Food manufacturers could face substantial compensation claims in future if their goods are deemed of unsatisfactory quality regardless of how the product was contaminated, write Jonathan Marks and Kirsten Houghton
Mass recall of contaminated products is an increasing risk for manufacturers and distributors, particularly in the sensitive food and beverage markets. An important judgment of Mr Justice Tomlinson in Bacardi-Martini v Thomas Hardy Packaging (THP) and Messer UK and Terra Nitrogen (UK) will have significant implications for food and drink manufacturers.
Tomlinson held that incorporation of a contaminated ingredient during manufacture does not cause physical damage to the end product. This means that liability for damages, including recall costs and expenses, will be determined in contract and not in negligence.
Manufacturers and suppliers of ingredients will have to be careful to ensure that their contracts contain carefully drafted and reasonable clauses setting out precisely where the risk of contamination should fall, so that the necessary product recall insurance can be arranged.
The dispute arose in 1998 after the discovery that many brands of fizzy drinks in the UK, including Bacardi Breezers, were contaminated by non-harmful but measurable amounts of benzene, a toxic carcinogen, found in the carbon dioxide (CO2) used to carbonate the drinks. The contamination originated from a failure in the manufacture of CO2 from natural gas at a plant at Severnside near Bristol owned by Terra Nitrogen (UK).
The incident was similar to the Perrier incident in 1990 when small amounts of benzene contaminated millions of bottles of Perrier water, leading to panic induced by a misplaced belief that the product was damaging to health. This blow to Perrier’s consumer confidence led to a vast reduction in market share and to the eventual takeover of the company by Nestle.
Mindful of the Perrier incident, a number of distributors, including Coca-Cola, Britvic and Bacardi, took prompt and effective steps to remove large amounts of stock from the supply chain in order to retain consumer confidence.
In Britvic v Messer [2001] Tomlinson decided primary liability against Messer and Terra in contract, holding that the CO2, being for food use, was not of “satisfactory quality” if it contained any level of benzene which would lead to a measurable quantity being present in the finished product.
In Bacardi v THP, Tomlinson considered the transmission of liability for the costs of the recall along the contractual chain from Bacardi to Terra and the availability of claims in tort against Terra by Bacardi and its manufacturer of Bacardi Breezers, Thomas Hardy Packaging.
Tomlinson held that Terra should bear the liability for the whole of the agreed sum of £2.125m payable in damages to Bacardi as a result of the product recall.
Two important questions arose: first, whether ‘direct physical damage’ had been caused to the end product by the contamination of the CO2 used for its carbonation – important because THP’s supply contract for the gas with Messer contained a clause which limited recovery in respect of ‘direct physical damage’, and losses, costs and expenses ‘directly arising’ from such direct physical damage, to £500,000. Secondly, whether the losses suffered by Bacardi or THP, even if there was physical damage, were irrecoverable in tort as purely economic losses lying outside the scope of the duty of care owed by Terra to Bacardi and THP.
Tomlinson held that there was no ‘direct physical damage’ and that the contractual limitation did
not apply, enabling THP to recover in full against Messer and to pass liability down the contractual chain to Terra.
Tomlinson said: “It is not because of damage to the ingredients that the loss has been suffered. The loss has been suffered because of the uselessness of the finished product. The question for decision is whether or not using a sub-standard ingredient which renders the end product (which is the result of the blending of that ingredient with other ingredients) unsaleable is direct physical damage to that property?
“If, as here, the thing alleged to be damaged did not exist prior to the alleged infliction of damage, it is not in my judgment correct to speak of direct physical damage to property. Rather there has been the production of a defective product.”
This conclusion is important in the context of manufactured food products, which generally source ingredients from a wide range of suppliers. The result is that, in most cases, a claim in tort against suppliers of ingredients will not run.
The difficulty for suppliers and manufacturers is to ensure that exclusion and limitation clauses in their contracts will be upheld (in Bacardi v THP, the ‘sweep up’ exclusion clause was held to fall foul of the Unfair Contract Terms Act 1977 because of an impracticable claims notification requirement).
In tort, Terra argued that the losses were irrecoverable on policy grounds, since they were only incurred as the result of contractual obligations and were, therefore, merely economic losses. Terra contended that its duty of care to avoid causing physical damage to Bacardi’s and THP’s property did not extend to such losses.
THP argued that where there is physical damage to property, damages are recoverable if four conditions are satisfied:
(1) the loss must be consequential on the physical damage (Spartan Steel v Martin [1973] 1 QB 27);
(2) the loss must be loss of a type which is foreseeable (Muirhead v Industrial Tank Specialities [1986] 1 QB 507);
(3) the claimant must have a proprietary or possessory interest in the property damaged (Cattle v Stockton Waterworks [1875] QB 453; Leigh & Sullivan v Aliakmon Shipping Co [1986] 1 AC 785); and
(4) there must be no policy reason why liability should not attach to the defendant (Marc Rich v Bishop Rock Marine [1996] AC 211).
On the assumption (contrary to his holding) that physical damage had been caused, Tomlinson held that the losses would be recoverable by Bacardi
and THP.
He said: “The recoverability of loss consequent [on physical damage] simply falls to be determined in accordance with the test of foreseeability. It was readily foreseeable that the consequence of the supply of CO2 contaminated with benzene would be a product recall by beverage manufacturers and/or distributors with consequential losses to those in the chain of distribution.
“The law of tort has adopted a pragmatic solution pursuant to which the occurrence of physical damage is, absent a special relationship, the touchstone of liability. Once that physical damage is established, all reasonably foreseeable consequences thereof are recoverable.”
Although an appeal is pending, Tomlinson’s statement is an important re-statement of general principle and should be welcomed. While the lines between economic and other losses continue to be blurred, where physical damage has occurred there is generally no room for seeking to escape liability by arguing that foreseeable consequential losses are not recoverable.
Jonathan Marks QC and Kirsten Houghton are barristers at 4 Pump Court and represented Thomas Hardy Packaging in Bacardi v THP.
