McCain Foods Gb Ltd v Eco-Tec (Europe) Ltd

This Action was tried in London but remains in the Leeds District Registry by the Order of Mr Justice Ramsey made on 12 July 2010 [1/233].

The claim relates to the purchase by McCain Foods (GB) Limited (“McCain”) of a BGPur system (“the System”) from the Defendants Eco-Tec (Europe) Limited (“ETE”) under an Equipment Purchase Agreement including a Specification. In essence McCain argue that the System proved impossible to commission successfully. Thus McCain treated ETE as being in repudiatory breach of contract and accepted that breach alternatively rescinded the Contract in consequence of which McCain seek recovery of monies paid under the Contract and damages. That claim is denied and is met by a counterclaim for money outstanding under the Contract. Both claim and counterclaim include a claim for interest.

The System was intended to remove Hydrogen Sulphide (H²S) from biogas produced in the Claimant’s waste water treatment processes at its Whittlesey plant in Cambridgeshire. The clean biogas was intended to be used by the Claimant in the generation of electricity through a Combined Heat and Power (“CHP”) plant to provide a source of power and electricity for the plant entitling, it is alleged, the Claimant as an Ofgem accredited generator of renewable electricity within the United Kingdom, to obtain Renewables Obligation Certificates based on the calculated energy value of electricity produced.

Mr Gamble, the expert Consulting Engineer called on behalf of the Claimant, produced a system flow diagram at TB3/555AAAA, which is itself an expanded version of a system flow diagram at TB3/555.

The wastewater effluent from the plant is processed by means of a covered anaerobic lagoon (“CAL”) which produces a methane rich gas (biogas). McCain intended to use the biogas as a fuel in the CHP gas engine driven electricity generation sets. The biogas from the CAL contains H²S in a concentration which would be unacceptable in the gas engine, McCain therefore required a system for removing the H²S from the biogas prior to feeding the biogas to the engine. Hence the need for the System. The System as installed consisted of two elements, namely what has become known as the McCain System and the Eco-Tec System. The inter-play between the two Systems is the cause of a substantial issue in this dispute.

The main components of the McCain System are as follows:

The main components of the Eco-Tec System are:

Mr Gamble’s evidence (which was not challenged in this respect) was that the normal method of operation is as follows:

I consider later elements of the pre-contract negotiations because the claim in part is based upon alleged representations and/or collateral contract. However whilst I deal with those allegations out of deference to the arguments of Counsel, in my judgement this dispute can be decided on the provisions of the Contract. Hence I first set out the provisions of the Contract.

It is now common ground that the contract documents referable to the supply and purchase of the System are the Equipment Purchase Agreement (“EPA”) dated 26 November 2007 [CB/Tab 6 (with a signed copy at TB1/58) and the Performance Specification at CB/Tab5].

The following provisions of the EPA are relevant.

At CB/65 the total price is fixed at £263,531.35 with a delivery date of 20/03/08 (to a UK port).

At CB/66 in Schedule A to the EPA it is provided that,

“McCain is entering into this Agreement on the basis of commitments, representations and warranties made to McCain by Seller, including but not limited to the representation that the Equipment will comply fully with the description, specifications, performance standards and intended use set out in this Schedule A, including the attached McCain documents identified asSchedules A-1”.

Schedule B contains the standard terms and conditions which include fitness for purpose of warranties [CB/67]

“(c)

Equipment Quality

On and following delivery, the Equipment will:

(i)

conform to the description, specifications and performance standards set out herein (the “Specifications”) and will be new and of merchantable quality, in good working order and condition, without defect in design, manufacture or other workmanship; and

(ii)

be fit and sufficient for McCain’s intended use as specified or as contemplated herein. If the Equipment is comprised of more than one component or if the Equipment is to be integrated with any other component(s) described or referred to herein, whether or not such components are provided by Seller, all components will together perform in accordance with the performance standards set out herein.

Without limiting any other obligations of Seller or any rights or repairs of McCain, Seller will, at the sole discretion of McCain, promptly repair or replace any Equipment or portion thereof that is defective in design, manufacture or workmanship or that fails to comply with the Specifications.”

