Webster Thompson Ltd v J G Pears (Newark) Ltd & Ors [2009] EWHC 1070 (Comm)

2007 Folio 966[2009] EWHC 1070 (Comm)Date Date: 18 MAY 2009
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Before
HIS HONOUR JUDGE MACKIE QCSitting as a Judge of the High Court
Between
WEBSTER THOMPSON LIMITEDClaimantJ G PEARS (NEWARK) LIMITEDDefendantOMEGA PROTEINS LIMITEDThird Party
B E T W E E N:
NORTHERN COUNTIES MEAT LIMITEDFourth Party
Mr Simon Picken QC and Mr Benjamin Parker (instructed by Plexus Law) appeared for DefendantMr Jeremy Stuart-Smith QC and Mr James Purchas (instructed by Dewey & LeBoeuf) appeared for Third Party
JUDGMENT
[1]These are claims for damages for breach of contract against the background of the European legislation enacted to regulate the handling and classification of animal by-products following the BSE/CJD crisis of the late 1990s. The parties are all involved in the trade of animal by-products, referred to as ‘materials’, and in some respects are in a chain. The Claimant (“Webster Thompson”) obtained summary judgment against the Defendant (“Pears”) in this court on 13 May 2008. Pears contracted to purchase Category 3 materials, which may be rendered into animal fats and bone meal, from the Third Party (“Omega”) who in turn purchased these from the Fourth Party (“NCML”). Pears claims that Category 1 material, which has very restricted commercial uses, was supplied instead. The court is concerned with Pears’ claim against Omega but also, if it succeeds, with Omega’s claim against NCML, a company which is in liquidation but whose liabilities may be enforceable against insurers.[2]A trial that was due to last four days finished in two days on 23 and 24 March 2009 because the issues narrowed at the time of the Pre-Trial Review and the parties recognised that there was little if any dispute between them about the primary facts before the Court, although much disagreement about their evidential significance. Background-Legislation[3]These claims arise out of the supply of animal by-products immediately after the lifting of the EU ban on the export of beef in May 2006. The legislative position at that time is helpfully summarised by Mr Stuart-Smith QC and Mr Purchas in their skeleton argument, in terms which Mr Simon Picken QC and Mr Parker for Pears adopt, as follows:- “As part of the price for the lifting of the export ban on beef, the UK agreed that its definition of Category 1 materials should become more rigorous and fall in line with other EU Member States so that it now included materials from the vertebral columns of bovine animals that were more than 24 months old rather than over 30 months old as had obtained previously. The relevant statutory provisions are as follows: a) EC Reg. 1774/2002 provides that Category 1 material includes animal by-products which are specified risk material or mixtures of Category 1 material with either Category 2 material or Category 3 material or both; b) Specified risk material is defined at Article 2 (1) (o) as having the meaning given to it in Annex V of EC Reg. 999/2001; c) In May 2006 the transitional provisions at Annex XI to EC Reg. 999/2001 remained in force. They provided that specified risk material included materials from the vertebral columns of bovine animals that were more than 24 months old; d) Before EC Reg. 657/2006 came into force the UK enjoyed a derogation from this provision which allowed the use of vertebral column derived from bovine animals under the age of 30 months; e) EC Reg. 657/2006 amended Annex XI to EC Reg. 999/2001 such that there was no derogation from the limit to 24 months applicable in other Member States; f) On 3 May 2006 the Transmissible Spongiform Encephalopathies (No. 2) Regulations 2006 (2006/1228) (“the TSE (No. 2) Regs”.) came in to force. These established the regulatory regime within the United Kingdom. The Category into which animal by-products fell was defined by the relevant statutory provisions and was not susceptible to re-categorisation or re-definition by the minister, DEFRA or anyone else either pursuant to an exercise of discretion or otherwise.”