Idas Group Limited v Syntech New Zealand Limited [2014] NZHC 3188 (12 December 2014)

Last Updated: 18 December 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-002014 [2014] NZHC 3188

IN THE MATTER	of an appeal from the District Court pursuant to s 72 of the District Courts Act 1947
BETWEEN	IDAS GROUP LIMITED Appellant
AND	SYNTECH NEW ZEALAND LIMITED Respondent

Hearing:	12 November 2014
Appearances:	A M Dollimore for Appellant D J G Cox for Respondent
Judgment:	12 December 2014

_{JUDGMENT OF VENNING J}

This judgment was delivered by me on 12 December 2014 at 11.45 am, pursuant to Rule 11.5 of the

_{High Court Rules.}

Registrar/Deputy Registrar

Date...............

Solicitors: Cavell Leitch, Auckland

Rennie Cox, Auckland

IDAS GROUP LTD v SYNTECH NZ LTD [2014] NZHC 3188 [12 December 2014]

Introduction

[1] Idas Group Limited (Idas) sued Syntech NZ Limited (Syntech) in the District Court at Waitakere alleging breach of contract relating to the supply of plastic material. In a judgment delivered on 16 July 2014 Judge B A Gibson concluded that, while Syntech had breached s 15 of the Sale of Goods Act 1908 (sale by description), Idas had failed to prove its claim for damages.¹ He entered judgment for Syntech. Idas appeals.

Background facts

[2] Idas manufactured and supplied trays for the storage of fish. With Talleys Group Limited (Talleys) it developed a market manufacturing trays for storing frozen fish that could also be used when cooking the fish. Idas used a copolymer material blend in the manufacturing process. The blend was a mix of polyethylene (35 per cent) and polypropylene (65 per cent) (the 35/65 blend).

[3] Syntech sources and supplies plastic materials to the tray forming industry. Syntech had previously supplied plastic material to Idas from which Idas had manufactured trays to store smoked, but not frozen, fish. Idas experienced difficulties with its supplier of plastic material for the trays it made for Talleys and asked Syntech to supply it with the 35/65 blend of plastic material. Idas signed Syntech’s terms of trade. The rest of the agreement was oral but was supplemented by email exchanges. Syntech agreed to supply the 35/65 blend.

[4] In 2010 and 2011 Syntech supplied three separate batches of plastic material to Idas. Idas paid $14,184.50 and $19,489.46 for batches 2 and 3 respectively. Idas accepted the plastic supplied and used it to manufacture trays for Talleys. There were no reported problems with the first batch – (there was no evidence about how Talleys used the trays manufactured from the first batch of plastic material supplied by Syntech). However it soon became apparent the trays manufactured from batches

2 and 3 were unsuitable for the storage of frozen fish. They cracked when frozen and contaminated the fish. Talleys complained. Idas gave Talleys a credit note for

_{the full amount of the trays manufactured from batches 2 and 3.}

¹ Idas Group Limited v Syntech NZ Limited DC Auckland CIV-2012-090-1444, 16 July 2014.

[5] Syntech had not supplied the 35/65 blend as requested but had in fact supplied a homopolymer plastic. The plastic material Syntech supplied did not comply with the description.

The District Court decision

[6] Evidence was given for Idas by Mr Eachen, Idas’ group manager and Mr Loughnan, a director. Syntech called Mr Farley, one of its directors together with its sales manager, Ms Ralph. In addition it called Messrs Levital and Baum who worked for the supplier of plastics to Syntech.

[7] Judge Gibson concluded that the contract was a contract for the sale of goods by description, the description being for the provision of plastic material comprising the 35/65 blend and that Syntech failed to supply goods of that description. However, the Judge also found that Idas had not made it clear to Syntech that the material was to be used for the manufacture of trays to be used for freezing fish.

[8] Having found the sale was a sale by description and that the plaintiff had breached that warranty Judge Gibson then went on to consider the issue of damages. The Judge concluded that:

(a) Idas had failed to prove that it had mitigated its loss;

(b) Idas had failed to establish the quantum of damages suffered; and

(c) Idas failed to satisfy the Court that any damages flowed from the breach by the defendant.

[9] For those reasons the Judge dismissed Idas’ claim and entered judgment for

Syntech.

Grounds of appeal

[10] The appeal is advanced on two principal grounds. First, Idas claims for a refund of the purchase price it paid for batches 2 and 3 on a restitutionary basis,

rather than a claim for damages, so that the usual rules of contractual damages of causation, remoteness and mitigation do not apply.

