Lord Justice Chadwick
This is the judgment of the Court on an appeal from an order made on 21 April 2004 by His Honour Judge Seymour QC in the Technology and Construction Court in proceedings brought by Filobake Limited against Rondo Limited and Frampton International Limited.
The proceedings arose from the supply of equipment to Filobake for use in its business as a manufacturer of pastry products. Following installation and payment, Filobake came to the view that the equipment was not able to produce pastry in accordance with its requirements and was not fit for its intended purpose. It sought a declaration that it was entitled to reject the equipment, to the return of the purchase price which it had paid and damages.
The judge dismissed the claim against Rondo for the reasons which he set out in his judgment,  EWHC 695 (TCC). He awarded nominal damages against Frampton. Permission to appeal was granted by this Court (Lord Justice Rix) on 9 July 2004. At the hearing of the appeal the Court has been concerned only with the dispute between Filobake and Rondo. Filobake's appeal from the award of nominal damages was dismissed, as against Frampton, on 6 October 2004 by consent.
The underlying facts
As its name suggests, the business of Filobake included the manufacture of filo pastry, which it supplied in a ready-to-bake form to its customers, principally for use in connection with Greek and Lebanese cuisine. By the summer of 1999 Filobake was interested in extending its product range into samosa pastry. Samosa pastry, which has some similarities with filo pastry, is used in Arab and Indian cuisine for making samosas. As the judge explained, samosas are triangular pastry parcels filled with vegetables or meat.
Rondo Limited is an English subsidiary of Seewer AG, a Swiss company specialising in the manufacture and supply of pastry and dough processing equipment. It is convenient to adopt the judge's description of such equipment, so far as material to the present dispute:
The equipment in question includes various elements which can be assembled into a production line. In particular, it includes dough or pastry extruders, that is to say, machines by means of which dough or pastry inserted in the top can, as a result of passing through rollers, be produced at the bottom as a continuous sheet of a given width and thickness. In addition Seewer produces machines which can fold sheets of dough or pastry on top of one another, a process called laminating, as well as machines to cut dough or pastry, laterally or longitudinally, and machines in which prepared dough or pastry can be packaged. It also produces conveyor belts which can link the various stages in the process of converting the raw dough inserted into an extruder into packaged prepared dough or pastry.
The judge went on to explain that, in the course of producing prepared dough or pastry for sale to final users, it was sometimes necessary to heat the pastry or dough to set the structure and reduce the moisture content. For that purpose an oven could be incorporated into the production line. In a case where pastry or dough had been heat treated in an oven it might be necessary, thereafter, to cool the product before it passed down the line to the packing stage. For that purpose a cooler could be incorporated into the production line. Seewer did not manufacture either ovens or coolers; and Rondo did not supply those products. Ovens and coolers were manufactured and supplied by Frampton.
Rondo had some experience in the supply of component elements for a production line for the purpose of manufacturing samosa pastry. In particular, in or about February 1999, it had supplied components to a customer in Saudi Arabia for that purpose. Rondo was, therefore, an appropriate supplier of the equipment which Filobake would need for the extension of its product range which was in contemplation. On 7 September 1999 Rondo provided a quotation to Filobake for various components; including, in particular, a six roller dough extruder and a longitudinal laminating unit or sheeter. The September 1999 quotation was followed (so far as material) by a further quotation dated 16 May 2000, which included, as an addition to an item (item 9 – conveyor belt), two flour dusters. Those quotations were for equipment which could be used for the production of both samosa pastry and filo pastry. The judge referred to that equipment as "the Rondo Equipment".
The September 1999 and May 2000 quotations were further revised in, and superseded by, a quotation dated 30 June 2000. That final quotation was accepted by Filobake on 21 September 2000 and forms the basis of the contract under which equipment was supplied by Rondo. The equipment was described in the final quotation in the same terms as had appeared in the two earlier quotations (including the addition to item 9 introduced by the May 2000 quotation). The principal variations were
a reduction in the quoted price and
the addition of a section under the heading "Performance".
The Rondo Equipment, together with an oven and a cooler purchased by Filobake from Frampton, were delivered to Filobake's premises in Enfield in March 2001. Shortly thereafter the equipment was installed on a production line, and the line was brought into commission. Problems were soon encountered. The attempts to resolve those problems are set out by the judge, in some detail, at paragraphs 38 to 48 of his judgment. It is unnecessary to rehearse them in this judgment. They did not lead to a satisfactory outcome. On 11 September 2001 Filobake, by its solicitors, wrote to both Rondo and Frampton purporting to reject the equipment. After referring to the final quotation of 30 June 2000 – and, in particular, to the Performance section contained in that quotation – the letter went on in these terms (so far as material):
Since the equipment was delivered in the week beginning 17th March 2001, there has been a consistent problem with the production capabilities of the equipment to the extent that the equipment has been idle, as it does not work.
.... It is now apparent to our Clients that after 5 months the problems to the equipment are so extensive that they cannot be rectified in order to work properly. In the meantime our Clients have incurred substantial losses and in particular have lost existing and potential customers.
Our clients therefore reject the equipment and demand that you remove the equipment and .... reimburse our Clients in an amount to be notified.
The equipment was not removed from Filobake's premises. It has remained there; or, at least, it was still there at the date of the trial. The judge observed that "until at least June 2003 Filobake had continued to use the Rondo Equipment, the Oven and the Cooler to produce quantities of samosa pastry for a customer, Gazebo Fine Foods ...."
The quotation of 30 June 2000
As we have said it was the final quotation dated 30 June 2000 which formed the basis of the contract under which equipment was supplied by Rondo. That quotation was expressed to be for a "Doge Thin Pastry Line". It contained a section in these terms:
The equipment detailed in this specification will be able to produce Samosa to the attached recipe as follows:–
There was attached to the quotation of 30 June 2000 a sheet containing two tables, described respectively as "Samosa Recipe" and "Filo Recipe". The first of those tables was in this form:
For best results a dough relaxer should be added at ½ % flour weight.
