Clariant Masterbatches (M) Sdn Bhd v Prestige Dynamics Industries Sdn Bhd (No.02(f)-70-06/2017(P))

DALAM MAHKAMAH PERSEKUTUAN MALAYSIA (BIDANG KUASA RAYUAN) RAYUAN SIVIL NO. 02(f)-70-06/2017(P) ANTARA ANTARA CLARIANT MASTERBATCHES (M) SDN BHD ... PERAYU DAN PRESTIGE DYNAMICS INDUSTRIES SDN BHD ... RESPONDEN KORAM: AHMAD BIN HAJI MAAROP, HBM RAMLY BIN HAJI ALI, HMP AZAHAR BIN MOHAMED, HMP ZAHARAH BINTI IBRAHIM, HMP JEFFREY TAN, HMP INTRODUCTION [1] This is an appeal by Clariant Masterbatches (M) Sdn Bhd, ["Clariant"] who was the Defendant in the High Court, against the decision of the Court of Appeal which allowed the appeal by Prestige Dynamics Industries Sdn Bhd, ["Prestige"] who was the Plaintiff in the High Court, against the decision of the High Court dismissing with costs the Plaintiff's claim. BACKGROUND FACTS [2] Clariant produces and supplies masterbatches. These are colour concentrates or colourants made from specific ratios of additives which, when mixed, will produce a specific colour. [3] Sometime in 2003, Clariant gave samples to Prestige. [4] Clariant also gave to Prestige presentation cards or laboratory references containing technical information such as heat stability, light fastness, food contact suitability and presence of heavy metal pigments [HMP]. [5] Prestige is a moulder who incorporates the masterbatches into its plastic products in accordance with the colour which its customers want. [6] From the samples, Prestige chose the product "PAJ4A741GM RED" ["Product"] . The Product contains HMP which is a hazardous substance and produces a specific shade of red in the plastic products to be moulded. [7] On 03/11/2004, Prestige placed its first order for the Product. [8] Between 2004 and 2007, Prestige placed 14 orders for the Product. [9] At all times, in all 14 of the purchase orders Prestige stated the description "PAJ4A741GM RED". [10] In all instances, Clariant delivered the Product with the exact specifications of "PAJ4A741GM RED" as contained in the samples and the laboratory references, which contained HMP. [11] On 07/08/2007, Prestige again ordered the Product, and for the first time stated in a note ["Note"] in the purchase order ["Subject PO"] the following: Please attach COA and Test Report for Hazardous Substance with every delivery Please take note no hazardous substance allow in all product and packaging supplier to PDI" [sic] [12] The Subject PO also contained the the following words: "The undersigned hereby acknowledge and accept this order in term accordance to the condition stipulated above". [13] Clariant's Customer Service accepted the order in the Subject PO on 17/08/2007. [14] Clariant delivered the Product specified in the Subject PO to Prestige in four separate consignments on 14/11/2007, 05/01/2008, 01/02/2008 and 01/03/2008 and sent them with the delivery orders and invoices. [15] Upon receiving the Product, Prestige stamped on the delivery notes the following statement: $$ “RECEIPTDOESNOTCONSTITUTEACCEPTANCE $$ $$ \text {TOBESUBJECTEDTOINCOMINGINSPECTIONAPPROVAL}" $$ [16] Prestige claimed to have used the Product supplied under the Subject PO in its business by incorporating it into the plastic parts which it made for Robert Bosch Power Tools Sdn Bhd ["RBSB"]. [17] Prestige paid Clariant a total sum of RM3,980.00 in four payments, on 29/02/2008, 10/04/2008, 10/05/2008 and 10/06/2008. [18] On 15/10/2007, the Swedish Chemical Agency inspected a tool sold by Robert Bosch AB ["RBAB"] and found that a plastic part component of the tool contained a chemical which was in breach of the European Union "EU Directive 2002/95/EC" ["EU Directive"] which had been in force since 2006. [19] The plastic part component of the tool which contained the chemical in breach of the EU Directive was supplied to RBAB by RBSB. That plastic part was supplied by Prestige and incorporated the colourant "PAJ4A741GM RED which had been supplied by Clariant to Prestige. [20] RBSB took action to halt usage of the part containing the colourant PAJ4A741GM RED which had been supplied to it by Prestige, and took action to rework items which had already been manufactured and having the plastic parts containing the colourant. [21] RBSB then claimed damages against Prestige for breach of the latter's contract with RBSB. [22] Prestige negotiated with RBSB and paid RBSB a sum of RM3,196,841.71 ["Compensation Sum"]. [23] Prestige then claimed against Clariant for damages as a result of Clariant's breach of the condition as expressed in the Note in the Subject PO. [24] Prestige filed this action against Clariant, seeking damages of RM3,196,841.71, interest and costs. AT THE HIGH COURT [25] At the High Court, Clariant contended that like the 14 previous purchase orders, the Subject PO was for the Product "PAJ4A741GM RED" (with contained HMP). Clariant delivered the Product under the Subject PO in exact conformity with the samples provided and identical with the 14 previous purchase orders. Clariant had provided only the certificate of analysis and not a Test Report. [26] Clariant contended that even if the cause of Prestige's breach to RBSB under the its contract with RBSB was due to the HMP in the Product which was incorporated into plastic part for RBSB, Clariant did not breach the contract in the Subject PO. [27] Clariant further contended that it was also not liable for Prestige's alleged loss in the form of the Compensation Sum which Prestige paid to RBSB, which sum had nothing to do with Clariant. [28] According to Clariant, the fact that the Product contained HMP was within the Respondent's knowledge. It supplied the Product before and after the EU Directive came into force and also under the Subject PO in exact conformity with the samples provided and description attributed to the Product. Prestige accepted the Product and made full payment without any objection. [29] Clariant said that it was not a party to Prestige's contract with RBSB and was not even aware of the terms of the contract. Neither Prestige nor RBSB had disclosed the terms to Clariant. Thus, it was not bound by RBSB's specific requirement for compliance with the EU Directive even if it was provided for in that contract. It merely supplied the Product and had no knowledge of the Product being incorporated into any specific part or that the part would be sold in Europe. In 2003, Clariant only knew that Prestige used the Product for 'Bosch' without any further details. [30] It was only in March 2008, after Clariant had delivered the last consignment of the Product that Prestige asked Clariant to give information on the Product