[11] Second, and in the alternative, that the Judge was incorrect to conclude that Idas had failed to prove damages for breach of warranty. Causation was established. The damages were not too remote. The Judge misdirected himself on the issue of mitigation.

[12] Idas seeks judgment on appeal for $33,673.96 (together with interest) being the amount it paid Syntech for the plastic product supplied by it. Idas does not pursue its claim for further consequential damages.

Is this a restitutionary claim?

[13] As Mr Dollimore submitted, the distinction between restitution and damages is fundamental. A buyer who sues for restitution does not have to prove damages since the claim is for the return of the precise money paid to the seller and is not subject to the rules relating to quantification, causation, remoteness or mitigation of

loss.²

[14] Mr Dollimore acknowledged that, while generally a buyer cannot sue for a refund on a failure of consideration unless he can return the goods, that is not the case if the inability arises due to the very breach of which the buyer complains.³ He submitted that the case of Bostock & Co Limited v Nicholson & Sons Limited⁴ was directly on point.

[15] In Bostock Nicholson & Sons contracted to sell by description sulphuric acid commercially free from arsenic to Bostock. In breach of the condition that the acid should correspond with the description, Nicholson & Sons supplied acid which was not commercially free from arsenic. Bostock used the acid in the manufacture of

_{brewing sugar which it sold to brewers who used it in the brewing of beer. The beer}

² Judah Philip Benjamin and M Bridge Benjamin’s Sale of Goods (8^th ed, Sweet & Maxwell, London, 2010) at [17-090]; and Donald Harris, David Campbell and Roger Halson Remedies in Contract & Tort (2^nd ed, Cambridge University Press, New York, 2005) at 232.

³ _{Rowland v Divall [1923] 2 KB 500.}

⁴ Bostock & Co Limited v Nicholson & Sons Limited [1904] 1 KB 725.

was rendered poisonous and the brewers suffered loss in respect of which Bostock was liable to them. Bostock also lost the price of the acid which was rendered worthless to it and the value of other goods spoilt through being mixed with it and the goodwill of its business was damaged. Bruce J confirmed Bostock was entitled to recover from the defendants the price of the acid and the value of the goods spoilt, but not the damages payable by Bostock to the brewers or the damage to the goodwill of Bostock’s business.

[16] Mr Dollimore relied on the following passage from the decision:⁵

[t]he acid being worthless to the plaintiffs there was an entire failure of consideration, and by virtue of s. 53, sub-s. 1 (a), Sale of Goods Act, where there is a breach of warranty by the seller, the buyer may set up against the seller the breach of warranty in extinction of the price: ...

[17] Section 53 of the United Kingdom Sale of Goods Act 1893 is equivalent to s 54 of the Sale of Goods Act 1908. Similarly, s 54 of the United Kingdom Sale of Goods Act is equivalent to s 55 of the Sale of Goods Act.

[18] The relevant provisions of the Sale of Goods Act 1908 providing for damages are ss 54 and 55 which confirm the buyer’s remedies for breach of warranty:

54 Remedy for breach of warranty

(1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may—

(a) Set up against the seller the breach of warranty in diminution or extinction of the price; or

(b) Maintain an action against the seller for damages for the breach of warranty.

(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of warranty of quality, such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.

(4) The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent him from maintaining an action for the same breach of warranty if he has suffered further damage.

55 Interest and special damages, or recovery of money paid

Nothing in this Act shall affect the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover money paid where the consideration for the payment of it has failed.

[19] Section 54 incorporates the first and second limbs of the approach to damages established in Hadley v Baxendale.⁶ The claim for restitutionary damages is provided for by s 55:

... to recover money paid where the consideration for the payment of it has failed.

Under a restitutionary claim the parties revert to their original positions as if they had never contracted with each other. The claim proceeds on the basis there has been no contract at all. The remedies of restitution and damages are effectively mutually exclusive. Both cannot be claimed.

[20] There is force in Mr Cox’s submission that the way the matter was pleaded in the District Court was not consistent with a restitutionary claim. However, in any event, in my judgment, a restitutionary claim was not available to Idas in this case. Idas did not have the right to rescind the contract under s 13(2) of the Sale of Goods Act. That is a function of ss 13(3) and 37 of the Act:

13 When condition to be treated as warranty

...

(3) Where a contract of sale is not severable, and the buyer has accepted the goods or part thereof, ... the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect.

37 Acceptance

The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or [(except where section 36 of this Act otherwise provides)] when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when after the lapse of a reasonable time he retains the goods, without intimating to the seller that he has rejected them.