These proceedings were commenced by the issue of a claim form on 26 June 2002. In amended particulars of claim, dated 7 November 2003, it was alleged (at paragraph 13) that it was an express term of the agreement between Filobake and Rondo that the Doge Thin Pastry Line described in the quotation of 30 June 2000 "would be able to produce 15 metres of samosa pastry 0.5 millimetres thick per minute to the recipe included in the quotation ...." The particulars went on to plead an implied term to much the same effect: "the Line would be fit for its purpose, namely the manufacture of samosa pastry to the specifications and the recipe set out in the quotation dated the 30th June 2000". And it was said that the circumstances gave rise to duties of care, imposed on Rondo,
to ensure that the oven and cooler were of satisfactory quality and fit for their purpose and were compatible with the Line and
to advise Filobake as to the compatibility or otherwise of the Line with Filobake's existing equipment and procedures, including its horizontal mixers and its packaging and freezing techniques.
Paragraph 18 of the particulars set out, under eleven heads, the manner in which it was said that, in breach of the agreement, "the Line could not produce samosa pastry to the agreed specification and/or recipe" and was not of satisfactory quality or fit for its intended purpose. Those included:
Paragraph 20 referred to the letter of 11 September 2001 by which Filobake purported to reject the Line; and paragraph 21 contains particulars of special damage amounting in aggregate to £688,808.
By its amended defence, dated 13 January 2004, Rondo admitted that the agreement contained an express term that the Rondo Equipment would be able to produce samosa pastry in accordance with what was described as "the performance guarantee"; but it was denied that the recipe attached to the quotation was a contractual term. It was said that: "On true construction, and based on industry practice, the recipe attached to the quotation was merely indicative of a typical samosa recipe and did not form a contractual term". There was a similar admission and denial in relation to the implied term:
The implied term was that the component parts supplied by the First Defendant would be reasonably fit for the purpose of making samosa pastry to the specifications set out in the performance guarantee. There was no implied term that the recipe attached to this document must be used in order to achieve these specifications. Such a term would be contrary to industry custom and practice.
Further, it was denied that there had been a breach of that term, express or implied. Although it was accepted that, following installation, "the Line, the Oven and the Cooler were not capable of producing samosa pastry 0.5 millimetres thick at 15 metres per minute", it was said that that was due to problems with the oven and cooler, and was not due to the equipment supplied by Rondo: "The Line itself [meaning, in that context, the Rondo Equipment] was always capable of producing samosa pastry which complied with the contractual specifications set out in the performance guarantee". Paragraphs 11(bA) and 11(bB) are material in this context:
The judge's reasons for dismissing the claim against Rondo
The judge addressed, first, the question whether Filobake had established the express term pleaded at paragraph 13 of the particulars of claim: that "the Line would be able to produce 15 metres of samosa pastry 0.5 millimetres thick per minute to the recipe included in the quotation dated 30th June 2000". He concluded, at paragraph 80 of his judgment, that it had not established that there was an express contractual term to that effect. He said: ".... the term pleaded at paragraph 13 of the Amended Particulars of Claim was not, in my judgment, upon a proper construction of the contract made between Filobake and Rondo, a term of that agreement". He reached that conclusion by the following steps:
The relevant section of the 30 June 2000 quotation – "Performance" – related only to the Rondo equipment and not to the whole of the production line, including the oven and the cooler.
It followed that the Performance section was not concerned with whether "the end result of mixing the ingredients [specified in the samosa recipe] in the proportions there set out and passing the dough thereby produced down [the production line] would be a pastry which could successfully be used to create samosas"; but rather with whether "the end result would be a pastry 1000 millimetres wide, 0.5 millimetres thick passing along the Rondo Equipment at 15 metres per minute". He observed that, "in practical terms", that question turned on "whether pastry having the composition and proportions set out in the recipe could successfully be extruded through the extruder and then successfully be folded on the laminating unit" – paragraph 77 of his judgment.
The samosa recipe to which the performance guarantee referred was not "a recipe in the traditional culinary sense of a list of ingredients and quantities and a series of instructions which, if followed, would produce a particular result". The recipe was simply "a list of ingredients, generically described, and an indication of the proportions in which those ingredients should be mixed". There were essential details which were missing: the type of flour, the type of oil, the method by which and the time for which the ingredients should be mixed, the temperature at which ingredients should be added to the mix and the length of time for which the dough should be allowed to rest before further processing. Those details had to be supplied if it were to be said that following the recipe would lead to the successful production of samosa pastry to the prescribed specifications – paragraph 78 of his judgment.
Accordingly, it was misleading to describe the samosa recipe as "the contractual recipe" – in the sense that, if followed, it would lead to a pastry which could be used to make samosas. The only significance of the recipe was as a "statement of the ingredients and proportions of ingredients which, if mixed in an appropriate fashion, at appropriate temperatures and for an appropriate period of time (as to all of which [the recipe] itself was silent), could then be passed through the Rondo equipment so as to produce pastry 1000 millimetres wide, 0.5 millimetres thick and so forth at a rate of 15 metres per minute". The judge observed that: "Whether the end result was tasty or not, whether it could be folded further once off the [production line] and what its moisture content might be do not seem to me to be matters with which the [quotation of 30 June 2000], on proper construction, dealt" – paragraph 79 of his judgment.
The judge then turned to the question whether terms, which were not expressed, should be implied in the agreement between Filobake and Rondo. He observed that Rondo accepted that the usual terms were to be implied in a contract for the sale of goods (so far as not expressed) – that is to say, that the equipment would be of satisfactory quality and reasonably fit for the intended purpose – while disputing that that purpose was (as Filobake contended) the manufacture of samosa pastry to the specification and recipe set out in the quotation of 30 June 2000. He reminded himself of the test set out by Lord Pearson in Trollope & Colls Limited v North West Metropolitan Regional Hospital Board  1 WLR 601, 609A-D. In particular he reminded himself that "An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them" (ibid, 609C). Applying that test he concluded that "none of the terms which it was asserted on behalf of Filobake, but disputed on behalf of Rondo, were to be implied into the agreement between them in fact represented the actual, but unexpressed, intention of both parties or otherwise met the requirements in law for the implication of terms into a contract". He held that, having regard to the circumstances in which the contract between Filobake and Frampton for the supply of the oven and the cooler had come into existence (some three months after the contract for the purchase of the Rondo Equipment), there was no justification for the implication into the contract between Filobake and Rondo of any term relating to the quality or fitness for any purpose of the oven or the cooler – paragraph 84 of his judgment. As to the scope of the Sale of Goods Act term as to fitness for purpose, the judge said this, at paragraph 85:
I accept the submission [on behalf of Rondo] that the purpose for which the Rondo Equipment had to be fit was of delivering the performance set out in the section of the Final Quotation entitled "Performance", and not some further or wider purpose, and in particular not of producing, in conjunction with the oven and the cooler, satisfactory samosa pastry.
