Blackboard Pty Ltd (Blackboard), a supplier of vinyl, entered into a contract with PostersPLUS Pty Ltd (PostersPLUS) to supply it with cast vinyl film over a 12 month period. Between November 2012 and September 2013, Blackboard supplied PostersPLUS with the film to the value of the $200,000 pursuant to the contract. The film was used to manufacture labels for bulk shipping containers, which were then sold to SEASTORM Containers Ltd (SEASTORM), who in turn leased the containers with the labels on them to shipping companies. Blackboard was aware of the use to which PostersPLUS intended to put the vinyl film at the time the supply contract was entered into. The contract contained the following clause:
Blackboard gives no warranty that the goods are fit for any particular purpose.
In early 2014, SEASTORM complained that the labels on the containers were fading and becoming illegible. The investigation revealed that the film was degrading because an insufficient amount of ultraviolet stabilizer had been added to it during the production process. As of February 2014, SEASTORM has made only one claim against PostersPLUS. PostersPLUS provided new labels worth $10,000 at its own expense. PostersPLUS still has $20,000 worth of the film supplied by Blackboard, which is unused and defective.
Is Blackboard in breach of its contract with PostersPLUS?
If so, how will PostersPLUS’s damages be assessed?
Firstly, the contract was entered into, as PosterPLUS have accepted part of the bulk of goods and has started manufacturing labels from the film, which is inconsistent with the ownership of the seller.1 Secondly, according to the Sales of Goods Act, the contract was breached when it became apparent that the goods supplied by Blackboard were of quality unfit for the intended use, having the insufficient amount of ultraviolet stabilizer. The seller was made aware of the intended use at the time the contract was entered into. Furthermore, PosterPLUS relied on the seller’s judgment in making the purchase after stating the intended use and, therefore, requesting certain characteristics of the goods.2
Even if the buyer has described his intention in general terms, this description should have been enough to expect the supply of the film fit for prolonged exposure to sunlight.3 The case is complicated with the clause “Blackboard gives no warranty that the goods are fit for any particular purpose” present in the contract. However, the law recognizes that not every word in the written contract is necessarily viewed as a relevant term.
Instead, the wording of the contract is usually viewed with the consideration of the surrounding conditions known to the parties.4 The court, therefore, will view this clause with regard to all relevant circumstances, including the relative knowledge and expertise of the parties, trying to determine what a reasonable person with background knowledge would make of it. In our case, the background knowledge is the knowledge of the goods application by both parties.
Common sense suggests that the contract which denies waranty to the product for any use effectively renders the product fit for nothing, and is initially faulty. Hence, the clause can be interpreted as describing the lack of warranty besides that required for the intended use.5 Furthermore, the contract should be subject to the Hadley v Baxendale test, specifically what is known as its second limb. In case the loss suffered by PosterPLUS is deemed as “unusual”, or that not arising in the usual course of events (the first limb), it is then considered if the parties could have contemplated it as a result of a possible breach at the time of conceiving a contract.
As it is explicitly stated that Blackboard was aware of the intended use of the vinyl film, and if we assume this can be definitively proven, it does not pass the test and is deemed responsible for the breach. Thirdly, the remedies applied to this breach include the compensatory damages of reliance loss of $30,000 ($10,000 already compensated to SEASTORM plus $20,000 of the goods unfit for intended use) plus the net profit expected had the remaining film been fit;6 and expectation loss of $170,000 worth of labels already sold to SEASTORM plus net profit lost after the reclamation by SEASTORM.
The expectation loss comes from the fact that the film is already known to be defective, and will inevitably deteriorate in the same manner as that already reclaimed by SEASTORM. The court can then rightfully assume that the need will inevitably arise for PosterPLUS to compensate for all of the defective merchandise. However, the expectation loss, as well as the expected net profit are determined on an individual basis and require additional evaluation by the experts.
Thus, presuming that the claimed knowledge of the intended use of the vinyl film by both parties can be definitively proven, Blackboard is in breach of contract with PosterPLUS despite the inclusion of the clause that seemingly relieves it of the responsibility. Blackboard is therefore liable for the compensation of all the damages suffered by PosterPLUS as the result of the breach.
Bibliography
Articles
McLauchlan, David, ‘Reliance Damages for Breach of Contract’ (2007) New Zealand Law Review 417-429.
Cases
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] 149 CLR 337.
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623.
Royal Botanic Gardens & Domain Trust v South Sydney Council [2002] 240 CLR 45.
TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd [1963] 180 CLR 130.
Legislation
Sale of Goods Act 1923 (NSW).
Footnotes
- Sale of Goods Act 1923 (NSW), s 38(1).
- Sale of Goods Act 1923 (NSW), s 19(1).
- Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441.
- Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] 149 CLR 337; Royal Botanic Gardens & Domain Trust v South Sydney Council [2002] 240 CLR 45.
- Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623.
- TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd [1963] 180 CLR 130, 140-41; David McLauchlan, ‘Reliance Damages for Breach of Contract’ [2007] New Zealand Law Review 417, 428-29.