[21] Idas clearly used the plastic material in the course of its manufacturing process and consequently, it accepted the goods within the meaning of s 37. There was no term of the contract either express or that would be implied in these circumstances entitling Idas to cancel the contract if the description of the composition was not fulfilled after Idas had accepted the plastic material in that way. Idas was compelled to bring its claim under s 54 of the Act. This was not a restitutionary claim under s 55.

[22] The case of Bostock does not assist Idas on this point. It is apparent that Bruce J did not consider the case to be a restitutionary claim. At 735 of the judgment Bruce J stated:

The damages in the present case must, I think, be determined by the rule laid down in s. 53, sub-s. 2. Before I proceed to consider the meaning and application of this subsection, I may refer to s. 54, which enacts that nothing in this Act shall affect the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable.

And later at 736:

Therefore it seems to me the question I have to determine in this case must be determined by the rule laid down in sub-s. 2 of s. 53; in other words, what is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty.⁷

[23] Mr Dollimore also referred to the case of Rowland v Divall. However, that case is quite different. It concerned the supply and use of a motor car, and importantly, title to it. The defendant vendor had no title to the car when he purported to sell it. Despite that he sought to argue the plaintiff purchaser could not rescind because he could not return the car. However, the reason the purchaser could not return the car was because he had been obliged to surrender the car to the true owner. It is a quite different case.

[24] For the above reasons I am satisfied that it is not open to Idas to pursue a restitutionary claim on appeal.

Has Idas made out a claim for damages?

[25] The real issue on this appeal is whether Idas can establish its claim for damages under s 54 of the Sale of Goods Act 1908.

[26] The Judge considered Idas had failed to mitigate by not putting the trays still in its warehouse (and apparently manufactured from batches 2 and 3) to use. But Syntech did not rely on that as failure to mitigate. Syntech’s case was that Idas had failed to mitigate its loss because it continued to use product which it was advised not to use it by Syntech when Syntech became aware that the trays were to be frozen. The loss claimed, the value of the product supplied, does not relate to that issue.

[27] More fundamentally, the Judge misdirected himself on the burden of proof in relation to mitigation in expressing it as follows:⁸

... The plaintiffs have not, therefore, satisfied me that they have mitigated their loss as they are obliged to do.

[28] Idas bore no evidential burden in relation to mitigation. Whether the plaintiff has failed to take a reasonable opportunity of mitigation is a question of fact dependent upon the particular circumstances of each case. The burden of proving such failure rests upon the defendant.⁹

[29] Syntech has not proved that Idas failed to act to mitigate its loss.

[30] Mr Cox conceded there was some difficulty with the Judge’s approach to mitigation but submitted that the mitigation argument had no real bearing on the ultimate outcome of the case or the judgment because of the fundamental finding by Judge Gibson that any losses sustained by the appellant were not caused by the

_{respondent’s failure to supply the 35/65 blend but rather as a result of Idas’ failure to}

⁸ _{Idas Group Limited v Syntech NZ Limited, above n 1, at [21].}

⁹ Garnac Grain Co v Faure & Fairclough [1968] AC 1130; Walop No 3 Ltd v Para Franchising

Ltd CA20/03, 23 February 2004 at [7]–[8].; and Governors Ltd v Anderson CA94/04, 16 August

2005.

disclose the use to which the material would ultimately be put, ie the manufacture of frozen trays.

[31] The Judge concluded that Idas had not established the quantum of damage it had suffered, nor had it established that any damages flowed from the breach by Syntech.¹⁰ He also considered that, as there was no reason for Syntech to have contemplated Idas would use the material to manufacture trays to be frozen, the loss was not foreseeable.¹¹

[32] It is logical to first address the issue of whether Idas suffered any loss or

damage as a consequence of Syntech’s breach of warranty.

[33] In concluding that Idas had failed to establish the failure of the trays was

attributable to Syntech’s breach the Judge’s relevant findings were:¹²

... when complaints were received in respect of the trays made from the second batch of material Mr McEachen said that he found it difficult to get information from Talleys Frozen Foods, to whom the trays had been supplied, as to which of its customers had experienced difficulties with the tray, but believed it may have been Qantas. The plaintiff could not even be sure that it was a tray it supplied to Talleys that was the subject of the complaint from Qantas. There was no evidence that the entire stock of trays supplied to Talleys and made from the material supplied under the second and third orders from [Syntech] were defective, or even that Talleys’ end purchasers had rejected all of the trays.

And:¹³

The evidence of Messrs McEachen and Loughnan that the conclusion they drew was that the homopolymer material was the cause of the failure does not, in my view, exclude the possibility that there was some other explanation. They had originally thought that rough handling may have been a reason.