The judge rejected the contention that the circumstances gave rise to a duty of care in tort that was more extensive than the duties in contract. He referred to the observation of Lord Hoffmann in South Australian Asset Management Corporation v York Montague Ltd  AC 191 (on appeal from Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd  QB 375), at 211F-G, that: ".... the scope of the duty in tort is the same as in contract". He held that Rondo owed no duty of care in relation to the oven and the cooler; and no duty to volunteer any advice in relation to general bakery techniques – paragraphs 91 and 92 of his judgment.
The judge summarised his conclusions as to the duties owed by Rondo to Filobake at paragraph 93 of his judgment:
.... the sole material obligations of Rondo to Filobake were to supply as component parts of the [production line] the items listed in the [quotation of 30 June 2000] which were of satisfactory quality, and which were, individually and collectively, capable of enabling pastry containing the ingredients listed in [the samosa recipe], mixed in the proportions set out in that recipe at appropriate temperatures, for an appropriate period of time on an appropriate mixer and left to rest for an appropriate period of time, to be extruded 0.5 millimetres thick and passed down the [line] at a speed of 15 metres per minute.
He described that obligation as "a distillation of the implied obligation to supply equipment which was reasonably fit for its intended purpose and the express obligation as to the performance of the Rondo Equipment".
The judge then addressed the question whether the Rondo Equipment met the contractual standard, as he had held it to be. He referred to the evidence of the expert witnesses called on behalf of the parties – Mr Maurice Leeke, Mr Donald Ives and Mr Roland Froebel. – and to the circumstances in which that evidence had emerged, which, as he said, were "rather unusual". After setting out passages from the experts' reports at some length, he reached the conclusion that they were in agreement as to what the Rondo Equipment could and could not do – so far as relevant to the matters which he had to decide. He took that agreement from a memorandum, prepared for the purposes of CPR 35.12(3) and dated 8 December 2003, which they had each signed:
At paragraph 110 of his judgment, the judge said this:
It seems to me implicit in that agreement, in particular in paragraph 4, that it was accepted by all experts that it was possible to produce a samosa pastry of acceptable commercial quality using the [Line], but that tests conducted by Mr Froebel and Mr Leeke had not resulted in that happening. Certainly the evidence of Mr Ives that Spurway [another pastry manufacturer with a similar production line, whose premises Mr Ives had visited for the purposes of preparing his report] was able to produce a samosa pastry suitable for its need to use it in the production of samosas was not challenged, and I accept it. I was impressed by Mr Ives .... So far as may be necessary I prefer the evidence of Mr Ives to that of Mr Leeke and that of Mr Froebel, but as I have indicated, on the central technical issues it did not seem to me that there was any significant disagreement between them. Where they did diverge substantially was in their respective views of what the Rondo Equipment, the Oven and the Cooler should have been able to do. That, in my judgment, was entirely a matter of law, depending upon the proper construction of the relevant contracts.
The judge observed, at paragraph 111 of his judgment, that it was surprising that it was not until the day before the commencement of the trial that any trials were carried out in order to establish whether or not a dough prepared to the samosa recipe annexed to the quotation of 30 June 2000 could be extruded through the Rondo Equipment. He went on to say this:
Mr Ives explained in oral evidence that for the purposes of the tests decisions had to be taken as to the temperature of the various ingredients at the time of mixing, the type of flour to be used (it was "Sovereign"), the type of oil to be used (rapeseed), the type of mixer to be used (spiral), the mixing times at slow and fast speeds (mixing commenced with a period at slow speed, followed by a period at high speed), and the resting time for the dough. Once these decisions had been made and implemented – some of them, in particular mixing times and resting times were altered between tests – five tests were conducted. Broadly the results were that to get an extrudable dough it was necessary to add a quantity of water equal to 35% by weight of the weight of the flour. Once that was done a good extruded pastry could be produced on the Rondo Equipment at a speed of 17 metres per minute.
It is pertinent to have in mind that the samosa recipe annexed to the quotation of 30 June 2000 provided for a ratio of 3kg of water to 10kg of flour; with the caveat that the amount of water was approximate and would depend on the flour. It had been submitted on behalf of Filobake that the fact that the Rondo Equipment was unable to extrude dough comprised of the ingredients and in the proportions set out in the samosa recipe (and, in particular with a water content of 30% by weight of the flour content) led to the conclusion that the Rondo Equipment did not meet the performance specification. And it had been submitted on behalf of Rondo that the fact that the proportion of water by weight had to be increased from 30% to 35% was within the performance specification – having regard to the caveat. The judge preferred the latter submission. He said this, at paragraph 113 of his judgment:
As it seems clear that questions of judgment and "feel" are important in assessing the sufficiency of a dough, and it is recognised that the expertise of the baker is involved in considering whether a particular dough is adequate or requires the addition of some more of some ingredient or other, specifically water, it seems to me that the submission [on behalf of Rondo] that a water content of 35% by weight of the of the weight of the flour is "approx. depends on flour" 30% is well-founded and I accept it. It follows that in my judgment the Rondo Equipment met the performance specification in the contract between Filobake and Rondo.
He went on to observe that, if he were wrong in that conclusion, it was plain on the evidence that the Rondo Equipment was capable of processing a samosa dough so as to produce finished samosa pastry of a commercially acceptable quality; and so it was reasonably fit for that purpose and of satisfactory quality. If there were a technical breach of contract arising from the need to add water in excess of the 30% by weight specified in the recipe in order to achieve an acceptable product, that caused no loss to Filobake and would attract only an award of nominal damages.
