Interface Europe Ltd v Premier Hank Dyers Ltd

This is an application dated 23 April 2014 made by Premier Hank Dyers Ltd (Premier) for permission to amend their Part 20 Particulars of Claim in accordance with the draft attached to the application.

I have the benefit of a hearing bundle in which the application is contained from page 62. The draft amended Particulars of Claim are from page 75 and form part of the witness statement in support of the application the author of which is Premier's solicitor, Ms Alison Siniver. There is a further witness statements of Mr Robert Welfare filed on behalf of Premier which I have added to the bundle as 217/218.

The Third Party, Airedale Chemical Co Ltd (Airedale) does not object to the proposed amendments except in respect of those proposed in paragraphs 14A to 14H of the draft. Those to which Airedale do not object can perhaps be described merely as administrative or housekeeping changes or changes to reflect the outcome of the main action of which these Part 20 proceedings form part. The main action was one in which Premier was the defendant and the claimant was Interface Europe Ltd (Interface).

Paragraph 14A to 14H however seek to introduce a claim in negligence, the unamended Part 20 claim being confined to a claim for breach of contract. A witness statement of Mr James Staton has been filed in opposition to the application and is dated 12 May 2014. It runs from page 110 of the bundle.

Mr Charles Dougherty QC appears for Premier and Mr Paul Toms of counsel for Airedale. Airedale oppose the amendments in so far as they introduce a claim in negligence on the basis that such a claim is statute barred pursuant to section 2 of the Limitation Act 1980 and Premier cannot satisfy the criteria in CPR 17.4(2) by which the court may only permit amendments to add a new claim outside the limitation period if the new claim arises out of the same facts or substantially the same facts as an existing, in time, claim.

Premier's primary position is that CPR 17.4(2) is not engaged because, whilst it does not dispute that the claim in negligence is a new claim, it contends that the new claim is not statute barred.

Its secondary position is that even if the claim in negligence is statute barred then in fact it does arise out of the same or substantially the same facts as the original contractual claim and that thus the criteria imposed by CPR 17.4 are met.

Accordingly I have to determine whether in fact the negligence claim is statute barred. If it is then it becomes necessary to consider whether the criteria in CPR 17.4(2) are met and if so, whether the discretion to permit the amendment should be exercised.

Premier dyes yarn for, amongst other things, use in the carpet industry. Airedale manufactures dyestuffs for natural and man-made fibres. Interface is a UK company within a global group carrying on the manufacture and supply of modular flooring and carpet tiles.

In February 2007 Premier was instructed by Interface to provide a colour sample for a specific shade of charcoal grey yarn to be incorporated into carpet tiles to be produced by Interface and which were ultimately to be fitted in the headquarters of Bank Vontobel in Zurich.

The specific shade of charcoal grey was created by Premier using dyestuffs supplied by Airedale and included a red dye, Acozine Red AD-GRL as well as blue and yellow dyes.

Once the shade had been approved by Interface it contracted with Premier for the dyeing to that shade of a substantial quantity of nylon yarn supplied for that purpose to Premier by Interface.

The contract or contracts were created by a series of purchase orders placed by Interface with Premier in the period 3 July 2007 to 3 April 2008.

In 2007/2008 Premier dyed the yarn with which it had been supplied by Interface who then used that dyed yarn in the manufacture of the carpet tiles which it then supplied to another company in the Interface group which then supplied them to a Swiss carpet contractor who fitted them at the bank’s Head Office between August 2007 and May 2008.

In February 2010 Premier were informed by Interface that a problem had developed with the carpet tiles in that they were exhibiting "off tonal fade due to exposure to sunlight". In fact they had turned from charcoal grey to a greenish colour.

It is not disputed that Interface wanted the dyed yarn to have a colour fastness to light (Footnote: ¹) of 5 or more (Footnote: ²), nor is disputed that the level of colour fastness of the dyed yarn did not attain level 5 of the relevant scale. A report dated 1 March 2010 from the British Carpet Technical Centre (BCTC) at page 87 of the bundle indicates that the relevant rating is between 3 and 4 and states that the yarn suffered a manufacturing defect "with regard to poor colour fastness to light”. That report was sent to Premier by Interface on 17 March 2010.

Shortly after Premier was advised by Interface of the problem Premier took the matter up with Airedale. At page 90 of the bundle is a letter of 20 April 2010 by which Airedale are put on formal notice that Premier consider that the dyestuffs supplied by Airedale for the dyeing of the yarn failed to meet the required standard.

I should say it seems to have been common ground even at that stage that the failure of the Acozine Red dye was thought likely to be the reason why the carpet tiles had assumed a greenish hue. If the red dye lacked the necessary colour fastness then its failure would allow the blue and yellow dyes to assume an ascendancy which would cause the tiles to assume this greenish hue.

In February 2013 loss adjusters appointed by Airedale (Cunningham Lindsey) notified Premier’s solicitors that their clients had undertaken an investigation of the dyestuffs supplied to Premier pursuant to the contracts between Premier and Airedale. The conclusion that was reached was that while the Acozine Red would achieve a colour fastness of 5 or more on either wool or wool/nylon blends it would not achieve that colour fastness when applied to pure nylon. There was therefore, it was contended, no defect in the dyestuffs per se, it was simply that Premier had created a recipe or formulation to use on nylon when that was not appropriate and, in fact, Airedale's literature stated that it was only suitable for wool or a wool/nylon mix.

Interface replaced the carpet tiles between October 2010 and June 2011 and subsequently brought proceedings against Premier for breach of contract to recover its outlay. Interface contended that it was a contractual term that the colour fastness to light of the dyed yarn would be at least 5. In fact, in their defence, Premier did not accept that and asserted that the obligation extended only to exercising reasonable skill and care to achieve that level. In any event Premier settled the claim by payment of £575,000 to include costs and interest.