relating to HMP and later suggested that Clariant had breached the Subject PO. [31] Despite the request for information on the Product relating to HMP, Prestige made three payments to Clariant: in April, May and June 2008. [32] Clariant's position was that while it agreed that the Product contained HMP, its contractual obligations were fulfilled when the Product was delivered and accepted by Prestige. There was no basis for any claim to be made against Clariant. [33] At the conclusion of the full hearing, the High Court dismissed Prestige's claim with costs. [34] The High Court held that as of 2003 Prestige knew the Product contained HMP. Between November 2007 and March 2008, Prestige accepted delivery of the Product on four separate occasions. Prestige was accorded reasonable opportunity to inspect and examine the product. Prestige never asked for nor insisted on the Test Report. Between February 2008 and June 2008, Prestige did not reject the Product but instead accepted them and paid for them on four different occasions. [35] Prestige appealed against the decision to the Court of Appeal. AT THE COURT OF APPEAL [36] The Court of Appeal, after hearing the parties, allowed Prestiges's appeal and set aside the judgement of the High Court. [37] The Court of Appeal held that the existence of hazardous substance in the product could only be confirmed by a Test Report. In the absence of such Test Report, it could not be said that Prestige had waived the condition that there be no hazardous substance in the Product. The Court of Appeal allowed the sum of RM3,196,841.71 claimed by Prestige as damages, being the Compensation Sum paid to RBSB. AT THE FEDERAL COURT LEAVE QUESTION [38] Clariant applied to this Court for leave to appeal against the decision of the Court of Appeal. On 01/06/2017, leave was granted. [39] The question of law (which we will refer to as Leave Question after this) for which leave was granted is-Whether a buyer of goods having made payment and having waived any alleged breach of contract by the seller, is able to recover damages for any further and/or consequential loss arising out of the buyer's own liability to a third party, which loss did not naturally arise in the usual course of the seller selling the goods. SUBMISSIONS Submissions by Clariant [40] Clariant submitted that Prestiges's main witness, PW1, agreed that as with all 14 previous purchase orders, by specifying the description of the product, the expectation was to get the same colourant which would correspond with the sample and specifications stated in the laboratory references. PW1 also agreed that the colourant attributed to the product was of paramount importance in Prestige's manufacturing process to produce the exact shade of red that RBSB requested. [41] Clariant submitted that at all times Prestige knew the product they wanted for their client and placed reliance on the description stated in the samples and laboratory references and this was still the case when Prestige placed its order under the Subject PO. [42] Prestige used the description 'PAJ4A741GM RED' in identifying the product it wanted to be supplied to it and Clariant supplied the product matching the description 'PAJ4A741GM RED'. [43] The statement in the Note that no hazardous substance was allowed would mean different chemical elements needed to be added or removed and would result in a masterbatch having a shade of red that is not the same as 'PAJ4A741GM RED'. [44] Prestige retained the Product for months and never intimated any rejection to Clariant and never insisted on being provided with a Test Report before accepting the Product and making payment. [45] By its conduct, Prestige, according to Clariant, had waived the requirement for a Test Report. In fact the non-supply of a Test Report like in all previous 14 purchase orders did not affect the orders made as the product was duly supplied in accordance with the sample and description. The Respondent also went on to pay the Appellant in full without objection. [46] Prestige had a reasonable opportunity to examine the Product but had retained and used the Product. Prestige must be deemed to have accepted the Product that they bought. [47] Prestige's claim was in relation to its breach of the RB Contract to RBSB. However, there was never any incorporation of the RB Contract into the PO. [48] The Restrictions of Hazardous Substances compliance was a term imposed by RBSB on Prestige under their contract and was never a term of the Subject PO between Prestige and Clariant. [49] Clariant was not responsible for any breach of the contract between RBSB and Prestige. The Subject PO was not related to that contract. Clariant duly repudiated liability. [50] Even if it was liable, Clariant position was that it was only liable to Prestige for the sum of RM3,980.00 which was the loss that naturally arose in the usual course of things from the breach of the Subject PO. Submissions by Prestige [51] Prestige contended that the sole contractual document relevant to this case was the Subject PO. Each purchase order between the parties constituted a separate and distinct contract. So, the terms or conditions stipulated in any previous purchase orders issued by Prestige to Clariant were not relevant. [52] Prestige issued the Subject PO by which it specifically ordered from Clariant a product which did not contain any hazardous substance. This was further emphasized by the fact that Prestige wanted a Test Report with each delivery. [53] Clariant accepted the Subject PO unconditionally and without any amendments. It was therefore under a contractual obligation to comply with the conditions stipulated in the Subject PO, failing which it would be liable to Prestige. [54] Prestige contended that Clariant failed to comply with the term that the Product must not contain any hazardous substance. [55] Under such circumstances, said Prestige, its receipt and usage of the Product and payment for the Product cannot amount to acceptance of the Product or waiver of its contractual rights. [56] Prestige asserted that Clariant knew Prestige was supplying the Product to RBSB. Under such circumstances, Clariant need not be a party or privy to the contract between Prestige and RBSB; it was liable for all consequential losses suffered by Prestige as a result of its breach of contract. [57] Prestige claimed that it had proven that it was Clariant's breach which had resulted in Prestige paying the Compensation Sum to RBSB and Prestige was entitled to be paid that same amount by Clariant. OUR ANALYSIS [58] The following facts are not disputed:

