Legal Lawsuit on Food Products - Can my business be forced into Insolvency?

[WandaVan]

Hello,

I desperately need your legal advice! I hope I am in the correct place.

To summarise, I am a consultant for the food industry. I recently helped a customer source a product that they needed a supplier of. The product was Pea Protein.

Essentially, the customer (Customer A) had an existing supplier (Supplier A) of Pea Protein; and an existing co-packaging company (Co-Pack A). Unfortunately, Supplier A ran out of stock; so they contacted me to source an alternative supplier. I presented Customer A with four possible new suppliers; from which they chose Supplier B based on a taste comparison test of the four possible samples.

At the same time, Co-Pack A also declined to continue business with Customer A, due to capacity issues. I introduced them to Co-Pack B.
I did not charge Customer A for any of my consultancy services, instead, I added a small commission onto the sale of Pea Protein from Supplier B, and a small commission onto packaging services from

Co-Pack B. Legally speaking, as Customer A was invoiced by me, and paid me this is where the legal contract sits.

Unfortunately, Supplier B delivered product from a batch that was different to the sample received, and the taste profile was different.

However, the Pea Protein was within the legal specification, as the “Organoleptic” properties are never measured analytically on food products. The Organoleptic properties are heavily dependent on the final food matrix. However, in this case, the product was sold as pure, unflavoured Pea Protein with no additional additives.

Customer A had not specifically asked that we deliver product from the sampled batch; nor had they checked the delivered batch matched their taste requirements BEFORE the instructed Co-Pack B to package the Pea Protein.

Consequently, Customer A complained to us about the quality. We complained to Supplier B.

Supplier B ordered the remaining stock from the 1800kg sale be returned and replaced with stock from the batch that the customer had sampled. This was completed free of charge.

Consequently Supplier A had a delivery of stock. Customer A received multiple complaints on eCommerce as customers noticed the change in material; and they also gave away numerous free pots of Pea Protein from Supplier A, who they reverted to in the interim.

Due to the complaints, Customer A has recalled product containing Supplier B material from eCommerce. Customer A wants a total refund on 1400kg of stock (including replacement stock from original batch); all recalled product units to be destroyed; packaging costs to be refunded; and about £15k in brand damages (about 20 online complaints, and a 0.2 point dip in average rating).

Supplier B has refused and said the legal contract is between us and Customer A. Their insurance won’t pay for consequential losses; and their terms state that if “goods are purchased according to samples they are only a guide and may not be representative of the final product”. They also state that “any use of material, even partial, shall be considered acceptance by quality standards”. Additionally, they also state that “they are not responsible for any indirect losses” accrued by the customer, when the product was been delivered within legal specification.

Obviously, Customer A, does not accept this and is threatening to sue us.

Our insurance is clear that they will not engage this complaint as they do not cover indirect losses, and that the product was delivered within specification. Our position is that Customer A never asked for batch specific delivery, or never tested product before the final packaging commenced so we can’t be held liable.

What do you guys think? Who is correct?
What would happen if Customer A did try to fight us in the courts?

We have no business assets, so technically if they did succesfully sue us we would not have the means to pay. What would happen in this case?

Thanks

Wendy

[des8]

Hi and welcome

Apart from the details of any possible case, do you trade as a limited company or a sole trader.

you state: "Our insurance is clear that they will not engage this complaint as they do not cover indirect losses"
Could you tell us what cover you as a consultant carry, and the name of your insurers
Is your insurer refusing to defend you if you are sued?

[WandaVan]

Thanks for your reply.

I am registered as an LTD.

I believed that we had a version of Public Liability Insurance; but I am told that does not include any indirect losses of this nature. Yes, they will refuse to defend me, as technically speaking, no breach of contract has occurred.

[des8]

Public Liability insurance, as you have found out. does not cover this scenario.
I was hoping you also had a Professional Indemnity coverage.

So if they successfully bring a case against your company and are awarded damages which your company cannot meet, they won't get paid!

If you operate from home. it could be that you will be visited by HCEOs instructed by the claimant.
Whilst they cannot force entry, nor take your personal goods, they can take whatever they believe are company property.
If that includes personal goods you will then have to prove the laptop for example belongs to your daughter and is not company property.

You could dissolve the company now (takes 3 months) and hope they don't object or start proceedings in the meantime.

Also I speculate that you have a case against the supplier of the goods which did not match the sample. Is their waiver valid?

Tagging R0b who will have a view on this (i hope!)

[R0b]

From the sound of things, you were acting as an agent to Customer A. My knowledge on agency law is a little rusty but as an agent, you have certain fiduciary duties (google these and you will understand). However, it seems to me that you were simply someone introducing Customer to a supplier of pea protein much in the same way an estate agent brings together a seller and a buyer but that is it. These types of agents are sometimes known as 'limited agents' because you don't have authority to bind the principal to any contract and once they have 'introduced' the two parties, then their duty to the principal is discharged.

Based on what you have said in your initial post, my view on the face of it would be that your duty as an agent was discharged upon you introducing Customer A to the four new potential suppliers. Customer A then took steps of its own to sample the product from each of the four suppliers and then made a decision to contract with the supplier that it favoured. That was not your doing - you never entered into the contract on Customer A's behalf nor did you have authority to do so, it was Customer A who did this.

I would struggle to see the basis on which they have a claim against you, unless you have breached your fiduciary duties or there is a written contract in place that overrules anything under common law agency.

