There can be numerous situations where commercial parties in dispute find that either the contract between them will provide not a remedy to their disagreement, or that in some scenarios there is no contract at all. The lack of a contract between parties in a dispute may not always be fatal.
In the recent case of New York Laser Clinic v Naturastudios Limited the High Court upheld established principles in a successful claim for damages for a breach of collateral warranty and negligent misstatement confirming that a claimant could obtain damages for the loss of profits it suffered as a result of the breach.
The case arose out of statements made by Naturastudios Limited (Naturastudios) about the performance and quality of their product which induced New York Laser Clinic (NYLC) into purchasing six defective laser diode devices for NYLC's laser hair removal business. Naturastudios were a UK distributor of the lasers which were manufactured by an Israeli company, Formakt.
The case is of interest for a number of reasons. Firstly, NYLC arranged for the purchase of the lasers by entering into agreements with three hire purchase companies, and therefore it did not have a contract with Naturastudios. This meant that instead of a standard breach of contract claim, the claimant brought a claim for breach of a collateral warranty and in the alternative, a claim for negligent misstatement, arising from the statements made by Naturastudios which induced NYLC to buy the lasers.
Secondly, NYLC contended that if the breach of collateral warranty claim was successful, it could recover damages for loss of profits, calculated by reference to future profits if the product had worked correctly. Under the alternative head of negligent misstatement damages would be much smaller. The judge noted that the claim for loss of profit was a potentially difficult area of law, but after considering the authorities, held that damages could be claimed by reference to the profits NYLC would have earned if the warranties had been true. Although this is not new law, the clarification is welcome, especially for those who may enter into the type of commercial arrangements considered in this case.
Thirdly, the defendant did not take part in or attend the trial so the consideration by the judge of the law and the evidence was very thorough and the judgment tries to strike a balance between both sides where appropriate. Finally, in an unusual move the claimant's, on receipt of the draft judgment, asked the judge whether it could extend the restriction on who was able to view the draft judgment to allow it to be shown to the manufacturers of the lasers to try and induce settlement of the claimant's dispute with them. The judge gave short shrift to this request.
What is a collateral warranty?
The judge defined a collateral warranty as "a promise or assertion, with contractual force, which leads to a contract being entered into. If the warranty that is relied upon turns out to be false, the person to whom it is made may have a cause of action against the promisor for breach of contract. It is not necessary that the warranty was made fraudulently, or even negligently" (paragraph 34).
In the present case, the collateral warranty claim was unusual as it involved a three party scenario; NYLC entered into a contract with three different hire purchase companies to buy a number of laser hair removal machines on the strength of warranties (i.e. statements) made by Naturastudios about the performance of those machines and the resulting good effects this would have on the NYLC's business.
Did Naturastudios breach the warranties given?
Cavanagh J considered the law on collateral warranties in depth and having considered previous case law set out seven requirements for a breach of a 'tripartite' collateral warranty claim to succeed:
Cavanagh J concluded that a number of warranties were given to NYLC by Naturastudios in advance of NYLC entering into the hire purchase agreement. These warranties consisted of a number of representations about the performance and results to be expected from the lasers and were made both orally and also in a brochure given to the claimant by the defendant. The judge concluded that the warranties were intended to have contractual force and this led to NYLC relying on the warranties to enter into the hire purchase contracts. The hire purchase companies supplied consideration as they paid Naturastudios directly for the lasers (and in addition NYLC paid deposits straight to Naturastudios). The hire purchase contracts did not contain any relevant exclusion clauses and there was no contract between the claimant and defendant. The evidence showed clearly that the warranties were inaccurate and as a result NYLC suffered significant financial loss.
Could NYLC claim loss of profits?
Cavanagh J then considered the authorities on "whether the remedy for a claim for breach of collateral warranty can extend to a claim for the loss of the profits that would have been earned by the Claimant if the warranties relied upon had been true, as an alternative to a remedy calculated by reference to the losses caused by the breach". Cavanagh J then continued that "this is an issue of real importance to the Claimant, because the sum claimed by way of loss of profit is very substantially greater than the sum claimed on the tortious measure, for wasted expenditure" (paragraph 72). The judge concluded that NYLC was able to make this election but only because the warranties went to the "performance or quality of the thing to be supplied" (paragraph 98). The authorities showed that different approaches to damages apply depending on the nature of the warranty.
The negligent misstatement claim
The claim for negligent misstatement was more straightforward; and so Cavanagh J summarised the principles arising out of Hedley Byrne v Heller as follows:
This claim was also successful on the same evidential basis as above; however the remedies for the breach of collateral warranty were more attractive to the claimant, as they extended to loss of profit (as discussed above), rather than on the tortious basis for wasted expenditure.
The embargo on the draft judgment
In an unusual move, the claimant, in their closing submissions, requested that the court vary the embargo on the draft judgment to enable the claimant to supply a copy of the draft judgment to Formatk, the manufacturers of the Magma Lasers.
The general rule, set out in Civil Procedure Rules Practice Direction 40E, is that a draft judgment is confidential to the parties to the case and their legal representatives, and they are not permitted to show the draft judgment to any third party, or tell anyone of the outcome in advance of the formal handing down of the judgment.
The court stated that it has discretion to vary the embargo but that it was not appropriate in this case. The first reason for this was that the court recognised that varying the embargo would offend the principle of open justice. Here, the claimant was asking the court suppress the judgment in order to assist the claimant in doing a deal with Formatk, to settle the proceedings. The effect of this would be that the court's final judgment would not be made public, and Formatk would avoid the potential commercial disadvantages of the defective nature of their product being made public.
The second reason was that Formatk was not a party to the proceedings, and the court was not aware that the defendant had been consulted on a possible accommodation with Formatk. Therefore, the court found that it was not appropriate to exercise its discretion in order for the claimant to try to extract a settlement from the manufacturer.
What this means for you?
The case is a valuable reminder for parties that there are remedies they can rely on when either there is no contract in place, or the contract provides no answer to the wrong suffered. It is of particular interest to companies that buy equipment on hire purchase and use that equipment to earn income in their business. This case provides a useful synopsis on the law relating to collateral warranties in 'tripartite' situations. Its conclusion, that loss of profits can be claimed where warranties are made as to the performance or quality of the goods or services to be supplied, especially in situations where a claimant may also bring a claim for negligent misstatement, is also welcome. In such circumstances the claimant will be able to make an election as to whether loss of profits or wasted expenditure will provide a more valuable remedy.