Before the settlement was achieved Premier brought their Part 20 proceedings against Airedale limited to breach of contract. Broadly, Premier alleged that Airedale warranted that the Acozine Red would achieve a light fastness of at least 5, further that in any event there was an implied term under section 14 Sale of Goods Act 1979 that the Acozine Red would be of satisfactory quality for all purposes for which it would commonly be supplied. Its failure to possess light fastness of at least 5 constituted a breach of Airedale's contractual obligations.

As I have said, the proposed contested amendments seek to implement a claim in negligence for damages equal to the outlay incurred by Premier in settling the claim by Interface.

As Mr Toms sets out in paragraph 13 of his helpful skeleton argument, the essence of the new claim is a claim for negligent failure to advise Premier on the suitability of Acozine Red for use on the relevant yarn and/or negligent misrepresentation as to its suitability for use on this yarn.

The new claim is premised not only on the basis that Airedale represented that Acozine Red could be used on nylon but also on the basis that there was a very close relationship between Airedale and Premier and the latter relied on Airedale's technical expertise in particular in relation to the formulation of dye recipes.

Premier contend that the close relationship between the parties gave rise to a duty of care to exercise reasonable care in the provision of technical advice. It is not denied by Airedale that historically and typically Airedale had given technical assistance to Premier from time to time. Indeed the Part 20 Defence volunteers that one of their employees, Mr Wilkinson attended at Premier's premises on average twice per week. Not only that, at paragraph 19.4 of the Part 20 Defence Airedale criticise Premier in failing to consult Airedale as to the formulation of the dye recipe, contrary to typical practice.

Inevitably the starting point as to whether a cause of action is statute barred is the date when the cause of action accrued.

Premier contend in this case that its cause of action against Airedale accrued in 2010 when the sunlight caused a reaction in the dye pigments causing the carpets to fade (Footnote: ³). In other words the cause of action accrued when the carpet sustained damage by way of this fading because it was at this point that Premier became liable to Interface for any claim by the end user (the Bank) that was passed up the chain of supply. If that is the case then the new claim is well within the primary limitation period.

Airedale however argue that if there is a claim in negligence (which is denied) it arose either in June 2007 when Premier acted upon Airedale's negligent omission/implicit representation and formulated a dye recipe which in the circumstances was unsuitable (Footnote: ⁴). Alternatively, the cause of action accrued when the dye recipe was used to dye Interface’s yarn most of which will have occurred in 2007 but with a final batch in or about May 2008 (Footnote: ⁵). Alternatively the cause of action accrued when the carpet was fitted at the bank's premises because at that stage the consequences of breach could not be avoided by those by whom the tiles had been supplied and those consequences would inevitably be passed up the chain of supply.

If Airedale is correct then the cause of action accrued more than 6 years before the hearing of this application on 2 July 2014. Mr Dougherty did not contend that a date other than the date of the hearing was the relevant date, no doubt on the basis that authority seems to make it clear that the date of the hearing is the critical date (Footnote: ⁶).

In resolving this issue certain principles of law have been agreed as follows:

The dispute between the parties centres on when Premier suffered actionable, measurable loss as a result of Airedale’s alleged negligence. It is Premier's case that its loss remained contingent until it crystallised in 2010 when the Acozine Red dye actually failed and the tiles assumed this greenish hue.

The principle that a contingent loss is not an actionable loss is derived from the case of Law Society v Sephton 2006 UKHL 22. However, before I deal in detail with this important case it is as well to set out the general principle. In that regard I can do no better than cite the observation of Arden LJ in Axa Insurance Ltd v Akther & Darby 2010 1 WLR 1662 at paragraph 32

In Sephton a solicitor practising on his own account engaged the defendant accountants to certify his annual reports to the Law Society. Between 1989 and 1995 the defendants negligently issued unqualified certificates of compliance with accounting rules. In fact the solicitor was misappropriating money over the relevant period. The Law Society argued that would have been discoverable by the accountants had they properly examined the solicitors records before thinking about issuing certificates of compliance.

From 1996 to 1999 the Solicitors’ Compensation Fund of which the Law Society was trustee, was obliged to make payments to some of the clients whose funds had been misappropriated. Their obligation to do so arose by virtue of the Solicitors Compensation Fund Rules 1995.

In 2002 the Law Society issued proceedings against the accountants alleging negligence. The Society claimed that it had relied on the accountant’s reports when deciding not to investigate or intervene in the solicitors’ practice before May 1996 which was when the fraud first came to light.

The accountants contended that the claim was statute barred because the action arose in relation to each accountant’s report when the money was misappropriated after receipt by the Law Society of the relevant report. Since the misappropriations occurred more than 6 years prior to the issue of the claim it was contended that the claim was time barred.

The Law Society contended that even though it knew (from the moment when its investigating accountant reported on the true state of the solicitors’ accounts) that it was facing the prospect (or risk) of having to pay heavy compensation in due course, it did not suffer actual damage in the eyes of the law until it resolved to make its first payment out of the compensation fund.

The House of Lords held that the solicitor’s misappropriation gave rise to the possibility of claim out of the Compensation Fund but that was contingent upon the misappropriation not otherwise being made good. Accordingly it was a contingent claim because it gave rise to no more than the possibility of an obligation to pay money in the future. That, it was held, was not damage until the contingency occurred. Accordingly, until the claim was made against the Compensation Fund no loss had been sustained by the Fund (or the Law Society) and thus no action accrued until that point. Accordingly the claim was not statute barred.

I was taken to various passages in Sephton on the basis of which Mr Dougherty contended that it was clear that no cause of action accrued until 2010 because before that any damage was merely contingent.

I have already pointed out that Mr Toms does not dispute that Sephton is authority for the proposition that a contingent liability for loss is not a loss for the purpose of accrual of a cause of action in negligence. His position is that the loss in this case is not a contingent loss but an actual, measurable loss albeit that measurement may be difficult until later.

In Wardley Australia Ltd v State of Western Australia 1992 175 CLR 514 it was said

At paragraph 18 of Sephton, Lord Hoffmann indicated that he was in complete agreement with this analysis.