(1) a valid contract of sale was entered into by Prestige and Clariant under the Subject PO;

(2) the Subject PO was for the supply of that product described as "PAJ4A741GM RED";

(3) the Subject PO dated 07/08/2007 bears the Note on hazardous substances;

(4) Clariant accepted the order in the Subject PO in terms of the conditions stipulated by Prestige in the Subject PO, which would include the condition in the Note;

(5) 4 deliveries were made pursuant to the Subject PO, the first delivery being on 14/11/2007, and the last on 01/03/2008;

(6) Prestige received all 4 deliveries and stamped on the delivery notes that receipt of the deliveries did not constitute acceptance, and the deliveries were still to be subjected to inspection approval;

(7) no Test Report as stipulated in the Subject PO was attached to any of the 4 deliveries;

(8) Prestige did not return any of the goods delivered pursuant to the Subject PO;

(9) Prestige did not at any time demand submission of the Test Results from Clariant. Sale of Goods Act 1957 Applicability [59] The Subject PO is obviously an order for the Product (the colourant identified as PAJ4A741GM RED) which must not contain any hazardous substance. [60] The contract for the sale (and purchase) of the Product is a clearly a contract of the sale of goods within the meaning of subsection 4(1) of the Sale of Goods Act 1957 ["Act 382"] as it is a contract whereby the seller (Clariant) agrees to transfer the property in the goods (the Product) to the buyer (Prestige) for a price. Sale by description [61] In our view that sale pursuant to the Subject PO is a sale by description within the meaning of section 15 of Act 382, which reads as follows: Sale by description

