SUPERIOR MINERALS LIMITED V WATT AND ORS HC DUN CIV 2005-412-000814

SUPERIOR MINERALS LIMITED V WATT AND ORS HC DUN CIV 2005-412-000814 30 June 2006IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY CIV 2005-412-000814BETWEEN SUPERIOR MINERALS LIMITED Appellant AND LINDSAY WATT First Respondent AND L B & D M WATT LTD Second Respondent AND MARK LINDSAY WATT Third Respondent Hearing: 11 & 12 April 2006 Appearances: L A Andersen for Appellant F B Barton and K A Hogue for Respondents Judgment: 30 June 2006JUDGMENT OF FOGARTY J Introduction[1] This is an appeal against a reserve judgment of the District Court which awarded general damages to purchasers of Superior Minerals fertiliser. The buyers were dairy farmers. They applied the fertiliser to their pasture. Their pasture did not grow as productively as they had come to expect using fertiliser supplied by Ravensdown. [2] The buyers refused to pay for the Superior Minerals fertiliser and when sued for the balance of the purchase price counterclaimed. There were two causes of action by way of set off and counterclaim. The first was that the buyers had been induced to enter into the contract for the purchase of fertiliser by representations that the plaintiffs' fertiliser would provide superior better quality growth thanconventional fertiliser, at a lower cost. The second cause of action was that the fertiliser supplied was not fit for its intended purpose. [3] There were pleading difficulties. The plaintiff had issued its proceedings against Mr Lindsay Watt, the first respondent, being the person they were dealing with. The Judge, at the end of the hearing substituted Mr Lindsay Watt's son, Mark Watt, and the family company, L B and D M Watt Ltd as parties. [4] There were four issues on appeal: 1. Was the substitution of the parties in accordance with the requirement of r 103 of the District Court Rules? 2. Can the judgment be supported as a breach of misrepresentation? 3. Can the judgment be supported as breach of an implied term that the goods were fit for purpose? 4. Did the Judge assess general damages correctly when he used a budget as the benchmark? [5] The second and third issues potentially dispose of the appeal, so they are considered first.Could the second and third respondents recover for an action of misrepresentation?[6] The proceedings had begun as a claim by the plaintiff for the sum of $23,230.15 being the balance due on account of fertiliser supplied. The claim had been issued against Mr Lindsay Watt. [7] Mr Lindsay Watt had filed a statement of defence and counter-claim which contained the following unusual pleading:HE admits the allegations in paragraph 2 of the Statement of Claim [alleging sale of fertiliser to the defendant to a value of $57,202.10] to the extent thatthe Plaintiff sold fertiliser to a value of $57,202.10 including GST and the particulars of that supply but says that the sales were made to LB & DM Watt Limited, a duly incorporated company having its office at Balclutha ("the company") and further says that the company is the correct Defendant in this proceeding.[8] Mr Lindsay Watt then went on in the same document to repeat this allegation and to plead that the defendant [at this stage, himself] was induced to enter into the contract for the purchase of fertiliser by representations. The pleading was as follows:THE Defendant was induced to enter into the contract for the purchase of fertiliser from the Plaintiff by representations made by the Plaintiff that: (a) The soil tests and fertiliser mix supplied by the Plaintiff would provide superior quality growth than conventional fertiliser; (b) The overall cost of the fertiliser supplied by the Plaintiff would be lower than conventional fertiliser, taking into account the superior growth and quality of pasture which would be achieved.[9] In the alternative the defendant pleaded s 16 of the Sale of Goods Act 1908:PURSUANT to Section 16 of the Sale of Goods Act 1908 the Plaintiff warranted that the fertiliser supplied by it was fit for its intended purpose, such purpose being made known to the Plaintiff by the Defendant.[10] The Judge's decision appeared to have found that both causes of action were made out. Paragraph [70] of the judgment is as follows:[70] Consequently, the representations as to the qualities of the fertiliser to be provided by brochure and in person by representatives of the defendant have in the result turned out to be untrue in respect of the Watts dairy unit. That is a clear breach of s16 of the Sale of Goods Act 1908. I am also satisfied that in the circumstances of discussions between the parties the representations were and were intended to be terms of the contract. If there is a loss arising from those representations either in breach of the Act or in breach of the terms of the contract the plaintiff is responsible for that loss.