[4]EU Regulation 1774/2002 lays down detailed rules for the collection, transport, storage, handling, processing, use and disposal of animal by-products that are not intended for human consumption. By Article 2(1) materials are divided into three categories.[5]Category 1 is the most stringently regulated, Category 3 the least. In outline: - Category 1 material includes all specified risk material (“SRM”). It must be labelled “for disposal only”, and must be indelibly colour-stained bright blue or green in order to assist its identification and tracing through a supply chain. It has only limited commercial use: unless incinerated and burnt as fuel, it must be buried in landfill. It is not permitted to enter any food chain, whether human or animal. - Category 2 products include those which would have been fit for human consumption but for some reason no longer are, for example because they became soiled in a cutting plant. They are not relevant to this case. - Category 3 material is defined in Article 6. It should be labelled “not for human consumption” but can be used to manufacture other products, including tallow and pet food. Category 3 material is not stained.[6]Features of EU Regulation 1774/2002 relied on by the parties include the following: - Article 1(1)(a) emphasises the breadth, scope and application of the Regulation, which governs “the collection, transport, storage, handling, processing and use or disposal of animal by-products, to prevent these products from presenting a risk to animal or public health”. - Article 3(1) lays down the general requirement that “Animal by-products, and products derived therefrom, shall be collected, transported, stored, handled, processed, disposed of, placed on the market, exported, carried in transit and used in accordance with this Regulation”. - The Regulation applies not merely to the animal by-products themselves but also to the places concerned in their handling and storage, which must be appropriately licensed. Article 6(3) provides that the intermediate handling and storage of Category 3 material shall take place only in Category 3 intermediate plants approved in accordance with Article 10. Article 17(1) provides that a Category 3 processing plant (such as Pears’ Market Harborough facility) “shall be subject to approval by the competent authority”, such approval only being given if the plant satisfies the conditions stipulated in Article 17(2). Accordingly, all material originating from a Category 3 approved plant must lawfully be Category 3 and not anything else. - Article 17(3) provides that “Approval shall be suspended immediately if the conditions under which it was granted are no longer fulfilled”. - Paragraph 4 of Chapter 1 provides that “Only Category 3 material … that has been handled, stored and transported in accordance with Articles 7, 8 and 9 may be used for the production of processed animal proteins and other feed material”.[7]Article 20(1)(i) of the Regulation states that the “competent authority” in each Member State shall be responsible for ensuring compliance with the requirements of the Regulation. In the United Kingdom this was the State Veterinary Service (“SVS”), which was then an executive agency of the Department for Environment, Food and Rural Affairs (“DEFRA”). In this case SVS and DEFRA traced the allegedly defective material from NCML through to Pears and downgraded the product from Category 3 to Category 1.[8]There is no means of distinguishing between Category 1 and Category 3 material except through the documentation provided down the chain and the colour staining which should be applied at the cutting plant if it is Category 1. Unsurprisingly failure to comply with the Regulation constitutes a criminal offence.

