Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B.

87 (1996)

For educational use only

*87 Bence Graphics International Ltd. v Fasson U.K.
Ltd.
Positive/Neutral Judicial Consideration

Court
Court of Appeal (Civil Division)

Judgment Date
17 October 1996

Report Citation
[1997] 3 W.L.R. 205
[1998] Q.B. 87

Court of Appeal

Otton , Auld and Thorpe L.JJ.

1996 July 1, 2, 3, 31; Oct. 17

Damages—Sale of goods—Measure of damages—Seller in breach of warranty

supplying goods with latent defect—Buyer incorporating goods in product for onward
sale—Discovery of defect by end—users—Whether prima facie measure of damages to
be applied to entitle buyer to market value of goods—Whether seller able to displace
prima facie measure— Sale of Goods Act 1979 (c. 54), s. 53(3)

The defendants produced vinyl film which the plaintiffs bought to use for making
decals bearing words, numbers or symbols used to identify sea-borne bulk containers.
It was a condition of the contract of sale that the film should survive in use in good
legible condition for at least five years and the defendants warranted its quality. In
fact, the film was defective because too little ultraviolet stabiliser had been used in
its manufacture. The plaintiffs sold on decals made with the film to container owners
who in turn sold the containers marked with the decals to shipping lines and other
users. Some of the decals became illegible, leading to complaints from the end-users.
After one user complained, the defendants compensated the plaintiffs for the cost of
replacing the user's decals. The plaintiffs retained about £22,000 worth of unused and
defective film. They brought an action for breach of warranty of quality. Morland J.
held that the prima facie measure of damages in section 53(3) of the Sale of Goods Act

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

1979 , 1 namely the difference between the value of the goods at the time of delivery
and the value they would have had had the warranty been fulfilled, had not been
displaced and awarded the plaintiffs £564,328 together with interest, representing the
price they had paid for the film.

On appeal by the defendants: -

Held, allowing the appeal ( per Otton and Auld L.JJ.), that the prima facie measure
of damages for breach of warranty of quality provided by section 53(3) of the Sale
of Goods Act 1979 would be displaced where it had been in the contemplation of
the parties at the time the warranty was given that the goods sold would be used in
making a product which would be sold on; that in such a case the measure of damages
would be based not on the difference between the value of the goods as delivered and
that warranted but on the buyer's liability to the subsequent or ultimate users of the
product arising from the defects constituting a breach of the seller's warranty; that
that measure would apply irrespective of whether the liability in damages resulting
would be higher or lower than that which would have resulted from the prima facie
measure in section 53(3), and the buyer had no right to elect the prima facie measure;
that, since the defendants had been aware that the vinyl film would be used by the
plaintiffs in making decals which would be sold on to customers requiring five-year
*88 durability, the parties must be taken as having contemplated that any latent
defect in the film might on becoming apparent render the plaintiffs liable to claims
for damages by subsequent or ultimate users and the measure of damages should
therefore be based on any such liability of the plaintiffs; and that, accordingly (Thorpe
L.J. dissenting), the judge had erred in law in holding that the prima facie measure
of damages had not been displaced, and there would be judgment for the plaintiffs
for £22,000 plus interest and the case would be remitted for assessment of damages
(post, pp. 97B-C, 99B-C, 100F, 101G-102A, 106C-D, 107D-F).

Dicta of Devlin J. in Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 , 435-436
approved.

Slater v. Hoyle & Smith Ltd. [1920] 2 K.B. 11 , C.A. not followed.

Per Thorpe L.J. The judge's finding of fact that the prima facie measure of damages
had not been displaced was justified on the evidence and no sufficiently substantial
misdirection in law has been demonstrated (post, pp. 109H-110A).

Decision of Morland J. reversed.

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

The following cases are referred to in the judgments:

Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 ; [1951] 2 All E.R. 191;
[1951] 2 K.B. 314; [1951] 2 All E.R. 191, C.A. .
Bostock & Co. Ltd. v. Nicholson & Sons Ltd. [1904] 1 K.B. 725
Czarnikow (C.) Ltd. v. Koufos [1969] 1 A.C. 350; [1967] 3 W.L.R. 1491; [1967] 3
All E.R. 686; [1967] 2 Lloyd's Rep. 457, H.L.(E.) .
Dexters Ltd. v. Hill Crest Oil Co. (Bradford) Ltd. [1926] 1 K.B. 348, C.A. .
Hadley v. Baxendale (1854) 9 Exch. 341
Hall (R. & H.) Ltd. v. W. H. Pim (Junior) & Co. Ltd. (1928) 30 Ll.L.Rep. 159, H.L.
(E.) .
Holden (Richard) Ltd. v. Bostock and Co. Ltd. (1902) 18 T.L.R. 317, C.A. .
Pagnan (R.) & Fratelli v. Corbisa Industrial Agrocapuaria Limitada [1970] 1 W.L.R.
1306; [1971] 1 All E.R. 165, C.A. .
Parsons (H.) (Livestock) Ltd. v. Uttley Ingham & Co. Ltd. [1978] Q.B. 791; [1977]
3 W.L.R. 990; [1978] 1 All E.R. 525, C.A. .
Rodocanachi, Sons & Co. v. Milburn Bros. (1886) 18 Q.B.D. 67, C.A. .
Slater v. Hoyle & Smith Ltd. [1920] 2 K.B. 11, C.A. .
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B. 528, C.A. .
Wertheim v. Chicoutimi Pulp Co. [1911] A.C. 301, P.C. .
Williams Bros. v. Ed. T. Agius Ltd. [1914] A.C. 510, H.L.(E.) .
The following cases were cited in argument:

Aryeh v. Lawrence Kostoris & Sons Ltd. [1967] 1 Lloyd's Rep. 63, C.A. .
British Westinghouse Electric and Manufacturing Co. Ltd. v. Underground Electric
Railways Co. of London Ltd. [1912] A.C. 673, H.L.(E.) .
Finlay (James) & Co. Ltd. v. N.V. Kwik Hoo Tong Handel Maatschappij [1929] 1
K.B. 400, C.A. .
Kwei Tek Chao v. British Traders, etc., Ltd. [1954] 2 Q.B. 459; [1954] 2 W.L.R. 365
; [1954] 3 W.L.R. 496 ; [1954] 1 All E.R. 779
Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker (A/B) [1949] A.C. 196;
[1949] 1 All E.R. 1, H.L.(Sc.) .
Randall v. Newson (1877) 2 Q.B.D. 102, C.A. .
Randall v. Raper (1858) E.B. & E. 84
Robophone Facilities Ltd. v. Blank [1966] 1 W.L.R. 1428; [1966] 3 All E.R. 128,
C.A. .
Smith v. Green (1875) 1 C.P.D. 92 *89
Appeal from Morland J.

By a writ issued on 24 June 1988, the plaintiffs, Bence Graphics International Ltd.,
claimed against the defendants, Fasson U.K. Ltd., damages in the sum of £581,070 for

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

misrepresentation and/or breach of contract arising from a series of contracts for the
supply of "Fasson 940 film." On 14 December 1994 Morland J. gave judgment for the
plaintiffs for £564,328.54 plus interest.

By an amended notice of appeal dated 9 January 1995 the defendants appealed on the
grounds that, inter alia, (1) the judge had misdirected himself in defining the issue
as to measure of damages; (2) the principal issue the judge had to decide was as to
whether at the time of making of the relevant contracts the parties had contemplated
that the loss which would be suffered by the plaintiffs in the event of a serious breach of
warranty of quality resulting in premature deterioration in service of decals made from
the defendant's goods was (i) diminution in value of the goods supplied by the defendant
or (ii) liability in damages to purchasers of the decals together with loss of business and
goodwill and any incidental loss and expense; (3) the judge had wrongly defined the
issue as being as to the parties' contemplation of the legal remedy which was available
to the plaintiffs in the event of breach of contract rather than as to their contemplation of
the nature of the financial loss which the plaintiffs would be likely to suffer upon breach;
(4) the judge had failed to find that the evidence established that the parties would have
contemplated that a breach of contract of the nature committed by the defendant would
not have been detected in the course of manufacture of the decals by the plaintiffs and
would have caused deterioration of decals in service so that 29 owners complained to
and made claims for damages against container manufacturers and they in turn made
claims against the plaintiffs; and (5) the judge had therefore been wrong in holding that
the prima facie measure of damages for breach of warranty of quality provided for by
section 53(3) of the Sale of Goods Act 1979 was not displaced.