At paragraph 125 of his judgment the judge pointed out that it followed from his conclusion that there had been no breach of the contract between Filobake and Rondo that the pleaded claim that Filobake had been entitled to reject the Rondo Equipment must fail. But he went on, at paragraph 130, to explain why that claim would have failed in any event. Payment of the final instalment of the purchase price was evidence of acceptance by Filobake of the Rondo Equipment; so, also, was the fact that Filobake then mortgaged the equipment. As the judge put it: "Had it been necessary I should therefore have held that Filobake had accepted the Rondo Equipment .... prior to 11 September 2001 when it purported to reject those goods." And, by using the Line to produce samosa pastry for Gazebo for profit in 2002 and 2003, "Filobake must be taken to have waived any right to treat the Rondo Equipment .... as rejected".
The judge's conclusion that there had been no breach of duty on the part of Rondo, either under its contract with Filobake or in tort, made it unnecessary for him to consider whether Filobake had sustained the substantial losses which it claimed – as the judge acknowledged at paragraph 131 of his judgment. Nevertheless, after recording that it was accepted that each of the pleaded claims (other than the loss of profits claim) were advanced only on the basis that Filobake had been entitled to, and had, rejected the Rondo Equipment, he addressed the loss of profits claim in some detail – at paragraphs 138 to 153. That claim had been advanced on the basis of a Business Plan prepared in or about September 2000 for the purpose of submission to Filobake's bankers (HSBC) in connection with an application for funds to assist in the purchase of the equipment. At paragraph 153 of his judgment, the judge said this:
On the totality of the evidence it seems to me that the only proper conclusion is that there was not the demand for samosa pastry which Filobake had anticipated at the time the decisions to acquire the Rondo Equipment, the Oven and The Cooler were taken. No existing unsatisfied demand was identified at the time of the decisions, and attempts to generate custom in and after April 2001 were unsuccessful save in the case of Gazebo. If there had in truth been a demand, there is no obvious reason why that demand should not have been met to some extent, at least, by increasing production on the Existing Line. Gazebo became an established and loyal customer for a period of at least some months, and perhaps as many as eighteen, until a dispute unrelated to the Rondo Equipment, the Oven and the Cooler led to a breakdown in relations. Filobake had competitors in the marketplace, such as St James, which did provide samosa pastry apparently serving whatever demand there was. Thus, had it been necessary to consider the loss of profits claim, I should have concluded that it had not been proved that the projections in the Business Plan were realistic or that any net profit had in fact been lost.
The issues on this appeal
The grounds of appeal set out the appellant's contentions under eight heads; of which three (numbered (5) to (7)) related only to the appellant's case against Frampton. Grounds (1) and (2) challenged the judge's conclusions as to the contractual obligation (express or implied) which Rondo had undertaken in relation to the performance of the Rondo Equipment. Ground (3) challenged the judge's conclusion that the equipment met the contractual obligation (as he had held it to be). Ground (4) put in issue the judge's rejection of Filobake's claim (based on representations said to have been made prior to the contract) that Rondo was under a duty to ensure that the oven and cooler supplied by Frampton were compatible with the Rondo Equipment. And ground (8) challenged the judge's conclusions in relation to loss of profits and (in the alternative) wasted expenditure. There was no appeal from the judge's decision that any right to reject the equipment had been lost by the time that Filobake purported to do so by its solicitors' letter of 11 September 2001.
At the hearing of the appeal little time was spent on ground (4) – the duty to ensure compatibility. It can be disposed of shortly. The appeal against so much of the judge's order as awarded nominal damages against Frampton has not been pursued. So there is now no challenge, on this appeal, to the judge's finding, at paragraph 120 of his judgment, that there was no evidence that a reduction of 4% (which, it was accepted, could be achieved by the Frampton oven) in the moisture content of dough capable of being extruded by the Rondo Equipment (that is to say, dough with an original moisture content by weight of 35% or thereabouts) was insufficient to enable satisfactory finished samosa pastry to be produced. Nor is there any challenge to the judge's finding, at paragraph 123 of his judgment, that the Frampton cooler was of satisfactory quality and reasonably fit for its purpose. Even if the judge were wrong in his conclusion that the purpose for which the Rondo Equipment was required to be fit did not include the production, in conjunction with a suitable oven and a suitable cooler, of commercially satisfactory samosa pastry, there is no evidential basis for a claim that the Frampton oven and the Frampton cooler were not, themselves, suitable in that context. It follows that, even if the judge were wrong in his conclusion that Rondo was under a duty to ensure that the oven and the cooler were compatible with the Rondo Equipment (on which we do not need to express a view), there is no evidential basis for a claim that Rondo was in breach of that duty.
The issues which need to be addressed by this Court reduce to three:
what contractual duty was owed by Rondo to Filobake in relation to the performance of the Rondo Equipment;
was it established by the evidence that Rondo was in breach of that duty; and
if so, of what loss (if any) suffered by Filobake was the breach of that duty causative.
The first issue:
what was the contractual duty?
When giving permission to appeal on 9 July 2004, Lord Justice Rix pointed out ( EWCA Civ 944, ) that the judge had construed the performance obligation in the contract between Filobake and Rondo narrowly; so as to hold that there was no warranty "that the equipment involved could successfully be used to create samosas but merely that the end result would be a pastry of a certain width and thickness, passing along the equipment at a certain rate per minute and so forth". He observed (ibid, ) that it was arguable that the judge had paid insufficient regard to those elements of the performance guarantee which warranted the equipment's capacity to produce "samosa to the attached recipe"; and he noted that the experts had agreed that it was "an essential feature of samosa pastry that it should be capable of being folded without cracking so as to make the pastry parcel in which the filling is placed".
That argument was developed at the hearing of the appeal in this Court. The express term – that the equipment detailed in the specification "will be able to produce Samosa to the attached recipe" – was to be read in the light of the obligation as to fitness for purpose imposed by the Sale of Goods Act 1979. The reality was that the purpose for which the equipment was required was the production of samosa pastry for resale: if the equipment was not fit for that purpose Rondo was in breach of its contractual obligations – whether expressed or implied by statute.
We think that there is force in that argument. Leaving aside the obligation as to fitness for purpose imposed by the Act, it is necessary to construe the express term so as to give effect to each of the three elements which it contains. The warranty is that the equipment will be able (i) to produce samosa pastry (ii) to the attached recipe (iii) at the speed and with the dimensions and sheet characteristics particularly described.