[11] The pleaded representations are promises. They are not representations. Representations are representations of fact. The distinction between a representation of fact and a promise was not referred to at any stage in the judgment. [12] There were, of course, no written terms to this effect, signed up to by the plaintiff. The Judge derived the representations from the presence of the Watts at aseminar, a pamphlet and representations by representatives that use of the plaintiff's product would produce larger returns and healthier stock by reason of the pasture being bigger, stronger and healthier. [13] The law draws a fundamental distinction between boasts which amount to an invitation to treat, and promises where it is apparent there is a willingness to undertake legal liability on defined terms. There was no analysis in the judgment of this distinction. It is inherently unlikely that the suppliers would have entered into a contract of supply which promised superior quality growth and lower cost, with a potential legal liability to compensate for loss of profits. Inasmuch as the judgment finds the representations are agreed terms of contract, it is in error. There is no proof objectively considered that the representations were agreed as terms of a contract. [14] The Contractual Remedies Act 1979 does not define "misrepresentation" but there is ample New Zealand authority that it is being assumed that it still bears the meaning it had under the old law. See Burrows Finn and Todd Law of Contract in New Zealand (2 nd ed 2002) at 11.2.1. The representation must relate to some existing fact or some past event and contain no element of futurity. The representations pleaded and the evidence meet none of these requirements. The action for misrepresentation must fail.Was there breach of s 16 of the Sale of Goods Act 1908?[15] Section 16 of the Sale of Goods Act provides:16 Implied conditions as to quality or fitnessSubject to the provisions of this Act and of any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows: (a) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply (whether he is the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose:Provided that in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose: (b) Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed: (c) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade: (d) An express warranty or condition does not negative a warranty or condition implied by this Act unless inconsistent therewith.[16] The statement of claim relied on the implied warrant of fitness for its intended purpose in s 16(a). Essentially the Judge found that the fertiliser was not fit for the purpose because after it had been applied it had failed to produce pasture to the same standard that the normally applied pasture would have done. [17] There was some ambiguity about whether he found the pasture had been damaged or was rather inadequate:Conclusion on the efficacy of Superior Minerals product[64] There is no doubt in my mind that the pasture in Big Paddock New Block was in a parlous state when representatives of the plaintiff were called to inspect. The plaintiff accepted this when it agreed to the test protocol for it. [65] I accept the opinions of Dr Edmeades as reliable and act on them. I am driven to the inescapable conclusion by the combination of his evidence and the differential growth rates in the test paddock Big Paddock New Block, that the plaintiff's fertiliser applied to Big Paddock New Block was totally inadequate for healthy plant growth. I think it more likely than not to have been harmful by reason of the inclusion of excessive quantities of manganese in the fertiliser supplied and its failure to provide sufficient quantities of the elements necessary for good pasture growth. [69] Notwithstanding those factors, I am satisfied that the other paddocks to which the plaintiff's fertiliser had been applied also failed to produce pasture to the same standard that the normally applied pasture would have done. It was, therefore essential that the Watts apply, as they did, normal fertiliser to remedy the situation. (Emphasis added)[18] The first two paragraphs are directed to the impact of fertiliser applied to the Big Paddock New Block. However, the damages claim was in respect of a number of paddocks of the dairy unit. The judgment goes on to address the effect of applying fertiliser there. Therefore the relevant conclusion comes in paragraph [69]. It was from that finding in paragraph [69] that the Judge came to his finding in paragraph [70] already set out in this judgment. Accordingly, that although the Judge found some harm in respect of the application of fertiliser to the Big Paddock New Block due to a probable excessive application of manganese, his main finding was that the plaintiff's fertiliser had failed to produce pasture to the same standard that the normally applied pasture would have done. [19] I turn now to whether or not the claim can be maintained under the Sale of Goods Act, the second cause of action. [20] Two principal fertiliser manufacturers provide about 90% of the fertiliser applied to New Zealand farms. Ravensdown is one of these. A third producer provides about 5% and the remaining 5% is shared by a number of smaller producers, of whom, the plaintiff is one. [21] The Judge recorded that the three principal suppliers, and perhaps some of the remainder, provide fertiliser on the basis of what is called the "quantity theory". This theory is that the soil must be provided with, at least, the appropriate quantity of a variety of 16 elements. The necessary quantity required for particular soils is normally calculated following analysis of representative soil samples. [22] The plaintiff company is not a subscriber to the quantity theory, but to what is known as the "ratio theory". The basis of this theory is that the soil should be in balance and the necessary elements for growth of particular plants should be an appropriate ratio that must include trace elements not necessarily included in fertilisers prepared in accordance with the quantity theory. Ratio theory is less fixated on nitrogen and believes that the amount of nitrogen applied by way of fertiliser can and should be reduced.