Clause 4 provides for termination in the event of default [CB/71]

“4.

Default

(a)

If any of the following occur:

…..

(v)

without limiting any of the foregoing, Seller is in breach of any commitment, representation, warranty or obligation hereunder, then McCain may, by notice in writing to Seller, elect to:

(A)

terminate McCain’s obligation to purchase and pay for the Equipment; and/or

(B)

have removed any Equipment already delivered, which Seller will do forthwith after receipt of such notice and Seller will indemnify McCain for any loss or expense in connection therewith, including any damage to McCain’s premises arising out of such removal; and/or

(C)

have returned to McCain all monies paid on account for undelivered equipment removed pursuant to (B) above which monies Seller will return within 14 days after receipt of such notice. Seller will pay interest at 2% above Libor, calculated and payable monthly on any such monies not returned in such 14-day period (NOTE: LIBOR = LONDON INTER BANK OFFERED RATE).

(D)

The exercise by McCain of any of the remedies set forth in paragraph 4(a) of this Schedule will not prejudice other rights and remedies that McCain may have and will not prejudice any liability of Seller to McCain, including without limitation, damages.

Notwithstanding the foregoing, McCain will not be entitled to exercise any rights or remedies set forth in paragraph 4(a) of this Schedule in respect of any breach pursuant to subparagraph 4(a)(v) of this Schedule if the breach is outside the scope of sub-paragraphs 4(a)(i)-(iv) inclusive of the Schedule, unless McCain has first provided notice in writing to Seller of the breach and Seller has failed to remedy the breach to the satisfaction of McCain within 30 days of receipt of such invoice.

(c)

Seller shall on termination of its employment by McCain, if so required by McCain within 28 days of the date of termination, assign to McCain without payment the benefit of any sub-contract or agreement for the supply of materials or goods and/or the execution of any installation work for the purposes of this Agreement to the extent that the same is assignable.”

Clause 10 provides:

“Engineering Information

The provision of the Engineering Information does not and will not in any way limit the obligations of Seller to provide Equipment that fully complies with the Specifications set out herein. Seller agrees that it will be solely responsible for the design, manufacture and performance of the Equipment based upon the data supplied by McCain Fluids (GB) Limited within the attached Performance Specification (specifically relating to biogas composition, volumes/flows, supply pressures and temperatures.”

Clause 17 provides

“17.

Entire Agreement

The Agreement (including all schedules) as amended pursuant to Section 15 of this Schedule, will constitute the entire Agreement between McCain and Seller for selling the Equipment….Once this Agreement has been executed by both parties should there be any inconsistency between the provisions of this Agreement and the provisions of any other Bid Document, the provisions of this fully executed Agreement shall supersede and prevail…”

Clause 19 of Schedule B provides:

“19.

Indemnification

19.1

Subject to paragraph 19.2 below, Seller will indemnify and hold McCain and its Directors, Officers, Employees and Agents harmless from and against any and all losses, liabilities, damages and expenses whatsoever (in no event however will Seller be responsible for indirect, special, incidental and consequential damages) arising out of any breach by Seller of any commitment or other obligation contained in this Agreement or in any document delivered pursuant hereto or in connection herewith or out of any inaccuracy or misrepresentation of [sic] any representation or warranty made by Seller herein or in any such other document, or out of any actual or alleged injury to persons or property due to the acts or omissions of Seller and those for whom in law it is responsible, whether on the premises of McCain or otherwise.”

The Specification [CB/56 and following] includes the following provisions:

“1.1

This Specification is for a scrubber to remove hydrogen sulphide (H²S) from biogas. The biogas will subsequently be used in a CHP engine to generate electricity.

1.2

The biogas is generated from potato waste in a covered anaerobic lagoon (CAL) and evacuated from it by blowers which distribute to the CHP engine, boilers or to a flare.

1.3

The scrubber will be situated in the pipework between the CAL and the blowers which are existing and therefore define the scrubber operating conditions.”

Clause 3 of the Specification provides as follows:

“3.

Performance Requirements

3.1

The scrubber shall ensure that biogas flows to the CHP Gas Engine have H²S levels of less than 40ppmv under all operational conditions described below.

