Activa DPS Europe SARL v Pressure Seal Solutions Ltd (t/a Welltec Systems UK)

This is an appeal by the Defendant, Activa DPS Europe S.A.R.L. (“Activa”), against an order of Mr Recorder Acton-Davis QC made on 11^th August 2011 in the Southampton County Court giving judgment for the Claimant, Pressure Seal Solutions Limited (“PSSL”), in the sum of €64,699.09 plus interest. The claim was for the unpaid price of goods supplied to Activa between September and November 2009 under five separate invoices (nos. 4405; 4546; 4551; 4565; and 4711). The goods in question comprised postal machinery, equipment and spare parts. It is common ground that the goods were delivered and were not defective but no payment has been made in respect of any of the invoices even though all but four of the pieces of equipment have now been sold on by Activa to its own customers.

In its defence and counterclaim Activa took the point (which is admitted) that because the contracts contained retention of title clauses PSSL had no cause of action for the price of the goods and was limited to suing in damages for Activa’s failure to pay. But its principal defence was that the machinery and equipment had been supplied (as the Recorder accepted) for re-sale (including within the EU) and that they had therefore to have been tested and certified as compliant with the regulations contained in EC Directive 2004/108/EC failing which their re-sale within the EU would be unlawful.

Activa’s case was that most of the items of electromagnetic equipment ordered, with the exception of one item (the MF4000), either had no certificates of conformity or were covered by certificates which had lapsed prior to the date of the sale. There was therefore a breach by PSSL of the implied term that the goods were fit for purpose (see Sale of Goods Act 1979 s. 14(2), (2B)) because, without the necessary certification, they were unsaleable. Activa also counterclaimed for damages and an indemnity in respect of its potential liability to its own customers who had bought the goods without their being properly certified.

Directive 2004/108 EC (“the Directive”) was published on 15 December 2004. Its purpose was to ensure the harmonisation of national laws for protection against electromagnetic disturbance in order to guarantee the free movement of electrical and electronic apparatus without lowering justified levels of protection: see recital (3). It does not apply to radio and telecommunications equipment which is separately regulated. Nor was the Directive intended to regulate equipment which is inherently benign in terms of electromagnetic compatibility: see recital (9). Recitals (15) and (16) therefore state that:

Article 1 of the Directive sets out its subject matter and scope by providing that:

“Equipment” is defined in Article 2(1) to mean any apparatus or fixed installation. “Apparatus” is defined as:

“Electromagnetic disturbance” means:

Article 3 requires Member States to:

The conformity assessment procedure is set out in Articles 7 and 8:

The protection requirements contained in Annex I are that:

Conformity is via a process of self-assessment normally by the manufacturer as set out in Annex II:

The obligation to assess and provide the necessary EC declaration of conformity therefore rests with the manufacturer or its authorised representative in the community. The obligation of the importer (unless also the authorised representative) is limited to holding the required declaration at the disposal of the competent authorities in the event that the manufacturer has no authorised representative within the EU. It is not part of the certification process.

If a Member State discovers that apparatus (as defined) bearing the CE marking does not comply with the requirements of the Directive then Article 10 provides that it shall:

In its reply and defence to counterclaim, PSSL took issue with the application of the Directive to the machinery and goods in this case and denied that it was a term of the contract that the equipment should meet the requirements of the Directive. But they also pleaded in paragraph 10 that the equipment did in any event conform with the requirements for sale in the EU and had all such certification as was necessary. In an answer to a request for information PSSL supplied particulars of the certificates of conformity which related to the equipment. But their primary defence was that there was no breach of any implied term as to fitness because Activa had in fact been able to sell the goods without difficulty.

The Recorder accepted that the purpose of the contract was the resale of the goods including in Europe. Activa purchased essentially on a wholesale basis. He also accepted that CE markings were on the machines, although not all were certified. But he went on:

Activa appeals against the order giving judgment for PSSL and dismissing the counterclaim on the ground that the Recorder was not entitled on the evidence to find (and did not find) that there was something amounting to a policy of non-enforcement of the Directive within Member States. The sales-on were therefore subject to potential challenge by the ultimate purchasers. The point is also taken that the Recorder was wrong to find that PSSL was not in breach of its duty to mitigate its loss by refusing to accept redelivery of the four machines which remain unsold. But Activa also sought and obtained from Aikens LJ a limited permission to seek to rely upon a new defence of illegality based not upon the Directive (which has no direct application) but upon PSSL’s non-compliance with the Electromagnetic Compatibility Regulations 2006 (“the Regulations”) which were made under s. 2(2) of the European Communities Act 1972 in order to give domestic effect to the requirements of the Directive. In order to raise this argument which was not part of its pleaded case at trial, Activa needs the leave of this Court including permission to amend its defence and counterclaim. This is not a case in which we are concerned only with the withdrawal of a concession made in the course of an argument on an issue that was squarely before the trial court.

