satisfied that the pipes did not comply with the Contracts.
[79] The next issue is whether there is a breach of the statutory warranty set out in s 16(a) of the Sale of Goods Act. It is not in dispute that the defendant was aware, as a result of the plaintiff ’s communications, that the pipes were to be used by Trustpower for the Esk Project and Westpower for the Amethyst Project.
[80] The plaintiff’s case is that the facts show the plaintiff was relying on the defendant’s skill and judgement in sourcing an appropriate factory in China. Mr Kohler submitted that the plaintiff was relying on the defendant’s expertise. If it was not intending to rely on the defendant, the plaintiff could simply have sourced the product from the factory itself.
[81] The plaintiff referred to the authorities on requirements in relation to fitness for purpose as it set out in Commercial Law in New Zealand at [13.5]–[13.5.5].8
That publication notes that courts readily find reliance in cases of retail sales, but where the sale is not at retail the matter is more complicated.9 In the case of Henry Kendall and Sons Ltd v Williams Lillico and Sons Ltd10 two of the parties were members of the same trade association. The issue was whether that ousted any possibility of reliance. The House of Lords held that that was not so and that the evidence indicated that there had been reliance. Indeed, the cases indicate that the
question in each case is whether a reasonable person in the shoes of the seller would realise that he was being relied on. If that inference can be drawn, the courts will hold that there has been reliance unless the seller can produce rebutting evidence.11
[82] In the case of Cammell Laird & Co Ltd v Manganese Bronze & Brass,12 a ship’s propellers were to be made and supplied according to the buyer’s specifications. To that extent the case can be considered analogous to the current one. The Court held that the propellers had to be fit for their purpose even though the seller was following the directions of the buyers to some degree. Therefore it is not necessary that the buyer totally and exclusively relies on the skill and judgement of the seller provided there is reliance to some substantial extent.
[83] In this case, there was a detailed specification and there was no issue that, had the pipes been manufactured to that specification, they would have been fit for the purpose of use in a hydro damn. The plaintiff did however rely on the defendant’s skill and judgment in having the pipes manufactured. Mr Parker’s evidence was that the plaintiff knew the defendant had a number of contacts in China and worked with the mills there regularly. In contrast, the plaintiff did not employ anyone in China.
[84] The House of Lords in Ashington Piggeries Ltd v Christopher Hill Ltd13
upheld the doctrine of partial reliance, analysing the facts in that case as to the fields
8 Commercial Law in New Zealand (online looseleaf ed, LexisNexis).
9 At [13.5.3].
10 Henry Kendall & Sons v Williams Lillico & Sons Ltd [1969] 2 AC 31 (HL).
11 Ashington Piggeries Ltd v Christopher Hill Ltd [1971] 2 WLR 1051 (HL).
12 Cammell Laird and Co Ltd v Manganese Bronze and Brass [1934] AC 402 (HL).
13 Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441; [1971] 1 All ER 847 (HL).
of responsibility of the buyer and seller. In this case the field of responsibility of the defendant was to select a competent manufacturer to produce the pipes in accordance with the specification. The plaintiff relied on the defendant to perform its field of responsibility properly.
[85] The policy behind s 16(a) was described by Thomas J in B Bullock & Co Ltd v Matthews:14
Section 16(a) applies irrespective of fault. It is a loss distribution or allocation provision as between buyers and sellers and reflects the legislature’s policy as to who should bear unexpected losses. In general terms, where the purpose for which the goods are to be used is known to the seller and the buyer looks to the seller for the requisite expertise in ensuring that the goods are fit for the purpose for which they are supplied, the loss is to fall on the seller.
[86] For these reasons I am satisfied that there has been a breach of the statutory warranty in s 16(a) of the Sale of Goods Act.
[87] I am also satisfied that the goods were not of merchantable quality in accordance with s 16(b) of the Sale of Goods Act which provides:
(b) where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality.: provided that if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed.