He goes on to say paragraph 30;

At paragraph 31 he states;

At paragraph 40 Lord Walker summarised the accountants’ case in support of its contention that the Law Society's claim was statute barred on the basis that;

At paragraph 41 he said;

Lord Walker agreed with Lord Hoffmann that Sephton fell into the latter category. He referred to a number of cases which might, at first blush be thought to be analogous but where it was held that the cause of action arose prior to quantification of the claim.

At paragraph 44 he said

At paragraph 45 he goes on;

And at paragraph 48 he states;

Lord Walker clearly did not see the loss to the claimant in these cases as purely contingent because the value of what the claimant received was diminished immediately by the negligent action.

Lord Hoffmann in his opinion (paragraph 22) also referred to these cases (and others of a similar ilk). He saw these cases on the basis that;

Lord Mance inevitably considered the same cases, from paragraph 67. At paragraph 76 however he distinguishes those cases from Sephton on the basis that;

He goes on at paragraph 77 to say the following;

At paragraph 79 Lord Mance recognises that there can be situations of measurable monetary detriment or loss even though there has been no change in a person's legal position.

So the question is does the alleged negligence of Airedale give rise to a contingent or an immediate, measurable loss?

Mr Dougherty of course makes the point that it was not inevitable by any means that any actionable damage would eventuate. That might be for all sorts of reasons. For example even though in fact the dye lacked the necessary colour fastness the deficit might never manifest itself if the carpet was fitted in an area where exposure to sunlight was limited because say the Head Office boasted smoked glass external windows which subdued the effect of sunlight. Alternatively any problems may only manifest themselves when the appropriate limitation period had expired -- in Switzerland it may for example be considerably less than 6 years. In other words “financial loss is possible but not certain" to cite the observation of Lord Nichols in Nykredit.

In these circumstances he argues that it cannot be said that the supply of the yarn gave rise to something greater than the possibility of an obligation to pay money in the future and that thus there was no measurable loss arising out of Airedale’s alleged negligence until any liability it had to Interface had actually crystallised.

Indeed he goes further, he points out that Interface never intended to retain the dyed yarn for its own use. It incorporated the yarn into carpet tiles and supplied them to a separate entity, albeit a sister company, as it had always intended to do. Accordingly Interface itself suffered no measurable loss which was capable of being passed on to Premier. Arguably Premier were in breach of contract but until a loss crystallised damages would be limited to nominal damages which, the defendant concedes, do not amount to actionable damages capable of giving rise to a cause of action in negligence.

Mr Toms argues that this is too simplistic an approach. He points out that Sephton was a claim arising out of a statutory scheme and that therefore it is by no means analogous to the situation with which I am concerned. It is true that Sephton involves consideration of the public law character of the Law Society's function as trustee of the Solicitors’ Compensation Fund but, at Paragraph 53 of his opinion, Lord Hoffmann makes clear that his conclusion that in that case the liability was purely contingent did not depend on that special feature. It is also true however that Sephton did not appear to involve a bilateral agreement in the usual commercial sense.

Mr Toms draws my attention to paragraph 76 of the opinion of Lord Mance to which I refer at paragraph 53 above in which the learned judge concludes that, until a claim is made, the Society’s position had not changed.

Is it true in this case in the sense that Premier’s legal position remained unchanged until it received a claim?

Mr Toms took me to Charlesworth and Percy paragraph 4 -- 153 -155 (at 18 of the authorities bundle) in which an effort is made to distil points of principle between cases such as those referred to by Lord Walker at paragraph 44 of his judgment in Sephton and Sephton itself.

The editors of Charlesworth and Percy suggest that there is actual (as opposed to purely contingent) loss if the claimant incurs an existing liability or suffers an existing diminution in the value of land or personal property or a chose in action. A cause of action accrues at that date even though there has been no demand on the liability, or the loss has not yet crystallised, or there has been no out-of-pocket expenditure.

Forster (Footnote: ¹¹) (where a client acting on the allegedly negligent advice of her solicitors in executing a mortgage as surety for her son's debts suffered economic loss and had a cause of action from that time, even though she was not required to pay debts for another 2 years) and Bell (Footnote: ¹²) are examples of that. The rationale of the decision in Forster was that the mortgage had the immediate effect of depressing the value of the mortgaged property.

The same result accrued in DW Moore & Co Ltd v Ferrier [1988] 1 WLR 267. In that case solicitors prepared an agreement containing covenants seeking to protect the claimant from competition by a former employee. The covenant turned out to be ineffectual. The loss was held to be sustained at the time the agreement was executed rather when the employee set up in competition or the error was discovered because the claimant received at that time a worthless covenant rather than a valuable chose in action.

A similar result accrued in McCarroll v Statham Gill Davis 2003 PNLR 509. In that case the claimant, a member of a rock band, alleged negligence by his solicitors in failing to advise him that an agreement to be signed by him with his co-members provided that he could be summarily expelled from the band without compensation. He was subsequently expelled. His loss was held to have occurred when he executed the agreement, not when he was expelled. This was because the agreement he signed was commercially less favourable than it would have been had his solicitors complied with their duty of care and that had caused a measurable loss at the point when he signed it.

In this case Mr Toms argues that Premier suffered the loss when it acted on Airedale's alleged negligent representation that the dyestuffs supplied would be satisfactory on nylon (or were not told that it would not) but certainly if not then it suffered loss when it supplied the dyed yarn to Interface and gave them a commodity which was less valuable than Interface had contracted for and Premier incurred a liability to Interface as a result.

Premier’s losses amounted to the diminution in the value of its contract with Interface that is, diminished by the monies it became exposed to pay Interface for providing it with a product that failed to meet Premier's contractual obligations. The fact that Premier was not aware that they had produced an unsatisfactory product and that indeed Interface was not aware when it took its dyed yarn from Premier that it had received less than it bargained for is not relevant. The claimants for example in Moore and McCarroll did not know that they had a defective product until some time later. As Mr Toms put it, the lack of knowledge does not affect the existence of the liability, the knowledge is only relevant to the issue of pursuing the claim that already exists (Footnote: ¹³).