On 31 July 1996 the court dismissed a motion by the plaintiffs for judgment.

The facts are stated in the judgment of Otton L.J.

Stephen Grime Q.C. and David Heaton for the defendants. In a case of sale of goods
where a term as to quality is broken, the measure of damages depends upon the
contemplation of the parties as to the consequence of a breach of the type committed,
such contemplation being based on either their imputed or actual knowledge at the
time of contracting: see Hadley v. Baxendale (1854) 9 Exch. 341 ; Victoria Laundry
(Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B. 528 and C. Czarnikow Ltd. v.
Koufos [1969] 1 A.C. 350 . There will be imputed to the parties knowledge of facts
which they have learnt as to the nature and background of their respective businesses:
see Randall v. Raper (1858) E.B. & E. 84 ; Smith v. Green (1875) 1 C.P.D. 92 ; Randall
v. Newson (1877) 2 Q.B.D. 102 and Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B.
422 . In section 53(3) of the Sale of Goods Act 1979 the words "prima facie" are not
an expression of special quality or merit being attached to difference in value measure
but more a reflection of the trading/mercantile *90 conditions of the times. Where
the sale contract is not made between merchants dealing in a market the displacement

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

burden is a light one: see British Westinghouse Electric and Manufacturing Co. Ltd. v.
Underground Electric Railways Co. of London Ltd. [1912] A.C. 673 . Actual knowledge
of special circumstances may extend the ambit of potential damages: section 54 of the
Act of 1979; Richard Holden Ltd. v. Bostock and Co. Ltd. (1902) 18 T.L.R. 317 and
Bostock & Co. Ltd. v. Nicholson & Sons Ltd. [1904] 1 K.B. 725 .

In some cases the finding as to contemplation of the parties as to the consequences of

breach may show that breach will give rise to difference in value measure under section
53(3) and special damages under section 54. The claimant will not be limited if he wishes
to choose one or both. In other cases the finding as to contemplation of the parties as to
the consequences of breach will show that the possible measures are alternatives. Where
the measures are alternatives it is for the court to choose the correct measure, not the
claimant. Where the court chooses one or other measure, the effect of the choice may
reduce the amount of damages which may be claimed or increase it: see Slater v. Hoyle
& Smith Ltd. [1920] 2 K.B. 11 ; Wertheim v. Chicoutimi Pulp Co. [1911] A.C. 301 ;
Dexters Ltd. v. Hill Crest Oil Co. (Bradford) Ltd. [1926] 1 K.B. 348 ; Williams Bros. v.
Ed. T. Agius Ltd. [1914] A.C. 510 and James Finlay & Co. Ltd. v. N.V. Kwik Hoo Tong
Handel Maatschappij [1929] 1 K.B. 400 .

Andrew Moran Q.C. and Anthony Edwards for the plaintiffs. In a case of sale of goods
when a term as to quality is broken the court should resolve any issue as to the measure
of damage by first recourse to section 53 of the Act of 1979. In doing so the court is
objectively ascertaining what loss would have been in the contemplation of the parties
at the time of making the contract had they been made aware that a breach of the type
which in fact occurred would occur: see Hadley v. Baxendale, 9 Exch. 341 , 354-355; C.
Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 , 416E-G; Biggin & Co. Ltd. v. Permanite
Ltd. [1951] 1 K.B. 422 , 435-436; Robophone Facilities Ltd. v. Blank [1966] 1 W.L.R.
1428 . The "loss" does not involve the precise detail of the damage or the precise manner
of its happening. It is enough for the innocent party to show that loss of that kind is not
unlikely or a serious possibility.

The parties are deemed to contemplate loss which directly and naturally results in the
ordinary course of events: see H. Parsons (Livestock) Ltd. v. Uttley Ingham & Co. Ltd.
[1978] Q.B. 791 . In the ordinary course of events when goods of defective quality are
delivered such loss is prima facie the difference in value. This principle is of universal
application and not confined to mercantile or trading conditions of the time when the
predecessor of the Act appeared.

Additional actual or imputed knowledge proved by a party seeking to rely on it may

demonstrate that particular loss would have been in the contemplation of the parties
either as a serious possibility of additional loss or, as in a chain sale proper, as the
exclusive kind of loss that might be suffered. In the first type of case the party suffering
loss may confine his claim to the loss which the parties are deemed to contemplate, or

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

he may add a claim for additional loss in contemplation. In the second he is confined
to a claim for the exclusive loss so contemplated: see Rodocanachi, Sons & Co. v.
Milburn Bros. (1886) 18 Q.B.D. 67 , 76-77; Williams Bros. v. Ed. T. Agius Ltd. [1914]
A.C. 510 , 520-523, 529; Slater v. Hoyle & Smith Ltd. [1920] 2 K.B. 11 , 15, 17-18,
20-23, 24-25 and R. & H. Hall Ltd. v. W. H. Pim (Junior) & Co. Ltd. (1928) 30 Ll.L.Rep.
159 . [Reference was also made to James Finlay & Co. Ltd. v. N.V. Kwik Hoo Tong
Handel Maatschappij [1929] 1 K.B. 400 ; R. Pagnan & Fratelli v. Corbisa Industrial
Agrocapuaria Limitada [1970] 1 W.L.R. 1306 and Kwei Tek Chao v. British Traders,
etc., Ltd. [1954] 2 Q.B. 459 .] The judge correctly distinguished Biggin & Co. Ltd. v.
Permanite Ltd. [1951] 1 K.B. 422 .

It is for the judge to resolve as a question of fact whether such additional knowledge
as is relied on demonstrates that some exclusive alternative loss was in contemplation:
see Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker (A/B) [1949] A.C. 196 ,
223, 232; C. Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 , 397B-D. [Reference was also
made to Aryeh v. Lawrence Kostoris & Sons Ltd. [1967] 1 Lloyd's Rep. 63 .]

Cur. adv. vult.

17 October. The following judgments were handed down

Otton L.J.

The defendants appeal against a judgment of Morland J. whereby he ordered that there
be judgment for the plaintiffs for £564,328.54 together with interest. The defendants
seek to set aside the judgment and assert that in substitution there be judgment for the
plaintiffs for the sum of £22,000 (being the admitted value of returned goods) together
with interest or alternatively that there be a new trial or that an assessment of damages
according to the correct measure (being that contended for by the defendants) be directed
in any event.

The sole issue raised on this appeal is whether the correct measure of damages was (as
the judge found) the difference in market value or the actual losses (if any) suffered by
the plaintiffs under or arising from a breach of contract for onward sales.

Background

The defendants were one of a small number of suppliers of cast vinyl film, one of the uses
for which is to manufacture decals which are used to identify bulk containers, this being
the only end use intended in the case of film sold by them to the plaintiffs. The plaintiffs'
manufacturing process involved screen printing words, numbers or symbols on the film
and cutting it to size. The decals were then attached to the containers by reason of the
self-adhesive character of the vinyl. Between 1981 and 1985 the defendants supplied to

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

the plaintiffs film to the value of £564,328. This was to produce in excess of 100,000
decals. Of the decals manufactured from the defendants' film, 93 per cent. went for use
on Sea Containers Ltd. ("S.C.L.") who were an important customer of the plaintiffs
and who imposed their own specifications for containers and decals on manufacturers.
S.C.L. owned the containers and leased them to shipping lines and others so that the
containers passed out of physical possession of the owners for the vast majority of their
life and were used all over the world.
*92

It was common ground that the standard requirement in the container industry for such
decals was that they should have a "guaranteed minimum five year life." The defendants
know this to be so. Moreover it was a term of the contract between the parties that the
film would be of such a nature as to survive in use in good legible condition for a period
of five years at least.