[88] The proviso means that if the buyer examined the goods, there is no implied condition that the goods are of merchantable quality as regards defects which the examination ought to have revealed. In this case, the Contracts make the SGS inspection part of the defendant’s obligations and it therefore cannot be considered an inspection by the buyer, the plaintiff.
[89] The defendant’s position is that the pipes were of merchantable quality as
evidenced by the fact that there was a sale of some of the rejected pipes to a third party who intended to use them in a hydro scheme.
14 B Bullock & Co Ltd v Matthews CA265/98, 18 December 1998.
[90] The accepted definition of merchantable quality is that articulated by
Lord Reid in Henry Kendall & Sons v William Lillico & Sons Ltd.15 It means:16
“... that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description. This is an objective test: “were of no use for any purpose…” must mean “would not have been used by a reasonable man for any purpose…”
[91] Hardie Boys J observed in Finch Motors Ltd v Quin (No 2):17
…the basic concept that “merchantable quality” means commercially
saleable under the description by which the goods are sold.
[92] Applying that analysis to the facts I am satisfied that the goods were not of merchantable quality. The description of the goods must include that the pipes were coated. I am satisfied by the evidence of Mr Koelman that the goods were not commercially saleable under the description because they were not properly coated. The fact that they were sold in this condition to the third party does not in itself mean that they were of merchantable quality as coated pipes.
Were the pipes supplied in accordance with the time requirements in the Contracts?
[93] With the exception of the two matters referred to in paragraph [34], the re- supplied pipes conformed with the Contracts.
[94] The issue then is the timing of supply of the conforming pipes.
[95] The defence accepts that supply dates were incorporated into the Contracts but its position is that these were only ever estimates rather than firm dates. The defence then says that the estimated dates were subject to factors outside the defendant’s control. Furthermore the effect of specifying estimated delivery dates only meant that time was not of the essence. It was not an essential term of the Contracts, in the defence position, that the defendant delivered the pipes strictly in
accordance with the time frames indicated in the orders.
15 Henry Kendall & Sons v William Lillico & Sons Ltd, above n 12.
16 At 77.
17 Finch Motors Ltd v Quin (No 2) [1980] 2 NZLR 519 at 524.
[96] The statement of defence does not plead that there was any variation to either
Contract extending the delivery dates.
[97] The delivery date for the Esk Contract was specified in the defendant’s final offer as “Standard Delivery 10 – 12 weeks from the date of order to arrival at port of destination”.
[98] The delivery date for the Amethyst Contract was that specified in the defendant’s email on 24 January 2012, “delivery: 45 days plus shipping (approximately four weeks)”.
[99] I accept the plaintiff’s analysis. There is nothing in the contractual documents to support the defendant’s contention that the delivery dates were always estimates only. At no time did the defendant seek a variation of either Contract to extend the delivery date. The only reference to an estimate related to the shipping date for the Amethyst Contract.
[100] In any event, this was not a case of there being slight slippage only in delivery times. Pipes which complied with the contractual specifications were not delivered to the plaintiff until October/November 2012. Even Mr Roberts, defence witness, conceded that a delivery date some 26 weeks after the date of the contract was not within the reasonable parameters of a contractual delivery date of “10 – 12 weeks.”
[101] The defence points out that the Contracts did not stipulate that time was of the essence. Such a provision is necessary where a party is seeking to cancel a contract.18 That was not the case here. The plaintiff required the defendant to perform the Contracts. In any event it was made clear to the defendant at the meeting in July 2012 that delivery dates were critical. The defendant knew that the plaintiff was under considerable pressure from Trustpower and Westpower to deliver
complying pipes. The defendant was on notice of the critical dates required by
Trustpower and Westpower. It did not negotiate extended delivery dates. The
18 Hunt v Wilson [1978] 2 NZLR 261 (CA).
defendant supplied the pipes outside of the critical dates and in any event well outside any reasonable delivery period required by the Contracts.
What loss did the plaintiff suffer and is it recoverable?
Did the plaintiff behave reasonably in mitigating its loss and incurring the claimed damages?