He referred (Footnote: ¹⁴) me to the passage of Lord Mance at paragraph 67 of Sephton;

So, says Mr Toms, unlike the Law Society, Premier’s position changed before it received a claim. In any event, the situation that Lord Mance saw in Sephton, namely that until a claim was made it was not possible to know which clients of Payne and Co might suffer what loss does not apply here.

Let me now turn to the case of Co-Operative Group Ltd v Birse and Others 2014 EWHC 530 TCC. In that case the claimant employed Birse as its main contractor for the construction of a warehouse. Birse employed a subcontractor to design and construct the floor. The claimant alleged the floor was defective and brought proceedings about 12 years after practical completion. Birse brought proceedings against the subcontractors. The relevant issue for the purpose of informing this application was whether Birse’s action in negligence against the subcontractors was statute barred. Birse contended that it was not, on the basis of Sephton.

In this case it is helpful to acknowledge that Premier occupied the role of Birse, Interface that of Co-Operative Group Ltd and Airedale that of the contractors. Stuart Smith J had some initial observations to make at paragraph 28 on Birse’s contention that loss is not suffered until it is ascertained. He gave it short shrift finding such a proposition "unprincipled and unacceptable".

It was “unprincipled” because;

It was “unacceptable” because;

However the real thrust of Birse’s argument is summarised in paragraph 41 of the judgment namely that its liability to the Coop was a contingent liability until the claim against it crystallised and that thus it did not constitute actionable damage. Until there was damage an integral ingredient of a cause of action in negligence was missing with the effect that time did not start to run.

Stuart Smith J accepted that a contingent liability was not actionable damage and what was required was present damage. He found however that Birse had in fact suffered actionable damage when its subcontractors negligently designed/constructed the floor of the warehouse. In paragraph 44 of his judgment he referred to the "Damaged Asset Rule" and at paragraph 48 the "Package of Rights Rule". This latter Rule was mentioned by Saville LJ in the First National Commercial Bank Plc case which was cited by Lord Walker in Sephton (Footnote: ¹⁵). They are also referred to in paragraph 30 and 31 of the judgment of Arden LJ in Axa to which I have also referred.

The Damaged Asset Rule reasserts the principle that I have mentioned above namely that damage to an asset, whatever it is, is not contingent but actual and measurable where the asset is devalued there and then by the negligence. Both Arden LJ and Stuart Smith J regard Forster as a good example of that because the claimant suffered economic loss when she executed the mortgage because it had the effect of encumbering, and therefore devaluing, the mortgaged property. That was when her cause of action arose.

The Package of Rights Rule relates to damage arising in those cases where the claimant could have expected to have received certain benefits but, due to the negligence of the defendant, he fails to receive them. At paragraph 35 of Axa Arden LJ describes it as “a failure to obtain the hoped for benefits under a bilateral transaction.”

In Birse Stuart Smith J held that Birse had suffered loss in the form of measurable loss to their package of rights with the transfer of a defective development to the employer, the Coop. The result was that Birse’s position changed to its financial detriment because it became a contract breaker whose rights under the main contract were devalued by its liability to the Coop (Footnote: ¹⁶).

The court's findings in Birse are perhaps conveniently summed up in paragraph 55. The learned judge held that;

He held that the accrued liabilities were measurable and as a result the cause of action arose sooner rather than later and was accordingly statute barred.

What, asks Mr Toms, is the difference between the situation with which I am concerned and the situation that prevailed in Birse?

Mr Dougherty marshals 4 arguments against following Birse. First, that it is factually different and distinguishable. He addresses this in paragraph 18c of the skeleton argument. Interface suffered no damage when it received the dyed yarn from Premier because it

“sold them in the form of carpet tiles down the chain as it always intended to…… it made no loss on the sale. Interface’s only claim against Premier at that stage would have been for nominal damages. Nominal damages do not amount to true damages"

In other words, the supply chain was considerably longer than that in Birse and that results in Premier, unlike Birse, having no direct liability to the end user. Interface itself, it is argued, has no claim against Premier unless and until its customer makes a claim against Interface. That customer has no claim until the end user, Bank Volotel makes a claim against it. In other words the liability of Premier to Interface is considerably more removed than Birse’s liability to the Coop.

It has to be said that I am not attracted by this argument. There is indeed a longer supply chain in this case than there was in Birse but the fact is that, on the analysis of Stuart Smith J, Premier’s financial position changed as soon as it became a contract breaker, as it did when it supplied dyed yarn that did not meet the necessary colour fastness level. The loss to Premier’s package of rights was not dependent upon the length of the supply chain. Its package of rights was devalued when it incurred a liability to its customer, Interface because Interface became exposed to a claim when it passed on the defective yarn which claim would be passed immediately up the chain to Premier.

His second point is that Birse is not binding in any event, it is a first instance High Court decision. That is true since I deal with this application in the High Court but it is a decision of a High Court Judge and it is persuasive.

His third point is that it is in any event inconsistent with the decision of Akenhead J in Linklaters v McAlpine [2010] EWHC 2931 (TCC). This is another case involving defective construction by a subcontractor. This time it is not flooring but insulated chilled water pipework.

McAlpine were the main contractors in respect of a development of premises occupied by the well-known solicitors firm of Linklaters. McAlpine subcontracted the chilled water pipework to How Engineering Services Ltd who sub subcontracted the installation of the works to Southern Installation Medway Ltd. The pipework corroded, Linklaters was put to the cost of replacement and sued McAlpine and How. The latter sought to pursue Southern. Translated into this claim, How equates to Premier and Southern to Airedale.

At paragraph 113 Akenhead J expressed the view that How’s loss from a tortious breach of duty by Southern arose;

Later, in the same paragraph, learned judge says;

The learned judge’s conclusions specifically had regard to Sephton to which he makes reference in the same paragraph of the judgment.

In Birse, Stuart Smith J was referred to the Linklaters case and in particular paragraph 113. At paragraph 57 of Birse he questions the correctness of what he described as the obiter dictum of Akenhead J in Linklaters and was not persuaded to follow it.