3.2

Biogas to the scrubber has the following components which will be confirmed by a current sample analysis programme.

Component	Max	Min	Remarks
H2S CO2 CH4 O2 Temperature	4500ppmv 38% 60% 1% 40oC	3500ppmv 34% 62% 0.2% Ambient	Varies slowly Average 35% Average 61% Average 0.6% Ambient + 125oC

3.3

Biogas flows are as follows:-

- 0 at start-up or shutdown or under the System failure

- Between 0 and 130Nm3/h during “week-ends”

- Between 300 and 500Nm3/h during normal production

- A peak of 600Nm3/h at full capacity (calculated).

Note that “week-ends” are any days out of production and will vary according to shift patterns. There may also be short periods of shutdown at Christmas and other holiday periods.

3.4

Biogas pressures between the CAL and the blowers are currently between -0.13mbarg and 0 mbarg, i.e. slightly less than or equal to atmospheric pressure. Since this pressure is maintained to protect the CAL cover, when the scrubber is inserted it will see this pressure at its inlet and the same pressure less its head loss at its outlet. Refer to the P&ID for System details.

3.5

…..

3.6

Under fault conditions, including any originating with the scrubber, the blowers will attempt to maintain the CAL under the same slight negative pressure. The scrubber must therefore be designed for the most onerous conditions to be expected.

3.7

…..

3.8

The scrubber shall be capable of operating continuously for about 360 days a year. Maintenance, cleaning, routine inspection, addition of chemicals and servicing shall be on-line without interruption to gas flows or performance.”

The first issue is whether the System as designed and supplied was compliant with this Specification and whether the System was fit for its intended purpose.

Additionally, as mentioned at paragraph 9 above, the claim is put in misrepresentation and/or collateral contract. In particular at paragraph 7 of the Amended Particulars of Claim a meeting on 1^st November 2007 is relied upon, an e-mail dated 2^nd November 2007 (paragraph 8 of the Points of Claim [CB/54]) and a further e-mail dated 7^th November 2007 (paragraph 9 of the Points of Claim [CB/55]).

In the Amended Reply and Defence to Counterclaim further representations are relied upon including, in particular, an exchange of e-mails dated 18^th and 19^th October 2007 (Amended Reply and Defence to Counterclaim paragraph 48 (iv) and (v)), the e-mails themselves being at 8/1930 and 8/1933.

The e-mail sent on 19^th October 2007 includes the following passage:

“I have some answers to your questions.

Gas Pressure

The booster blow within our system should not effect how you draw the biogas off of the lagoons. They can continue to control their air extraction blowers from the pressure under the cover so that when you need to draw the biogas it will do so. When the pressure indicates that it does not use biogas, then when you shut down the extraction blower, our booster blower will re-circulate around itself, so that the current draw on the mixer/agitator remains constant.

If you are more comfortable with having the gas purification after the extraction blower, then that will be OK also but since the gas pressure here would be 180-240 mbarg then we would need to use a valve off to keep the two gases separate rather than a natural water seal.”

Mr Middleton’s concern as expressed in his e-mail of 18^th October 2007 was whether the internal ETE fan proposed in the design would cause problems.

Mr Hopkinson accepted in evidence that he appreciated that Mr Middleton’s concern was the issue of whether any interface between the ETE fan and the McCain blower would create any difficulty: see Transcript Day 4/p57, line 8 p.88 line 6.

At a meeting on 1^st November 2007 Mr Bond and Mr Hopkinson were present on Site. Mr Bond then spoke to Mr Fontana on the telephone. Mr Hopkinson’s evidence was as follows:

“Q: At this meeting, Mr Bond did ask Mr Fontana whether fluctuations in flow rates would affect the System; that is correct isn’ it?

A: Yes.

Subsequently by e-mail sent on 2^nd November 2007 [8/1963] Mr Hopkinson wrote:

“I would also like to again stress that the BgPur system is a very robust system, and is not affected by any change or gas composition or temperature. It also can cope with any changes to the incoming flow rates.”