[102] The plaintiff was required to take reasonable steps to mitigate its loss. Whether it did so is a question of fact judged by the circumstances of the case. The onus of proving that the plaintiff has failed in this duty lies on the defendant being the party in breach of contract.19
[103] There is no pleading to the effect that the plaintiff failed in its duty. In any event I am satisfied on the evidence that the plaintiff acted reasonably. The plaintiff investigated the costs of having all the pipes recoated in New Zealand. That cost was prohibitive. It kept the defendant fully informed. It arranged for some of the pipes to be recoated in New Zealand in order to comply with its customer’s critical dates. As matters transpired more pipes than originally envisioned had to be recoated in New Zealand. The defendant complains it was unaware of that. I am satisfied however that the plaintiff acted reasonably in circumstances where the defendant was not only in breach of the Contracts but failed to deliver replacement pipes in accordance with the timetable of critical dates of which the defendant was aware. Provided that the mitigating steps are reasonable, loss is recoverable even if
additional loss is suffered.20
[104] The plaintiff’s evidence, which was essentially unchallenged, was that it negotiated with Trustpower and Westpower for extensions to the delivery dates and on a staggered basis in order to mitigate its loss. The defendant’s witnesses accepted
that the supply of materials is critical in construction contracts.
19 Payzu Ltd v Saunders [1919] 2 KB 581 (CA).
20 Andros Springs (Owners) v World Beauty (Owners) [1970] P 144 (CA) at 156.
What is the effect of the inspection of the Amethyst re-supplied pipes in China prior to shipment?
[105] The re-supplied Amethyst pipes were inspected by Mr Elder prior to the shipment from China. The plaintiff claims the cost of this inspection. Mr Elder identified the fact the pipes had been painted right to the end. He informed the plaintiff of this. The plaintiff asked Westpower if they would accept them in that state. Before the plaintiff had received a reply from Westpower, the pipes were to be shipped. The plaintiff therefore elected to have the pipes shipped in their non- conforming state and to have the problem rectified in New Zealand should Westpower require it. The defendant says that the plaintiff should not recover the cost of that remedial work (some $8,500), because the plaintiff accepted the state of the pipes before they left China. The defendant says that it would have been relatively easy for the mill in China to remove the coating.
[106] I am satisfied that the plaintiff acted reasonably in authorising the shipment of the Amethyst replacements pipes notwithstanding its awareness that they did not conform with the Contract. By the date of shipment the plaintiff had not heard from Westpower as to whether it would accept the pipes in that state or not. It was a reasonable decision in my assessment to authorise the shipment. Holding the shipment back in China would have further delayed the supply date of the pipes in circumstances where they may have been acceptable to the plaintiff’s customer. The plaintiff is therefore entitled to recover the cost of having to strip the ends of the pipes.
[107] I also accept that the defendant is liable for the cost of having the welds gound on some of the resupplied Esk pipes. While it was not a requirement of the contract in terms, the dimensions of the pipes and the tolerances were specified in the contractual documents. I am satisfied from the evidence that the reason for that was to allow the pipes to be fitted together. The reason the welds had to be ground was so the pipes could fit together. In other words, the resupplied pipes did not comply with the specification. The defendant is therefore liable to the plaintiff for the plaintiff’s loss in having to rectify that breach. The position is strengthened by the evidence that the pipes originally supplied did comply in this respect.
Is the plaintiff entitled to be reimbursed for the liquidated damages paid to
Trustpower and Westpower?
[108] The defendant says that liquidated damages are not recoverable because they are too remote. The defence position is that the plaintiff took the risk of agreeing to liquidated damages in its contracts with Trustpower and Westpower. The losses are consequential and the only direct loss was money paid for the pipes. The defendant had no knowledge of the terms of the contracts between the plaintiff and Trustpower and Westpower. Those losses were not foreseeable.