Background- the facts

[9]NCML processed animal carcasses at its cutting plant in Sunderland which were consigned as Category 3 material to Alba, a sister company of Omega. Alba was licensed to process Category 3 material only and consigned it to Pears at its plant in Penistone near Sheffield. Material was transferred within Pears from Penistone to the rendering plant in Market Harborough which is licensed for Category 3 only. Once processed it was sold as bone meal to pet food manufacturers and as tallow to Webster Thompson and others.[10]This case concerns 28 deliveries totalling just over 220 metric tonnes of material certified as Category 3 which took place between 3 May and 8 July 2006. As 3 May was the date on which EC Regulation 657/2006 came into force, material containing vertebral column from animals aged over 24 months was thenceforth in Category 1. It seems that NCML did not act promptly to put the change into effect. A picture of how this came to light emerges from material obtained by Omega’s solicitors under the Freedom of Information Act 2000. Some of these documents have been redacted but when set in context and combined with material available from the parties the relevant facts emerge.[11]On 8 June 2006 the Meat Hygiene Service apparently “identified a problem” at NCML and dealt with it by giving a verbal warning. On 19 June 2006 the SVS inspected Alba’s premises and concluded that material consigned as Category 3 from NCML may have contained vertebral column from animals aged over 24 months. Further enquiries by the SVS concluded that NCML had not made arrangements to segregate vertebral column as required by the new legislation. Following the visit by SVS to Alba and Omega, Mr Pickup of the SVS wrote to companies on 21 June about a considerable number of issues including, as regards Omega “Blue stain needs to be applied to any materials downgraded to Category 1”. There was a further visit and an internal SVS e-mail of 14 July records; “I was contacted by yesterday. Northern Counties has been visited. They have not been segregating the >24months vertebral column from the column <24 months. It has all been consigned as category 3 material. They have now been enlightened as to the errors of their ways. The column has been through the category 3 intermediate plant and onto for processing into meat meal for petfood use…”[12]A later report to Mr Bradshaw, the relevant Minister at DEFRA on 19 July 2006 includes the following:- “5. On the 19 June 2006, during a routine SVS inspection of an animal by-product intermediate plant (Alba, Swalesmoor), it was suspected that material received as Category 3 (low risk) material from a cutting plant (Northern Counties Ltd) may have contained vertebral column from animals over 24 months of age thus making it Category 1 animal by-product. Further investigations confirmed that no arrangements had been made at the cutting plant since 2 May 2006 to segregate vertebral column from animals over 24 months from vertebral column from younger animals and all was being consigned in error as Category 3 material. Procedures at the cutting plant have now been rectified and the plant has been compliant since at least 11 July 2006. 6. Tracings are in progress and a full report is being prepared. It has been confirmed so far that all the material consigned by the cutting plant between 2 May and 11 July has now passed through the intermediate plant chain to a processing (rendering) plant, redacted produces processed animal protein (PAP), the majority of which is used for petfood (with remainder going for incineration) and tallow which is sold to brokers.”[13]The redacted name is clearly Pears. SVS telephoned Pears on about 18 July and on 27 July wrote in terms which included the following:- “This letter confirms that on July 18 2006 DEFRA AHWDG (BAP Division) required that Meat and Bone Meal and Tallow produced at the above plant between May 3 and July 16 2006 inclusive not be consigned as Category 3 but be sent to a rendering plant which is approved under Regulation EC 1774/2002 to render Category 1 animal by-products or to an incinerator approved in accordance with that Regulation.” As Mr Corner, Pears’ Site Manager at Market Harborough says in his statement, the plant continued to receive and separately process and store material both for bone meal and tallow. Until DEFRA cleared the product it would be regarded as Category 1 material and could only be dealt with on that basis. Market Harborough thus remained as a Category 1 facility until the SVS said otherwise. The report to Mr Bradshaw described the proposed corrective action as including tracing “all the bulk supplies of PAP and tallow and serve notices requiring the material to be disposed of as SRM”. The SVS issued an emergency instruction on 20 July 2006 which, in relevant part, read as follows:- “ACTION FOLLOWING TRACING OF SPECIFIED RISK MATERIAL TO CATEGORY 3 PROCESSING (RENDERING) PLANT … MBM or tallow produced at … between 2 May and 11 July 2006, are considered as derived from Category 1 material … tallow derived from Category 1 material must not be marketed as if it were derived from Category 3 material … … batches of tallow or MBM produced by … between 2 May and 11 July 2006 must not be placed on the market outside, or exported from, the United Kingdom as Category 3 tallow, Category 3 MBM or as Category 3-derived finished products eg pet food, because they are derived from Category 1 material/SRM.” “ACTION FOLLOWING TRACING OF SPECIFIED RISK MATERIAL TO CATEGORY 3 PROCESSING (RENDERING) PLANT … MBM or tallow produced at … between 2 May and 11 July 2006, are considered as derived from Category 1 material … tallow derived from Category 1 material must not be marketed as if it were derived from Category 3 material … … batches of tallow or MBM produced by … between 2 May and 11 July 2006 must not be placed on the market outside, or exported from, the United Kingdom as Category 3 tallow, Category 3 MBM or as Category 3-derived finished products eg pet food, because they are derived from Category 1 material/SRM.”[14]Once SVS was satisfied that there was no more contaminated material in the supply chain it confirmed, in a letter of 25 July 2006 that animal protein and tallow produced at Market Harborough on or after 17 July could be classified as Category 3. That confirmation did not however apply to material supplied before 17 July which Pears says had to be treated as Category 1 thus causing it the losses which it claims from Omega in this action. The incident ended with a press release published by the Foods Standards Agency on its website on 15 August 2006:
“Domestic SRM breach The FSA received a report on 17 July that SRM vertebral column from cattle aged 24 to 30 months had been discovered at Alba Proteins Ltd in Halifax. The material had been received from Northern Counties Meat Group Ltd, approved cutting plant. Investigations revealed that Northern Counties had not been segregating and staining the material and disposing of it as Category 1 animal by-product as required by law since May 2006. Instead, they had been dispatching this material as low risk Category 3 animal by-product. Alba Proteins was not responsible for the breach”
.