By e-mail sent 7^th November 2007 [8/1980] Mr Hopkinson wrote as follows:

“With regard to the questions on the excess capacity in the proposed BgPur System, I now have some answers.

The design gas flow rate for the contactor is 560m³/hr, the unit can also cope with an extra 10% gas flow on a short term basis (30 mins).

With regard to the potential increase in H²S concentration, the Sulphur Removal Contractor (SRC) is designed to remove 4Kg per hour of Sulphur which equates to 96Kg per day. The 4,000ppmv of H²S stated in your enquiry will produce 54Kg of Sulphur per day. So that the BgPur a unit will be able to cope with an H²S content of 7,000 ppmv with no loss of performance (less than 40ppmv of H²S in the outlet).”

When Mr Bond gave evidence it was suggested to him that his evidence in his witness statement [2/16 paragraphs 5-13] was incorrect. Mr Bond did not accept that suggestion. In any event, in the light of Mr Hopkinson’s evidence, I have no hesitation in accepting that Mr Bond’s recollection of what was said is accurate.

It is suggested by Mr Latimer that construed properly the representations relied upon do not bear the meaning sought by Mr Hussain; I disagree. Taken as a whole the e-mails and telephone conversations amounted to an assurance that the System supplied is (a) robust and (b) can cope with changes to the incoming gas flow rates and that the interface between the Claimant’s existing fan and the equipment fan would create no practical difficulties.

Mr Latimer also argues that there is an absence of evidence on reliance. However, Mr Bond at paragraph 42 of his witness statement [2/243] said:

“As a result of the communications that I had with Eco-Tec in early November 2007, I consider that the BgPur System was the most flexible and robust option for McCain’s intended application. This persuaded me that the BgPur System was the best solution available to McCain and I understood that it could be installed at site within an acceptable timeframe.”

In my judgement that paragraph is clear evidence of reliance.

The Defendant places reliance, but perhaps limited reliance upon the entire agreement clause mentioned at paragraph 17 above. At paragraph 41 of his Closing Submissions Mr Latimer says that there is no place for a collateral agreement or representation in the light of the “entire agreement” clause.

The Contract also at Schedule A (CB/Tab.6/p.66) includes a clause permissive of representations which I have set out at paragraph 13 above.

In any event, in the Judgment of Ramsey J in BSkyB v. EDS [2010] BLR 267 he carried out a detailed review of the authorities (paragraphs 358-397 of the Judgment). His conclusion was (paragraph 387) that to be effective such a clause must be intended:

“to take away a right to rely on misrepresentations” and that “clear words are needed”.

There was no attempt by Mr Latimer to suggest that the reasoning of Ramsey J was wrong. Clause 17 of the EPA does not include any such words. The Clause in Schedule A to the EPA quoted at paragraph 13 above is inconsistent with any such intention.

As I have said, in my judgement this case can be determined by reference to the express terms of the Contract. However if it be necessary to do so I would also find that the e-mails and telephone conversation mentioned at paragraphs 21-28 above amount to representations which were relied upon by the Claimant when entering into the contract. The Claimant’s claims in misrepresentation are not excluded by the entire contract clause. The claims in collateral contract add nothing.

The System was due to be delivered on 20^th March 2008 under the Contract. It was delivered on 14^th May 2008.

It is common ground that at the time of delivery the System suffered from a number of design and manufacturing faults. Mr Jones, ETE’s Process Expert, says: “As initially provided the BgPur System was not fit for purpose” [3/606 paragraph 146].

Mr Bond sets out at paragraphs 63-163 the various difficulties faced in attempting to commission the System.

The witness statements from ETE make little reference to what occurred during commissioning. There is little challenge to Mr Bond’s evidence. That may be because ETE’s own engineer, Mr Hohn, was present on the McCain site for much of the commissioning process. A note which appears to be from him at 12/3063 at 3065 says:

“The tank lid and tank lip are grossly undersized. This is a pressure vessel. The problem is just piss-poor engineering. See 1 !!!!

I can live with this.

BS in a real sense of the expression but you have to build to local standards.

I think we need to look at the real problem not a quick fix. (I think the real problem is with the liquid level in the tank.)