[109] McGregor on Damages states that:21
... probably one the of the most frequent types of recoverable expenditure involves money paid by the claimant in proceedings with a third party which have been brought about by the defendant’s breach of contract. Thus compensation paid to a third party, whether under a court judgment or by way of settlement, has been recovered as damages against the defendant, as where the third party is a sub-buyer of goods sold by the defendant to the claimant...
[110] The author describes the question of remoteness as being: 22
…whether, in the case of breach of contract, it was in the contemplation of the parties that the now claimant would become involved in a legal action with a third party.
[111] In Contigroup Companies Inc v Glencore AG, the Court found that these damages were within the reasonable contemplation of the parties.23 Contichem sold a cargo of butane to the Glencore. Glencore resold the cargo to Glencore International which in turn resold it to the third party, Petrochina. Under the terms of the sale contract (and the sub-sale to Glencore International) the cargo should have reached Wenzhou in Eastern China by 10 June 2002; and under the sub-sale contract
with Petrochina, delivery was to take place by 12 June. In fact the cargo reached
Wenzhou on 15 June. Petrochina claimed against Glencore International in respect of the delay, and that claim was settled for US$172,899.67. Glencore in turn claimed
21 Harvey McGregor McGregor on Damages (18th ed, Sweet & Maxwell / Thomson Reuters, London, 2009) at [2-031].
22 At [17-057].
23 Contigroup Companies Inc v Glencore AG [2004] EWHC 2750 (Comm), [2005] 1 Lloyd’s Rep
241.
damages against Contichem (which it could use to set off against Contichem’s claim
for the unpaid balance of the price of the cargo).
[112] The Judge held that Glencore could recover these damages from Contichem. His reasoning is helpful and worth setting out in full:
[80] … The question is whether Glencore can recover damages for having compensated Petrochina for this loss.
[81] The position is in my judgment is as follows:
(a) Contichem knew that Glencore was a trader and that it would probably resell Lot 2. Such a resale might be to another trader, to a retailer, or indeed to an end user.
(b) Glencore did resell Lot 2, to Glencore International which in turn sold it to Petrochina, a retailer.
(c) On the facts of this case, the interposition of Glencore International is of no consequence. The sale to it was on terms back to back to the sale contract, and any claim for a breach of contract against Glencore International caused by a breach of contract by Contichem would inevitably be passed back to Glencore. The position is the same as if Glencore had resold direct to Petrochina.
(d) Given that Glencore was likely to resell Lot 2, the parties must have contemplated that if Contichem delivered late, that was likely to put Glencore in breach on any sub-sale (for which purpose, for the reasons given, I include the sub-sale to Petrochina).
(e) There was no available market on which Glencore could acquire a substitute cargo. If it is necessary to do so, I find that it must have been within the contemplation of the parties to the sale contract that, if the nominated vessel was late, Glencore would be unable to acquire substitute goods. The parties certainly must have realised when they made the sale contract that, if Glencore found itself looking for 21,000 metric tons of butane at the port of discharge because the nominated vessel had failed to arrive in time it would have precious little chance of finding them. But even on the basis that Glencore would be given, as it was, 12 or 13 days' warning of the breach, the parties must have appreciated Glencore would probably be unable to find substitute butane. Indeed, it is noticeable that Contichem does not seem to have made any attempt itself to find a substitute cargo to enable it to comply with the sale contract. Doubtless it knew then, and earlier at the time of the sale contract, that such an attempt would be fruitless.
(f) It follows that it must also have been in the contemplation of the parties that, if delivery was delayed, Glencore would have to compensate a sub-buyer for any loss (including of course loss of profit) it suffered as a result of that delay.
(g) Glencore (albeit through Glencore International) did have to compensate such a sub-buyer.
(h) The compensation in question was that provided for in the settlement. That compensation was wholly referable to the delay, and the settlement itself was reasonable.
[82] Accordingly, Glencore is in my judgment entitled to damages in the sum of US $172,899.67 and to set off those damages against Contichem's claim for the balance of the purchase price of Lot 2.