[34] On the last point, Mr McEachen gave evidence that Idas was able to reject rough handling as a cause by inspecting trays that had not been moved from the Talleys’ site. Further it appears the Judge was wrong in his statement at [22] of the

_{judgment that:}

¹⁰ _{Idas Group Limited v Syntech NZ Limited, above n 1, at [27].}

¹¹ _{At [30].}

¹² _{At [22].}

¹³ At [25].

No written correspondence was available concerning that complaint [in relation to the third batch of trays].

[35] Email correspondence was produced between Idas, Syntech, Talleys and an end user dealing with both the fact and cause of the failure of the trays. In that email exchange Mr Farley said he could “understand the frustration of your customer but PP is not the ideal solution for frozen applications”.

[36] There was further evidence before the Court of the defects in the trays manufactured from the material supplied by Syntech. Mr McEachen’s evidence in his affidavit about his visit to Talleys’ site and inspecting the trays was:

38. These trays were also cracked/shattered and upon seeing them I realised for the first time that the problem was likely to be caused by [Syntech] supplying something other than the 35/65. Of course, [Syntech] has since confirmed that it did not supply [Idas] with

35/65.

[37] And Mr Farley, a director of Syntech, himself notes in his affidavit:

14. ... It appears however in this circumstance, the product was not tested by Idas because if testing had been carried out (and the product frozen as part of the testing), the product would have cracked, as it was not manufactured for being frozen.

[38] Mr Cox sought to support Judge Gibson’s conclusion that there was inadequate evidence of the damages claimed because:¹⁴

Independent analysis was required by an expert witness who could ascribe the failures in the trays to the material supplied by the defendant and who could also give evidence of the degree of loss.

He submitted that Idas had failed to prove on the balance of probabilities that it had in fact suffered loss as a result of the alleged defective product.

[39] However, with respect, I consider the Judge and Mr Cox’s submissions proceed on a misapprehension. While it was open for the Judge to find that, as a matter of fact, Idas never made the purpose for which the trays it proposed to manufacture from Syntech’s plastic known to Syntech, so that it could not be said the

_{goods were in breach of any condition of fitness for purpose, the Judge had already}

¹⁴ Idas Group Limited v Syntech NZ Limited, above n 1, at [26].

found that the goods failed to comply with description, namely the 35/65 blend. The issue remained whether Idas had proved damages resulting from that breach.

[40] Put another way, the fact Idas may not have told Syntech the trays would be used to store frozen fish is irrelevant on this point. Idas contracted for the Syntech to supply it with 35/65 plastics blend. Syntech failed to supply such product. Without knowing the product failed to comply Idas used the product in the manufacture of trays.

[41] Mr Cox’s reference to Mr Baum’s evidence that the material was only suited to withstand a minimum of 4 degrees Celsius is also somewhat of a red herring. There was no need in the circumstances for Idas to call expert evidence to show that the product would fail. The trays ultimately produced were not suitable for the storage of frozen fish, as Mr Farley conceded.

[42] Idas did not have to prove the trays failed because of the materials supplied by Syntech. Rather, it had to prove that plastic material supplied by Syntech did not comply with the description and that it had suffered a loss as a result. In any event there was uncontested evidence that plastic material complying with the description of 35/65 blend would produce trays that could be frozen. Mr McEachen’s evidence was:

6. Together with Talleys the plaintiff successfully developed a market manufacturing trays from 35/65. Between 2007 and 2010 the plaintiff manufactured and sold hundreds of thousands of 35/65 trays to the fishing industry. As a result of this experience [Idas] was completely satisfied that 35/65 was suitable for the task of both storing and cooking frozen fish. In particular the 35/65 trays did not crack or fracture when commercially frozen.

[43] In the absence of evidence to the contrary that is sufficient proof that the trays with the proper blend of 35/65 compliance with description would have been compliant.

[44] The short point is that the plastic material supplied by Syntech was not the

35/65 blend. It did not comply with the contractual description. If Idas had not paid for the product before discovering that it failed to comply with description there can

be no argument that Idas would have been entitled to refuse to pay for it by way of extinction of the purchase price under s 54(1)(a). However, as it had paid for the product it is entitled to claim under s 54(1)(b) for damages arising from the breach. Under s 54(2) the measure of damages for breach of warranty is the usual test of estimated loss directly and naturally arising in the ordinary course of events from the breach.