See See 5

Just plan (sic) bad piss poor Engineering.

See above.”

Mr Gamble helpfully summarises the evidence of the parties’ attempts to commission and operate the BgPur system in the following language:

“6.2

From this evidence it is clear that the System was unable to achieve consistent or stable operation for any sustained period. In particular I note that whilst the parties managed to achieve an overnight run of the System on one occasion in each of the months October and November 2008, this was not subsequently repeated and the operational problems were apparently still continuing in January-February 2009.

6.3

Although the parties take different positions on the underlying causes and/or significance of these matters, generally speaking the evidence indicates that the two major operational issues identified with the system were as follows:

(a)

liquid level control and foaming issues (with associated excessive chemical consumption) in the reactor tanks causing the System to shut down; and

(b)

problems with the performance of the gas blower installed on the System.

6.4

I note that, in addition to these operational problems, the evidence also refers to various other mechanical/engineering and fabrication issues (some of which appear to relate to significant design features, such as component alignments) which had to be addressed before commissioning of the System could begin.” [3/523]

Mr Jones for ETE says at paragraph 146 “The fact remains, however, that the BgPur System could not be operated satisfactorily for any sustained period of time.” [3/607]

Since there has been no substantial challenge to Mr Bond’s evidence or to Mr Gamble’s summary of that evidence, it is unnecessary for me to repeat the lengthy litany of problems in this Judgment. I accept the evidence of Mr Bond as summarised by Mr Gamble. The argument pursued by Mr Latimer is not that the System could be commissioned but that it “worked”: see the Defendant’s Closing Submissions at paragraphs 1 and 3. That may well be so. The System may even have worked in Australia and Canada (see the evidence summarised at paragraph 4 of Mr Latimer’s Closing Submissions). But that does not meet the claim in this case. Whether or not System was capable of being made to work, I find as a fact the System supplied by the Defendant to the Claimant could not be commissioned at the Claimant’s plant in Cambridgeshire. I asked whether there was any response to the Claimant’s letter of 13^th February 2009 accepting the repudiatory breach of the Contract, alternatively terminating the Contract. None was provided. In my judgment the System supplied by the Defendant under the EPA was not capable of being commissioned at the Defendant’s plant in Cambridgeshire. I turn now to the causes of that incapability.

As the Process Engineer for the Defendant, Mr Jones explained at paragraph 159 of his first report [3/611]:

“The commissioning process was never completed, primarily because it proved impossible to maintain a steady sustained period of operation. Difficulties were encountered with excessive foaming, instability in the air contactor, and rapid degradation of the chelate chemistry.”

The causes of those difficulties and the contractual responsibility are the issues.

By trial the defences to liability were two-fold:

Both those arguments are the subject of expert evidence which I can deal with fairly shortly below.

In relation to the first defence, Mr Latimer argues that the Contract is silent as to responsibility for risk occasioned by that cause and thus the loss lies where it falls: see Belize v. Belize Telecom Ltd [2009] UKPC 10 paragraphs 16-17.

Mr Hussain points to Schedule B clause 1(c)(i) and (ii) of the EPA [CB/Tab 6/page 67].

From there Mr Hussain goes to the Specification at paragraph 1.3 [CB/Tab 5/page 57] which provides that: “The scrubber will be situated in the pipework between the CAL and the blowers which are existing and therefore define the scrubber operating conditions”.

Mr Hussain thus argues that it follows as a matter of construction of the Specification that ETE was responsible for supplying a System that could meet the performance requirements under clause 3 of the Specification while being located between and operating at the same time as the CAL and the McCain blower.

In response, Mr Latimer argues that paragraph 1.3 does not impose a contractual obligation on ETE, rather that paragraph makes clear that the operating conditions are defined by McCain’s existing system. He suggests that the clause created an opportunity, which McCain did not take, to impose a contractual obligation on ETE and to pass the risk of problems in integrating the System and McCain’s system.