The Regulations apply to “equipment placed on the market or put into service, or both, unless, pursuant to regulations 8 to 14 and regulation 17, it falls outside the scope of these Regulations”: see regulation 6 (1). This therefore implements Article 3 of the Directive. Regulation 8 excludes electromagnetically benign equipment in conformity with Article 1(3) of the Directive.

“Equipment” and “apparatus” are defined in regulation 3(1) in the same terms as in the Directive and regulation 4(2) repeats verbatim the essential protection requirements for electrical equipment specified in Annex 1.

The specific enforcement measures required under Article 10 of the Directive are contained in regulation 15. This provides that:

Compliance with the essential requirements is achieved (as under the Directive) by the manufacturer carrying out an electromagnetic compatibility assessment of the apparatus and regulation 19 repeats the substance of Annex II. The requirements of a valid declaration of conformity are contained in regulation 22(2) which provides that:

The additional case which Activa wishes now to run in this court is that Regulation 15 applied to the contracts of supply with PSSL because they constituted a placing of the apparatus on the market. Although most, if not all, of the relevant machines have the necessary CE markings, they were not (with the exception of the MF4000) covered by any valid declarations of conformity and their placing on the market by PSSL under the contracts was therefore unlawful. If this is right then the contracts are void and unenforceable and the claim must fail. This would therefore be decisive of the appeal.

Where the court is satisfied that it is seized of all the relevant facts and that the contract under consideration was clearly illegal then the court has a duty to decline to enforce the agreement regardless of whether the illegality was pleaded. This principle applies both at first instance and on appeal so that the Court of Appeal can and in appropriate cases should take the point of its own motion: see Snell v Unity Finance [1964] 2 QB 203. In that case the Court affirmed the statement of principle set out by Devlin J in Edler v Auerbach [1950] 1KB 359 at p371 where he said that:

Mr Goldkorn submits that the issue of illegality was raised at trial, although only in the context of the claim for breach of the fitness for purpose term. He accepts that he was responsible for not bringing to the Recorder’s attention the existence of the Regulations but the Directive, he says, contains identical provisions which the Regulations have now give effect to as part of English law. The Recorder has made findings of fact to the effect that many of the machines lacked valid declarations of conformity and his treatment of the fitness for purpose issue (i.e. whether the Directive would be enforced in the Member States where Activa sells its goods) proceeded on the hypothesis that the Directive and any regulations made to enforce it were in terms applicable to the apparatus supplied under the relevant invoices.

Despite these submissions, I am not persuaded that this is a case where the provisions of the Regulations can be said, on the material before us, to apply ex facie to the contracts under consideration. PSSL were not faced with a defence based on illegality in respect of the supply of the machines to Activa. The principal defence was that Activa would be unable to dispose lawfully of the goods to its own customers within the EU given their lack of certification. Their answer to this (which the Recorder accepted) was that Activa had in fact been able to dispose of most of the goods without difficulty both within and outside the EU and that it could also have disposed of the items which remain had it not, on advice, decided to withdraw them from sale.

In its reply PSSL put in issue the application of the Directive to the goods supplied but, given the nature of its case on fitness for purpose, it was not essential to establish that the Directive had no application. The Recorder therefore proceeded on the working assumption that the Directive did apply. There are e-mails in existence which indicate that Mr Baldwin of PSSL considered that the machines did require declarations of conformity and PSSL has, as mentioned earlier, pleaded the certificates which it believes apply to the machines in question. But none of this was directly an issue in the proceedings and the Recorder was not called upon to nor did he make detailed finding of facts about it.

Although I think there is little doubt that many of the products are capable of generating electromagnetic emissions so as not to constitute benign equipment within the terms of regulation 8, I think that Mr Harby is right in his submission that had the application of the Regulations been directly in point, the trial would have taken a very different course. His clients would have had to make much more detailed enquiries of the manufacturers in Korea as to whether the goods had been properly certificated and could, if they thought fit, have adduced expert evidence to challenge the assertion that the machines were all apparatus within the meaning of the Regulation. None of this was explored by the Recorder for the reasons I have given and it would, in my view, constitute an injustice for us to proceed to determine the appeal without first giving PSSL the opportunity to meet in evidence a direct challenge to the legality of the contracts.

The consequence of this is that Activa can only raise the point if they are able to satisfy us on the usual principles that it would be right to give them permission to amend to plead the illegality point at this stage and then to run it as part of their appeal. This requires us to exercise a discretion taking into account all relevant circumstances, including in particular the lateness of the application and the effect which, if successful, it would have on the respondent and on other court users. Applying these principles I have no doubt that we should refuse permission to amend. For the reasons already stated, the amendment would place PSSL at a considerable disadvantage which could only be satisfactorily removed by a further trial. Moreover to admit the defence at this stage would run contrary to the recent guidance given by this court in Swain-Mason v Mills & Reeve LLP [2011] EWCA Civ. 14 and to what May LJ said in Jones v MBNA International Bank (unreported 30^th June 2000) at paragraph 52:

I would therefore refuse permission to appeal on this ground.