[23] As for the quantity theory the ratio theory is dependent upon soil analysis to establish a prescription for the appropriate elements that need to be added to the soil to achieve the appropriate balance for production of the pasture or crop to be grown in it. The plaintiff, initially, and at all times relevant to this case, engaged the services of a Dr Lester who operated as an analyst. The Judge doubted that he had earned a doctorate, believing it to be an honorary doctorate from "what is thought to be" the Anglo-American Institute of Drugless Therapy. [24] The respondent called an expert witness from the University of Canterbury who rejected the ratio theory as an effective method of prescribing fertiliser needs for soils used in growing pastures. [25] Representatives of the plaintiff visited the defendant's farm and took initially two soil samples for analysis. The report of the two samples taken shows deficiencies in cobalt, sulphur, lime, magnesium potash, boron, iron, manganese, copper, zinc, single super and RPR. Later the plaintiff took further soil samples from various other locations on the farm. This led to full scale recommendations by the plaintiff's consultants as to the mix required for the paddocks from which the soil samples were taken. [26] The Watts in consultation with the plaintiff agreed to 100% application of the recommended mixes to the various tested paddocks. The application was to the majority but not the entire dairy unit. The Watts were warned not to apply any other fertiliser to the paddocks to be treated after the soil samples were taken for analysis. The application of the plaintiff's mixes was delayed in delivery and by weather. As noted already the Judge found that the application was more likely than not to have been harmful to the "Big Paddock New Block" by reason of the inclusion of excessive quantities of manganese. As noted he otherwise found that in respect of the other paddocks to which the fertiliser had been applied they failed to produce pasture to the same standard as with the traditionally applied fertiliser. The damages claim was based on a loss of production over all the paddocks dressed with the plaintiff's fertiliser. That was the setting of the Judge's conclusion set out in paragraph [70] above, at [10].[27] The Sale of Goods Act 1908 is directed to enacting and partly reforming the common law on the sale of goods. It is not directed to remedying any mischief in the sale of experimental goods and provision of novel services. It is well understood that s 16 of the Sale of Goods Act is a qualification to the common law principle of buyer beware (caveat emptor). [28] By finding that inadequate growth was in breach of s 16(a) the Judge effectively required the vendors of the fertiliser to guarantee the same level of production as that achieved when traditional fertiliser was applied. [29] The classic New Zealand judgment on the correct interpretation of s 16(a) is that of Salmond J in Taylor v Combined Buyers Ltd [1924] NZLR 627. In that case the Judge gives a number of examples of findings that products were not fit for the purpose. In all of them the products were defective and caused positive harm, rather than not delivering any promised benefit. [30] It is sufficient to quote only part of the judgment on page 629:In the third place, it is settled that, although the implied condition of fitness exists only in cases where reliance is placed on the seller's skill or judgment, the liability of the seller is not limited to defects which might have been avoided by due use of his skill and judgment, but is an absolute liability for all defects which in fact make the goods unfit for the buyer's purpose, even though such defects were latent and undiscoverable. The foregoing propositions are illustrated by such cases as Priest v. Last (1)and Wallis v. Russell (2). In both of these cases the sale was of a specific article – namely, a hot-water bottle in one instance, and a boiled crab in the other. In both of them the "particular purpose" was nothing more than the general and normal purpose to which such goods are devoted; and in both of them the defect was latent and undiscoverable by the seller, the crab being poisonous, and the hot-water bottle bursting on being used. Yet in both of them it was held that the vendor was liable in damages to the buyer for a breach of the implied condition of fitness for his purpose. (emphasis added)[31] That statement of the law has in my view not been altered by any other decision. The recent decision of the Privy Council in Hamilton v Papakura District Council [2002] 3 NZLR 308 deals with the requirement that to take advantage of this(1) [1903] 2 K.B. 148implied term it is necessary for the buyer to communicate to the seller the purpose and to show reliance upon the seller's skill and judgment. However, as a matter of fact that case was built on damage to the tomatoes of the plaintiff. [32] In Henry Kendall & Sons Ltd v William Lillico & Sons Ltd [1969] 2 AC 31 Brazilian ground-nut extraction was sold for the purpose of compounding it into feeding-stuff for cattle and poultry. It was held that there was a breach of the section because the extraction proved fatal to pheasants, though it was not dangerous to cattle. [33] The main purpose of the Sale of Goods Act 1893 (UK) was to codify case law dealing with what were, by today's standards, small-scale commercial transactions. 