I am unable to accept Mr Latimer’s argument. Clause 1.3 of the Specification provided for the location of the scrubber and the presence of the McCain blowers. The “scrubber operating conditions” included the pre-existing blower. By clause 1(c)(i) of Schedule B of the EPA [CB/Tab 6/page 67] the equipment was required “to conform to ... specifications.” If it was unable to be commissioned because of the presence of the McCain blower, which appears to have been the case, that was a breach by ETE of the requirements of the Specification and thus the EPA. If risk for that breach was to be excluded, ETE could have sought to negotiate that exclusion. They did not do so.

Furthermore, by clause 1(c)(ii) of Schedule B of the EPA the System is to be “fit and sufficient for McCain’s intended use as specified or as contemplated herein”. By clause 1.3 of the Specification the intended use of the System is to be with the McCain blower. That clause also contains a requirement that the System is to be “integrated with any other component(s) described or referred to herein, whether or not such components are provided by Seller, or components will together perform in accordance with the performance standards set out herein”. Again the System is to be integrated with the McCain blower, that being a component described in the Specification and is expected to perform in accordance with the performance standards. Mr Latimer argues that clause 1(c)(ii) is designed to ensure that if McCain has more than one supplier then the burden is on all the suppliers to co-ordinate their components with one another. I see no justification for such a limited reading of the clause. It would have been possible to formulate a clause which provided for such a meaning, but the clause as drafted is far broader. In my judgement it covers components provided by McCain, as well as by third party suppliers, particularly where the McCain component is expressly referred to in clause 1.3 of the Specification.

Thus, even if Mr Jones’ expert evidence is correct, the risk for the failure adumbrated by Mr Jones is contractually that of the Defendant. That finding is sufficient to decide liability in favour of the Claimant. The alleged interaction between the ETE System and the McCain blower is ETE’s liability under the Contract.

In any event, I am unable to accept that the inability to commission the System was indeed due to pressure transience and changes in biogas flow rate from the CAL. To do so would be to accept Mr Jones’ evidence. Mr Jones’ arguments are subject to a sustained attack at paragraph 8.3.1-8.4 (paragraphs 278-306) of Mr Hussain’s written Closing Submissions. At the heart of Mr Jones’ theory is that the pressure transient travels at the speed of the biogas and therefore travels through the recycle line faster than it travels through the System. For the reasons summarised by Mr Hussain at paragraph 282 of his written Closing Submissions I am unable to accept that evidence.

If that evidence of Mr Jones is wrong, then on my understanding of his explanations, his theory falls away.

In any event, I overwhelmingly prefer the evidence of Mr Gamble. In the light of the conclusion which I have reached above on the interpretation of the Contract, I can deal with the expert evidence very briefly. In essence I am persuaded that the conclusions summarised by Mr Gamble at paragraph 3.3 of his first report [TB3/514] and in his second report are correct. They were strongly defended in cross-examination and do not suffer from the disadvantage of being deployed very late in the Chronology. I accept the evidence of Mr Gamble wherever it conflicts with that of Mr Jones and I do so because it is inherently more persuasive.

The second line of defence is as mentioned in paragraph 44 above that “the concentration of the hydrogen sulphide and the flow rate of biogas entering the equipment were higher than those contained in the Specification or otherwise anticipated and/or the biogas contained other as yet unidentified gases” [ADCC File 1/Tab 2/page 100 paragraph 43.4].

That defence depends entirely upon the evidence of Dr Buck. The difficulty with Dr Buck’s evidence is that his conclusions are either negative: “there is no evidence presented ...” or expressed as hypotheticals: “may” [see TB3/Tab 33/page 661]. In one respect I asked about his use of the word “possibility” and his answer is at Day 7/page 139/line18-page 140/line 18. In my judgement expert conclusions based upon possibilities do not assist.

Thus the pleaded defence is not supported by expert evidence which I can accept.

In the light of that finding it is unnecessary for me to consider in any detail the evidence of Dr Martin. I record that I found it persuasive and if necessary, would have accepted it.

As a matter of contractual interpretation the risk for the inability to commission the System explained by Mr Jones is that of the Defendant. Therefore it is unnecessary to consider in any great detail the expert evidence and I have not done so. However, I would in any event have preferred the evidence of Mr Gamble to that of Mr Jones. As to the second line of defence, it is not supported by evidence upon which I can place any reliance. In any event, had it been necessary for me to do so I would have preferred the evidence of Dr Martin. It was impossible to commission the System and the Defendants were thus in breach of Contract. The Claimant ended the Contract by its letter dated 13^th February 2009.