That leaves the issue of fitness for purpose. There can, I think, be no doubt that when Activa sells the machines on to its own retail customers it thereby places them on the market.

If the machines are non-benign “apparatus” within the meaning of the Directive and any national regulations made to enforce it, then they will require to have their compliance certified by valid declarations of conformity. Assuming in Activa’s favour for these purposes that the necessary declarations are not in place, two issues arise; has the Directive been brought into force in the Member States which constitute Activa’s market; and, if so, are they enforced?

There is no evidence before us nor was there any before the Recorder that the Directive has been brought into effect in the Member States where Activa was to trade. On this basis the defence that the goods were unsaleable cannot succeed. But the Recorder was also entitled in my view to reject the plea in the light of Activa’s admitted ability to dispose of everything it had acquired from PSSL. Mr Goldkorn submits that the Recorder approached this issue the wrong way round. The presumption should be, he says, that local regulations restricting sales of uncertified products will be enforced. Non-certified goods will therefore only be fit for purpose if there is positive evidence that the competent national agencies will turn a blind eye to infringements of these local regulations. So in Bramhill v Edwards [2004] EWCA Civ 403, it was established that the width regulations contained in regulation 8 of the Road Vehicles (Construction and Use) Regulations 1986 were in practice never enforced against mobile caravans imported from the United States which had a width of 102 inches against a maximum permissible width of 100 inches. Applying an objective assessment to the question whether the goods were fit for purpose, a reasonable buyer knowing these facts would, it was held, conclude that they were.

It seems to me that this is not a case of presumptions but of crediting the reasonable buyer with knowledge of the relevant facts. Unless the Recorder’s assessment of how the reasonable buyer would regard the goods in the light of that material is perverse or clearly wrong then his conclusions must stand. Although shortly stated, I think that the Recorder was entitled on the evidence to reach the conclusion which he did. I agree with Mr Goldkorn that sales under what are described as generic certificates prove nothing. There is no such thing for the purposes of the Directive as a generic certificate and if purchasers were confused into thinking that goods were thereby covered by a valid certificate then they were mistaken. But there was no evidence of the taking of any enforcement proceedings in France or elsewhere in the EU and no evidence that the necessary regulations were even enforced. Sales under generic certificates would not have prevented enforcement proceedings. It has not therefore been submitted to us that there was no material from which the Recorder could conclude that there was no risk involved in the sale of the goods within the EU. Mr Goldkorn’s point is really that the Recorder applied the wrong test but, for the reasons which I have given, I am not persuaded about that. I would therefore dismiss the appeal on this point.

The final issue concerns mitigation. Activa says that it offered to return the machines which remain unsold but that its offer was refused. PSSL has therefore failed to mitigate its damages in respect of these items. There was evidence before the Recorder that PSSL had originally offered to take back the goods in February 2010 but had rejected Activa’s offer to return them when it was made in September. It was said that by then the warranties on the machines had expired but Mr Goldkorn says that on examination it was shown that the goods in question did not in fact have warranties.

The Recorder did not, however, decide the reasonableness of the refusal to take back the goods by reference to the issue about the warranties. He took a more fundamental approach by holding that the duty to mitigate did not extend to requiring the party who had suffered damage to undo the transaction which had caused it loss. That would not be to reduce the claimant’s loss but rather to assist the defendant by in effect curing the breach.

Support for the Recorder’s approach can be found in the judgment of this court in Strutt v Whitnell [1975] 1 WLR 870 where the vendors of a tenanted house who had agreed to sell it with vacant possession but had failed to remove the tenants offered to buy it back from the claimant. The offer was refused and the claimant successfully sued for the loss in value attributable to the lack of vacant possession. Cairns LJ (at page 873B-D) said that:

In The Solholt [1983] 1 Lloyds Report 605, Sir John Donaldson MR treated the decision in Strutt v Whitnell as turning on reasonableness and its own special facts. But it seems to me to have an obvious application to this case. The defendant is only liable for such loss as can be properly be regarded as caused by his breach of contract. In this context the claimant is under a duty to take reasonable steps to mitigate the loss which flows from the breach. But as Cairns LJ pointed out, there is an obvious difference between taking what steps are available to reduce the loss under the contract caused by the breach and in effect reversing the transaction at least to the extent that goods remain in the possession of Activa. The Recorder was entitled to conclude that this lay beyond the scope of the claimant’s duty to mitigate.

I would therefore dismiss this appeal.

I agree.

I also agree.