[45] Mr Cox sought to rely on the case of McSherry t/a Mainland Wine

Negociants v Coopers Creek Vineyard Ltd. In that case Panckhurst J noted:¹⁵

... for a seller to be entitled to damages when, in the event, the transaction has not occasioned him loss, is to subvert, not promote, the purpose of damages in contract. Money will not have restored his position, but rather elevated it on the basis of a theoretical loss. This, in my view, cannot be right.

[46] There is a good argument that, as a matter of principle, damages for breach of warranty should not give the buyer more than his true loss: Bence Graphics International Ltd v Fasson UK Ltd.¹⁶ However, that is not the case here. The Bence Graphics and McSherry cases are quite different to the present. The difference is made apparent in the first paragraph of the McSherry judgment:

[1] A wine producer supplied bottles of wine which were mislabelled.

These were onsold by a liquor merchant to his customers. Despite the mis-descriptions the customers did not complain. Nonetheless, the buyer claimed damages based on the difference in value between the wine which he had contracted to buy and the value of the mislabelled wine which was in fact delivered. This appeal raises the question whether damages for breach of warranty are available in these circumstances.

(emphasis added)

[47] In the present case there is clear evidence of complaint. The product was not acceptable to Talleys. The evidence confirms that as a result of the defective trays Idas was not paid by Talleys (or any other entity) for trays manufactured from

_{batches 2 and 3. Mr McEachen’s evidence was:}

¹⁵ McSherry t/a Mainland Wine Negociants v Coopers Creek Vineyard Ltd (2005) 8 NZBLC

_{101,619 (HC) at [20].}

¹⁶ Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (CA) at 102.

39. The plaintiff did not receive any payment from Talleys (or any other entity) for the trays manufactured from batches 2 and 3. The plaintiff wrote off Talleys’ costs from batches 2 and 3 by a combination of a credit note dated 20 February 2012 and a product write off dated 27 February 2012.

[48] Given the complaints from a good customer, Talleys, Idas acted reasonably in providing the credit note and writing off the price it had charged for the defective products.

[49] The general or prima facie measure of damages for breach of the description is the difference between:

(a) the value of the goods complying with the description measured at the time of place of delivery; and

(b) the actual value of the goods in their actual condition as at the time of delivery.

[50] In the absence of other evidence, the contract price itself can be taken as the value of the goods. In Hammer and Barrow v Coca Cola¹⁷ Richmond J took the contract price as evidence of the value of the goods where there was no established market.

[51] The next issue is the actual value of the plastic material supplied by Syntech. In the present case of course the fact the goods did not comply with description was not known until after they had been applied and used as in Bostock.¹⁸ In Bostock the plaintiff was able to recover the whole price paid for the acid which failed to comply with the contract description. The price paid by the purchaser was “wholly thrown away”. Idas’ loss similarly was the price it had paid Syntech for product that Idas then used in its manufacturing process. The plastic supplied by Syntech had no

value to Idas as it did not comply with the description. As in Bostock the price Idas

_{paid for the non-complying product was “thrown away”. The product supplied}

¹⁷ _{Hammer and Barrow v Coca Cola [1962] NZLR 723 (SC).}

¹⁸ Kasler & Coen v Slavouski [1928] 1 KB 78, at 85-86; Bence Graphics International Ltd v

Fasson UK Ltd, above n 16; and Lambert v Lewis [1982] AC 225 (HL).

failed to comply with the description and was expended in the manufacturing process.

[52] Idas has proved its loss. It is the amount it paid Syntech for product not supplied in accordance with the contract description. Idas could also have claimed for other wasted costs of the production. It has not pursued those costs on this appeal.

[53] On the issue of foreseeability, the Judge fell into error by reasoning that, as Syntech had not been advised the trays to be manufactured from its product were to be frozen, Syntech could not have foreseen the losses that Idas sustained.

[54] I accept Mr Dollimore’s submission it is inconceivable that a seller who supplies product which does not comply with the description, knowing the product is to be consumed in a manufacturing process, would not contemplate the buyers’ losses might include the price paid for the goods. The seller would or should know that the goods manufactured from the product supplied otherwise then in accordance with the description, may not be able to be used or on sold, so that the entire value of the goods supplied will be lost. There is a reason for the sale to be a sale by description.

Result

[55] For the above reasons the appeal must be allowed. The judgment and costs award in Syntech’s favour in the District Court are set aside. Judgment is entered for Idas against Syntech in the sum of $33,673.96 together with interest on that sum at the judicature rate. Interest is to run from the date of issue of the proceedings in the District Court.

Costs

_{[56] Idas is to have costs against Syntech calculated on a 2B basis on the appeal.}

Venning J