Mr Toms of course argues that Birse should be followed. He argues that the constituent elements of the cause of action of negligence causing economic loss were in place from the moment of the alleged breach by Airedale or at least when Premier supplied the yarn to Interface. Thus by mid-2008 at the latest Premier had had its legal position altered to its immediate measurable economic disadvantage.

Mr Dougherty argues that Birse is incorrect and not in line with Sephton which is a House of Lords decision and he also argues that it is not in line with a decision of the Court of Appeal in Abbot v Will Gannon & Smith 2005 BLR 195. This precedes Sephton and it was not cited in it but in that case the Court of Appeal was unanimous that economic loss was suffered only when the negligence manifested itself in some way that affected the value of the thing in issue (in that case a hotel suffering from the defective construction of a bay window).

By extension it is argued that the economic loss in this case was suffered when the carpet tiles changed colour in 2010, well within the primary limitation period. Mr Toms dismisses Abbot as irrelevant. It was to do with physical damage. It has to be said however that this judgment does appear to address economic loss.

I have concluded that Premier’s cause of action (if any) against Airedale accrued at the latest when Premier supplied dyed yarn to Interface and not simply when the carpet tiles changed colour.

I see no meaningful distinction between the facts of this case and those cases referred to by Saville LJ in First National and cited by Lord Walker in the passage in paragraph 44 of his opinion (Footnote: ¹⁸). Nor do I see any meaningful distinction in the other cases cited in Charlesworth and Perry paragraph 4-153 to 155. Nor indeed do I see any meaningful distinction between this case and Birse.

In this case, and notwithstanding the length of the chain of supply, at the very least the package of rights that Premier had against Interface on the supply of the yarn was diminished by its liability to Interface as a contract breaker.

In my view in addition the Damaged Asset Rule is engaged, as it was in Birse. I have no doubt that this case, like Birse, is a case of an accrued liability that immediately affects the value of a contract. In this case as soon as Premier supplies Interface with unsatisfactory goods the accrued liability immediately affects the value of Premier’s rights under its contract.

In my view it does not matter that the loss is not quantifiable there and then. The authority for that is Lord Walker’s opinion in Sephton at paragraph 48. Neither does it matter that the consequences of the defect may not eventuate because for example the carpet tiles are fitted in a sufficiently dark area or the fault manifests itself at a time when, under Swiss law, the bank had become debarred from pursuing a claim. In DW Moore it was not inevitable that the defendant employee would leave his employment and set up in competition and in McCarroll it was not inevitable that the claimant would be expelled from his rock band. Even in Forster it was not inevitable that the claimant's son would default on the payment of his debts.

So how does this square with Sephton? First, it should be noted that Sephton itself recognises that in bilateral contracts i.e. those where the transaction includes benefits and burdens, a contingent liability will not necessarily be a purely contingent liability. As Lord Hoffmann said (Footnote: ¹⁹);

The reasons are "already discussed" discussed at paragraphs 20 to 22 from which I have already partially quoted. It is instructive in this context perhaps to quote a greater part of paragraph 22;

In Axa the Court held that the limitation period accrued when the negligence occurred rather than when a claim arose from that negligence because "the negligence caused the claimant to suffer a failure in its hoped for benefits under a bilateral transaction".

It seems to me that this case involves a bilateral transaction in much the same way as Axa as well as in much the same way as Lord Hoffmann envisaged in the passage to which I have referred in paragraph 102 above.

I am satisfied as Mr Toms contends, that in this case Premier’s legal position changed at the latest when it supplied the unsatisfactory dyed yarn. In much the same way as Birse’s position changed to its financial detriment when it handed over to the Coop a warehouse with a defective floor. This is because at that point Premier became a contract breaker whose rights under its contract with Interface were devalued by the extent to which Interface’s contract with its customers was devalued. This is in distinction to the position of the Law Society in Sephton.

Furthermore, it is worth recalling the observations of Lord Mance in paragraph 76 (Footnote: ²⁰). This is a case where in fact there is no difficulty in ascertaining who it was that suffered a loss by virtue of the unsuitability of the dye recipe. It was everybody further down the chain of supply whose loss amounted to an obligation to compensate the company to whom it supplied.

There seems to me to be no way of reconciling Birse and Linklaters. Indeed Stuart Smith J did not seek to suggest one. He simply thought the view of Akenhead J was questionable. I prefer to follow Birse because I do not see it as inconsistent with Sephton but merely an example of the kind of case to which Sephton does not apply by the court in Sephton’s own lights because, by virtue of the bilateral nature of the transaction, the loss from the negligence occurred then and there (Footnote: ²¹).

As for Abbott, this was a case with a very limited remit namely whether Pirelli v Faber 1983 2 AC 1 remained good law. The Court of Appeal held that since Pirelli was a House of Lords decision it was bound by it. The observations in paragraph 20 of the judgment to the effect that the defective design of the bay window did not cause any loss at the time it was fitted but only when the defect manifested itself in some way are I think obiter but even if they are not, the focus of the Court was not substantially directed to the issues considered at length in Sephton and the case was not even referred to in Sephton.

In my view therefore the primary limitation period had expired by the date of the hearing of this application.

The question therefore arises as to whether Premier can rely on the extension for latent damage as set out in section 14A.

It is as well to set out this section in full ;

The essence of section 14A is that it provides an extension to the limitation period of 3 years from the first date that Premier had the right to bring a claim and the knowledge required for bringing such a claim.

The critical factors are the meaning of “knowledge” and the date of its acquisition. In this case the relevant knowledge must have been acquired after 2 July 2011 i.e. within 3 years of this hearing. Knowledge can be actual or constructive.

It is not disputed that by 2010 Premier knew that there was a problem with the yarn because that is when they were notified by Interface that that was so. Indeed Mr Dougherty concedes as much in paragraph 23 of his skeleton.

His point however is that it was only in 2013 that Premier learnt that the problem was attributable to Airedale’s negligent advice (or negligent omission to advise) as to the colour fastness of Acozine Red when applied to nylon and exposed to light.

