Legal Alert – New Precedent on Indirect Loss and Express Warranty in the Sale of Goods

The distinction between direct and indirect loss has been somewhat challenging to determine in Finland. The Finnish Supreme Court has clarified the distinction in its recent ruling (KKO 2017:74).

The Nordic Sale of Goods Acts distinguish between direct and indirect loss when measuring the quantum of damages due to a contract breach. Indirect loss consists of, inter alia, loss due to reduction in production or turnover, loss due to damage to property other than the goods sold and other similar loss that is difficult to foresee. Under the Finnish Sale of Goods Act, the seller is only liable for indirect loss if the goods do not conform to an express warranty of the seller or if the seller has acted negligently.

New precedent focuses on express warranty

The Supreme Court’s recent ruling provides further guidance on the distinction between direct and indirect loss and  also focuses on the prerequisites for an express warranty. In this case, the buyer had bought fuel oil from the seller to be used in tractors and other agricultural machines. Due to impurities in the fuel oil, the  engines in the machines had broken down and had to be repaired several times. The buyer claimed damages for repair costs claiming that the seller had expressly warranted that this type of fuel oil was suitable for the buyer’s intended use.

In this ruling, the Supreme Court reversed rulings by the District Court and the Court of Appeal and ruled that the loss due to the damage to the machines was, despite its close connection to the defective fuel oil, to be considered an indirect loss, which is only recoverable if the seller has expressly warranted the product’s applicability for the intended use (negligence was not invoked by the buyer).

It is often assumed that the primary characteristic of an indirect loss is its difficult foreseeability. The conclusion is understandable as the Sale of Goods Act lists categories of indirect loss and ends the section with a general characterisation: and other similar loss that is difficult to foresee. The Supreme Court, nevertheless, referred to the preparatory works in which loss due to damage to other property than the goods sold is specifically considered indirect despite its foreseeability and close connection to the goods sold.

The Supreme Court, therefore, examined whether the seller had expressly warranted that the fuel oil was applicable for the buyer’s intended use. The Supreme Court held that not all information provided by the seller can be construed to constitute an express warranty, and usually only an express statement on the characteristics of a product constitutes an express warranty. An express warranty can also be established in a situation where the seller has sold a product to a buyer that has specifically requested a product with certain attributes.

The Supreme Court considered that merely the seller’s awareness of the buyer’s intended use of the product, which was in line with the product’s normal use, did not constitute an express warranty concerning the purity of the fuel oil. The court considered that there must be circumstances that deviate from customary circumstances in fuel oil purchases for an express warranty to be established. In other words, the purity of the fuel oil would have had to be the object of special attention – in one way or another – at the conclusion of the contract in order for the buyer to be able to invoke an express warranty concerning the purity.

Specify your needs and ask for an applicable product

The distinction between direct and indirect loss can sometimes be challenging to determine. In commercial contracts in the Nordics, a limitation of liability for indirect loss is one of the classic negotiation items. It would seem that the term indirect loss is often considered to correspond to a loss that is difficult to foresee and not closely connected losses such as damage to property with which a procured product has been used. The consequence of such a limitation might, therefore, be surprising when a closely connected loss materializes.

When concluding contracts, the buyer should also thoroughly consider whether there is a risk for an indirect loss, and therefore a need for an express warranty. If the buyer decides to require an express warranty, it should be clear and definitive in order to be effective. The buyer should also keep in mind that if an express warranty has not been issued, the seller might be able to avoid liability if it is later established that the seller has not been negligent.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.