Evidence

[15]As I have already indicated there was little difference between the parties about the facts before the Court although Omega contends that these are insufficient to enable Pears to establish liability. Further this important industry is a close knit community of companies that worked in harmony together and continues to do so. Pears recognises that its claims do not arise from any commercial fault of Omega and the constructive atmosphere of the hearing reflected this.[16]The witnesses for Pears were Mr Jeff Pears, Managing Director, Mr Alistair Collins, Operations Director and Mr Brian Corner to whom I have already referred. The only witness for Omega was Mr Danny Sawrij the Managing Director of its holding company Leo Group Limited. As so much is uncontroversial I refer only to some points of difference raised in cross examination.[17]Mr Pears was cross-examined. He accepted that his premises were only licensed to store Category 3 and that if any Category 1 material was mixed in it would all be degraded and treated as Category 1. He was aware of the dangers of prosecution. He did not accept that notification by DEFRA was given only to others and not to him because he recalled a telephone call on 18 July from Alistair George of DEFRA stating that Pears had received Category 1 material and should stop despatching. As far as he was aware DEFRA were confirming that they thought the material was Category 1.[18]Mr Collins was briefly cross-examined about the perception in his witness statement of the effect of re-categorisation of material but that issue was left for submission.[19]Mr Corner accepted in cross-examination that on 17 July DEFRA were saying that Pears were to hold the materials on site and not release them until the potential problem had been sorted out. He understood that DEFRA were still making further inquiries. He was asked about his notebook and entries such as “most of day sorting out DEFRA”. It emerged that his frustration with DEFRA was because he felt that he was not getting a decision about what to do with the material that was potentially Category 1.[20]Mr Sawrij was not cross-examined.

Issues between the parties

[21]Leaving aside the points that fell away or were abandoned before the start of the trial, the essential differences between the parties are these. Pears submits that the material in question was Category 1 not Category 3 and that this was a breach by Omega of its contractual duties to Pears. Pears contends that there was an express term of the contract that material supplied to it by Omega would be Category 3 and that the supply of Category 1 would be a breach of contract. By the start of the trial Omega admitted the existence of that term but denied there was a breach. Pears contends that if no breach of the express term is established Omega is liable under one or both of two terms implied by the Supply of Goods and Services Act 1982 (as amended by the Sale and Supply of Goods Act 1994) (“The Acts”). It is not disputed that the contracts in this case fell within the Acts as being ones “under which one person transfers or agrees to transfer to another the property in goods”. The implied terms relied upon are first that “the goods supplied under the contract are of satisfactory quality”, under Section 4(2) and secondly that the goods supplied under the contract are reasonably fit for their purpose under Section 4(5).[22]Omega contends that while it is clear that DEFRA “intervened” there is no sufficient evidence that it supplied Category 1 materials rather than the Category 3 contracted for. Omega criticises the absence of direct evidence and contends that the multiple hearsay produced by Pears is not of sufficient weight to justify a conclusion that there has been a breach of contract. Omega accepts that the Acts of 1982 and 1994 apply to these transactions but denies that there has been breach of either term relied on. Omega contends that the statutory requirement of “satisfactory quality” relates to the intrinsic quality and condition of the goods, not to the considerations that arise in this case. Omega contends that the implied condition of reasonable fitness for purpose does not apply because this was not a case where the transferee made known to the transferor any particular purpose for which the goods were being acquired or where the transferee reasonably relied upon the skill or judgment of the transferor.