The leading case, at least on the issue of actual knowledge, is Haward v Fawcetts 2006 UK HL9. This is in fact a case upon which both counsel rely, Mr Toms relies on it not least to remind me that the burden is on the claimant to establish that it had the relevant knowledge later than 2 July 2011.

The headnote in that case summarises the decision as follows;

Mr Dougherty referred me to paragraph 9, a passage from the opinion of Lord Nichols in which he discusses the degree of certainty of the knowledge that is required. The position is that

At paragraph 19 the learned judge points out that the trigger for time beginning to run is when the claimant knows enough for it to be reasonable to embark upon preliminary investigations into the possibility that the defendant has breached his duty of care.

At paragraph 49 Lord Scott considers the trigger date, his conclusion is that it is;

I was also referred to Kays Hotel Ltd v Barclays Bank 2014 EWHC 1927 in which Haward was considered. At paragraph 14 Hamblen J recognised the importance of seeking to identify the essence of the act or omission to which the damage was attributable.

Mr Dougherty argues that 2013 and not 2010 is the relevant date because it was not until 2013 that Premier had knowledge of the facts constituting the essence of the complaint; namely Airedale’s negligent representation that Acozine Red was a suitable ingredient in the recipe for this project which was specifically to dye nylon yarn or alternatively Airedale’s failure of Airedale to point out the inability of Acozine Red to bind as required topure nylon. In 2010 the concern is simply that the dyestuffs themselves were defective. Only in 2013 did it become clear that the problem was not with the dyestuffs per se but with their application to nylon.

As to actual knowledge Mr Dougherty took me to the witness statement of Ms Siniver and perhaps more particularly the witness statement of Mr Welfare. Essentially Premier did not know and could not reasonably know until 2013 that the dye recipe itself was at fault in that it was a recipe unsuitable for nylon rather than simply that the dyestuffs themselves were defective because they constitutionally lacked the necessary colour fastness.

As for constructive knowledge, the information from Interface prior to 2013 simply suggested that there was a problem with the dyes per se. That was the purport of the BCTC report and the basis upon which Interface had framed its complaint to Premier. In those circumstances says Mr Dougherty issues as to the inadequacy or otherwise of advice as to the use of the dyestuffs on nylon were not even in play.

If I can summarise paragraph 24 of Mr Dougherty’s skeleton argument: knowledge that the damage was caused by Airedale negligently representing that Acozine Red was suitable on nylon is a completely different thing to a suspicion that the dye itself was constitutionally defective.

Mr Toms argues that the date of the knowledge was April 2010 at the latest because by then it was clear that Interface was holding Premier liable for the colour fade and that in turn Premier was holding Airedale liable. Thus, he argues, Premier had knowledge "of the material facts about the damage in respect of which damages are claimed” (Footnote: ²²).

He argues that the material facts were that the colour of the yarn in the tiles had failed to hold and that the parties adversely affected by that were seeking recompense.

Mr Toms accepts however that for the purposes of section 14A there is another limb to the issue of the acquisition of knowledge namely that set out in section 14A (8)(a).

With regard to this Mr Toms argues that Premier knew in 2010 the damage was attributable to the act or omission of Airedale. Premier may not have known that the damage arose because of the inability of Acozine Red to remain bound satisfactorily to nylon on exposure to prolonged sunlight but it knew that the dyed yarn was defective and knew enough to investigate the cause of the defect.

As Mr Toms points out, Premier is itself a dye specialist with a degree of expertise. He referred me for example to paragraph 9 of Ms Siniver’s statement as a demonstration of Premier using its expertise to explain to Interface why a fading problem may have occurred.

In addition he points out that the pleadings indicate that in 2005 Premier had engaged with Interface in a lengthy testing process with a view to ensuring that dyed products supplied to Interface met its colour fastness requirements (Footnote: ²³).

He argues that given their expertise and what they had been told by Interface Premier knew either;

All one needs to do, he argues, is consider Interface’s letter to Premier of 17 March 2010 which put Premier on notice that the allegation was that the yarn fell below minimum fastness levels.

I have already indicated that Mr Toms prays in aid Haward as did Mr Dougherty. Bearing in mind the burden of proof his position is that, on the evidence, the claimant cannot satisfy the court that it was not until 2013 that it had enough knowledge to make it reasonable to investigate whether or not there was a claim against Airedale.

Furthermore he argues that Premier has fallen well short of establishing that it did not know that there was a possibility that acts or omissions by Airedale in the advice it gave may have caused the damage. Suffice it to say that Mr Toms deals with this by references to passages in Haward referred to from paragraphs 70 to 72 of his skeleton argument.

He also makes the point that in fact, when presented with information to the effect that the colour had faded, as well as making some general suggestions to Interface as to why that may be so, Premier agreed to "look into the problem" (Footnote: ²⁴).

Ms Siniver’s statement at paragraph 30 makes it clear that testing was carried out in 2010 but did not reveal what the defect was but clearly there was a defect and, so far as Premier were concerned, all it had done was mix a recipe of dyestuffs supplied by Airedale in accordance with guidance given by Airedale. On that basis, it is argued, there was clearly a real possibility that acts or omissions by Airedale were responsible for the defect.

As Lord Nicholls pointed out in paragraph 21 of Haward;

Mr Toms argues that Premier have not established that it was reasonable not to start asking questions about Airedale's position in February/March 2010.