The plaintiffs alleged that the film did not fulfil the warranties with which it was sold,
was not reasonably fit for its intended purpose and was not of merchantable quality.
The reason for the defective condition was that the polymer constituting the film had
insufficient stabiliser against the effects of ultra violet light and became degraded
upon such exposure. The defendants were at pains in their promotional literature to
assure customers that their film would be of such a nature as to survive in use in
good legible condition for a period of five years at least. The Dutch manufacturing
associate of the defendants incorrectly formulated the film sold to the plaintiffs by
putting insufficient ultraviolet stabiliser in the film so that, in use, it tended to degrade
over a period eventually making some decals illegible. There were extensive complaints
from customers of S.C.L. about the poor performance of the film. However, only one
claim relating to 349 Tsujii containers was met by the plaintiffs who applied new
decals at their expense and the defendants paid an agreed amount to the plaintiffs in
compensation. There was also an intimation of a claim from S.C.L. which has so far
not been pursued. The plaintiffs retained about £22,000 worth of unused and defective
material.

By the statement of claim served in August 1988 the plaintiffs claimed for the difference
in value (i.e. the recovery of the whole purchase price). By an amendment served three
years later the claim was enlarged to include an alternative claim for indemnity against
"all claims" by customers of the plaintiff. The defendants sought to rely on exclusion
clauses contained in their standard trading terms. However, on the penultimate and final
days of the trial the defendants made several admissions including that their terms did
not operate so as to exclude or limit their liability for any breach and that they were
in breach of their warranty that their product was durable for five years. Thus in the
concluding stages of the trial the only issue left to the judge was the proper measure
of damage. The defendants conceded that at least the plaintiffs were entitled to be

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

reimbursed in the sum of £22,000 in respect of the stock returned to them. The judge
accurately summarised the position thus:

"In the present case the plaintiffs have not suffered a loss in the
shape of a claim for damages from their customers in respect of
the decals processed by them from the defective Fasson 940 sold to
them by the defendants to whom they have paid the contract price.
Although they have suffered no such loss, they have been exposed
and remain exposed to claims from their customers and they have
been put to the expense of investigating and answering complaints.
Also their commercial reputation may have suffered."

The judge found, applying section 53(3) of the Sale of Goods Act 1979 , that the
plaintiffs were entitled to the difference between the value of the *93 goods at the time
of delivery and the value they would have had if they had fulfilled the warranties.

At the heart of this appeal is the defendants' assertion that the judge misdirected himself
in defining the issue as to the proper measure of damages which fell for determination.

Section 53 of the Sale of Goods Act 1979 has the sidenote "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 fulfilled 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

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

action for the same breach of warranty if he has suffered further

damage."

Section 54 provides:

"Nothing in this Act affects 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."

The Sale of Goods Act 1979 lays down the basic principles for remoteness of damage
in language derived from the leading case of Hadley v. Baxendale (1854) 9 Exch. 341
where the main proposition was:

"Where two parties have made a contract which one of them has
broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly and
reasonably be considered either as arising naturally, i.e. according
to the usual course of things, from such breach of contract itself,
or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as
the probable result of the breach of it:" per Alderson B., at p. 354.

The principles in Hadley v. Baxendale have been interpreted and restated by the Court of
Appeal (see Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B.
528 ) and in the House of Lords in C. Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 .
In the latter case the word "directly" is eliminated and more emphasis is placed on the
"reasonable contemplation" of the parties. Such moderately differing formulations of
the common law principles for remoteness of damage in contract are still *94 based
on Hadley v. Baxendale, 9 Exch. 341 . Lord Reid in C. Czarnikow Ltd. v. Koufos [1969]
1 A.C. 350 stated, at p. 385:

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

"The crucial question is whether, on the information available

to the defendant when the contract was made, he should, or the
reasonable man in his position would, have realised that such loss
was sufficiently likely to result from the breach of contract to make
it proper to hold that the loss flowed naturally from the breach or
that loss of that kind should have been within his contemplation."

Lord Upjohn stated, at p. 424:

"the broad rule as follows: What was in the assumed contemplation

of both parties acting as reasonable men in the light of the general
or special facts (as the case may be) known to both parties in regard
to damages as the result of a breach of contract . . ."

The so-called second rule in Hadley v. Baxendale, 9 Exch. 341 applies when the loss
caused by the breach of contract is greater than, or different from, what would have been
in "normal" circumstances. The rule is that:

"if the special circumstances under which the contract was actually
made were communicated by the plaintiffs to the defendants, and
thus known to both parties, the damages resulting from the breach
of such a contract, which they would reasonably contemplate,
would be the amount of injury which would ordinarily follow from
a breach of contract under the special circumstances so known and
communicated:" pp. 354-355.

Section 53(2) lays down the basic rule in terms of Hadley v. Baxendale . The second
rule is not expressly incorporated in the Sale of Goods Act 1979 but is considered to
be impliedly accepted by the wording of section 54 : "Nothing in this Act affects the
right of the buyer or the seller to recover . . . special damages in any case where by
law . . . special damages may be recoverable:" see Benjamin Sale of Goods, 4th ed.
(1992), Appendix A, p. 1768, para. A-023.

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

The judgment

The judge approached the problem thus. He said:

"In my judgment - the main issue which I have to determine in this

action is whether the prima facie measure of damages is displaced
by some other measure. At the time the contracts were made what
may the court reasonably suppose to have probably been in the
contemplation of the parties as to the remedy to be available to
the plaintiffs in the event of breach of the warranty of quality,
assuming the parties to have applied their minds to the contingency
of there being such a breach? . . . Unless the court is satisfied on the
balance of probabilities that some other measure of damages was
objectively in the contemplation of the parties when the contract
was made, the prima facie measure set out in section 53(3) remains
un-displaced if as the result of transactions by the buyer with
other parties either the buyer may recover a windfall or the seller's
liability may be limited *95 to the prima facie measure albeit that
the buyer's loss is much greater . . .

"A plaintiff will only be restricted in his claim for damages (by
reduction from the prima facie measure) as a result of special
circumstances when those special circumstances have been brought
home to him in such a way as to show that he has accepted or is
taken to have accepted the risk that he will not be able to claim
damages in respect of defective goods supplied to him unless his
customer of his processed goods brings a claim against him. . . .
Not only at the time that the contract was made must the parties
be viewed objectively to have contemplated that the plaintiff is
taking the risk of having his normal measure of damages restricted
in the event that his customer does not claim against him although
he may still suffer loss because his customer may not re-order
from him because of the defective quality of the goods supplied
to him but also they must be taken to have contemplated that
the defendant is taking the risk that the damages awarded against
him will not be limited to the prima facie measure but that he
will be exposed to a potential open-ended liability that he will
have to indemnify the plaintiff in respect of any claim made by a
customer against him. . . . The defendants have failed to satisfy
me on the balance of probabilities that having regard to all the
circumstances in which the contract was made the parties must

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

be taken to have contemplated that the section 53(3) measure of

damages was displaced." (Emphasis added.)