Express term - submissions of Pears

[23]Mr Picken submits that there is ample evidence that the material actually supplied by Omega to Pears was Category 1. He relies upon the SVS documents to which I have already referred and to other similar material. The report to Mr Bradshaw on 19 July 2006 records that the material had been consigned in error as Category 3 in contravention of the new rules on SRM and should be disposed of as Category 1 animal by-product. An SVS email to its EU colleagues dated 21 July 2006 records that the material in question in this case was consigned through one or more Category 3 intermediate plants and was to be disposed of as Category 1 material. Indeed DEFRA’s letter to Omega’s solicitors of 21 April 2008 records that NCML failed to identify the material and to dispose of it as Category 1 and instead treated it as Category 3 in contravention of the relevant Regulation.[24]Pears claim that Omega itself recognised the reality in its letter to NCML of 19 July 2006. This letter states that “bones collected from your site should have been consigned to us as Category 1 material from 3 May 2006 … you made us aware that the bones from 11 July 2006 have been downgraded to Category 1 and as a result we now handle the bones in accordance with the treatment of Category 1 material …”. No other parties in the chain have suggested that the position was otherwise and indeed NCML when taxed with the matter by Omega replied on 4 August 2006 in terms which did not deny the fact. NCML emphasised what it saw as incompetence within DEFRA and the Food Standards Agency and its view that the problem was a wide-spread one not experienced by NCML alone.[25]Pears emphasises that no direct evidence of the composition of the consignments can be made available given the impossibility of distinguishing Category 1 material from Category 3 except by reference to the documents and to the colour staining where that applies. Pears contends that, alternatively, the material should be treated as Category 1 because of the steps which SVS took to downgrade it. Mr Picken relies upon what are accepted to be DEFRA’s wide-ranging powers under the Regulations to reclassify any facility from Category 3 to Category 1 and to reclassify the material itself.

Express term – submissions of Omega

[26]Omega points to the absence of any direct evidence that NCML supplied Category 1 to Omega and that Omega passed it on to Pears and warns that the court should be slow to find liability based only upon multiple levels of hearsay. Mr Stuart-Smith draws attention to the provisions of the Civil Evidence Act 1995 and to the notice requirements which have not been observed in this case. Whatever the practical difficulties of obtaining direct evidence in this case there was no reason not to call, for example, Mr Pickup or other witnesses from DEFRA, SVS or NCML. There was, he submits, a “creep” of perception and orthodoxy as matters developed on the papers and shading of evidence once the problem moved up to the Minister. Although Omega can no longer contend that Mr Pears was not the recipient of any information from DEFRA and additional testimony became available from Mr Collins and Mr Corner, the available material is beset with what Pears “understood” from or “were informed by” others. While DEFRA’s intervention persuaded Pears to treat material as if it were Category 1, Pears itself undertook no investigations.[27]Omega suggests that if there really was an actual as opposed to a potential breach the sensitivity of the issue would have caused the authorities to move much quicker. The Meat Hygiene Service visited NCML and “identified a problem” on 8 June but took no further action and it was not until 19 June that the SVS visited Omega and started to suspect the presence of Category 1 material. Mr Stuart-Smith analyses the documents in some detail to suggest that while there was suspicion of the presence of Category 1 materials there was no evidence that it existed. He cites an early draft of a memo of 19 July referring to it being “suspected” that the material received as Category 3 became Category 1 and to the addition of the words “may have” before “contained’ in the next version of the draft. There are other examples of emails referring to the problem in terms of possibility and suspicion rather than certainty. Omega contends in effect that the “creep” from possible suspicion to apparent certainty was not justified by any evidence available to the court.[28]Mr Picken responded by pointing out that the evidence before the court necessarily reflected the case being made on Omega’s behalf before it modified its position around the time of the Pre-Trial Review and the absence of direct evidence was mitigated by the more recent witness statements of Mr Collins and Mr Corner. Pears was under no moral obligation to carry out its own investigations and no more able to do so than any of the other parties, none of whom, notably Omega, took that step. No-one has ever suggested that there was anything incorrect, irresponsible or capricious about the way in which DEFRA approached the whole issue. The suggestion that DEFRA got wind of this issue in May is misconceived and the appearance of delay from 19 June 2006 until action was taken in July was inevitable given the need for DEFRA to investigate and establish the position. Pears submits that the creep was the result of developing evidence not of suspicion being hardened.