1 As Sir Mackenzie Chalmers, the draftsman of the 1893 Act explained, the original Sale of Goods Bill:endeavored to reproduce as exactly as possible the existing law, leaving any amendments that might seem desirable to be introduced in Committee on the authority of the Legislature.2However, as Mitchell notes, the aim of the Act was to codify, but the method of drafting made it impossible to do justice to the law as it stood. As a result, the ideas and theories behind the implication of quality obligations in sale are absent from the Act and can only be understood by examining the nineteenth-century developments which led to the Act. 3[34] I emphasised the word "defect" appearing in Salmond J's dictum in Taylorbecause on my reading of the case law under the Sale of Goods Act it is the concept of defect or deficiency in the goods supplied which gives rise to the remedy. This concept of defect is somewhat difficult to apply to goods which are not suitable to the purpose, but are not otherwise inherently harmful.(2) [1902] 2 Ir. 5851 M Bridge, "What is to be Done About the Sale of Goods" (2003) 119 LQR 1732 Preface to the first edition of the Sale of Goods Act 1893 (1894) cited in W C H Ervine, "Satisfactory Quality: What does it mean?" [2004] Journal of Business Law 6843 P Mitchell, "The Development of Quality Obligations in Sale of Goods" (2001) 117 LQR 645[35] The speech of Lord Wright in Cammell Laird and Company Limited v Manganese Bronze and Brass Company Limited [1934] AC 402, is a classic on the topic of fitness for the purpose and is riddled with the concept of defect and deficiency. [36] In Cammell Laird a firm of ship builders agreed to build two sister ships. The ship builders entered into a contract with the Manganese Bronze and Brass Company (M B and B) for the manufacture of two propellers for the ships to be of a special bronze, of a specified diameter, and pitch, each with four blades of a specified total area and a maximum break horsepower at a specified number of revolutions per minute. There were other requirements as to quality. [37] On trial the propellers fitted to one vessel, No 972, caused so much noise that the vessel could not be classed as A1 at Lloyds and the buyer of the ship would not accept it. The second propeller fitted to the other ship proved satisfactory. After two attempts M B and B company produced a propeller which eventually satisfied the requirements for No 972. The ship builders brought an action for damages against the supplier of propellers for delay and expenses. The Court upheld the right to damages. Some of the Law Lords disposed of the Cammell Laird case on the basis of express terms being agreed as to quality, see Lord Tomlin and Lord Russell of Killowen. [38] Lord Wright approached the case as a sale of future goods by description. He found breach of the implied term of fitness for the purpose. [39] Lord Wright said: The conclusion I arrive at is that in all matters relevant as between these parties to the creation of a propeller for No. 972, there was reliance on the sellers' skill or judgment within the section. But it is said this conclusion would throw on the makers responsibility fordefects in the plan and design, for instance, if a propeller of the specified plan and design could not be physically cast, or would be too weak, or otherwise could not be fitted to or worked on No. 972. (at 425) (Emphasis added)And: A very common case in which the implied condition is invoked is where an article made to a design exhibits a defect originally latent ; or where goods purchased on sample but for a particular purpose, fail to answer the purpose though they correspond to the sample. (at 428) (Emphasis added)And Lord Wright also quoted from Lord Macnaghten in Jones v Bright (1829) 5 Bing. 533, at 429 of his speech: Lord Macnaghten, after stating that the Lord Chief Justice "based his judgment on the board principle that manufacturers were bound to supply an article fit for the purpose for which they knew it was required," went on to say : "I can see no distinction between a sale by sample where the sample gives incomplete and consequently misleading information, and a case where the purchaser selects the goods in bulk, and those goods have anintrinsic defect not discoverable on inspection." (Emphasis added)[40] The purpose of the Act is to provide remedies for defective goods, not to impose guarantees of performance. Consider this passage from Lord Wright inCammell Laird:In dealing with these contentions, the first thing to be considered is, what is exactly the article which is the subject of the contract of sale, and what is the particular purpose for which it is required, in so far as relevant, as between the contracting parties. In some cases the matter may be very simple : the purpose for which a hot water bottle is required is easily determined and equally easy is it to determine the extent of reliance on the seller : similarly in the case of a piece of mechanism, intended