Mr. Stephen Grime on behalf of the defendants submits that the judge misdirected
himself in defining the issue as to the measure of damages which fell for determination.
He submits that the principal issue which the judge had to decide was as to whether at
the time of the making of the relevant contracts the parties contemplated that the loss
which would be suffered by the plaintiffs in the event of a serious breach of warranty
of quality resulting in premature deterioration in service of the decals made from the
defendants' goods was (i) diminution in the value of goods supplied by the defendants
or (ii) liability in damages to purchasers of the decals together with loss of business and
goodwill and any incidental loss and expense. The judge wrongly defined the issue as
being as to the parties' contemplation of the legal remedy which was available to the
plaintiffs in the event of breach of contract rather than as to their contemplation of the
nature of the financial loss which the plaintiffs would be likely to suffer upon breach.

Leading counsel advanced the following propositions. (1) In case of sale of goods
where a term as to quality is broken, the measure of damages depends upon the
contemplation of the parties as to the consequence of a breach of the type committed,
such contemplation being based on either their imputed or actual knowledge at the
time of contracting. (2) There will be imputed to parties knowledge of facts which they
had learnt as to the nature and background of their respective businesses (first limb of
Hadley v. Baxendale so called). (3) In the Sale of Goods Act 1979, section 53(3) the
words "prima facie" are not an expression of special quality or merit being attached
to difference in value *96 measure but more a reflection of the trading/mercantile
conditions of times. Where the sale contract is not made between merchants dealing
in a market the displacement burden is a light one. (4) Actual knowledge of special
circumstances may extend the ambit of potential damages: section 54. (5) In some cases
the finding as to contemplation of the parties as to the consequences of breach may be
to show that breach will give rise to difference in value measure under section 53(3)
and special damages under section 54. The claimant will not be limited if he wishes to
choose one or both. (6) In other cases the finding as to contemplation of the parties as
to the consequences of breach will show that the possible measures are alternatives. (7)
Where the measures are alternatives it is for the court to choose the correct measure, not
the claimant. (8) Where the court chooses one or other measure, the effect of the choice
may reduce the amount of damages which may be claimed or increase it.

Mr. Andrew Moran on behalf of the plaintiffs submits that the judge did not misdirect
himself in defining the issue as to the measure of damages which fell for determination.
The issue was whether the loss claimed by the plaintiff was too remote a consequence

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

of a breach of contract. In approaching this issue the judge was correct to proceed to the
measure prescribed by section 53(2) and (3) of the Act as the starting point and then to
consider whether on the facts of this case, the defendants had satisfied him that the prima
facie measure was displaced by some other measure. This was to be resolved by asking
the question, what loss to the plaintiffs is it reasonable to suppose would have been in the
contemplation of the parties as a "serious possibility" or "a not unlikely result" had they
had in mind the breach when they made their contract? The time of assessment is the
time of making the contract. The judge both correctly defined the issue and expressed a
proper approach to its resolution. Section 53(2) lays down a rule defining the measure
of damages as a particular "loss" and section 53(3) is the exposition is how "such loss"
is ordinarily calculated.

Leading counsel advanced the following propositions. (1) In a case of sale of goods
when a term as to quality is broken the court should resolve any issue as to the measure
of damage by first recourse to section 53, Sale of Goods Act 1979 . In doing so the
court is objectively ascertaining what loss would have been in the contemplation of the
parties at the time of making the contract had they been made aware that a breach of the
type which in fact occurred would occur. (2) The reference to "loss" in paragraph 1 does
not involve the precise detail of the damage or the precise manner of its happening: it is
enough for the innocent party to show that loss of that kind is not unlikely or a serious
possibility. (3) The parties are deemed to contemplate loss which directly and naturally
results in the ordinary course of events. In the ordinary course of events when goods
of defective quality are delivered such loss is prima facie the difference in value. This
principle is of universal application and not confined to mercantile or trading conditions
of the time when the predecessor of the Act appeared. (4) Additional actual or imputed
knowledge proved by a party seeking to rely on it, may demonstrate that particular loss
would have been in the contemplation of the parties either (i) as a serious possibility
of additional loss or, (ii) (as in a chain sale *97 proper) as the exclusive kind of loss
that might be suffered. In (i) the party suffering loss may confine his claim to the loss
which the parties are deemed to contemplate as in (3) above, or he may add a claim
for additional loss in contemplation. In (ii) he is confined to a claim for the exclusive
loss so contemplated. (5) It is for the judge to resolve as a question of fact whether such
additional knowledge as is relied on, demonstrates that some exclusive alternative loss
was in contemplation.

Conclusion

I take as my starting point that section 53(3) lays down only a prima facie rule, from
which the court may depart in appropriate circumstances. The burden of proof lies upon
the person who seeks such a departure. The plaintiffs do not suggest that it is only open to
a buyer to rebut the presumption. In my view, there is no reason in logic or principle why
a seller cannot, in appropriate circumstances, seek to discharge the burden and displace
the presumption: see Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 , 435-436.

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

The situation often arises where the buyer seeks to displace the presumption and recover
losses other than the diminution in value. Where a seller knows that the buyer intended
to resell the goods and ought reasonably to have contemplated that a breach of his
undertaking as to the description or condition of goods would be not unlikely to cause
the buyer to lose the profit he hoped to make on the resale, or potential sub-sale, the
buyer may recover damages in respect of such loss of profits caused by a breach of the
seller's undertaking: see Chitty on Contracts, 27th ed. (1994), vol. 2, pp. 1290-1291,
para. 41-315.

Situations arise where the court is satisfied and finds as a fact that it was within the
contemplation of the parties, at the time of making the contract that:

"(a) the buyer intended to resell, or probably would do so, and

that his sub-buyer would probably resell, and so on, so that there
would be a series of sub-sales or 'string contracts' of the same
goods; and (b) that each contract in the series would, or probably
would, contain the same, or a similar, contractual undertaking as
to the description or condition of the goods; and (c) that it was
not unlikely that a breach of the seller's undertaking would cause
the buyer and each sub-buyer in the series to be in breach of his
undertaking to his own buyer; and (d) that it was not unlikely that,
in the case of such a breach, the ultimate buyers would recover
damages from their sellers, so that liability would in turn be passed
up the chain of sellers and buyers. In these circumstances, the buyer
who has paid to his sub-buyer damages and costs for breach of
the undertaking in the first contract of sub-sale (which the sub-
buyer claimed from the buyer, as the result of similar payments of
compensation between successive sub-buyers down the chain) may
recover the amount paid by him to the sub-buyer, together with his
own reasonable costs in reasonably defending the sub-buyer's claim
against him; the damages and costs paid or incurred by the buyer
are taken as the measure of damages for the seller's breach of the
original contract [see Hammond & Co. v. Bussey (1887) 20 Q.B.D.
79 , Kasler and Cohen v. Slavouski [1928] 1 K.B. 78] :" per Chitty
on Contracts, 27th ed., p. 1295, para. 41-321.

In the present case there was no series or "string" of contracts. The same goods were
not sold on. Even so the string contract cases illustrate graphically how the court is

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

permitted to and will depart from the presumption in order to do justice between the
parties based on a finding of fact of what the parties reasonably contemplated.

If the buyer uses the goods to make some product out of them the value of the goods is
not taken. In Holden (Richard) Ltd. v. Bostock and Co. Ltd. (1902) 18 T.L.R. 317 where
sugar was sold to brewers to be used for brewing beer and because of arsenic in the
sugar the beer was rendered poisonous and was destroyed by the brewers the value of
the beer at its market price in their cellars was allowed, inter alia as damages. Similarly
in Bostock & Co. Ltd. v. Nicholson & Sons Ltd. [1904] 1 K.B. 725 where commercial
sulphuric acid warranted free from arsenic was used by the buyer for making brewers'
sugar, one of its ordinary uses, he recovered not only the price paid for the acid rendered
worthless to him by the breach of warranty but the value of other ingredients spoilt by
being mixed with the acid.