The judge concentrated his analysis on the second and third of those elements; but discounted the first. As he put it at paragraph 77 of his judgment, in the passage to which we have already referred, the performance obligation was not concerned with whether "the end result of mixing the ingredients [specified in the samosa recipe] in the proportions there set out and passing the dough thereby produced down [the production line] would be a pastry which could successfully be used to create samosas". The contractual requirement was that "the end result would be a pastry 1000 millimetres wide, 0.5 millimetres thick passing along the Rondo Equipment at 15 metres per minute, and so forth".
We accept, of course, that the performance obligation did impose a contractual requirement that dough produced by mixing the ingredients in the proportions specified in the samosa recipe could be extruded, by being passed through the Rondo Equipment, into a continuous sheet 1000 millimetres wide and 0.5 millimetres thick, that that could be done at the speed of 15 metres per minute (measured by reference to the continuous sheet) and 440 kilograms per hour (measured by reference to the weight of the dough), and that the continuous sheet could be cut into sheets of 300 mm x 400 mm in size and 90 grams in weight. But we do not accept that that was the limit of the obligation. It was necessary, if the contractual obligation were to be met, that the extruded dough should be capable of use as samosa pastry.
That is not to say that the extruded dough should be capable of sale for use as samosa pastry without further processing. It is clear, as the judge pointed out at paragraph 11 of his judgment, that "in the course of producing prepared pastry or dough for sale to final users it is sometimes necessary to heat the pastry or dough to set the pastry structure and reduce the moisture content". And it is clear that where the pastry or dough has been heated for that purpose it may be necessary to cool it before packing. In the present case, heating and cooling of the pastry or dough was contemplated from the outset. So, the performance obligation in the agreement between Filobake and Rondo has to be construed with that in mind.
We accept, also, that the samosa recipe was not exhaustive – in the sense that it was no more than a list of ingredients and an indication of the proportions in which those ingredients should be mixed. The recipe gave no instructions as to how the mixing process was to be carried out. As the judge pointed out, in the passage at paragraph 78 of his judgment to which we have referred, essential details were missing: the type of flour, the type of oil, the method by which and the time for which the ingredients should be mixed, the temperature at which ingredients should be added to the mix and the length of time for which the dough should be allowed to rest before further processing. Those details had to be supplied. But we do not share the judge's view, expressed at paragraph 79 of his judgment, that the only significance of the recipe was as a "statement of the ingredients and proportions of ingredients which, if mixed in an appropriate fashion, at appropriate temperatures and for an appropriate period of time .... could then be passed through the Rondo equipment so as to produce pastry 1000 millimetres wide, 0.5 millimetres thick and so forth at a rate of 15 metres per minute". The contractual obligation required that, if the ingredients were mixed in the proportions specified "in an appropriate fashion, at appropriate temperatures and for an appropriate period of time" and were then passed through the Rondo Equipment (after an appropriate rest), the result would be pastry which had the characteristic essential for use in the production of samosas – that is to say, it could be folded without cracking.
The judge's analysis led him to distil the express and implied terms as to fitness for purpose and performance into the composite obligation which he set out at paragraph 93 of his judgment: "to supply as component parts of the [production line] .... items .... which were, individually and collectively, capable of enabling pastry containing the ingredients listed in [the samosa recipe], mixed in the proportions set out in that recipe at appropriate temperatures, for an appropriate period of time on an appropriate mixer and left to rest for an appropriate period of time, to be extruded 0.5 millimetres thick and passed down the [line] at a speed of 15 metres per minute." He rejected the contention that the obligation required that the pastry which had passed down the line should be capable of being used as samosa pastry. In our view the judge's conclusion gives no sufficient weight to the first of the elements in the expressed obligation, and no sufficient weight to the purpose for which the equipment had to be fit.
We would express the substance and effect of the performance warranty in wider terms: "the items listed in the quotation of 30 June 2000 and supplied as component parts of the production line are, individually and collectively and together with a suitable oven and a suitable cooler, capable of enabling pastry containing the ingredients listed in the samosa recipe, mixed in the proportions set out in that recipe at appropriate temperatures, for an appropriate period of time on an appropriate mixer and left to rest for an appropriate period of time, to be extruded 0.5 millimetres thick and passed down the line at a speed of 15 metres per minute, to be cut into sheets 300mm x 400mm in size and 90 grams in weight, and to be packaged and sold for use as samosa pastry".
The second issue:
was Rondo in breach of that duty?
When granting permission to appeal Lord Justice Rix observed that it was arguable that, if the judge had concluded that Rondo's obligations in relation to the performance of the Rondo Equipment were wider than he had found them to be, then upon the basis of the statement agreed between the experts he should have found that the equipment was not capable of producing samosa pastry.
At the hearing of the appeal in this Court the appellant placed much reliance on the joint statement agreed by the experts. We have set out that statement earlier in this judgment. It is important to note that, in a letter dated 12 February 2004, Mr Ives – by way (as he said) of clarification not amendment – made two observations on that statement. First, that the second sentence in item 1 "refers solely to the Filobake specification as detailed in Mr Froebel's report where he has listed the target moisture content and his difficulty in obtaining a longitudinal strength of the pastry product". And, second, that item 6 "relates to the assessment of the .... contractual recipe by Mr Froebel and Mr Leeke as detailed in Mr Froebel's report".
It is convenient to set out, again, items 1 and 6 of the joint statement:
It is pertinent, also, to note that the joint statement contains a record of two items of disagreement:
Appendix 3 to Mr Froebel's report (dated 20 June 2003) is said to comprise "a quality variables and attributes Finished Product Specification for a Samosa pastry sheet." It sets out a number of attributes and visual requirements for samosa pastry which have no parallel in the recipe attached to the Rondo quotation. It describes "Fitness for Purpose" in these terms:
Folding Ability Clear evidence of ability to fold Samosa sheets in both a longitudinal and transverse direction without causing the sheet to crack.