Express term – conclusion of the court

[29]I accept that a court should be careful not to determine the central issue in a case on the basis of hearsay evidence alone. Mr Stuart-Smith relied upon the decision of the Court of Appeal in Welsh v Stokes & Another [2008] 1WLR 1224 which was concerned with a case where there was hearsay evidence about what an unidentified motorist had told a witness about a road accident involving a horse. After considering the relevant factors under the Act and under Section 4(2) Lord Justice Dyson, in a judgment with which the other members of the court agreed, said at paragraph 23:- “The decision what (if any) to give to hearsay evidence involves an exercise of judgment. The court has to reach a conclusion as to its reliability as best it can on all the available material. Where a case depends entirely on hearsay evidence, the court will be particularly careful before concluding that it can be given any weight. But there is no rule of law which prohibits a court from giving weight to hearsay evidence merely because it is uncorroborated and cannot be tested or contradicted by the opposing party. I do not consider that the statements in the authorities relied on by Miss Rodway in her skeleton argument support such an extreme position”.[30]In the ordinary way the issues of importance, if controversial, will generally be proved by oral evidence and there is some force in what Mr Stuart-Smith says about the absence of witnesses. There is no reason why an official from DEFRA or SVS should not have given evidence to add some flesh to the bones of the documents and to provide more detail about quite what was found in the course of the inquiries. To some extent Pears has taken a risk. On the other hand no-one, including parties with a great deal at stake, has questioned the conclusions reached by DEFRA and the SVS. The documents need to be read as a whole and in context and to be seen for what they are, working papers being generated for important decision making by busy experts and officials not carefully drafted expositions suitable for detailed textural analysis. The picture the documents present is a clear and convincing one. No-one had any motive to exaggerate or misrepresent this incident, quite the reverse given the sensitivity of the matter. Similarly no-one within DEFRA or SVS had any incentive to under-play it given the concern that any public servant would have about the risk of allowing the terrible affliction of CJD to spread within the community. The position would have been different if material had been discovered which might have undermined the accuracy of some part of the clear record presented by the documents. This material could have been deployed to cross examine Mr Pickup or some other SVS representative. But there is no such material nor any sign that it might exist and Omega, unsurprisingly, does not seem to have taken great steps to find it. I see nothing surprising in what was suggested to have been delays or a lack of urgency in the process and these points do not begin to build a foundation for the contention that the events were less serious than is now being suggested.[31]The record of the documents over a period of time supported by the recollections of the witnesses who have been produced is a reliable enough body of evidence to enable Pears to succeed in showing that it received Category 1 materials when it had a contractual right to insist on Category 3. It is possible that the material was not Category 1 and the position may not be established beyond doubt, but on a balance of probabilities the position is clear. The accumulation of hearsay and circumstantial evidence and its application to the series of events in this case is telling in a way which similar material would not have been in the evaluation of a sudden motor accident such as Welsh where the best evidence is usually that of the eyes that see it. The court is accustomed in commercial cases to placing reliance upon the truth of written records of events where there has been no suggestion of fraud, incompetence, bias or of a motive to distort on the part of those who compile them. Indeed it is a common complaint by judges in commercial cases that there has been too much, not too little, live witness evidence.[32]Taking the material as a whole it seems to me clear that as a result of NCML omitting to comply with the new law in time, vertebral column from animals over 24 months of age became mixed into low risk Category 3 material thus making it (the Category 3 material) a Category 1 animal by-product. Category 1 material was supplied by Omega, through no fault of its own, when Category 3 should have been delivered. This was a breach of a contract which caused loss to Pears who are entitled to damages as a result.