In McGregor on Damages , 15th ed. (1988), at p. 519, para. 808, it is stated:

"In all these cases, it is once again vital that the use to which
the goods have been put by the buyer is one that the seller either
contemplated or must be taken to have contemplated: otherwise
the damage will be too remote. If the buyer adopts the ordinary
use of the goods, as where food sold for human consumption is
eaten by him, or adopts one of the ordinary and well recognised
uses although not the only one, as in Bostock v. Nicholson , or
adopts even a use which is not the predominant one provided it is
a use which is sufficiently common, as in Hardwick Game Farm
v. Suffolk Agricultural Poultry Producers Association [1969] 2
A.C. 31 , where contaminated groundnut extractions were supplied
for compounding into poultry food and the compound was fed to
pheasants and partridges, he will recover under the first rule in
Hadley v. Baxendale . If however he puts them to some special
use, he will recover only if this intention is communicated to the
seller, i.e. under the second rule in Hadley v. Baxendale . Here, as
elsewhere, the dividing line between the first and second rules is
not always clear in the cases."

Mr. Moran in argument invoked the principle that where the seller delivers defective
goods but the buyer is nevertheless able to perform a sub-contract by delivering the
goods to his sub-buyer, the buyers damages against the seller cannot be reduced by
taking this into account. He relied upon the decision of the Court of Appeal in Slater

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v. Hoyle & Smith Ltd. [1920] 2 K.B. 11 where the buyer bought cotton cloth from the
seller in order to fulfil another contract which the buyer had already made with a sub-
buyer. The seller delivered cloth which was not up to the contractual quality, but the
buyer was able to perform the sub-contract by delivering the same cloth. The sub-buyer
paid the full price under the sub-contract. The buyer sued the seller for damages. The
court awarded the buyer *99 damages assessed at the normal measure, namely, the
difference between the market price at the time and place of delivery of cloth up to the
contractual quality and the market price, at the time and place of delivery of the cloth
actually delivered. Scrutton L.J. said, at p. 23:

"If the buyer is lucky enough, for reasons with which the seller has
nothing to do, to get his goods through on the sub-contract without
a claim against him, this on principle cannot affect his claim against
the seller any more than the fact that he had to pay very large
damages on his sub-contract would affect his original seller."

In my judgment the decision in Slater's case can be narrowly distinguished from the
instant case. In Slater's case the sub-sale was of the same goods albeit after bleaching;
the seller did not know of the contemplated sub-sale. In the instant case the goods were
substantially converted or processed by the buyer and the sellers were aware of the
precise use to which the film was to be put at the time the contract was made. I recognise
Auld L.J.'s reservations.

This last case must be considered in the light of the dicta of Devlin J. in Biggin & Co.
Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 , 435-436:

"Damages which arise under the so-called 'second rule' in Hadley v.

Baxendale, 9 Exch. 341 , are sometimes referred to as if they were
an increased sum which the plaintiff could obtain if he could show
'special circumstances,' or as if the rule embodied a measure of
damage specially beneficial to the plaintiff which he could invoke
if he fulfilled the necessary conditions. It is, no doubt, true that it
generally operates in favour of a plaintiff rather than against him,
but I think that it is capable of doing either."

and later, at p. 436:

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

"It has often been held . . . that the profit actually made on a sub-
sale which is outside the contemplation of the parties cannot be
used to reduce the damages measured by a notional loss in market
value. If, however, a sub-sale is within the contemplation of the
parties, I think that the damages must be assessed by reference to
it, whether the plaintiff likes it or not. Suppose that the only fault in
the compound was its incompatibility with bitumen felt, the chance
that it might produce bad results would certainly reduce its market
value before use. But if it is the plaintiff's liability to the ultimate
user that is contemplated as the measure of damage and if in fact it
is used without injurious results so that no such liability arises, the
plaintiff could not claim the difference in market value, and say that
the sub-sale must be disregarded. I say this so as to make it clear,
that although I have come to the conclusion that, if the plaintiffs'
basic claim fails, they can to some extent rely on the alternative of
difference in market value, it is not because I think the plaintiffs
have an option in the matter."

Lord Pearce in C. Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350 made a similar point
when he said, at p. 416:

"of course the extension of the horizon need not always increase
the damages; it might introduce a knowledge of particular
circumstances, *100 e.g. a sub-contract, which show that the
plaintiff would in fact suffer less damage than a more limited view
of the circumstances might lead one to expect."

In my judgment, once the goods had been converted in a manner which was
contemplated by the parties, Slater v. Hoyle & Smith Ltd. [1920] 2 K.B. 11 has no
application, the damages must be assessed by reference to the sub-sale "whether the
plaintiff likes it or not." Thus the plaintiff does not have the option to choose which
outcome is most favourable to him. It is for the court to determine the correct measure
of damage, not the aggrieved party. Where the court determines the proper measure the
effect of the choice may reduce the amount of damages claimed or increase it.

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

With this analysis I address the issue as to what was within the contemplation of the
parties. The evidence showed that there was a close and protracted business relationship
between the parties from which it can be readily inferred that the defendants had detailed
knowledge of the plaintiffs' business. The end use of the film was exclusively for
container decals. The defendants knew that the plaintiffs then supplied the decals to
container manufacturers and the manufacturers subsequently supplied the containers
(suitably marked by the decals) to subsequent purchasers. The sellers knew that the
plaintiffs' customers demanded five-year durability of their product.

Moreover, the sellers would have known that any defect in the film would not have been
detected on delivery or in the process of manufacture. The defect, i.e. the breach, would
have caused deterioration of decals in service with the result that the ultimate users of
the containers (lessees of the owners) would complain to and claim damages against the
container owners who would in turn make claims against the container manufacturers.
The manufacturers in turn would make claims for damages against the plaintiffs which
the plaintiffs would be "not unlikely" obliged to meet. Moreover the defendants would
expect to be liable for the value of unmerchantable film processed by the plaintiffs and
of unsaleable raw materials supplied by the defendants.

These factors, to my mind, point indubitably against a loss of value basis and towards
a measure of damage based upon the plaintiffs' liability to the subsequent or ultimate
users of the plaintiffs' product in which the defendants' goods were an integral part and
in the event of a breach of the warranty as to quality the plaintiffs' liability to those
others would be triggered.

It is not without significance that after the breach had been discovered the remedy sought
by the plaintiffs in correspondence was one of indemnity and not the difference of value
of the goods. However, when the statement of claim was served in 1988 it was solely for
the difference in value. The obvious inference to draw is that by that time the plaintiffs
had realised that the claim for indemnity and the peripheral claims were of lesser value
than a claim for the market value. It is true that the statement of claim was amended in
1991 to include, in the alternative, an indemnity against all claims by customers of the
plaintiffs. However, at trial they pressed for relief under the section 53(3) presumption.
*101

Thus, in my view, at the time of making their contract the parties were aware of facts
which indicated to both that the loss would not be the difference between the value of the
goods delivered and the market value and accordingly the prima facie measure ceased
to be appropriate.

Finally, the judge in rejecting the defendant's case at trial said:

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

"Mr. Heaton's submission is that the measure of damages

recoverable by the plaintiffs is in effect an indemnity in respect
of claims by their customers made against them. The weakness of
the Heaton submission is demonstrated by nebulousness of what
Mr. Heaton called an indemnity. Was it unlimited in amount? The
purpose for which the vinyl was made was for processing into
decals. A degraded decal, that is not having the five year durability
quality, could result in the loss of a container and the goods within
it, the value of which could be large or small. It could also result
in a container and its goods going to a wrong destination. Did the
indemnity cover such losses which might well be of a magnitude
out of all proportion to the price of the vinyl when sold to the
plaintiffs or the price of the decal, the vinyl processed by the
defendants when sold on to their customers? Did the indemnity
only cover claims the defendants were legally obliged to satisfy
or did it cover claims which could be defeated by reason of the
Limitation Act but which would be commercially suicidal not to
satisfy? Did the indemnity cover claims successfully defended in
respect of costs of successfully defending claims arising out of
the breach of warranty. Did it cover the costs of processing and
investigating complaints?"

