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Damages for breach of contract and loss of profit… without a contract: Clarifying collateral warranties

Contract_with_magnifying_glass_and_pen Print publication

12/12/2019

Commercial Dispute Resolution partners Malcolm Simpson and Nick Lees highlight points of interest arising from a recent rare case on collateral warranties.  New York Laser Clinic v Naturastudios demonstrates how damages for breach of contract may be obtained – including damages for loss of expected profit – even where the defendant is not party to a contract.

When parties consider doing business, a multitude of enquiries, discussions and negotiations take place before any deal is done. Marketing campaigns, promotional offers and other communications are often undertaken prior to the contemplation of any particular enquiries, leads or potential contracts. At this pre-contract stage, various representations are made, many of which could give rise to liability.  As well as the laws of misrepresentation and negligence/negligent misstatement, the law of collateral warranties can come into play.

To avoid inadvertently leaving itself open to challenge amid this legal minefield, it is important for any business to understand the potential bases of a claim.

In an earlier briefing Walker Morris provided information and advice on misrepresentation/misstatement claims per se.  In this article we focus on another cause of action of which businesses should be aware: collateral warranties.

Why is the New York Laser Clinic case of interest?

New York Laser Clinic Ltd v Naturastudios Ltd [1] is of interest because it is a relatively rare example of a collateral warranty claim coming before the courts.  This is a potentially valuable cause of action which can be pursued where a claimant has no completed contract with, and no other legal recourse against, a defendant who has made promises which have caused the claimant loss.

The case not only clarifies the circumstances in which a collateral warranty claim may succeed, but it also confirms that it can result in an award to the claimant of damages for breach of contract – even including damages for loss of expected profit.

What legal and practical points arise?

A collateral warranty is a promise made, with contractual force, which leads to a contract being entered into (albeit the contract need not necessarily be entered into between the promisor and the promisee).  If a collateral warranty that is relied upon turns out to be false, the promisee may have a cause of action against the promisor.

Sometimes a collateral warranty will be given by one party to a contract to another.  However, a collateral warranty may arise in a “tripartite” scenario – for example where a warranty is given by one person, which induces a party to enter into a contract with someone else.  A common example might be (as in this case) where a marketer or manufacturer makes promises about a product, which induce a person to enter into a contract to buy that product with a hire purchase provider.

This case confirms that the requirements for an actionable “tripartite” collateral warranty are:

  • The promise was given to a third party in advance of the main contract being entered into
  • The promise was not mere “puff” and was intended to have contractual force

(As to whether a promise is intended to have contractual force, that is an objective test to be applied in all the circumstances of the case.  It should be clear to the promisor that the promisee will rely on the promise by entering into, or causing someone else to enter into a contract with the promisor, and the promise must be given to that end.  Unlike in usual commercial contract claims, there is no presumption of intention to create legal relations, and the burden of proving intent lies on the claimant.)

  • In reliance upon the promise, the third party caused another party to enter into the main contract
  • The promise was inaccurate
  • The third party suffered financial loss as a result
  • There are no relevant, applicable exclusion clauses
  • It is not necessary that the promisor knew that the promise was false or was negligent or deliberately acting in a fraudulent manner.

Once an actionable collateral warranty has been made out:

  • If the promise was about the quality or performance of the thing to be supplied, the claimant can elect to recover the higher of damages calculated by reference to losses incurred by entering the contract (wasted expenditure), or loss of expected profits.
  • If the promise was merely that reasonable care was taken in relation to the statement relied upon/estimate of future performance, damages will be recoverable only by reference to losses incurred by entering the contract (wasted expenditure).
  • The difference, in financial terms, between the two bases of calculation of loss can be significant. (In this case, the former basis resulted in damages of some £3.8 million; the latter only some £400,000.) Proper categorisation of a promise underlying a collateral warranty claim is therefore essential.
  • In many cases where a collateral warranty claim can be established, so too can a claim for, say, negligent misstatement. (That was the case here.) Where more than one type of claim is available, claimants should assess which is likely to be more valuable.

WM comment and advice

There are a number of best-practice tips arising from the pre-contractual marketing minefield which are likely to benefit businesses generally:

  • Take care to ensure that marketing material and all forms of pre-contract communications are accurate…
  • …and that they are checked and kept accurate and up-to-date on an ongoing basis.
  • Beware providing ‘estimates’ of costs, facts or figures as a negotiating tactic unless these can be confidently backed-up with reliable evidence/calculations.
  • Educate sales staff and negotiators as to the dangers of misrepresenting facts or projections.
  • If you think you may have suffered loss having relied on a false promise, act quickly. Different causes of action have different characteristics and requirements, so take specialist legal advice immediately to ensure that you do not prejudice your rights to claim any particular remedies.
  • Any potential claimant must ensure that its claim is calculated and formulated correctly. Ask your legal advisor to consider which type or types of claim should found your action to ensure the most advantageous recovery.

For further advice or assistance on misrepresentation, collateral warranties and other associated actions, please do not hesitate to contact Malcolm Simpson, Nick Lees or any member of Walker Morris’ Commercial Dispute Resolution Team.

[1] [2019] EWHC 2892

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