to fit into a complete machine, the relevant purpose as between the buyer and the maker will normally be simply that it should be of the specified plan and, when properly fitted, work in its place : there is no reliance on the maker for the general performance of the machine as a whole. Similarly in Manchester Liners, Ld, v. Rea, Ld. [[1922] 2 AC 74] the bunkers were to be fit to burn in the furnaces but not to raise any given head of steam. The definition of the particular purpose will vary according to the contract in question. (at 424) (Emphasis added)[41] Essentially the defendants in their counterclaim wish to obtain from the supplier of fertiliser an implied assumption of legal liability for the general performance of the farm as a whole. Their complaint is not so much that the fertiliser was defective, but that it was not capable of maintaining the general performance of the farm, that is, the appropriate production in milk fat from the cows. This is an ambitious claim and in my view well beyond the original purposeof the implied terms of fitness for purpose imposed by Parliament in the statutory reform of the common law. [42] I am driven to the conclusion that the findings of the Judge that the fertiliser was inadequate are not sufficient to grant a remedy under the implied condition of fitness for the purpose. The claim was put fundamentally on the footing of lack of growth to the desirable level hitherto achieved using Ravensdown's fertiliser rather than any damage to the pasture. The product supplied was not so much defective but ineffective. When the UK and other common law Parliaments enacted the Sale of Goods Act they did not intend to make suppliers of inputs guarantors of the output of which the input was only part. The judgment for damages for breach of an implied condition of fitness for the purpose cannot be sustained.Conclusion on both causes of action by counterclaim[43] Both causes of action of counterclaim were not made out. [44] In this particular case the correct perspective is that the buyers were farmers who took a risk. They had previously been purchasing traditional fertiliser from Ravensdown. Their imagination had been captured by a seminar they attended. They decided to try this new fertiliser and its concomitant use of what the supplier called the "ratio theory". They knew it was an idea developed in the United States. It had no history of success in New Zealand. There was no basis for them to assume that the sellers' boasts about their products were intended to be binding promises to meet the difference in any loss of income they might be suffer by reason of trying a different fertiliser. Objectively there was no such bargain. [45] To construe s 16(a), an implied term, as the District Court implicitly did, in this way, would be to impose enormous burdens on suppliers. Section 16 of the Sale of Goods Act is a qualification to the common law principle of buyer beware. It does not eliminate that principle. Where buyers take a risk on a novel product s 16(a) has no application.Against whom is the plaintiff entitled to judgment?[46] Judgment should not have been entered for any counterclaiming party. Accordingly, the prejudice that Mr Anderson was concerned about as to the joinder of parties does not arise. Nor is it necessary to review the quantum of damage assessed. [47] The appeal against the judgment by way of set off and counterclaim succeeds. The outcome is that the set off no longer satisfies the judgment. The plaintiff is entitled to judgment in the sum of $23,230.18 together with interest thereon and costs in the District Court and on appeal. The only remaining question is who should be the judgment debtor. [48] The fertiliser was paid for by the family's company, L B & D M Watt Ltd. The company owned the farm. Mark was the shareholder. The Judge found that the father and son had been to the seminar and the father had arranged with a representative of the plaintiff to purchase the fertiliser. Another employee of the plaintiff, who had never met Mr Lindsay Watt, invoiced him. The Judge found he was an agent for the company and Mr Mark Watt. Mr Andersen contested this finding. However, the trial Judge's finding is consistent with the evidence and fits the normal pattern of trade in rural New Zealand. No supplier of farm products would presume that the farmer was the principal. Farms are frequently held by companies, partnerships or trusts. If the supplier was concerned about creditworthiness, the supplier would clarify who was the principal. [49] Mr Andersen challenged the substitution of these parties as defendants. However, he was more concerned about their substitution as counter-claimants. There is no issue of prejudice substituting them as defendants. It is not necessary to examine closely the exercise of discretion exercised by the Judge, as afforded by r 103 of the District Court Rules. That aspect of the appeal is dismissed. [50] The plaintiff appellant is entitled to judgment for the balance of the purchase price against the substituted defendant respondents jointly. That part of the judgment remains. What is lost is the set-off.[51] The plaintiff is entitled to interest and costs. I will hear submissions from the parties, if they cannot be agreed. Fogarty JSolicitors: Albert Alloo & Sons, Dunedin, for Appellant Anderson Lloyd Caudwell, Dunedin, for Respondents