And, as to "Variables":
Variables Target Range
Moisture 26% 26% +/- 2%
It is clear that the judge was puzzled as to the origin of the "Filobake specification" set out in appendix 3 to Mr Froebel's report of 20 June 2003. The explanation, to which the judge referred at paragraph 104 of his judgment, was that Mr Froebel had thought it essential, if he were to make an assessment of the performance of the production line "from a bakery perspective", to take a view as to what it was that the line was supposed to produce – that is to say, to identify "not only the characteristics of the dough which was supposed to be processed by the line but also a finished product specification". The judge went on to say this, at paragraph 105 of his judgment:
It is apparent that [Mr Froebel] approached the giving of the advice sought from him on the basis that what Rondo and Frampton agreed between them was to provide to Filobake was a production line which produced a samosa pastry with given characteristics, central among which was a specific moisture content after passing through the heat-treatment stage .... No such finished product specification had ever been produced by Filobake, so Mr Froebel prepared his own, which was attached as Appendix 3 to the Froebel Report.
The judge found that Filobake, itself, had no specific requirement for a moisture content of finished samosa pastry: "Its requirement was simply for a samosa pastry saleable commercially as such". But, as the judge put it at paragraph 107 of his judgment, "once the supposed requirement for a moisture content of finished samosa pastry of 26% had been identified, It assumed a crucial importance in the further evaluations of the [Line] made by Mr Froebel and Mr Leeke". Pertinently, in the present context, it coloured the approach of the experts towards the agreed joint statement.
A further feature of Mr Froebel's report of 20 June 2003 is that, in each of the trials which he conducted (six trials on 21 and 22 May 2003 and a further four trials on 2 and 5 June 2003), he reduced the oil content of the samosa recipe from 15% of flour content by weight to 1.5% of flour content by weight. This appears clearly from the figures set out in respect of each trial. His explanation, when the matter was put to him in the course of his oral evidence (transcript of proceedings, 1 March 2004, page 111), was that that he believed that, in the recipe as attached to the quotation (10kg Flour, 1.5kg oil), the decimal point was (in error) in the wrong place. He thought that a recipe which provided for oil content of 15% by weight of flour would produce "a completely unworkable dough". Whether or not he was correct about that – it was neither conceded nor established by other evidence and the judge made no finding – the effect was that he conducted no tests on the basis of the recipe by reference to which the performance warranty had been given.
The judge, of course, approached the matter on the basis that what he had to decide was whether a dough prepared to the samosa recipe (as attached to the quotation of 30 June 2000) could be satisfactorily extruded through the Rondo Equipment – paragraph 111 of his judgment. But, as we have mentioned, he thought it implicit in the experts' joint statement – in particular, at paragraph 4 – that it was accepted by all of them "that it was possible to produce a samosa pastry of acceptable commercial quality using the [Line]". The problem was that the tests conducted by Mr Froebel and Mr Leeke, with Mr Froebel's finished product specification in mind, had not resulted in that happening. And it is important to keep in mind that the judge made a specific finding, at paragraph 113 of his judgment, that "it is plain on the evidence that the Rondo Equipment was capable of processing a samosa dough so as to produce a finished samosa pastry of a commercially acceptable quality, as happened in the case of Spurway."
There was evidence on which the judge could reach that conclusion. First, there was the evidence in Mr Ives's first report, dated 27 March 2003, following his visit to Spurway Foods. Second, there was Mr Ives's opinion, in a letter dated 24 February 2004, following a test carried out very shortly before the trial. Third, there was the oral evidence of Mr Ives. Fourth, there was the fact that the Spurway line, using the same equipment, was producing satisfactory samosa pastry; albeit to a different thickness and at a slower speed. But, perhaps more pertinently, there was no satisfactory evidence that the Rondo Equipment, together with a suitable oven and a suitable cooler, could not have produced satisfactory samosa pastry from the ingredients in the proportions specified in the samosa recipe, given an appropriate (spiral) mixer, appropriate mixing times and temperatures and appropriate rests. Mr Froebel's tests did not demonstrate that the performance obligation could not be met – only that the results produced by his tests did not meet it. But, as we have said, he did not conduct those tests on the basis of the recipe by reference to which the performance warranty had been given.
For those reasons the second issue – whether it was established by the evidence that Rondo was in breach of the contractual duty as we have held it to be – must be answered in the negative. The appeal fails on that ground.
The third issue:
was the breach (if any) causative of loss suffered by Filobake?
In view of our findings on liability, it is not strictly necessary for us to deal with the various issues raised in relation to damages, but out of courtesy to the judge, whose handling of the damages claim was severely criticised before us, we think that we should say something about them. The submissions had two limbs. First, the appellants challenged the judge's rejection of their case as put at trial. Second, if they failed in that endeavour they sought to amend their pleadings to claim, in this court or below, damages on a quite different legal basis. We deal with those issues in turn.
The claim at trial
As we have said, at trial Filobake claimed, first, a declaration that it was entitled to reject the goods, with consequent return of the purchase price; and, second, damages. The damages were calculated on the basis, first, of continuing loss of profits; second, wasted costs in installing the equipment and adapting the premises for it; and, third, wasted overheads and operating costs allocated to the equipment. How the second and third of those items related to the claim to reject the goods does not seem to have been explored.
The judge held that Filobake had lost or waived any right to reject the goods, and there is no appeal from that finding. The judge rejected the claim for loss of profits, a matter to which we shall have to return. He also rejected the second and third heads of damage listed above. The appellant complains of the whole of the rejection of the third item, though it now limits its claim to a figure different from that contended for at trial. It also complains of the rejection of one part of the second item, though now seeking to recover a different amount under that part from what was contended for at the trial. It will be convenient to deal with those latter issues first.
There was before the judge a joint accountants' report in which each expert posited a different total for wasted overheads. The appellant now seeks to rely on the total accepted by the respondents' expert. However, all of those calculations had as their starting-point accounts drawn up by Mr Kyriacos Pittalis, an accountant who is also a director of Filobake. Mr Pittalis gave evidence before the judge, who rejected virtually in its entirety his method, and his reliability in bringing items into the account. There was effectively no answer, and certainly no convincing answer, to that part of the judge's judgment. So far as the claim for wasted expenditure was concerned, the judge held that there was a serious absence of evidence to support any of the items claimed; and, as we have seen, that claim is not now maintained in anything like its original form.
