Caveat venditor – has the pendulum swung too far?

Directors duty to act in company’s best interests:how much is too much?
April 22, 2019
Perwaja Steel S/B v. RHB Bank Bhd and 789 others [2019] 5 AMR 342
September 26, 2020

Overview

‘Caveat emptor’ or ‘buyer beware’ is a familiar concept. It is an age-old warning to all prospective buyers that goods are bought at their own risk.

The effects and consequences of the principle of caveat emptor have been criticised over time and as a result, commercial law has slowly developed more stringent protection for consumers and buyers.

This has resulted in, among other things, the growing perception that in disputes between sellers and buyers liability is almost automatically imposed on sellers.

The question to be asked is whether the legal pendulum has swung too far in favour of buyers, and whether it is sellers who need to beware?
The recent decision in Clariant Masterbatches (M) Sdn Bhd v Prestige Dynamics Industries Sdn Bhd(1) suggests that this may be the case. The legal ramifications of this case appear to have created an unexpected and undoubtedly unfair backlash against sellers.

Facts

Clariant Masterbatches supplied Prestige Dynamics Industries with a specific red masterbatch (the product) from samples and lab references provided by Clariant. The lab references specified that a hazardous substance had been used to produce the desired shade of red that Prestige had selected.

Between 2004 and 2007, Prestige placed 14 orders with Clariant which were all accepted without issue. On the 15th occasion (in August 2007) Prestige ordered the product again. The difference this time was that the purchase order had a new notation that:

  • no hazardous substance was allowed in the product; and
  • a certification of analysis and a test report must be attached with each delivery.

Clariant delivered the product under the purchase order in four separate consignments between 14 November 2007 and 1 March 2008. Prestige accepted delivery on all four occasions without protest and paid Clariant the full sale price of RM3,980.

Prestige used the product in various plastic parts made for its customer, Robert Bosch Power Tools Sdn Bhd (RB). On 15 October 2007 the Swedish Chemical Agency found that the plastic part sold to RB contained a hazardous substance in breach of an EU regulation. To resolve the proceedings brought by RB against Prestige (the RB proceedings), Prestige paid a compensation sum of RM3.197 million to RB. Prestige then filed an action to recoup from Clariant the compensation Prestige had paid to RB even though Clariant had not been:

  • involved in the proceedings involving RB; or
  • aware of the dealings between RB and Prestige.

Kuala Lumpur High Court decision

As expected, the Kuala Lumpur High Court found that Prestige had been aware that there were hazardous substances in the product supplied by Clariant. Thus, Prestige’s recurring acceptance of the product without insisting on test reports, which waived a breach of the purchase order’s conditions, was sufficient to dismiss Prestige’s claim.

Court of Appeal proceedings

However, the Court of Appeal took an unusual approach and reversed the Kuala Lumpur High Court’s decision.(2) It appeared to ignore the previous 14 product orders and focused solely on the purchase order. In this regard, the Court of Appeal found that since the test report required under the purchase order had not been delivered, Prestige would have been in no position to waive the no hazardous substance condition set out in the purchase order, since the product’s specific chemical
composition could be found only in the test report.

Having determined liability, the Court of Appeal then allowed Prestige’s claim for RM3.197 million as a result. The Court of Appeal appeared not to have considered that the contract price under the purchase order had been a paltry RM3,980. Putting things into perspective, the awarded damages of RM3.197 million were 803 times more than the RM3,980 contract price.

Federal Court proceedings

Understandably aggrieved by the decision, Clariant appealed to the Federal Court. In deciding this appeal, the Federal Court chose to disregard the previous 14 orders that had been supplied to Prestige because they had not contained the new purchase order’s conditions.

Instead, the Federal Court took a clinical approach and held that Prestige had been entitled to assume that the product could be produced without any hazardous substance (notwithstanding its previous dealings) simply because the purchase order constituted a sale by description under Section 15 of the Sale of Goods Act 1957.(3) Hence, since the product contained a hazardous substance, there had been a clear breach of the purchase order’s conditions by Clariant.

The Federal Court also relied on Section 13 of the Sale of Goods Act(4) to hold that the breach of conditions constituted a breach of warranty, as ownership of the product had passed to Prestige. As a result, the Federal Court believed that despite Clariant being unaware of the RB proceedings, Prestige had been entitled to claim for its full loss of RM3.197 million.

The Federal Court decision to award damages of RM3.197 million for breach of a contract that had been worth only RM3,980 appears even more unpalatable because the breach of the EU regulations had been discovered by the Swedish Chemical Agency on 15 October 2007 before any delivery had been made on the purchase order. This in effect means that the masterbatch which precipitated the breach (and triggered the RB proceedings) had not been delivered under the purchase order, but instead under one of the previous 14 orders supplied to Prestige (which had not contained the condition). Nevertheless, despite this distinction, the Federal Court found Clariant liable.

Comment

The ramifications of the Malaysian apex court’s decision are far reaching. In short, liability can now be imposed on sellers even if the buyer has previously accepted the same product without qualification. Such liability may even attach to previous dealings despite the condition (which was breached) only appearing in later contracts or purchase orders.

This approach places sellers in a dangerously vulnerable position. Not only will they have to constantly review and verify all new purchase orders (from repeat customers on identical transactions) for the potential insertion of new notations or terms, they must also be mindful that any agreement to new terms may still apply to previous transactions which have long been
completed.

To say that it is commercially impractical or patently wrong would be a gross understatement. The rather obscene consequences of any potential breach become apparent when considering that any minor infraction could potentially bankrupt a thriving business. This is because the ensuing damages could potentially be a few hundred times more than the value of the original sale. It bears repeating that the damages awarded against Clariant were more than 800 times the revenue that it had received through the product’s original sale.

Given the perceived injustice caused to Clariant (and any similar potential sellers), it is imperative that the Federal Court finds a suitable occasion to revisit and review this decision to ensure that a proper balance is struck between the competing interests of both buyer and seller. Otherwise,Malaysia will be entrenched in the caveat venditor era, which not only places unnecessary hardship on sellers, but also goes against the grain of perceived balance and fairness in commercial
transactions.

For further information on this topic please contact Alvin Tang or Teo Ju-li at Bodipalar Ponnudurai De Silva by telephone (+60 362 055 000) or email (alvin@bpdlex.com or ju- li@bpdlex.com).

Endnotes

(1) Clariant Masterbatches (M) Sdn Bhd v Prestige Dynamics Industries Sdn Bhd [2019] 3 MLJ 701.
(2) Prestige Dynamics Industries Sdn Bhd v Clariant Masterbatches (M) Sdn Bhd [2017] 2 MLJ 272.
(3) Section 15 of the Sale of Goods Act 1957.
(4) Section 13 of the Sale of Goods Act 1957.