I do not see any "nebulousness" of what Mr. Heaton called an indemnity. The defendants
will only be liable to indemnify the plaintiffs in respect of any liability which they may
be held to have incurred to third parties. The difficulties posed by the trial judge are,
to my mind, more apparent than real and would be a matter for determination in any
subsequent action by third parties and in third party proceedings against the defendants.

I accept Mr. Grime's submission that the judge attached weight to the supposed
difficulties in assessment that adoption of the measure of damages contended for by the
defendant would create when such difficulties as may exist were irrelevant to the issue
which the judge had to decide.

It follows that, with respect to the judge, I consider his reasoning and conclusion cannot
be sustained. If the plaintiffs had sought to rebut the presumption they would have
succeeded with ease. Any argument by the defendants that the correct measure of
damage was the difference in value would have been doomed to failure. I am satisfied
therefore that the judge erred in law in holding that the prima facie measure of damages

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

for breach of warranty of quality provided for by section 53(3) of the Sale of Goods
Act 1979 was not displaced.

Accordingly I would allow the appeal, substitute a judgment for £22,000 with any
appropriate interest and direct that the case be remitted for assessment of damages.
*102

Auld L.J.

I agree with the conclusion of Otton L.J. and his general reasoning, but wish to add
some words on the effect of section 53(3) of the Act of 1979 and on mercantile contracts
where the parties obviously contemplate that the buyer will sell on the subject matter of
the contract in its existing or in an altered form or as part of some other thing.

As to section 53(3), there is, in my view, a danger of giving it a primacy in the code of
section 53 that it does not deserve. The starting point in a claim for breach of a warranty
of quality is not to determine whether one or other party has "displaced" the prima facie
test in that subsection. The starting point is the Hadley v. Baxendale principle reproduced
in section 53(2) applicable to a breach of any warranty, namely an estimation on the
evidence, of "the . . . loss directly and naturally resulting in the ordinary course of events
from the breach of warranty." The evidence may be such that the prima facie test in
section 53(3) never comes into play at all.

The Hadley v. Baxendale principle is recovery of true loss and no more (or less), namely
to put the complaining party, so far as money can do it, in the position he would have
been if the contract been performed. Where there is evidence showing the nature of
the loss that the parties must be taken to have contemplated in the event of breach, it
is not to be set aside by applying the prima facie test in section 53(3) simply because
calculation of such contemplated loss would be difficult. Equally, it should not be set
aside in that way so as to produce a result where the claimant will clearly recover more
than his true loss.

Where, as here, the contract of sale is between two merchants both of whom contemplate
that the subject matter of the sale is to be sold on in whatever form, it offends the Hadley
v. Baxendale principle to rule out mutual contemplation by them of damage arising from
the buyer's onward sale simply because the subject matter is to be altered or incorporated
in another product, or because the terms of the sub-sale may not be identical to those
in the sale. It is equally offensive to that principle to describe the subject matter, as
Mr. Moran did, as "worthless" or of "no value" to the buyer at the time of delivery if it
appeared then to be of the contract quality and he was able to incorporate it in his product
and sell it on without claim or provable prospective claim. Put shortly, and drawing on
the analysis of Scarman L.J. in H. Parsons (Livestock) Ltd. v. Uttley Ingham & Co. Ltd.

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[1978] Q.B. 791 , 807, the sort of question the judge should have asked is: "What would
the parties have thought about the probable loss to the buyer in the event of a latent
defect in film at the time of delivery later causing trouble?"

Those observations run contrary to the judgments of this court in Slater v. Hoyle & Smith
Ltd. [1920] 2 K.B. 11 , though they are of a piece with the approach of Devlin J. in
Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 . In my view, the time has come
for the former case to be reconsidered at least in the context of claims by a buyer for
damages for breach of warranty where he has successfully sold on the subject matter
of the contract in its original or modified form without claims from his buyers. With
respect to Otton L.J., I do not think that the case is materially distinguishable from the
present on the two bases that he suggests.
*103

As to the first, the seller's knowledge of the buyer's intended use of the goods, the report
in Slater v. Hoyle & Smith Ltd. [1920] 2 K.B. 11 states that the seller did not know
of the buyer's onward sale contracts. However, that must simply mean that he did not
know of the specific contracts; for there can be no doubt that, in contracting to sell
3,000 pieces of unbleached cloth of a certain quality, the seller knew that he was dealing
with a commercial buyer who would sell them on either unprocessed or processed to
some degree, and must be taken to have contemplated that loss could result from such
onward sales if the cloth was not of the required quality. The fact that the seller in this
case had more detailed knowledge of the use to which the buyer would put the film is
not a material distinction in determining the measure of damages as distinct from their
precise calculation.

Second, as to what happened to the goods, the buyer in Slater's case did in fact process
them before selling them on; he bleached the unbleached pieces of cloth. That does not
seem to me to be materially different for this purpose from incorporating the goods in
a manufactured product for onward sale.

The Court of Appeal in Slater's case had to reason around two decisions to the effect
that where there has been delivery of goods to the buyer his onward sale may be taken
into account in the assessment of damages. The first was a decision of the Privy Council,
Wertheim v. Chicoutimi Pulp Co. [1911] A.C. 301 , where their Lordships held that
the damages for late delivery should take account of the price actually obtained by the
buyer in his onward sale. Lord Atkinson, giving the judgment of the Board, said, at pp.
307-308:

"it is the general intention of the law that, in giving damages for
breach of contract, the party complaining should, so far as it can
be done by money, be placed in the same position as he would

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

have been in if the contract had been performed . . . That is a

ruling principle. It is a just principle. The rule which prescribes
as a measure of damages the difference in market prices at the
respective times above mentioned is merely designed to apply this
principle and . . . it generally secures a complete indemnity to
the purchaser. But it is intended to secure only an indemnity. The
market value is taken because it is presumed to be the true value of
the goods to the purchaser. In the case of non-delivery, where the
purchaser does not get the goods he purchased, it is assumed that
these would be worth to him, if he had them, what they would fetch
in the open market; and that, if he wanted to get others in their stead,
he could obtain them in that market at that price. In such a case,
the price at which the purchaser might in anticipation of delivery
have resold the goods is properly treated, where no question of loss
of profit arises, as an irrelevant matter: Rodocanachi v. Milburn
(1886) 18 Q.B.D. 67 . The purchaser not having got his goods
should receive by way of damages enough to enable him to buy
similar goods in the open market. Similarly, when the delivery of
goods purchased is delayed, the goods are presumed to have been
at the time they should have been delivered worth to the purchaser
what he could then sell them for, or buy others like them for, in
the open market, and when they are in fact *104 delivered they
are similarly presumed to be, for the same reason, worth to the
purchaser what he could then sell for in that market, but if in fact the
purchaser, when he obtains possession of the goods, sells them at a
price greatly in advance of the then market value, that presumption
is rebutted and the real value of the goods to him is proved by the
very fact of this sale to be more than market value, and the loss he
sustains must be measured by that price, unless he is, against all
justice, to be permitted to make a profit by the breach of contract,
be compensated for a loss he never suffered, and be put, as far
as money can do it, not in the same position in which he would
have been if the contract had been performed, but in a much better
position."