Alternative claim that material was regarded by the SVS as being Category 1

[33]Mr Picken put forward this alternative case in somewhat general terms both as a variant of the express term and as a suggested implied term. I indicated that I would be inclined to allow amendments to the pleadings to make this case since this would cause no surprise or embarrassment to Omega in a situation where the pleaded history on Omega’s side has been fluid. In the event it is not necessary for me to deal with this alternative claim.

Implied term as to satisfactory quality

[34]This claim would have arisen only if the Claimant had failed on its claim based on an express term. It is therefore unnecessary for me to address this issue but as it was the subject of extensive very able submissions from Counsel at the hearing I will deal with it briefly.[35]Section 4(2A) of the Act provides that “goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances”. Mr Picken says that a reasonable man would not regard material as being satisfactory where it was vulnerable to being downgraded as Category 1, particularly where the contractual description of the goods was specifically for Category 3 material. He submits that this is so regardless of the actual physical condition of the goods. Section 18(3) of the 1982 Act provides that “the quality of goods includes their state and condition”. This is identical wording to that found in the Sale of Goods Act 1979 and its predecessors which, he submits, has been found to apply not simply by reference to the goods themselves but to surrounding circumstances such as defects in the instructions or labelling, as was the case in Niblett Limited v Confectioners’ Materials Co Limited [1921] 3 KB 387. He equates the infringing trademark “Nissly”, a rip-off from Nestlé, and the risk in that case of exposure to seizure by customs authorities, with the vulnerability of the materials in this case. He supports his citation from the cases with reference to textbooks, particularly the views of Professor Sir Roy Goode in Commercial Law 3rd Edition 2004 who observes that “prior to the 1994 Act it had been held that the concept of merchantable quality was not confined to the physical state of the goods or their suitability for a normal purpose; for goods to be merchantable there also had to be no legal impediment to their being used for such a purpose and sold under the contract description …”.[36]Mr Stuart-Smith submits that the statutory requirement of satisfactory quality relates to the intrinsic quality and condition of the goods, unsurprisingly where the contract has identified the goods which are to be transferred by a clear and comprehensive description which carries a strong statutory or regulation-based implication. He relies upon observations in the judgment of Sedley LJ in Jewson v Boyhan [2004] 1 Lloyd’s Rep 505 (one of the few cases which address satisfactory as opposed to merchantable quality). The Lord Justice pointed out that Section 14(2) is directed principally to the sale of sub-standard goods. This means that the court’s principal concern is to look at their intrinsic quality using the tests in the sub-sections. Those tests may well require regard to be had to extrinsic factors but the issue is still the quality of the goods themselves.[37]Mr Stuart-Smith also submits that Niblett has to be seen in the light of Sumner Permain & Co v Webb & Co [1922] 1 KB 55 which he says indicates that Niblett was dependant upon the intrinsic state and condition of the goods and not on an abstract notion of saleability or non-compliance with legal requirements. Mr Stuart-Smith and Mr Purchas produced a helpful chart reviewing the subject matter of merchantable/satisfactory quality cases from the case of Gardiner in 1815 to Jewson in 2004. Interesting and instructive though that chart is, it does not as I see it do anything to undermine the view that the issue of satisfactory quality is not limited to the intrinsic quality of the goods.[38]I see no reason to confine “satisfactory quality” to the intrinsic quality and condition of the goods. In Jewson Sedley LJ was, as Mr Picken points out, distinguishing explicitly (see Paragraph 15) between the quality of the goods on the one hand and, on the other hand, factors peculiar to the buyer or to the purposes of the proposed use of the goods which would apply, if at all, to the question of fitness for purpose under Section 14(3). As one would expect, and as commentators such as Goode point out, the change from “merchantable” to “satisfactory” was intended to strengthen the fitness test, particularly to enhance consumer protection. I am unconvinced that the merchantable quality cases relied on by both sides are directly relevant to arriving at the meaning of satisfactory. I see no reason to read into the expression "satisfactory” a limitation only to intrinsic quality when Section 4(2A) of the 1982 Act prescribes the standard “that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances”. I recognise that the list in Section 14(2B) points to intrinsic matters but it is not exclusive (“the following (among others) are in appropriate cases aspects of the quality of goods”). In this case a reasonable person would regard the goods described as Category 3 as being unsatisfactory given the circumstances that the physical condition of the material supplied was in doubt and could not be ascertained and that it could only be handled, transported, stored and sold as the inferior Category 1.