As for Mr Dougherty’s argument that the cause of the defect was not obvious at all and that the relationship between the dyes and their efficacy when applied to nylon had not occurred to anybody until 2013 and prior to that date there was nothing to give rise to the need to explore the possibility, it is right however that Cunningham Lindsey managed to discover the relationship between Acozine Red and nylon so that they could bring it to the attention of Premier’s solicitors within 11 months of Premier’s letter of claim. (Footnote: ²⁵)

In any event, even if Premier did not have actual knowledge, Mr Toms argues that they had constructive knowledge within the meaning of section 14A(10)(b). Subsection 10 is the means by which knowledge is extended to constructive knowledge by indicating that knowledge includes knowledge that a person might reasonably have been expected to acquire from the facts referred to in sub sub paragraphs (a) and (b)

Albeit that Haward dealt with actual knowledge, at paragraph 123 Lord Mance said that

At paragraph 83 of his skeleton Mr Toms points out the state of Premier's knowledge by April 2010. Broadly Premier knew the Interface was holding it responsible for the fading colour and that the claim was significant. It also knew that it had dyed the yarn with dyestuffs supplied to it by Airedale and that it had done so on the basis of a recipe in respect of which it had had guidance from Airedale. It also knew that there were only 2 explanations for the fading (Footnote: ²⁷) both of which caused some culpability to attach to Airedale. Further it knew that the precise reason why the colour had faded would inform it as to whether the buck for the fading stopped with Premier or could be passed on to Airedale.

On that basis it is argued the claimant has failed to establish that it was reasonable not to make the appropriate enquiries with or without expert assistance.

I have to say that I am persuaded by Mr Toms argument. In my view it does not matter that in 2010, when the problem first surfaced it was not clear why the problem had come about and that that conundrum was not actually resolved until 2013. What matters is that in 2010 Premier knew that it was facing a claim in respect of the quality of its dyeing process when this had taken place using Airedale products and in reliance on their guidance. This in my view must furnish Premier with the necessary knowledge of their claim against Airedale in the sense of giving them sufficient confidence to justify embarking on the preliminaries to the issue of proceedings. This must be so because Premier itself contended in 2010 that the damage was attributable to the act or omission of Airedale because it wrote to Airedale on 20 April 2010 saying just that (Footnote: ²⁸).

The fact that the letter is premised on the basis that the dyestuffs failed to meet the required standard rather than on the basis that the recipe was unsuitable in my view does not prevent time from beginning to run in 2010 even in respect of a claim based upon the recipe. This is because it is not necessary to know the precise nature of the negligence claim. It is merely necessary for there to be knowledge of the material facts about the damage in respect of which the damages are claimed and that the damage was attributable in whole or in part to the negligent act or omission of Airedale.

I am satisfied that the "material facts" here are;

Even if that is not so and Premier lacked actual knowledge I am satisfied that it had constructive knowledge by April 2010. It must be so that that circumstance made it “reasonable to acquire further knowledge” (Footnote: ²⁹)

My conclusion therefore is that the negligence claim is statute barred even under s14A. On that basis permission to amend to include it would fall to berefused unless CPR 17.4 applies and it is to this that I now turn.

CPR 17.4 (2) permits the court to allow an amendment the effect of which is to add a new claim to existing proceedings even if the claim is statute barred but only if the new claim arises out of the same facts or substantially the same facts as the existing claim (Footnote: ³⁰).

It is helpful therefore to compare the factual basis of the claim in contract with the proposed claim in negligence. The original Particulars of Claim sets out the facts upon which Premier relies from paragraph 2 thereof as follows;

In its defence Airedale deny that its terms and conditions warranted that Acozine was suitable in terms of its light fastness for use on nylon and that any warranty as to light fastness only extended to its use on woollen yarn or a wool/nylon blend. In addition Airedale argues that if Premier had been reasonably competent it would have known that the light fastness properties of dye are dependant upon the medium with which it is incorporated.

Importantly, at paragraph 8 of the Defence, Airedale pleads that Premier failed to make use of Airedale's skill and expertise as it had done on previous occasions and, in particular, did not seek assistance in connection with the dye recipe as Premier had done "historically and typically" in the past. As I mentioned in paragraph 25 above, the Defence records that Airedale's technical director, Mr Wilkinson visited Premier's premises on average twice a week.

In so far as it is relevant to this application, Airedale's position, put simply, is that Acozine Red should not have been used on nylon, it never said that it should and had it been asked it would have provided a dye formulation which delivered the required colour with the necessary colour fastness (Footnote: ³¹).

At paragraph 18.2.2 Airedale states that it made no representations as to the light fastness of the dye in relation to nylon yarn. Once again, as I record in paragraph 25, at paragraph 19.4 of the defence, Airedale repeats that Premier's failure to consult with Airedale’s technical director, contrary to typical practice, meant that Premier was responsible for its own misfortune.

The proposed new claim seeks to introduce a claim in negligence founded upon the contention that the close relationship between the parties gave rise to a duty of care. It is a claim for economic loss in tort for damages in respect of what is said to be a reasonable settlement by Premier of its liability to Interface. From paragraph 12 of his skeleton argument, Mr Toms summarises the new claim. I think it is sufficient to record here simply the following:

Paragraphs 14D to F do not plead any "facts" as such. There is merely an assertion that the close relationship between the parties gave rise to a duty of care to exercise reasonable care in the provision of technical advice in relation to dyes supplied and that it also gave rise to a duty on Airedale to test the light fastness of dyes it supplied to Premier on the yarn which it knew were used by Premier.

In the same way as paragraph 14C raises a new fact, so too does paragraph 14G because it talks of a conversation between Mr Wilkinson and Mr Farrell and a second conversation which also included Airedale’s finance director, Mr Swallow after the problem with the tiles came to light. The point made by Premier is that even then Airedale did not suggest that the use of Acozine Red on nylon was unsuitable. Premier infers from that that negligently Airedale had not itself carried out testing of the colour fastness of Acozine Red to nylon.

Paragraph 14H simply brings the threads together in order to allege precisely what the particulars of negligence actually are. In essence, as Mr Toms puts it, the new claim is a claim or negligent failure to advise on the suitability of Acozine Red and/or a negligent misrepresentation as to its suitability.

Mr Dougherty argues that it is clear from a comparison of the Particulars of Claim, the Defence and the Part 18 Replies on the one hand and the proposed Amended Particulars of Claim (Footnote: ³³) that the negligence claim arises out of substantially the same facts. Essentially Airedale's case is that Premier did not, as it could have done, rely on Airedale's technical skill and expertise as it had done before. He argues that all paragraphs 14A to H do is plead that in essence that is exactly what Premier did. The same facts which are therefore already in play by virtue of the original proceedings simply give rise to an additional claim in negligence. He points out that the amended claim would be the recovery of exactly the same loss as is sought in the original claim.