The judge was therefore entitled to take the view that he did of the sustainability of this part of the claim as a simple matter of fact and evidence. More fundamentally, however, as the judge emphasised at the end of paragraph 156 of his judgment, the claimant could not in any event claim under these heads unless it could make good its claim for damages for loss of profit. The basis of that position will become clear when we address the proposed amendment to the Grounds of Appeal. Before doing that, we address the most substantial element in the argument before us on the original grounds, the claim for loss of profits.
The claim for loss of profits
The quantum of this claim was pleaded by reference to the report of the claimant's accountancy expert, Mr Warman. He however had not done any investigation of his own, but had relied on the Business Plan supporting Filobake's (successful) application to HSBC for a substantial loan for the purchase of the new equipment. That plan had been drawn up by Mr John Pittalis, a director of Filobake and the moving spirit in the accountancy firm founded by Mr Kyriacos Pittalis, referred to above. That plan was based upon forecasts of very substantial additional sales that were expected to be obtained by use of product from the new equipment. Mr John Pittalis did not, however, himself investigate those sales prospects, nor see any direct evidence of them. He proceeded by speaking to two active directors of the company, Mr Tsangarides and Mr Harry Charilaou, and reflecting in the plan their confidence that increased sales of at least 5,000 kilogrammes per week would be available with the new equipment.
This being the origins of the figures, it was essential, if Filobake's claim were to be made good, that Messrs Tsangarides and Charilaou give detailed and direct evidence of how they reached the conclusion that they had related to Mr Pittalis, and he in his turn to Mr Warman; and material be produced that verified their optimism. In the event, Mr Tsangarides offered only the most vague and second-hand evidence of that nature in his witness statement; and Mr Charilaou, held out as the person with real and direct knowledge of the market, almost no evidence at all. Such information as the judge received on this issue, in particular from Mr Charilaou, was almost entirely volunteered under cross-examination.
In these circumstances, it was hardly surprising to find the judge concluding, in paragraph 145 of his judgment, that there was simply no credible evidence that the increased sales forecast in the Business Plan could have been made. We were read a substantial part of the evidence of, in particular, Mr Charilaou in an attempt to dislodge that conclusion. We will say no more of that experience than that it threw further light on why the judge concluded as he did in the passage which we have already set out in paragraph 26 of this judgment.
Mr Marks however further criticised the judge on two main grounds. First, he had impermissibly referred, at some length, to Filobake's difficulties with potential customers after the equipment was installed as demonstrating the difficulty of the market. That was misconceived, because by then Filobake was having to use the inferior product produced by the equipment and it was that, the fault of the defendants, that alienated the customers. Second, he did not refer to the conviction expressed by Filobake that new customers would be available because, with the equipment performing as warranted, they expected to have a better product at a lower price than that of the opposition.
It is quite right that the judge did not refer specifically to the latter claims. They were before him only in an undated note written by Mr Tsangarides, and did not feature at all in Mr Charilaou's evidence in chief, the latter only referring to the point under cross-examination. The judge may reasonably have taken the view that if these prospects were so important he would have heard more about them; and discounted them together with the rest of Filobake's evidence of which they formed part. The judge's reference to contacts made after the equipment was installed no doubt had as its point of departure the fact that references to customers in Mr Charilaou's evidence were almost entirely so confined – paragraph 144 of the judgment. In so doing he did not, however, make the error of which Mr Marks complains. He reached the conclusion set out in paragraph 55 above purely on the evidence, such as it was, of Mr Tsangarides and Mr Charilaou about the prospects before the equipment was installed and on which the business plan that elicited funding for the purchase of the equipment was based, before embarking, at paragraph 146 of his judgment, on Mr Charilaou's account of customer relations after the equipment was installed. The judge was justified in concluding that those events did nothing to displace the view that he had already formed as to the reliability of the Business Plan, but they were not the basis of or justification for that view.
The claim for wasted expenditure
We would therefore dismiss the appeal against the judge's finding that Filobake had proved no part of its loss of profits claim. Against that possibility, Mr Marks applied at the opening of the appeal to amend the Particulars of Claim and the Grounds of Appeal to assert, as an alternative to the loss of profits claim, a claim for costs and expenditure wasted in and by its purchase of the equipment. The quantum of that claim was made up of return of the purchase price; and the items of wasted expenditure already identified as the second and third items in the original damages claim in paragraph 49 above.
This new claim was drawn from the line of jurisprudence based on the decisions of this court in Cullinane v British "Rema" Manufacturing Co  1 QB 292 [Cullinane] and Anglia Television v Reed  1 QB 60 [Anglia]. To assert it at this very late stage required the permission of the court, for which Mr Marks applied. That application plainly raised very difficult issues, quite apart from the question of whether the claimants were right in the conclusions that they drew from Cullinane and Anglia. We deal first with the considerable problems posed by those cases, not in order to resolve them, which we could hardly do on the material before us, but to demonstrate that Filobake's application would, if successful, plainly require the remission of the case; and that such remission would almost certainly result in a return to this court, if not indeed to the House of Lords, not only to resolve uncertainties in the very sparse authority available on the Cullinane principle, but also to determine how that authority fits into the particular facts of this case .
We start with the "Cullinane" principle. The actual issue in Cullinane itself was the disentanglement of a claim that was based at one and the same time on loss of profits expected from the operation of equipment and loss of the capital value and installation expenses relating to that equipment. This court held that at least on the facts of that case the overlap between the two claims meant that to allow them both would grant double compensation. That, however, was as far as Cullinane went. It was left to Lord Denning, Master of the Rolls, in Anglia  1 QB 60 at pp 63H-64A to state the law more generally:
It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits – or if he cannot prove what his profits would have been – he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach.
Filobake said that that was its case. It could not prove what its profits would have been, so it could fall back on claiming the expenditure that flowed from what, on the hypothesis on which this part of this judgment proceeds, had been Rondo's breach in selling what was effectively a useless equipment.
