Background
Liability
Quantum: the Sale of Goods Act
Quantum: the basis of Air Studio's claim
Section 51(3): available market
Damages under Section 51(2)
Comment


In Air Studios Limited v Lombard North Central Plc(1) the High Court considered the operation of Section 51 of the Sale of Goods Act 1979, which prescribes the measure of damages for wrongful non-delivery of goods and the circumstances in which an "available market" for the goods exists for the purposes of that section.

Background

The claimant, Air Studios, is an audio production company. The defendant, Lombard, is an asset finance company. Between April and October 2007, Lombard entered into three lease finance agreements with a third company, Future Post, for various items of equipment used in television and audio post-production. The first agreement related to what was described as an "AMS Neve DFC Gemini", which is a console used for dubbing speech onto film (a DF console).

In June 2011 Future Post went into liquidation, which terminated the lease finance agreements. Rental payments of £64,297 remained outstanding. Lombard sought to exercise its right to sell the financed equipment to recover the outstanding rental payments (with any surplus returnable to the liquidator of Future Post).

Liability

In August 2011 Lombard took steps to negotiate a sale of the equipment to Air Studios, which was particularly interested in acquiring the DF console. Although the first agreement referred to the DF console, Lombard had never financed it, but rather only certain software upgrades for it. However, the judge found that the reference in the agreement should reasonably have been understood by Air Studios (and in fact was understood by both parties in the course of negotiations) to mean that the DF console was included in the first agreement. He found that the DF console did form part of the subject matter of the negotiations.

The negotiations culminated in an exchange of emails on August 19 2011, which Air Studios claimed resulted in a binding contract to sell the assets (including the DF console) for £100,000. Lombard asserted that its email, which Air Studios submitted was an acceptance of its offer, was in fact a counter-offer, in part because it introduced new terms and conditions.

Lombard refused to deliver the equipment and subsequently sold it to a third party. Air Studios claimed that Lombard had repudiated the contract, terminated it and commenced proceedings for breach of contract.

At trial, the judge found that a contract had been created, which Lombard had repudiated by refusing the deliver the goods, and that Air Studios was therefore entitled to damages.

Quantum: the Sale of Goods Act

It was common ground between the parties that the legal framework applicable to the determination of Air Studio's damages was contained in Section 51 of the Sale of Goods Act:

"(1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller's breach of contract.

(3) Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver."

Quantum: the basis of Air Studio's claim

Air Studios submitted that there was no "available market" for second-hand equipment within the meaning of Section 51(3), so it should be entitled to damages under that sub-section with reference to the market price of new equipment, in which there was an available market. Accordingly, Air Studios claimed the difference between the contract price of £100,000 and the estimated cost of purchasing replacement equipment of the same specification, but in new, rather than second-hand, condition. According to the valuation evidence of the single joint expert, such new equipment would have cost £505,810, resulting in damages of £405,810. His evidence was that comparable second-hand equipment would have cost £140,735.

Air Studios also claimed damages calculated by reference to the lost opportunity for it to earn profit from the use of the equipment, until such time as it could obtain replacement equipment. However, Air Studios did not pursue this claim at trial as it was unable to produce supporting evidence (in part because it never bought replacement equipment).

In response, Lombard submitted that:

  • Air Studios could not claim damages by reference to the price of new equipment under Section 51(3) when the contract was for the sale of second-hand equipment;
  • any damages therefore had to be claimed under Section 51(2);
  • damages under this sub-section had to be determined by reference to Air Studios' lost opportunity to make profits; and
  • given that Air Studios had not established any such loss, the quantum of its claim was nil.

Section 51(3): available market

The judge noted that Section 51(3) applied only where there was an "available market for the goods in question" (emphasis added) and held that for the equipment at issue, there was a material difference between second-hand and new equipment (not least because of the large disparity in value) and, accordingly, new equipment could not be "the goods in question".

The judge then considered whether, contrary to Air Studios' submission, there was in fact an available market for second-hand equipment. The expert's evidence was that there was an available market, but that in the case of the second-hand DF console, that market was "very limited". He noted that:

"[a] like-for-like replacement may not have been available, but a used system which could have done the same kind of workwould likely have been sourceable within around three monthswith the assistance of specialist dealer/brokers".

In light of this evidence, the judge considered that there plainly was no available market for second-hand goods "of the precise contractual specification", but noted that "the availability of equivalent second-hand goods capable of performing the same functions in much the same way would constitute an available market". However, based on the expert evidence, the judge considered that there was not an available market in the equivalent second-hand equipment for the purposes of Section 51(3), noting that the market lacked the requisite flexibility and was not one in which "a would-be buyer could be confident of being able to purchase appropriate replacement equipment within a reasonable time". The judge considered both the time it would take to acquire replacement equipment and the need for assistance from a specialist to be relevant.

Damages under Section 51(2)

Because there was no available market, Air Studios' damages fell to be assessed under Section 51(2). The judge rejected Lombard's submission that such damages had to be determined with reference to Air Studios' loss of profits (which it had not established). The judge noted that Section 51(2) required damages to be assessed based on the "estimated loss directly and naturally resulting" from the breach. It did not prescribe the basis for this assessment. Rather, the correct basis in a particular case was a question of fact, the answer to which would vary. In certain cases (eg, one in which a would-be buyer had already arranged a re-sale at a profit), a loss of profits basis would be appropriate; in others, it would be the cost of procurement of the nearest equivalent goods. The judge found that in the case at hand, damages should be assessed by reference to the cost of procuring substantially similar second-hand goods. Accepting the joint expert's evidence that such goods would have cost £140,735, the judge awarded damages of £40,735, the difference between that cost and the contract price of £100,000.

Comment

This decision confirms that Section 51 is not intended to produce outcomes which diverge significantly from the common law measure of damages for breach of contract. In particular, in the absence of an available market in goods of the precise contractual specification, a claimant is not entitled to substitute more valuable goods as the benchmark under Section 51(3) and, in doing so, receive a windfall. Also, Section 51(2) does not tie claimants to a loss of profits measure where some other measure would be more appropriate.

The purpose of Section 51(3) is to simplify claims for non-delivery of goods where a market in those goods exists, fixing the claimant's damages as the difference between the contract and market prices. It is unlikely that this sub-section could operate to the detriment of claimants, because it would be difficult to establish a claim for loss of profits where a liquid market for the goods exists.

For further information on this topic please contact Daniel Hemming at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (daniel.hemming@rpc.co.uk).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

Endnotes

(1) [2012] EWHC 3162 (QB).