Mr Toms argues that this new claim does not arise out of substantially the same facts. He addresses this from paragraph 85 of his skeleton argument. He points out that the current case is very limited in scope. Essentially did Airedale's product literature state that Acozine Red had a light fastness level of 5 on nylon? In other words the contractual claim is whether Airedale failed to supply goods of a warranted specification.

The new claim, if permitted, will give rise to significantly greater areas of factual enquiry going to the issue of the nature and scope of the relationship between these parties and advice given.

At paragraph 88 he sets out the areas of enquiry that would be indicated by the enlargement of these proceedings but which are not necessary if the amendment is refused. I need not set them all out here, they are clear to be seen but broadly they include investigations into;

the extent of representations and advice as to the colour fastness of Acozine when applied to nylon

the extent of Premier's reliance on those representations/advice

the extent of Airedale's own testing of Acozine and what it told Premier about such testing

the depth of the relationship between the parties and

what Airedale knew of Premier's business.

All in all Mr Toms says, it would change the focus of the case and would require a much greater investigation into discussions and conversations taking place over a very significant period of time perhaps even going back 12 years. Not only will it involve wider discussions with personnel and indeed discussions with personnel who may otherwise not have been involved but it will involve a perusal of documents created over a long period of time to identify what discussions were had etc and how those documents and their content impact on the relationship between these parties.

Some of these issues may go to the question of whether, even if the conditions in Part 17.4(2) are met, the discretion should not be exercised but I have to say that I agree with Mr Dougherty that the facts in the new claim are indeed substantially the same as the current claim.

As Mr Dougherty points out, it is not a question of focus -- it is a question of whether the new claim arises out of substantially the same facts. The relationship between the parties and the extent of reliance are already in issue. What Premier rely on to create the duty of care is broadly what Airedale rely on already as the basis of the contending that Premier has nobody to blame but itself for producing a dye which did not possess the necessary light fastness.

The commentary at paragraph 17.4.4 of the White Book reveals a wealth of cases where Part 17.4(2) has been considered but both counsel spared me specific reference to any of them because it was agreed that inevitably whether the new claim arises out of substantially the same facts as the existing claim is a matter of impression formed by a comparison of the existing and proposed statements of case.

I am satisfied that the new claim framed in negligence arises out of substantially the same facts as the current claim as defined in the current statements of case.

The allegation of negligence is based upon a contention that the close relationship gave rise to a duty of care. The nature of the relationship is already a pleaded matter. The inference of negligence is drawn from facts already in play.

I do not overlook that the proposed pleading introduces new facts, I have referred to them above but even the original Particulars of Claim refer to previous occasions when Acozine has been used on nylon to the knowledge of Airedale, implying at the very least that some thought had been given previously to the suitability of applying a dye containing Acozine to a nylon product. In any event the point is that the facts do not need to be the same, they need to be substantially the same. In my view they are and so the court has power to permit the amendment.

Merely because the court has the power does not mean that it should be exercised to permit an amendment. The final question therefore is whether the court should exercise its discretion to do so.

Mr Toms submits that the amendment would cause hardship to Airedale not least because the allegations refer to discussions possibly going back to 2002. The passage of time brings with it the risk of prejudice in the presentation of a defence to the new claim.

When considering prejudice it is relevant to have regard to how far out of time the claimant is. As I recorded at paragraph 28 above Airedale contends that time expired in June 2013 or possibly May 2014 (Footnote: ³⁴).

I can understand the problem of investigating the contents and significance of discussions going back to 2002 but it is not immediately clear that those difficulties are significantly compounded by virtue of the fact that the defendant is obliged to make them in the latter half of 2014 rather than say in the first half of 2013.

In any event it seems to me that evidence as to the extent and nature of the relationship and the flow of information between the parties is just as relevant to the original claim, or least to the defence of it, as it is to the new claim.

Mr Toms argues that the new claim will add considerably to the length of the hearing as well as to the length of preparation. I am not convinced of that. There will be some addition to the length but it is by no means inevitable that it would be considerable. I am also not convinced that the additional claim will require the use of experts other than those who may be needed in any event. Nor of course does the new claim expose Airedale to any greater liability. The money that is sought is the same.

True it is that I have no information as to why the negligence claim did not find its way into the original claim. It is inappropriate therefore to speculate but even if I take the least charitable explanation so far as Premier is concerned namely that it did not occur to them, that is only one factor against amendment to put in the balance to add to those to which Mr Toms has referred including his concern as to the effect this amendment will have on costs.

I accept that the amendment will cause additional costs to be incurred because the nature of the dispute is widened at least to some extent. It is not only costs, it is also the extra time that will have to be devoted by Airedale personnel and which takes them away from pursuing more profitable objectives. I also accept that the omission of this claim originally has widened the period in which memories, like carpet tiles, can fade or documents disappear.

However, I am satisfied that these factors are outweighed by my finding that actually the factual matrix for both causes of action is substantially the same, the new claim is not more than a year or so out of time, it does not extend the value of the claim and that the investigations that the new claim brings are not in my view significantly different to those which would be necessary in any event.

Furthermore, where there is a difference some of the critical issues are discreet ie conversations Mr Wilkinson had with Mr Farrell about Acozine and nylon. I note that these may be less far reaching than might have otherwise been the case by virtue of Premier’s concession that it “does not allege that it discussed the creation of the relevant shade with or provided Airedale with any information in relation to the same to Airedale prior to the use of the dye on Interface’s yarn” (Footnote: ³⁵)

In those circumstances, taking all factors into account I propose to permit the defendant to amend pursuant to Part 17.4(2). As I understand it and will no doubt be corrected if I am wrong, by virtue of section 35(1)(b) Limitation Act 1980 the amendment relates back to the issue of the proceedings so the negligence claim ceases to be statute barred for the purpose of the action going forward.