When it's a Bacardi Breezer - "A rum judgement?"
A case was heard in the Commercial Court last year which was potentially of great significance in the context of product liability claims against processors and manufacturers alike, yet received very little comment in the legal press. The decision has now been approved by the Court of appeal. There were two distinct issues before the Court. First, whether the finished product had suffered physical damage. Second, whether certain terms and conditions relied upon to limit or exclude the claimed losses were reasonable. This article is concerned principally with the first issue.
Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd and others concerned the manufacture of Bacardi Breezer by Thomas Hardy Packaging (THP) under contract with Bacardi for production of the drinks at their brewery in Dorset. Part of the manufacturing process involved carbon dioxide being added to the drinks. This had been produced by Terra Nitrogen (UK) Ltd who supplied this to a company called Messer UK. Messer then supplied this to Thomas Hardy Packaging.
It subsequently transpired that certain batches of Bacardi Breezer manufactured using this gas contained Benzene as a result of a failure in the production of the gas by Terra. Although Benzene is a carcinogen when present in sufficient quantity, in this case the level of contamination did not represent a health hazard. Nonetheless, Bacardi had learned valuable lessons from a similar incident involving Perrier in 1990 when naturally occurring Benzene was discovered in bottles of water. Even though this did not represent a health risk, Perrier lost huge market share as a result of the public panic that ensued and was eventually sold to a competitor. Once Bacardi discovered the contamination they therefore organised a major product recall and then sought to claim the £2.125 million costs of the recall from Thomas Hardy. Thomas Hardy sought damages against Messer and Messer against the suppliers of the gas Terra.
In the original action involving Britvic Soft Drinks Ltd., Thomas Hardy Packaging Ltd and Brothers Drinks Co Ltd., Messer and Terra it was held that the gas supplied by Messer and Terra was not of satisfactory quality and was unfit for the purpose for which it had been supplied. The case by Bacardi against Thomas Hardy Packaging was resolved on the basis of the findings in the Britvic case. The current case concerned the extent to which Messer could rely upon the exclusions and limitations in their contract with Thomas Hardy Packaging.
The supply contract between Messer and Thomas Hardy Packaging contained limitations of liability in the following terms:
"12.1 …..the liability of Messer…in respect of personal injury or direct physical damage to property (and losses costs and expenses arising from such injury or damage), whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident….
12.2 Messer…shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to loss of profits, loss of use or other consequential loss), or any other loss or damage not covered in clause 12.1, unless such loss, cost, expense or damage be caused by Messer not supplying Gas that is not of the purity warranted or by failure to deliver or by late delivery of Gas by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer's liability shall be limited to the value of the quantity of Gas concerned..."
In July 2001, Mr Justice Tomlinson sitting in the Commercial Court held that the contamination of the drinks with Benzene did not amount to direct physical damage. He said "If, as here, the thing alleged to be damaged did not exist prior to the alleged infliction of damage, it is not in my judgement correct to speak of direct physical damage to property. Rather there has been the production of a defective product." As a result he held that the contractual limitation of liability in clause 12 .1 of Messers' contract did not apply. The judge also held that clause 12.2 amounted to a blanket exclusion of liability for the typical consequences of the supply of contaminated gas which was unreasonable. As a result Thomas Hardy packaging could pass the whole claim along the contractual chain.
Judgement was handed down by the Court of Appeal on 30th April. Although the Court re-visited a number of earlier cases which had provided guidance as to what constitutes physical damage, it decided that previous authorities offered no assistance in determining whether the loss suffered in this case was as a result of direct physical damage. Reference was made to The Orjula [1995], Hunter v Canary Wharf and Blue Circle Industries v Ministry of Defence, but Lord Justice Mance, in distinguishing these cases from the facts of Bacardi, commented that "In each case pre-existing property was damaged and was useless or depreciated, at least unless money was spent to restore it to it's former state."
In the Court of Appeal's view, the answer to the Bacardi case lay in the well known 1991 decision of the House of Lords in Murphy v Brentwood D.C.. The Court of Appeal referred to key passages of the House of Lord's Judgment in which they had held that:
1. There is no liability in tort upon the manufacturer towards the purchaser from a retailer of an article which proves to be useless due to defects caused by careless manufacture, because the loss is economic.
2. The fact that the defect in the article would cause physical injury or property damage if not remedied does not alter the position.
Of greater significance, however, was the Court of Appeal's application of the House of Lord's reasoning on (and rejection of) the so-called "complex structure" theory. In Murphy v Brentwood the House of Lords had rejected a suggestion that one part of a building could be said to have been damaged by another part, in this case by inadequate foundations. It held that a building is in reality a single and indivisible unit of which the different parts are inter-dependent. The House of Lords did, however, recognise that there may be circumstances in which a distinction can be drawn where the alleged defective product is not truly an integral part of the structure, the example given being a heating boiler which explodes.
It is clear from the Court of Appeal's Judgment that the Court concluded that the same principles apply equally in the context of the manufacture of products. In reaching the view in Bacardi that there was no physical damage, the Court, while accepting that certain ingredients owned by Bacardi were separate from the defective carbon dioxide and water supplied by THP, the reality was that "The new product was not damaged, but merely defective from the moment of its creation." The Court was reinforced in their view by the fact that the loss claimed was not in respect of the value of the concentrate but in respect of the recall costs and the value of the finished product.
The decision of the Court of Appeal has potentially far-reaching consequences in the context of product contamination cases. How far, for example, can one take the Court of Appeal's reasoning? Does it matter, for example, that the ingredient that has rendered the end product defective was introduced deliberately? Thus, for example, if small particles of glass are introduced into bottled drinks during the bottling process, is that also economic loss? Similarly, if a disgruntled employee maliciously contaminates a product but the malicious act is discovered before the product is consumed by the end user, is that also pure economic loss? Although in both these examples, the contaminant is, unlike in the Bacardi case, still a separately identifiable component at the end of the process, could it not equally be said, as it was in Bacardi, that an end product has been produced which is of no value and that the loss in reality is therefore economic?
The immediate consequences for the manufacturing or processing industry are twofold. First, it places even greater importance upon contractual remedies available to those involved in the supply chain where restrictions on economic loss are fewer. For the same reasons, the presence and effectiveness of exclusions or limitations on liability will be of paramount importance. Second, it throws open the question of to what extent traditional product liability policies do in fact cover losses of this nature. While many policies provide cover by reference to a broad definition of physical damage, including coverage in respect of loss of use for example, there remain policies which merely refer to "damage" or "physical damage". (That debate may, however, be academic if the policy contains an exclusion in respect of recall costs). Manufacturers and processors should be reaching both for their insurance policies and contractual conditions as a matter of priority.
For further information please contact Anthony Hobkinson by e-mail at anthony.hobkinson@cms-cmck.com or Colin Masson at colin.masson@cms-cmck.com or by telephone on +44 (0)20 7367 3000.