Customer A's gripe should be directed against the supplier, not yourself. That said you should really have a written contract in place which limited your liability excluding indirect losses, profits, contracts etc. and simply placed a cap on your liability to the commission paid (or payable) under the arrangement.

I will caveat the above by saying there may be something out there that overrules everything that I have said on common law agency but if there is, then it will likely be fact specific.


As for your options, you could dissolve the company but you really need to understand the basis of their claim. You could also point out that you have no assets so even if they did decide to sue you and were successful, they are unlikely to recover anything and will simply be a waste of time.

[WandaVan]

Hi

Thanks for your replies.

Yes, I believe the supplier's waiver is standard within the industry that samples are only representative of that batch and final product quality may differ slightly. We obviously have this waiver also on our T&C's.

Essentially, Customer A approved a material based on the taste; and although this differed, the legal buying specification was adhered to. With that in mind, do they even have any justification for legal recourse? We haven't technically broke any contract.

We have acted as a an agent, but because the payment was processed via our bank accounts; I think this would make us legally different from the standard "Estate Agent" laws.

In fariness, Supplier has been very reasonable and offered Customer A $10k as compensation without admitting liability, but Customer A is adamant that she can make additional money if she sues us directly.

The question is - does she legally have any reason to sue us if no breach of contract has taken place?

[R0b]

Even if a payment was processed through your bank account, that may not necessarily mean that you had authority to enter into a contract on behalf of Customer A, unless that is what you are saying?

You've also mentioned your own T&C's so did the customer sign your T&C's or not? If they customer did then without seeing those T&C's we can't really comment if you are in breach of contract and the extent of your liability.

[WandaVan]

The customer did not sign the T&C's, but I was not aware that they techniaclly had to. As long as they are sent to the customer, and they pay a proforma invoice, aren't they automatically accepting them?

[jaguarsuk]

Legally speaking, as Customer A was invoiced by me, and paid me this is where the legal contract sits.

We have acted as a an agent, but because the payment was processed via our bank accounts; I think this would make us legally different from the standard "Estate Agent" laws.

It sounds to me like like you have acted more like a distributor than an agent.

You sourced the product from Supplier B whom billed you and then you billed Customer A.

In future you would be better placed to charge a fixed fee or commission for your services and then the customers/suppliers enter into direct contracts with each other to avoid this happening again.

It's unlikely you'll have receipts for all the things in your house to prove to a HCEO that a laptop say belonged to your daughter. A solution would be to register another Ltd companyand then inventory all the things in your house that personally belong to you. Personally sell them all to the Ltd company for £1 for example and then rent them back for £0.01 per annum.

If a letter before action is issued you can then confidently warn Customer A the business owns no assets and that suing it would result in them obtaining a very expensive piece of paper nothing more. And whilst HCEO's turning up at your home might be stressful once presented with the evidence of what's owned by the business they can report back to the claimant of the unenforcebility of any writ.

[R0b]

No not quite.

In order to make sure that your standard terms are incorporated into the arrangement, they must be brought to the customer's attention prior to the contract being formed. You can't invoice your customers and then attached the terms and conditions to apply retrospectively, that's not how it works.

If, for example, you sent Customer A the terms and conditions by email and said that the services you provide will be subject to your terms and conditions, and then Customer A instructed you to source potential suppliers then, by Customer A's conduct, it would have accepted your terms and conditions.

If you simply agreed to provide the services but didn't make Customer A aware of any terms and conditions until you presented the invoice after work had been done, I doubt you can claim that Customer A was bound by your terms and conditions.

This is exactly the reason why contracts are signed, to avoid any doubt. Even if you don't have a signature block on your T&Cs you should really have some kind of quotation form referencing your standard T&Cs and then getting the customer to signed the quotation.

It sounds to me that this issue is largely a question of fact and then perhaps the extent to which you were an agent (or depending on the circumstances you could be deemed a distributor of Customer A), whether you became a 'full' agent with the applicable authorities or whether you were a limited agent and were merely introducing Customer A and the new suppliers.

jaguarsuk The one thing at the moment that makes me think that the OP is not a distributor is that she has provided facts that have the hallmarks of an agent. A distributor is of course a reseller who sells on to its customers but the OP quite clearly states that this was more of an introduction between Customer A and the supplier.

[jaguarsuk]

they pay a proforma invoice

Being that a proforma invoice is paid in advance of a service this could be the key to applicability of your T&C's as R0b explains. It could be argued that by their conduct of paying in advance at that point they accepted the T&C's sent with the proforma invoice.

R0b I now agree with you with revelation of how the transaction was conducted, Customer A Billed in advance of the purchase being made with Supplier B is indicative of an agent sourcing a product as opposed a distributor buying it and selling it on.

[WandaVan]

Hello,

Thanks for all your replies - very helpful. In essence, do they even have a legal claim against us? The summary is below;

• Customer A approved Pea Protein as a product
• The Pea Protein batch that was delivered was within the legal specifications provided and approved
• Customer A did not specify that there were batch restrictions on the delivery of the order
• Customer A did not specify further specifications or limitations regarding organoleptic properties that needed to be adhered to
• Customer A used the product delivered without testing
• We sought immediately to rectify a subsequent complaint (after the product had been repacked into their own brand containers); despite no legal breach of contract occurred
• Customer A received replacement product from the original batch sampled as a recourse
• The indirect costs is excluded from our legal responsibilities surely?
• We acted in good faith; and as directed

Surely, we are not responsible for indirect losses?

Thanks

[WandaVan]

Do any of you very helpful guys have any opinion on the above? Thanks for all your help so far, I appreciate your replies..