Fletcher Insulation v Renold Australia [2006] VSC 269
In the Supreme Court of Victoria, Byrne J held that a company which bought a business's plant, including conveyor chains that were defective when supplied but whose defects appeared after the sale, could recover its own losses from the supplier as assignee of the vendor's contract claim, because the vendor's right of action arose on delivery and passed under a later deed of assignment, it not being suggested that the purchaser's losses were greater than the vendor's would have been [90], [95], [97].
What the court decided
The chains carried product through an oven at a Dandenong factory and failed prematurely after about 14 months in service [1]. The supply agreement was made on or about 29 August 2001 with Laminex [2]. By a sale agreement effective on 1 July 2002, before the deficiencies became apparent, Laminex sold the business assets to Fletcher [3]. The deficiencies became apparent in February 2003 and the chains were later replaced [4]. By a deed dated 31 December 2003, Laminex assigned to Fletcher its interest in all claims arising out of the supply agreement [5].
Renold admitted in its defence the implied terms as to merchantability and fitness for a purpose [22]. The principal contest was whether Renold had a design function [23]. His Honour held that, by suggesting in its quotation that Laminex buy a special chain with a modified specification, Renold assumed a design function and the obligations of a designer, including a warranty of fitness for the disclosed purpose [24]. As neither party took the point, his Honour saw no point in deciding whether the fitness term was implied at common law or by section 19(a) of the Goods Act 1958 (Vic) [29].
Finding his evidence "little more than assertion", his Honour placed little weight on the conclusion of Renold's expert that misalignment was the principal cause [52]. He found considerable force in the observation that the assembly had worked satisfactorily for over 20 years before the Renold chains and again after they were replaced [61]. He rejected sprocket misalignment as a significant cause of the chain failure [64]. He accepted the hypothesis of the plaintiffs' expert as describing the effective cause of the failure [75]. The chains were not reasonably fit for their purpose, and the contributions to the design for which Renold was responsible caused that unfitness [76].
Renold argued that, because the business was sold before the defects appeared, Laminex had suffered no loss when it made the assignment, so the assigned cause of action was worthless [94]. When delivered the chains were defective, so Laminex then had a right of action in contract although it was unaware of the deficiencies [95]. If that right did not pass under the sale of business agreement, it certainly passed to Fletcher under the deed of assignment [95]. It was not suggested that Fletcher's losses were greater than those Laminex would have suffered [95].
Although it was unnecessary to decide negligence, his Honour expressed the view that Renold owed no duty of care to Fletcher as a subsequent purchaser [77], [82]. An assignee such as Fletcher could protect itself and was not vulnerable [81]. Had a duty been owed, he would have found Renold in breach [83]. He also held that the pleas of contributory negligence, proportionate liability and contribution failed [84], [87], [88].
His Honour allowed $355,022.48 as the total cost of replacing the chains [98]. Because Fletcher could sell all that the factory could produce, its loss was the value of lost production capacity, and it need not identify a customer turned away [106]. The consequential losses were accepted at $545,569 [107]. He held that there should be judgment for Fletcher for $900,591.48, and would hear counsel on its terms, interest and costs [108].
Why it matters
A purchaser of business assets that takes an assignment of the vendor's contract claims may recover its own losses from a latent defect that emerges after the sale, at least where those losses are no greater than the vendor's would have been [95]. A supplier that proposes its own modified design may also be found to have assumed a designer's obligations, here with an admitted fitness term.
The Court of Appeal dismissed Renold's appeal, Chernov JA (Ashley JA and Whelan AJA agreeing) holding that the cause of action was complete on supply of the defective chains and that an assignee may recover damages of the kind the assignor could have claimed had there been no transfer, even if the assignor suffered no substantial loss (Renold Australia Pty Ltd v Fletcher Insulation (Vic) Pty Ltd (2007) VSCA 294). The Court also rejected challenges on causation, consequential loss and indemnity costs. Chernov JA relied on Fletcher carrying on essentially the same business as Laminex, and the Court did not decide the negligence questions.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.