Recovering losses from product recalls - December 2001

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Ethelbert Banks
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1 Recovering losses from product recalls - December 2001 In brief: What considerations will a Court take into account in assessing the costs of recovering damages for a product recall? AAR lawyer Joe Tan reviews the recent UK "benzene litigation". Britvic, Bass & Ors v Messer and Terra (9 May 2001) - The contractual dispute - The recall - The recoverable losses- Bacardi-Martini Beverages Ltd v THP, Messer and Terra (12 July 2001) - Limitation of liability clauses To what extent will Courts uphold the reasonableness of product recalls and permit the recovery of losses suffered as a result? How would limitation of liability clauses be regarded? Guidance on these issues was provided recently in the UK in the "benzene litigation" cases. Britvic, Bass & Ors v Messer and Terra (9 May 2001) In May 1998, Britvic and Bass, UK manufacturers of carbonated drinks, were forced to withdraw their products from the market when detectable levels of benzene, an aromatic hydrocarbon and genotoxic carcinogen, were discovered in their products, which originated from supplies of carbon dioxide. Tests revealed levels of benzene in the range of 10 to 20 parts per billion (ppb). There were no existing guidelines on the recommended levels of benzene in food and drink products in force in the UK at that time. In the following months, however, a number of guidelines were established. The British Soft Drinks Association reached the view that products with benzene levels greater than 10 ppb should be recalled. The Ministry of Agriculture, Fisheries and Food (MAFF) advised that products containing levels of benzene of between 15 to 20 ppb should be recalled. The World Health Organisation set limits of 10 ppb in drinking water based on lifetime exposure. After a lengthy process of tracking down the source of the contamination, and determining which factories and deliveries of carbon dioxide were affected, Britvic recalled all products manufactured from the offending plant during the relevant period. A first recall of drinks with a benzene level of 10 ppb took place followed by a subsequent recall directed at products with benzene levels above 15 ppb. Bass recalled products with levels above 20 ppb. On 1 June 1998, widespread media coverage revealed that the risk to health was in fact negligible. MAFF in particular noted that a person would have to drink 40 litres of mineral water contaminated with ppb of benzene to replicate a day s worth of exposure to benzene from urban air. By this time however, Britvic and Bass had incurred significant costs as a result of measures taken to address the risks and

2 reassure the public that they were dealing responsibly with the discovery of benzene in their products. In the wake of the recall, Britvic and Bass brought an action for breach of contract against Messer, their bulk supplier of liquid carbon dioxide. Messer in turn brought a claim for breach of contract against Terra Nitrogen (UK) Limited (Terra), the producer of the carbon dioxide. The UK High Court dealt with a number of issues: whether there had been a breach of contract; whether Britvic and Bass were justified in carrying out a recall; and what were the recoverable losses. The contractual dispute The Court found that there had been a breach of contract in the plaintiffs favour on two grounds: 1. The terms of the contract under scrutiny provided that Messer would provide to Britvic and Bass deliveries of gas which complied with BS4105 (the British Standard Specification for Liquid Carbon Dioxide Industrial). A point of contention revolved around the fact that this standard made no reference to benzene and tests conducted according to this standard would not detect the presence of benzene. 2. However, the Judge interpreted a reference in the standard to suitability for food use as providing a separate criterion over and above the explicit specifications. Notwithstanding that the supply of carbon dioxide met the technical criteria, if some unexpected characteristic undetected by the prescribed test methods rendered the carbon dioxide unsuitable for use in food, then the carbon dioxide would be said to not conform to BS4105. On a broader basis, the Judge held that the plaintiffs would be equally successful under the relevant provisions of the Sales of Goods Act There was a breach of the statutory implied terms as the carbon dioxide supplied was not of a satisfactory quality and was unfit for its purpose. In respect of Messer s claim against Terra, the contract stipulated that Terra was obliged to supply carbon dioxide conforming to a technical specification of "total hydrocarbons (measured as methane) less than 10 ppb". The evidence that emerged during the course of proceedings suggested that Terra could not be certain whether its carbon dioxide complied with this specification and a considerable amount of carbon dioxide supplied in the relevant time period had been out of specification. This was sufficient for the Judge to make a finding of a breach without having to resort to the statutory implied terms. Accordingly, Britvic s and Bass contractual claims against Messer were sustained and Messer s claim against Terra for indemnification of that liability was also upheld. The recall The Judge also held that the plaintiffs were justified in carrying out their recall and retrieval programme, particularly given the scale in which contaminated carbon dioxide was supplied during the relevant period. Perception played an important role in the Judge s findings. Britvic and Bass were forced to take the steps that it did to satisfy the public that all reasonable measures were taken to recall the batches of production affected. Anything less and they would have faced the prospect of all their production becoming quickly unsaleable, in the real sense that no consumer would knowingly purchase them. Despite the fact that there had been no recall directly from consumers, Britvic and Bass, as responsible manufacturers, could not be seen to attempt selling contaminated products. In response to the argument that the plaintiffs had not acted reasonably in mitigating its loss, the Judge cited Lord Macmillan in Banco de Portugal v Waterlow 1 :