Rondo's principal, though not its only, reply was based on C&P Haulage v Middleton  1 WLR 1461 [Middleton], where, in the context of the Cullinane jurisprudence, this court drew attention to two elementary principles of the law of damages: that an award of damages should not place the claimant in a better position than he would have been in had the contract been performed; and that any award, be it in terms of loss of profits or of wasted expenditure, must quantify only damage that has been caused by the breach. It was said that Filobake's decision to purchase the equipment had been, in the colloquial language adopted in Middleton, a bad bargain. On the judge's findings Filobake would have lost money on the enterprise even if the equipment had operated fully as promised; or, to put the same point under a different legal characterisation, its loss, at least in terms of wasted expenditure, had been caused not by the breach but by its foolish decision to try to expand its business by buying the equipment.
In response to that, Mr Marks relied on the decision of Mr Justice Hutchison in CCC Films (London) Ltd v Impact Quadrant Films Ltd [CCC]  1 QB 16 at 40D, picking up what had been said by Lord Denning, Master of the Rolls, at p64E in Anglia, that once a breach of contract was established the burden passed to the contract-breaker to prove that it would not have caused loss. We would accept that that proposition, which has been approved by commentators (McGregor on Damages, 17th edition (2003), para 2-035), represents the law. But Filobake's attempt to deploy it here, by saying that the defendant had not essayed such proof, is forensically very unpromising. The defendant did not set about proving that issue at the trial because no-one told them that it had to. It is very unfair to try to place that burden on Rondo now, by amendment after the trial. And, as we shall demonstrate when we address the substance of this application in paragraphs 66 and 67 below, on the facts as found by the judge that burden, even though not known of at the time, has in fact almost certainly been discharged by the defendant.
At best, therefore, this amended claim would have to go back for further hearing. When it did so, a series of problems would immediately present themselves.
First, Filobake relied on the conclusion of Mr Justice Hutchison in CCC at p 32A-D that the plaintiff always has "an unfettered choice" whether to frame his claim in terms of loss of profits or of wasted expenditure. But that goes no further than to say that he has a choice between the two bases. That is not what Filobake seeks. In its pleading, and in its submissions before us, the claimant was quite clear that it advanced those two measures as alternatives, as demonstrated by its strenuous support before this court for the profits basis that was rejected by the judge. There is no case that supports that step. It is quite true that in CCC the very experienced judge permitted amendment to claim wasted expenditure at a very late stage of the trial, but that was a case in which, although a claim for loss of profits had been pleaded, it had been withdrawn at the opening of the trial: see  1 QB at p 29D. And there are formidable objections to running the two claims in the alternative, not the least being that, as we have seen, on the issue of the outturn of the contract the burden under a lost expenses claim rests with the defendant; whereas under a lost profits claim the claimant bears the burden of establishing his loss. That conjunction is at least potentially embarrassing for the defendant.
Second, and to some extent linked to the former point, Lord Denning, Master of the Rolls, in Anglia spoke of recovery for wasted expenditure being available "in cases such as the present" where the claimant has not suffered any loss of profits or "cannot prove what his profits would have been". In Middleton Lord Justice Ackner, at 1465H, interpreted that formulation as contemplating a case where "it would not be possible to establish any loss of profits because the situation could not be prophesied had the defendant complied with his contractual obligations" [emphasis supplied]. It is not clear how far that limitation on the principle extends. It has not, so far as we are aware, been tested in any other case. What it does at least demonstrate, however, is that this court in Middleton had in mind a very different case from the present. Here, the claimant has not taken the position that it cannot prove his loss of profits, but rather has set itself, however unsuccessfully, to do just that.
These are issues that it is quite inappropriate to introduce into the case at this late stage. But if we revert to the substance of the present case it rapidly becomes clear that, without an impermissible re-opening of the factual enquiry as it was before the judge, Filobake cannot in any event succeed on a wasted costs basis. Mr Marks argued that all that he had to establish in order to come potentially within the Cullinane rule, and thus throw the burden upon the defendant under CCC, was that with proper equipment Filobake would have made some sales, however sparse. Despite the judge's findings on the evidence that was actually put before him, it was self-evident that some such sales would have occurred. We cannot agree with that formulation, for which there is no authority. The question under Mideleton is whether the plaintiff would have incurred a loss on "the contract as a whole": see per Mr Justice Berger J in Bowlay Logging v Domtar  4 WWR 105 at p117, cited by Lord Justice Ackner at p 1467D. To avoid a loss on the contract as a whole the claimant must at the least achieve sufficient income to discharge the interest on the purchase price. In the face of the judge's finding that the future volume of sales had not been proved at all, it is simply not possible to assume that nonetheless there must have been the prospect of sufficient sales to cover the purchase price of the equipment.
That was also the reason why, as we pointed out in paragraph 52 above, the judge was justified in rejecting the claim for wasted expenses as it was before him. In the context of the new basis of damages, the losing nature of the contract equally precludes the claim made there for loss of expenditure. What, however, of the return of the purchase price? Some difficulty is caused in that connection by the exposition of the nature of the "Cullinane" claim given by Sir Raymond Evershed, Master of the Rolls, in Cullinane itself, at 303. A purchaser faced with useless equipment:
may say, when he discovers its incapacity, that it was not what he wanted, that it is quite useless to him, and he may claim to recover the capital cost that he has incurred .... A claim of that kind puts the plaintiff in the same position as though he had never made the contract at all
It might be said (though it was not said to us) that if Filobake is entitled to be put in the same position as though it had never made the contract at all, it is at least entitled to return of the purchase price, however much the wasted collateral expenditure was caused not by the breach but by the bad bargain. We certainly do not intend to enter upon that enquiry, which so far as we can see has never been addressed in the fifty-one years for which whatever Cullinane does decide has been the law. The answer, at least on the facts of this case, may possibly be that the result adumbrated by Sir Raymond Evershed, Master of the Rolls, is the same as would be produced if the contract had been repudiated by rejection of the goods; and Filobake, having lost its right to reject by its own acts, cannot restore the equivalent of that right under the guise of a damages claim. But that such issues even potentially arise further demonstrates that this amendment is quite inept.
The application to amend opens up a morass of difficulties, which it would be unfair to impose on the defendant at this stage of the case, and disproportionate to impose on a further trial court. Unless the claimant could make progress on the issue raised in paragraph 68 above (an enterprise that would at the least require a return to the court the below, almost certainly to be followed by a further outing in this court), the application would in any event avail it not at all. We reject it on that series of grounds.
The appeal is dismissed for the reason which we have already given.
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