15. Where there is a contract for the sale of goods by description there is an implied condition that the goods shall correspond with the description; and, if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. [62] Even if the goods in question had been specified, there can still be a sale by description. In Grant v Australia Knitting Mills Ltd [1936] AC 85, the Privy Council took the view that "there is a sale by description even though the buyer is buying something displayed before him on the counter; a thing is sold by description, though it is specific, so long as it is sold not merely as the specific thing but as a thing corresponding to a description, eg, woollen under-garments, a hot water bottle, a secondhand reaping machine, to select a few obvious illustrations". [63] In this case, the thing being purchased was the colourant identified as PAJ4A741GM RED, and which was further described as a product which must not contain any hazardous substance. There was therefore the implied condition that the goods (the Product) to be supplied under the Subject PO must comply with that description. Was there a breach of the implied condition? [64] In this case, the product being sold and purchased was the specific product which both the seller (Clariant) and the buyer (Prestige) knew as PAJ4A741GM RED, which must also, in addition, not contain any hazardous substance. [65] As mentioned earlier, Clariant accepted the Subject PO with the stipulated condition that the colourant specified as PAJ4A741GM RED must not contain any hazardous substance. [66] If, as argued by Clariant, the colourant PAJ4A741GM RED must of necessity contain the hazardous substance in order to produce the desired colour, it stands to reason that Clariant should not have accepted the order under the Subject PO. Having accepted the Subject PO, Prestige is entitled to assume that the colourant PAJ4A741GM RED could be produced without any hazardous substance. [67] The contention that Prestige had accepted 14 previous deliveries of PAJ4A741GM RED under previous purchase orders is misconceived as the previous purchase orders did not contain the condition that the product ordered must be free of any hazardous substance. [68] There is no doubt that what was delivered by Clariant did not meet the condition that the product must be free of any hazardous substance. There was therefore a clear breach of that condition of the Subject PO. Waiver [69] As stated earlier, Clariant delivered the Product in four separate deliveries: on 14/11/2007, 05/01/2008, 01/02/2008 and 01/03/2008. No Test Report was attached to any of the deliveries. The deliveries were accepted by Prestige subject to the qualification stamped on the delivery notes that the deliveries were still to be subjected to inspection approval. [70] There was a gap of 52 days between the first delivery and the second delivery. There was more than sufficient time for Prestige to examine/inspect the Product delivered, or at the very least to insist on the Test Report for that delivery. Not only did Prestige not do so, it in fact paid for that first delivery. It did so on 29/02/2008. [71] There was a gap of between three weeks and one month between subsequent deliveries. Certainly more than sufficient time for examination/inspection of the Product delivered. Again, Prestige did not ask for the Test Report. It accepted the deliveries and paid for them. The last payment being on 10/06/2008. [72] It must be remembered that the Subject PO came with 2 conditions: that a Test Report be attached to every delivery, and that the product and packaging supplied must not contain any hazardous substance. [73] As we understand it, the importance of the Test Report lies in the fact that it would disclose the true nature of the product supplied in each delivery of the product ordered under the Subject PO and thus should have been able to indicate the presence or absence of hazardous material in the particular shipment of the Product. [74] Not only did Prestige not reject the product supplied by Clariant, Prestige claimed to have used the Product in its own product and supplied the latter to a third party. [75] There is no question that property in the goods (Product) had passed to Prestige. [76] In those circumstances, does Prestige have any remedy as against Clariant? Remedy When condition to be treated as warranty

13. (1) Where a contract of sale is subject to any condition to be fulfilled by the seller the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.

(2) . Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, or where the contract is for specific goods the property in which has passed to the buyer, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract express or implied to that effect.

(3) Nothing in this section shall affect the case of any condition or warranty the fulfilment of which is excused by law by reason of impossibility or otherwise. [78] In this case, Prestige accepted the Products, incorporated it into the plastic parts it manufactured and sold those parts RSB. In our considered view, the breach of the condition is to be treated as a breach of warranty. [79] Section 59 of Act 382 allows a buyer to sue for damages for breach of warranty. It provides as follows: Remedy for breach of warranty