3 "The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken." The recoverable losses Britvic successfully recovered under several broad heads of damages: The destroyed product, which on testing was found to be in excess of 10 ppb. In response to whether the defendants should pay for that portion of destroyed product below this level or which had not been tested at all, the judge concluded that Britvic had acted entirely reasonably and had no other alternative. Returning previously recalled product of less than 10 ppb of benzene to customers after the media scare would have risked a reaction potentially more damaging than the initial publicity. A small proportion of the claim with respect to deliveries of carbon dioxide before the relevant period was disallowed. Destruction costs were allowed in the same proportion as above. Britvic s distribution costs incurred in relation to the incident were allowed in full. However, it failed to make out other heads of loss: Cost of product destroyed by retailers themselves, as this was deemed to be covered under the first head above. An exception to this were payments to the large supermarket chains Tesco and Waitrose as they had played an important part in maintaining good trading relationships and therefore held to be reasonable. Loss of profit was the largest element of Britvic s claim at 6 million and was fully disallowed. The court, on the basis of an in depth evaluation of the soft drinks market for the period of 1998 and the performance of Britvic s competitors, concluded that Britvic had not sufficiently demonstrated that the publicity surrounding the incident had any measurable impact on consumer demand for its products. In fact this claim sat uncomfortably with its successful claim that it was entitled to act immediately in withdrawing its products in order to protect its market position. Excluding the loss of profit claim, Britvic was successful in recovering just over 2 million of the 2.2 million claimed. Bass separately was successful in recovering 115,000. An appeal is pending on certain aspects of this case. Bacardi-Martini Beverages Ltd v THP, Messer and Terra (12 July 2001) In this matter, which arose from the same factual context, the parties agreed to be bound by the Britvic judgment. However, an outstanding issue with regard to the interpretation of exclusion of liability clauses remained to be decided. Here the plaintiff (Bacardi), a manufacturer of alcoholic carbonated drinks, supplied most of the raw ingredients while THP supplied the remaining ingredients including the carbon dioxide. In addition THP also mixed, bottled and labelled the drinks and supplied the finished product to Bacardi. As a result of the benzene contamination alert, Bacardi also undertook a testing, product recall and destruction programme and brought an action for breach of contract against THP. THP in turn, claimed in contract for the same amount against Messer, its supplier of bulk liquid carbon dioxide. Messer subsequently brought an action against Terra. Alternatively, THP also entered claims against Terra in tort and under the Civil Liability (Contribution) Act Bacardi itself also brought a contingent claim in tort against Terra.

4 While THP conceded that there was some contamination of the products (although only to a level of 20/25 ppb) it did not admit any breach of contract. Judgment was entered for Bacardi against THP for damages to be assessed (subject to the outcome of any appeal in the Britvic action). Judgment was also entered for THP against Messer and for Messer against Terra. Limitation of liability clauses There was agreement over quantum in the amount of 2,125,000 early in proceedings. The outstanding issue therefore was the extent to which THP could pass its liability to Bacardi onto Messer, the original supplier of the carbon dioxide. The Contract between THP and Messer, contained clauses which sought to limit Messers liability: "12.1, the liability of Messer, its employees and agents to [THP] in respect of personal injury or direct physical damage to property (and losses, costs and expenses directly arising from such injury oor damage), whether through negligence or otherwise, shall be limited to 500,000 in respect of any one incident 12.2 Messer its employees and agents shall have no liability whatsoever in respect of losses, costs or expenses of a purely financial or economic nature (including, but not limited to, loss), or any other loss or damage not covered in clause 12.1, unless such loss, cost, expense or damage be caused by Messer supplying [CO2] that is not of the purity warranted by failure to deliver or by late delivery of [CO2] by Messer and unless such defective or late delivery or failure to deliver is notified within five days of the delivery or intended delivery, in which case Messer s liability shall be limited to the value of the quantity of [CO2] concerned (at Messer s selling price)." In characterising the exclusion clauses, the Court held that clause 12.1 was a reasonable limitation clause which did not contravene provisions of the Unfair Contracts Act 1977 for the same reasons as the Judge had expounded in the Britvic case. Nevertheless, it was found to be inapplicable as Messer s liability to THP was not in respect of "physical damage to property" since the property (the finished drink product) did not exist as such at the time the CO 2 was added to the mixture. As "it did not exist prior to the alleged infliction of damage" there could not have been direct physical damage to the property but "[r]ather there has been the production of a defective product". Neither could Messer rely on clause 12.2 as this was held to be plainly unreasonable under the Unfair Contracts Act. The part that concerned the Judge the most was the five-day notice period provision. Practically, it was impossible for THP to meet the notice period as the CO 2 was delivered into large silos at THP s premises, the fill-level in the silos was never allowed to fall below 40% and they were usually refilled before supplies got that low. Any fresh delivery of CO 2 therefore mingled with unused, previously delivered CO2, making it difficult for THP to determine from which delivery was the source of the latent defect. The Court noted that " if a term contains a plainly unreasonable notice condition in respect of certain liabilities, it cannot be saved by putting a blue pencil through the offensive parts leaving the balance of the clause enforceable". Clause 12.2 was in this case "tantamount to a blanket exclusion of liability for the typical consequences of the supply of contaminated gas". For completeness though this was not strictly necessary, the Judge held that Terra would be liable in tort to Bacardi and consequently, THP would be entitled to a contribution from Terra under the Civil Liability (Contribution) Act.

5 For further information please contact: Peter O'Donahoo, Partner Ph: Peter.O'Donahoo@aar.com.au [Recent publications]

IN THE COURT OF APPEAL KENNETH HARRIS. and SARAH GERALD

MONTSERRAT CIVIL APPEAL NO.3 OF 2003 BETWEEN: IN THE COURT OF APPEAL KENNETH HARRIS and SARAH GERALD Before: The Hon. Mr. Brian Alleyne, SC The Hon. Mr. Michael Gordon, QC The Hon Madam Suzie d Auvergne