Mrs Catherine Rawlin was jointly appointed as a Single Joint Expert. Her report is dated 11^th June 2010.

At paragraph 4.02 of her report [TB4/674] she helpfully includes a table showing the claim and her calculations. I set it out.

Mr Hussain accepts those figures save for the figure for Replacement Equipment.

Of the cost of Replacement Equipment, Mrs Rawlin’s approach at paragraph 406 of her report ([TB4/682] is as follows:

“Had the Claimant purchased the comparable system rather than the Equipment from the Defendant, it would have incurred the full cost of the system from Treatment Systems Limited (£389,750). Therefore, I consider the only additional costs incurred by the Claimant are the costs expended on the allegedly faulty equipment. As such, my calculation for this category reflects the purchase price of the Defendant’s system £224,282.”

In my judgement that is not the test. The test is what it would have cost McCain to obtain an equivalent system in 2010 to replace the System supplied by ETE in breach of contract. On the evidence the answer to that question is £389,750 which was the quotation in March 2010 from Treatment Systems for an equivalent replacement of the ETE system [see TB17/page 4632 at 4644]. Thus I replace Mrs Rawlin’s figure of £224,282 with the claimed figure of £389,750. That produces an overall claim of £1,693,183.

Mr Latimer accepts liability to pay damages in respect of the Replacement Equipment but challenges all other items of quantum.

Mr Latimer’s primary argument is based upon clause 19.1 of Schedule B of the EPA [CB/Tab6/page 77].

Clause 19 provides as follows:

“... Seller will indemnify and hold McCain and its directors, officers, employees and agents harmless from and against any and all losses, liabilities, damages and expenses whatsoever (in no event however will Seller be responsible for indirect, special, incidental and consequential damages) arising out of any breach by Seller of any commitment or other obligation contained in this Agreement or in any document delivered pursuant hereto or in connection herewith or out of any inaccuracy or misrepresentation of (sic) any representation or warranty made by Seller herein or in any such other document, or out of any actual or alleged injury to persons or property due to the acts or omissions of Seller and those for whom in law it is responsible, whether on the premises of McCain or otherwise.”

Mr Latimer says that the remainder of the claim falls within the definition of “indirect, special, incidental and consequential damages”.

Mr Hussain’s argument is first that the sums claimed are not consequential damages because the Court of Appeal has determined that consequential loss is to be confined to loss or damage within the second limb of Hadley v Baxendale. These damages fall within the first limb and thus are not consequential.

In Hadley v Baxendale (1854) 9 EX 341 Alderton B said:

“Where two parties which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract as the probable breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under the special circumstances so known and communicated. On the other hand, if these special circumstances were wholly unknown to the person breaching the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such breach of contract”

In Croudace Construction v Cawoods 8 BLR 20, the Court of Appeal confirmed that consequential loss is confined to loss or damage within the second limb of Hadley v Baxendale.

That approach was followed by the Court of Appeal in subsequent cases: British Sugar v NEI Power Projects (1988) 87 BLR 42; Deepak v ICI [1999] 1 Lloyds Rep. 387 and Hotel Services Ltd v Hilton International Ltd [2000] BLR 235.

In his oral submissions on 2^nd December 2010 [Transcript page 107/lines 3-7] Mr Latimer sensibly and realistically accepted the import of those decisions.

I find the decision in Hotel Services Ltd v Hilton International Ltd [2000] BLR 235 to be of particular assistance. In that case, Hilton rented from HSL a number of mini bars for installation in Hilton Hotels. The rental agreement excluded HSL’s liability for any “indirect or consequential loss, damage or liability arising from any defect or failure in the system”. The chillers in the mini bars leaked ammonia and the units had to be removed. Hilton claimed, amongst other losses, loss of profit from the use of the mini bars. The Court of Appeal held that the loss of profit claim was direct loss.

