Car-Wizard Limited v Vixen Surface Treatments Limited

A collateral contract may arise between a customer and a supplier where the supplier makes assurances about goods, the customer relies on them in procuring a third party to acquire the goods, and that acquisition is the consideration for the supplier’s promises.

Representations about the qualities of a branded product are statements of fact, rather than predictions, where they are objectively understood as describing the product. A supplier may owe a duty of care for negligent misrepresentation where it has assumed responsibility, the customer reasonably relies on the representations, and loss results.

Standard terms do not govern a collateral contract unless properly incorporated. A clause excluding liability for product faults must satisfy the requirement of reasonableness. Contract damages protect the expected contractual position; tort damages protect the position before reliance on the misrepresentation. Mitigation limits recovery only where the claimant acted unreasonably.

The claimant operated a vehicle and wheel-repair business. It negotiated with the defendant for a diamond-cutting lathe, paid a deposit, and then procured a finance company to purchase the lathe so that it could acquire it under a hire-purchase agreement.

The claimant alleged that the defendant had represented that the lathe was new, of high quality, fit for its intended wheel-repair purposes, capable of cutting tapered edges and mapping black surfaces, and compliant with applicable safety requirements. After delivery and training, the claimant found substantial defects and limitations, rejected the lathe, and claimed damages for breach of collateral contract and negligent misrepresentation, alternatively deceit.

The central issues were whether a collateral contract existed, whether the representations were actionable and false, whether the defendant’s standard terms were incorporated or effective, the applicable measures of damages, and whether the claimant had failed to mitigate its loss.

1. Outcome. The claim succeeded. The court found that a collateral contract existed between the claimant and defendant. Assessment of contractual damages, principally lost profits, was adjourned for further submissions on calculation.
2. Collateral contract. The negotiations, demonstration, direct payment of the deposit and the claimant’s procurement of the hire-purchase transaction showed that the claimant relied on the defendant’s promises and that the defendant undertook that the lathe would be suitable and of sufficient quality. The lathe was used, damaged, improperly commissioned, unable to cut tapered edges or map black surfaces without masking tape, and unsafe as supplied.
3. Terms and exemption clauses. The standard terms referred to contracts for the supply of goods or services and were not incorporated into the collateral contract. Alternatively, the express assurances given during negotiations prevailed over the standard exclusion of fitness for purpose. The limitation for losses resulting from product fault was ineffective under the Unfair Contract Terms Act 1977: it was neither fair nor reasonable, and any limitation to the invoice value would likewise have been unreasonable.
4. Negligent misrepresentation. The defendant assumed responsibility towards the claimant. The claimant relied on objectively understood representations which were false in material respects, and the defendant failed to take reasonable care. Section 2(1) of the Misrepresentation Act 1967 applied because the misrepresentations led to the collateral contract; it was unnecessary that the contract should be a sale of goods.
5. Deceit. The court was not satisfied that the defendant’s representative knew the representations were false, lacked belief in their truth, or was reckless as to their truth. The deceit claim therefore did not succeed.
6. Damages and mitigation. Contract damages were measured by the profits the claimant would have earned if the contractual promises had been true. Reliance losses, including the deposit and hire-purchase payments, were potentially recoverable in tort, together with reasonable storage costs, but the claimant could not recover twice. The claimant acted reasonably in refusing further inspection and in considering a replacement lathe until May 2021, but cancellation of the replacement order was unreasonable. Lost-profit recovery was therefore limited to nine months. The defendant failed to establish any tax deduction.
7. Procedure and evidence. The court treated the accountants’ calculations as aids to understanding rather than expert opinion. The defendant’s destruction and non-disclosure of relevant records justified adverse inferences.