59. (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may—

(2) The fact that a buyer has set up a breach of warranty in diminution of the price does not prevent him suing for the same breach of warranty if he has suffered further damage. [80] In this case, Prestige is 'compelled' by section 13 to treat the breach by Clariant as a breach of warranty and therefore is entitled to sue Clariant for damages. Damages [81] Prestige claimed the sum of RM3,196,841.71, being the Compensation Sum it claimed to have paid under its settlement with RBSB due to product supplied by Clariant under the Subject PO being found to contain hazardous substances, and for damages to be assessed. [82] The Court of Appeal allowed the claim for RM3,196,841.71. The basis for that amount being granted appear in the paragraphs quoted below: Proof of damages [29] On perusal of the evidence adduced, we are of the opinion that the plaintiff had adduced sufficient documentary and oral evidence to prove its damages. Reference is made to Exhibit P11, which shows the breakdown of the total sum of damages claimed by the plaintiff in the sum of RM3,196,841.71. [30] The documents pertaining to rework costs appear as Exhibit 43 (p.759-766 R/R Jilid 5). Invoices relating to freight charges appear as Exhibits P44 and P45 (p. 770-851 and 852-888). Legal fees incurred in European countries is shown in p. 767 R/R Jilid 5. [31] The Plaintiff's witnesses, PW2, PW4 and PW6 had verified the claims from Robert Bosch and the amount claimed by the plaintiff from the defendant." [83] Neither section 59 of Act 382 nor any other provision of that Act has the equivalent of subsection 53(2) of the English Sale of Goods Act 1893 after which it is modelled. That subsection provides that "The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty". In the circumstances, the applicable statutory provision is section 74 of the Contracts Act 1950, which continues to apply to contracts for sale of goods by virtue of section 3 of Act 382 "in so far as they are not inconsistent with the express provisions of this Act". [84] The relevant provisions of section 74 of the Contracts Act 1950 are as follows:

74. (1) When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

(2) Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. [85] In the context of the case before us, there was nothing to negate the evidence that the sum of RM3,196,841.71 was paid by Prestige under its settlement with RBSB. [86] The pertinent question to be asked is whether that sum paid to RBSB is a loss to Prestige that "naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach"? Or was the payment/loss "a remote and indirect loss"? [87] The pleaded case of Prestige is that the breach by Clariant is in respect of the Subject PO which imposed a condition that the product to be supplied must not contain hazardous subsances. [88] As mentioned above the Prestige's case was that on 15/10/2007 the Swedish Chemical Agency inspected a part in a tool sold by RBAB and found that the tool contained plastic part which contained a chemical which was in breach of the EU Directive. That tool was supplied by RBSB and the plastic part was supplied by Prestige with the colourant supplied by Clariant as one of its components. [89] It must be noted that the first "instalment' of the masterbatch/colourant ordered under the Subject PO was only delivered on 14/11/2007. This was 29 days BEFORE the inspection by the Swedish Chemical Agency. The tools inspected by the Swedish Authorities could not possibly therefore have contained the Product supplied by Clariant under the Subject PO. [90] However, our examination of the oral and documentary evidence in the record of appeal shows that the report of the Swedish Chemical Agency triggered the inspection, quarantine, return and reworking of the products containing the colourant supplied by Clariant under the Subject PO. [91] That the sole cause for the remedial and preventive measures that RBSB had to take was the colourant supplied by Clariant was not in dispute. We note that Clariant's position was not that it did not supply the product containing the hazardous substance, but that Prestige (and RBSB) knew all along that the Product contained the substance, and that it did not have knowledge that the Product would be used in goods to be sold in the European Union countries. [92] We are satisfied that Clariant knew that the Product would be used in parts to be produced by Prestige and those parts would be supplied to third parties to be incorporated in products produced by the third parties. Clariant was surely aware that if a breach of the condition of its contract with Prestige causes a loss to Prestige it would also in the usual course of things naturally cause a loss to the third parties. In this case, the third party concerned was RBSB. [93] We are satisfied that the payment that Prestige had to make to RBSB to compensate RBSB for those measures that RBSB had to take had been amply proved, in particular, through the evidence of PW4 and PW6, who were the employees of RBSB with knowledge of the payments. Their evidence was largely unchallenged. [94] There was more than sufficient oral and documentary evidence to prove that the compensation was paid to compensate RBSB in relation to the plastic parts supplied by Prestige using the Product supplied under the Subject PO. [95] In the circumstances, we found no basis to disagree with the Court of Appeal that Prestige had proved the amount it claimed as the Compensation Sum it had to pay and had paid to RBSB due to Clariant's breach of the Subject PO. Leave Question [96] We are of the considered view that in the circumstances of this case, which involves essentially issues of facts, the leave question need not be answered. DECISION [97] This appeal is dismissed with costs. [98] Finally, we wish to state that this judgement is delivered pursuant to section 78 of the Courts of Judicature Act 1964 as our brother, Jeffrey Tan, has retired. (ZAHARAH BINTI IBRAHIM) Federal Court, Malaysia. Putrajaya. 10 April 2019. For the Appellant: Cik Ng Sai Yeang Cik Teoh Chye Yi [ Messrs. Raja Darryl & Loh ] For the Respondent: Dato' Cyrus Das Cik Karin Lim Ai Ching Encik Suppiah a/1 Arumugam [Messrs. Pregrave & Matthews]