Lord Atkinson's reasoning in that case, in particular the distinction between cases of non-
delivery and late delivery and the relevance of the onward sale price in the latter case,
was approved and restated by Lord Dunedin in the House of Lords in Williams Bros. v.
Ed. T. Agius Ltd. [1914] A.C. 510 , a case of non-delivery. He said, at pp. 522-523:

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

"It is certain that Lord Atkinson, who delivered the judgment in that
case, did not think that he was going against Rodocanachi's case,
for he says so in terms. Nor, in my mind, is there any discrepancy
between the two judgments. Wertheim's case was a case, not of
delivery withheld, but of delivery delayed. The buyer, therefore, got
the goods, and the only damage he had suffered was in delay. Now,
delay might have prejudiced him; but the amount of prejudice was
no longer a matter of speculation, it had been put to the test by the
goods being actually sold; and he was rightly, as I think, only held
entitled to recover the difference between the market price at the
date of due delivery and the price he actually got. But when there
is no delivery of the goods the position is quite a different one. The
buyer never gets them, and he is entitled to be put in the position
in which he would have stood if he had got them at the due date.
That position is the position of a man who has goods at the market
price of the day - and barring special circumstances, the defaulting
seller is neither mulct in damages for the extra profit which the
buyer would have got owing to a forward resale at over the market
price . . . nor can he take benefit of the fact that the buyer has made
a forward resale at under the market price."

See also per Lord Atkinson, at p. 529, and the unusual case of R. Pagnan & Fratelli
v. Corbisa Industrial Agrocapuaria Limitada [1970] 1 W.L.R. 1306 , where a buyer,
having initially rejected goods because of their defective quality, later accepted them
after negotiating a reduced price which was less than the market price for similar goods
at the date of the seller's breach. The Court of Appeal held that the prima facie market
price rule in section 53(3) did not apply because the buyer had suffered no loss.

In Slater's case [1920] 2 K.B. 11 all the members of the court were disinclined to extend
the decision in Wertheim's case [1911] A.C. 301 to a claim for breach of warranty of
quality. Bankes L.J. [1920] 2 K.B. 11 , 15, confined it in any event to a sub-sale of the
identical goods, relying on reasoning of Lord Dunedin in Williams Bros. v. Ed. T. Agius
Ltd. [1914] A.C. 510 , 523 about the difficulty of establishing damages based on the
terms of a sub-sale in a non-delivery case. Warrington L.J. [1920] 2 K.B. 11 , 17-18,
appears to have been of the view - though he did not explain why - that section 53(3)
of the Sale of Goods Act 1893 (56 & 57 Vict. c. 71) (corresponding to section 53(3) of
the Act of 1979) was the right principle governing delivery of inferior goods to those
provided for by the contract and that what the buyer did with the goods was irrelevant.
Scrutton L.J., at p. 22, expressed the view that the Rodocanachi principle, 18 Q.B.D.

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

67 as to non-delivery applied equally to delivery of inferior goods, because if the buyer

fulfils his sub-contract by buying in the market, he is left with the inferior goods at
their market value against the market value of sound goods. Alternatively, if he applies
the inferior goods to a sub-sale the damages he may have to pay to his buyer may be
calculable differently from those in the contract with his seller. He acknowledged that,
on this approach, the buyer may recover more than his true loss, but he cited examples
of the same principle resulting in a recovery of less than the true loss.

With respect to the Court of Appeal in that case, and to the authors of the supporting
comments in McGregor on Damages, 15th ed., p. 502, para. 774 and Chitty on Contracts
, 27th ed., vol. 2, p. 1280, para. 41-300, note 91, it seems to me that they wrongly: (1)
overlooked the basic rule in section 53(2) as to what would have been in the ordinary
and natural contemplation of the parties in a commercial contract such as it was, namely,
that the buyer could well be prejudiced in his onward dealing with the goods if they were
defective; (2) disregarded the reasoning of the Privy Council in Wertheim v. Chicoutimi
Pulp Co. [1911] A.C. 301 as approved and re-stated by Lords Dunedin and Atkinson in
Williams Bros. v. Ed. T. Agius Ltd. [1914] A.C. 510 that where there has been delivery
in a mercantile contract and it can be seen what the buyer has done with the goods, it is
possible and proper to measure his actual loss by reference to that outcome; (3) had too
much regard to practicality at the expense of principle in relying on possible difficulties
of establishing causation and assessment where the goods sold have been subjected to
some process or where the terms of the contract and sub-contract may for that or some
other reason be different; and (4) were seemingly content to award a buyer more than
the evidence clearly showed he had lost.

As Devlin J. made plain in his consideration in Biggin & Co. Ltd. v. Permanite Ltd.
[1951] 1 K.B. 422 , 436 of the supposed two rules in Hadley v. Baxendale, 9 Exch. 341
, the critical matter in determining the earlier question as to the applicability or not of
the prima facie rule in section 53(3) is the contemplation of the parties:

"there is only one area of indemnity to be explored, and that is

what is within the prevision of the defendant as a reasonable man
in the light of the knowledge, actual or implied, which he has at
the time of the contract. It has often been held . . . that the profit
actually made on a sub-sale which is outside the contemplation
of the parties cannot be used to reduce the damages measured by
a notional loss in market value. If, however, a sub-sale is within
the contemplation of the parties, I think that the damages must be
assessed by reference to it, whether the plaintiff likes it or not. . . .
if it is the plaintiff's liability *106 to the ultimate user that is
contemplated as the measure of damage and if in fact it is used
without injurious results so that no such liability arises, the plaintiff

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

could not claim the difference in market value, and say that the
subsale must be disregarded."

The judge directed himself broadly to the question of the notional contemplation of the
parties in the event of a latent defect in the film putting the buyer in breach of his contract
to the container manufacturers. However, apart from a brief summary of the relevant
circumstances and posing a series of unanswered questions about uncertainties as to the
extent of the damages if calculated on that basis, he has not made a reasoned finding as to
their notional contemplation. His approach was a paraphrase of a passage in McGregor
on Damages , 15th ed., pp. 161-162, para. 264 relating to contracting parties' knowledge
of "special circumstances." He asked whether there were "special circumstances" known
at the time to the buyer which he should be taken as having accepted so as to restrict his
claim "by reduction from the prima facie measure" or by which the seller should have
contemplated exposing himself to an "open-ended liability" of indemnity.

In my view, that was a wrong approach. This was not a "special circumstances" case
or one where the possible damages were so remote or open-ended as not to have been
within the parties' contemplation. It was eminently a case in which they would have
contemplated that, in the event of a breach by the seller discovered only after the
decals had been in use, the buyer might wish to pass on to it claims for damages from
dissatisfied customers.

I add a few words about chain contracts. In Dexters Ltd. v. Hill Crest Oil Co. (Bradford)
Ltd. [1926] 1 K.B. 348 , C.A., Bankes, Warrington and Scrutton L.JJ. expressed the
view, obiter, that all the contracts in a chain must be the same if recoverable damages are
to be passed along the chain. However, as the editors of McGregor on Damages, at p.
522, para. 815, observe, that approach is "a little too strict." The matter was considered
by Devlin J. in Biggin & Co. Ltd. v. Permanite Ltd. [1951] 1 K.B. 422 . He said, at p.
433, that he agreed with the reasoning that lay behind the view, namely that material
variations in contracts down the line could lead to contractual claims for damages not
contemplated by the original seller. However, he clearly regarded the matter as one of
fact for determination in each case, not as a rigid principle of law that all contracts in
the chain must be in the same terms. He said, at pp. 433-434:

"I respectfully adopt this principle, but I have still to determine how
it should be applied in this case, and also what degree of variation
in descriptions breaks the chain. . . . To understand the application
of the principle it is necessary to understand its basis. Like every
principle in this branch of the law, it stems from the broad rule that

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

the damage is to be measured by those consequences of the breach

which the parties as reasonable men would, if they had thought
about it, have foreseen and accepted as natural and probable. If the
variation to a description is such that it is impossible to say whether
the injury that ultimately results would have flowed from the breach
of the original warranty, the parties must as reasonable men *107
be presumed to have put the liability for the injury outside their
contemplation as a measure of compensation. If this is, as I believe,
the nature of the principle, it must be applied very differently
according to whether the injury for which the defendant is being
asked to pay is a market loss or physical damage. In the former
case (which I think is what the Lords Justices were considering in
Dexters Ltd. v. Hill Crest Oil Co. (Bradford) Ltd. [1926] 1 K.B.
348 ) any variation that is more than a matter of words is likely to
be fatal, because there is no way of telling its effect on the market
value. In the latter case the nature of the physical damage will show
whether the variation was material or not."