[113] In this case, the defendant’s knowledge was even more concrete than that of Contichem. The defendant was aware at the time of the Contracts that the plaintiff was supplying the pipes to Trustpower and Westpower for use in hydro schemes. The defendant also knew that the plaintiff’s agreements with Trustpower and Westpower contained strict time requirements. Although Mr Carajannis said he was surprised when told at the meeting in July 2012 that the plaintiff was liable for liquidated damages, the circumstances of the case causes me to question his stance.
[114] In any event, it is not necessary that the defendant knew that the plaintiff was liable for liquidated damages. Given the circumstances, the defendant must have known, at the time of entering the Contracts, that if the pipes were delivered late, or arrived in an unacceptable condition so that delivery of pipes that accorded with the specification was late, it was likely to put the plaintiff in breach of its contracts with Westpower and Trustpower. It must also have been within the contemplation of the parties, given the scale of the order, that the plaintiff would be unable to acquire substitute pipes in time to satisfy the time requirements.
[115] It follows that it was within the reasonable contemplation of the parties that, if the defendant did not deliver pipes that accorded with the specifications within the time requirements of the plaintiff’s contracts with Westpower and Trustpower, the plaintiff would be in breach of those contracts and would have to compensate Westpower and Trustpower for any loss they suffered as a result of the delay.
[116] The liquidated damages claimed by the plaintiff total $156,000. Liquidated damages are imposed in a contract to remove the need to prove actual loss. They are payable provided they are not a penalty. They must be a genuine pre-estimate of a loss most likely to flow from the breach. The defendant has not claimed that the
losses were not a genuine pre-estimate. There is also no dispute that the plaintiff paid those damages to the power companies.
[117] No authorities were cited to the effect that a party is not entitled to claim liquidated damages to which it is subject in a case such as this. There seems to be no reason in principle why the defendant should not be required to compensate the plaintiff for having to pay these liquidated damages. I therefore find that the liquidated damages are not too remote and can be recovered from the defendant by the plaintiff.
Are any of the losses claimed excluded by the terms of the Contracts?
[118] I have already found that the Terms and Conditions were not incorporated into the Contracts.
[119] The only qualification on performance is that relating to the Esk Contract referred to in paragraph [58] above. That makes reference to a force majeure provision defining it as “any force” beyond the control of the defendant that impacts on the successful completion of the Contract. The correct interpretation of this provision was not addressed by counsel. The defence did not seek to rely on it. In any event the correct interpretation must rest on the accepted meaning of “force majeure” and the ordinary meaning of “force” to the extent that the clause attempts to define force majeure. The ordinary meaning of “force” is “power; exerted
strength or impetus; intense effort”.24
[120] The simple fact of non-performance by the mill in China does not, on any analysis, fall within this category.
[121] For these reasons I am satisfied that there are no losses excluded by the terms of Contracts themselves.
[122] I have reviewed the plaintiff ’s schedule of losses and I am satisfied that they
are all recoverable from the defendant for its breach of contract. The losses fall under the following headings:
24 The Concise Oxford Dictionary (9th ed, Clarendon Press, Oxford, 1995).
(a) Recoating of lengths of original pipes in New Zealand including transport and storage costs.
(b) Repairing re-supplied pipes. (c) Liquidated damages.
[123] The only claimed loss which I exclude is that associated with Mr Elder’s inspection of Amethyst replacement pipes prior to the shipment from China. The plaintiff chose to incur that cost. It is not a direct consequence of breach or reasonably foreseeable. It is excluded.
Decision
[124] For the foregoing reasons, judgment is given for the plaintiff in respect of the defendant’s breach of contract. The losses claimed are awarded to the plaintiff except for the cost of Mr Elder’s inspection.
[125] There would seem no reason to depart from the general principle of awarding costs to the plaintiff on a 2B basis. The defendant is also liable for costs on the discontinuance of its counterclaim. If there is any issue leave is given for the plaintiff to file and serve a memorandum within 28 days of this decision with any
response from the defendant seven days thereafter.
Thomas J
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