Sedley LJ said at page 239 “An example of consequential loss might be injury to the profitability of the hotel itself. But when the contract is one of hire of the “thing itself” is not the equipment but the use of the equipment, and if through breach of contract it becomes unusable and dangerous the natural or immediate loss is, it seems to us, the profit (if any) which it would otherwise be yielding and the cost of neutralising the danger”.

In Deepak v ICI [1999] 1 Lloyds Rep 387, the Court of Appeal stated that consequential damages did not include loss of profits arising from a destruction of a plant. They were by definition direct losses:

“90.

... The direct and natural result of the destruction of the plant was that Deepak was left without a methanol plant, reconstruction of which would cost money and take time, losing for Deepak any methanol production in the meantime. Wasted overheads incurred during the reconstruction of the plant, as well as profits lost during that period are no more remote as losses than the cost of reconstruction.”

As I understand it, Mr Latimer’s primary position is that all of the heads of claim are consequential loss but he focuses in particular upon the additional utility cost and the lost revenue from ROC’s as being larger figures.

In my judgment the costs of repair, replacement, mitigation and associated losses are direct losses. Subject to two additional points which Mr Latimer made on employee time and mitigation with which I deal at paragraph 85 and 86 below the Defendants are liable for the costs of contractors, site managers and health and safety personnel, attempted mitigation, auxiliary equipment and civil works, employee time, third party experts and laboratory testing and the purchase of auxiliary equipment from ETE. The Defendants are liable for those sums as direct costs.

Additional utility costs arise because they are the cost of electricity which McCain had to purchase elsewhere between 12^th August 2008 and 31^st December 2009 which ought to have been generated by the System. In principle that sum could have been claimed from the date of contractual delivery (20^th March 2008) but the claim is from 12^th August 2008.

The claim for lost revenue from ROC’s arises because the Renewals Obligation Order 2007 creates a market for Certificates of Renewable Energy Production (ROC’s). An accredited generator of renewable energy can use the renewed energy itself and sell on to another electricity supplier the ROC’s issued for the renewable energy produced and used. Thus, had the System been commissioned the Claimant would have obtained certificates under the Order which had market value. Mrs Rawlin has valued the revenue thereby lost as £609,319.

In my judgment the cost of acquiring electricity which would have been generated by the System had it been commissioned is clearly a direct loss. The evidence is that the additional utility costs are £372,431, I award that sum as a direct loss.

In line with the guidance from the Court of Appeal in Deepak (supra) and Hotel Services (supra), loss of profit can be direct loss. Applying the distinction drawn by Sedley LJ (see paragraph 77 above) it seems to me that the use of the System would have resulted in revenue and that loss of revenue is the natural or immediate and thus direct loss caused by the inability to commission the System. Thus I award the further sum of £609,319 as direct loss.

Mr Latimer argued that the mitigation of loss is overly expensive and thus unreasonable. However in Mr Stewart’s evidence [TB2/Tab17/page 314/paragraphs 104-108] he explained how those costs arose and what was done. In my judgment, set in the context of the losses, those attempts amount to reasonable mitigation of loss.

In relation to employee time, Mr Latimer says that there is an absence of contemporaneous time records. He is correct. However, Mr Stewart sets out in his witness statement [TB2/Tab17/page 308 at paragraphs 83-85] the basis for the hours claimed. It is admittedly an estimate of time spent by Messrs Stewart, Bond and Cochrane dealing with the ETE System problems based on their payroll salaries. Mr Stewart made clear in cross-examination that the approach had been conservative [Day 3/page 116/line 20-page 118/line 21]. I accept that evidence. There is no material before me upon which I can conclude that the sum claimed is unreasonable.

It follows that I assess damages at £1,693,183.00. I do so as damages for breach of contract. It was not suggested to me that there is any difference in the circumstances of this case between the measure of damages for misrepresentation and for breach of contract. Questions of contributory negligence do not arise where liability is founded in contract. Accordingly there will be judgment for the Claimant in the sum of £1,693,183.00 and the Counterclaim must be dismissed. I hope that Counsel can agree questions arising out of interest and costs. In the event that they are not able to reach agreement I will hear argument on interest and costs when I hand down this Judgment.