Implied term of reasonable fitness for purpose

[39]Pears claims that Omega knew, because of long-standing dealing and knowledge of the industry, that Pears would process the material and sell it on as tallow and that only Category 3 material would suffice. Whatever the physical state of the material it was not fit for that purpose because it was liable to be condemned by the SVS as Category 1. Omega rejects this claim for two reasons. First Omega says that the fact that it had general knowledge of the nature of Pears’ business is irrelevant as what is required is that the particular purpose be made known expressly or by implication. The goods in this case were simply bought by description as Category 3. Secondly it is claimed that Pears did not rely upon Omega’s skill and judgement to select goods that were going to be fit for the particular purpose since Omega was merely aggregating material received from NCML not selecting it. For this reason reliance upon Omega’s skill or judgement was unreasonable or outside the section.[40]Pears responds that the attempt to draw a distinction between general and particular knowledge fails because of the decision of the House of Lords in Kendall v Lillico [1969] 2 AC 31 (see in particular Lord Wilberforce at 123 and Lord Pearce at 114). That case explains that “particular” is used not in contrast to “general” but more in the sense of “specified” or “stated”. As to reliance Pears cites the decision of Tomlinson J in Britvic Soft Drinks Limited v Messer UK Limited [2002] 1 Lloyd’s Rep p 20. The judge held that where there is a chain of contracts it is not necessary for the buyer to rely upon the skill and judgement of his immediate seller if he relies upon that of the person from whom the seller acquires the goods further up the line. So it is not relevant that NCML rather than Omega may have selected the material.[41]I prefer the position of Pears for the reasons Mr Picken gives. At Paragraph 24 of his statement Mr Sawrij of Omega volunteers “I understood that Pears would take the material and then process it into tallow - that is Pears’ principal business.” That seems to me to be an end of the point given the decision in Kendall and the fact that Irespectfully agree with the views expressed by Tomlinson J in Britvic. Had it been necessary to do so I would have concluded that Pears made known to Omega the particular purpose for which the goods were being bought, that the goods were not fit for the purpose and that the circumstances do not show that Pears did not rely on Omega’s skill and judgment or that it would have been unreasonable for it to do so.

Damages

[42]I have concluded that Omega supplied defective material in breach of contract. Pears suffered loss and claims to recover the sums set out in Schedule 2 of its skeleton argument. These claims cover an indemnity in respect of its liability to Webster Thompson and the accompanying costs, a similar indemnity as regards claims by Harris Tobias which have been brought but not yet heard, loss of the value of material sold as Category 1 rather than as Category 3, costs relating to incineration, recovery of material from customers, clean up and haulage and compensation for loss of sales of meat and bone meal between July and August 2006. By the end of the trial I understood that the figures had for practical purposes been agreed or compromised. If I am wrong about that I will decide any outstanding questions about damages when handing down this judgment.

Omega’s claim against NCML

[43]Omega has a claim set out in its pleading as against NCML, supported by the uncontested witness statement of Mr Sawrij and helpfully summarised in Section 5 of the skeleton argument of Mr Stuart-Smith and Mr Purchas. The factual findings I have made in the dispute between Omega and Pears apply equally to the claims against NCML. NCML has had the opportunity to participate in these proceedings but for practical reasons has chosen not to do so. In those circumstances little purpose would be served in my tracing through these claims in detail. In short Omega seeks an indemnity from NCML in respect of any liability it may have to Pears and, like Pears, a declaration as regards those claims further down the chain which have not yet been resolved. The reasons I have given for awarding Pears judgment against Omega apply even more strongly to Omega’s claim against NCML and I will therefore make the order sought.

Conclusion

[44]Pears’ claim against Omega succeeds. Omega’s claim against NCML succeeds. I shall be grateful if the parties will let me have, not less than 48 hours before the hand down of this judgment, an agreed list of corrections, a draft order and short skeletons dealing with any further matters arising for decision.

Cited in 1 later judgment