As Mr. Stephen Grime submitted on behalf of the seller, the point is essentially one
of causation, namely whether there is sufficient similarity between the sale contract
and the subsequent contract(s) to enable a finding that breach by the seller of the sale
contract has in fact caused the breach of the subsequent contract(s). Clearly, as he also
submitted, a substantial change to goods sold as a result of the buyer subjecting them
to a manufacturing process may break the chain of causation between the breach of
the contract sued upon and any claim arising under a subsequent contract. However,
that is unlikely on the facts of this case - a five-year film life without deterioration
was stipulated by the container owner, the container manufacturer and the decal
manufacturer, the buyer, in the contracts into which they respectively entered along the
chain.

I therefore conclude, as Otton L.J. has done, that this is plainly a case in which the
parties must be taken as having contemplated that any latent defect in the vinyl film
at the time of delivery or at the time of conversion by the buyer into the decals might
when later discovered render the buyer vulnerable to claims for damages which it would
wish to pass back to the seller. On the material before the judge, there appear to have
been no material differences between the contracts in the chain which would have put
damage claimed at any point in the chain outside the imputed contemplation of the
buyer and seller, given their knowledge that the vinyl film and the decals into which it
was converted were required to serve their purpose for a minimum of five years. I am

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accordingly of the view that the appeal should be allowed and that there should be an
order in the terms stated by Otton L.J.

Thorpe L.J.

Where a contract is breached the natural objective of the legal system is to compensate
the injured party fairly. Where a manufacturer supplies a defective product to his
customers as a consequence of the use within the process of a raw material that did not
possess the qualities warranted by the supplier the manufacturer is fairly compensated
by recovering from the supplier the cost of settling claims made by his customers
together with the profit lost on those sales, and perhaps prospective sales. Compensation
so calculated would in the vast majority of cases considerably exceed the price that the
manufacturer paid *108 for the raw materials. I make those generalisations to illustrate
the conclusion that the facts underlying this appeal are exceptional.

The condition governing the supply of the product to the plaintiffs dealt with liability
under paragraph 11 in these terms:

"(c) The seller's aggregate liability to the purchaser whether for

negligence breach of contract misrepresentation or otherwise shall
in no circumstances exceed the cost of the defective, damaged or
undelivered goods determined by net price invoiced to the buyer in
respect of any occurrence or series of occurrences. (d) The seller's
prices are determined on the basis of the limits of liability set
out in this condition. The purchaser may by written notice to the
seller request the seller to agree a higher limit of liability provided
insurance cover can be obtained therefor."

Thus the parties must be taken to have contemplated the consequence of possible future
breach within the terms of those sub-paragraphs.

When problems of discoloration and disintegration of the decals arose in the summer
of 1985 the plaintiffs did not know the cause but the defendants did. The defendants
took steps to remedy the deficiency in future supplies, concealing its realisation and
its reaction from the plaintiff. When the plaintiffs subsequently asserted the true cause
of the defect the defendants refuted the assertion by spurious reliance on test results
that were not germane. Despite this unmeritorious history the defendants vigorously
contested the issue of liability. The plaintiffs' managing director gave lengthy evidence.
On the sixth day the defendants made substantial admissions. On the seventh day they

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

added the admission that all the material supplied to the plaintiffs between 1980-1985
inclusive was defective in that by reason of its lack of ultraviolet stabiliser it had a
tendency to discolour or degrade within the five year period for which it was warranted
durable. The defendants were therefore left with the issue of quantum of the resultant
damage. The statement of claim sought the return of the contract price of £564,328.54.
By subsequent amendment it sought an indemnity in respect of all claims made or to be
made against the plaintiffs caused by or attributable to the supply by the defendants of
defective film. But the defendants' endeavour to persuade the judge to assess damages
on the alternative basis pleaded by amendment had to be weighed not only in the light
of the concessions but also upon the evidence of the plaintiffs alone, since the defendant
elected to call no evidence. In the course of his evidence Mr. Bence for the plaintiffs
had asserted that the defective film supplied was worthless, since it lacked the essential
durability, and that accordingly the plaintiffs were entitled to the return of the price paid.

Of course the reality was that he had had no conception that the material was defective
until 1985 and had processed it to supply decals to manufacturers whose ultimate
dissatisfaction had only given rise to modest claims. Despite that reality the judge was
entitled to find that the product was worthless for want of durability and that finding
has always been accepted by the defendants. But that is simply an unusual feature of
the *109 developments post the defendants' breach and it is the consequence of the
latent character of the defect.

The issue fought by the defendant following the concessions on the sixth and seventh
days had to be resolved by the application of sections 53 and 54 of the Sale of Goods Act
1979 to the contract from formation to breach. By the terms of section 53(3) the plaintiffs
had a prima facie entitlement to the return of the contract price. At trial Mr. Heaton
mounted an argument under section 54 or the second limb in Hadley v. Baxendale,
9 Exch. 341 . Throughout this appeal Mr. Grime has contended under the first limb
and section 53 that the plaintiff's prima facie entitlement is displaced by the party's
exclusive contemplation of an alternative measure of damages. Mr. Grime criticises with
justification the use of the word "remedy" in the judge's judgment. But in the end the
judge made a finding which in my judgment is decisive of this appeal. His ultimate
conclusion was in these terms:

"The defendants have failed to satisfy me on the balance of

probabilities that having regard to all the circumstances in
which the contract was made the parties must be taken to have
contemplated that the section 53(3) measure of damages was
displaced."

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Bence Graphics International Ltd v Fasson UK Ltd, [1998] Q.B. 87 (1996)

That was a finding of fact made on the evidence of the plaintiffs. I accept Mr. Moran's
submission that that finding is unassailable in this court. The consequence of the finding
was judgment for damages equivalent to the price paid for the defective goods. The
plaintiffs accepts that the judgment is comprehensive of all claims arising from the
breach and that should they face future claims from those they supplied they cannot
look to the defendants for indemnity or any other contribution.

Before reaching his essential contribution Morland J. reviewed the relevant authorities
at some length. As the sophisticated argument in this appeal demonstrates this is not an
easy field of case law to summarise or to reconcile. But in my judgment Mr. Moran is
right to emphasise the distinction between authorities which determine cases involving
a string of contracts and cases involving the supply of a raw material to a manufacturer
or processor who converts the material to, or incorporates it within, some other product
for supply to his customers. As Mr. Moran submits, in the former class of case the buyer
changes role and becomes himself the seller, the selfsame goods passing along a conduit
of contracting parties on identical terms save as to price. In such cases (exemplified by R.
& H. Hall Ltd. v. W. H. Pim (Junior) & Co. Ltd. (1928) 30 Ll.L.Rep. 159 ) the exclusive
contemplation of the parties is very different in the event of breach of a quality warranty.
In the latter type of case the contemplation of the supplier and the manufacturer is less
confined and will depend upon all the circumstances of the case. Here the judge decided
the contemplation of the parties on the evidence of the plaintiffs alone.

Although the arguments have ranged wide over authority which as Auld L.J.
demonstrates is difficult if not impossible to reconcile, I would *110 dismiss this appeal
on the simple ground that the judge's conclusion was justified on the evidence and no
sufficiently substantial misdirection in law has been demonstrated.

Representation

Solicitors: Lace Mawer, Manchester ; Hill Dickinson Davis Campbell, Liverpool .

Appeal allowed with costs. ([Reported by John Spencer Esq., Barrister] )

Footnotes

1 Sale of Goods Act 1979, s. 53 : see post, p. 93B-D. S. 54: see post, p. 93E.

(c) Incorporated Council of Law Reporting for England & Wales

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