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Liability for latent defects and for consequential damages

Where a person sells property, the seller may give an explicit guarantee as to its quality. In that event, if the property turns out not to be of that quality, the purchaser can sue the seller for damages for breach of contract for the financial loss which was sustained as a result of the property not being of the promised quality.

Implied warranty against latent defects

Even where the seller gives no guarantee of quality, the law creates an implied warranty against “latent defects”. In other words (unless the property is sold voetstoots) a seller is regarded as giving an assurance that the property sold has no abnormal characteristics, which impair its usefulness and which are not apparent on ordinary inspection.

If the property turns out to have a latent defect, the purchaser is entitled to cancel the sale and demand repayment of the purchase price (if the defect is serious) or is entitled to demand a reduction in the purchase price (if the defect is not serious enough to warrant cancellation of the contract).

Liability for consequential damages

It is only in limited circumstances, however, that the purchaser of goods, which turn out to be latently defective, can sue the seller for consequential damages, (in other words for financial loss to him caused by the defect in the goods).

One such circumstance is where the seller had manufactured the goods in question.

Thus, in D&H Piping (Pty) Ltd v Trans Hex Group Ltd 2006 (3) SA 593 the Supreme Court of Appeal was confronted with the situation in which a purchaser had bought aggregate and sand from a company, which the purchaser then manufactured into concrete sewage pipes and sold to its own customers.

The aggregate and sand turned out to be latently defective, with the result that the concrete pipes manufactured therefrom failed. As a consequence thereof, the purchaser incurred a liability of some R13 million to its customer.

The purchaser of the aggregate and sand sued the seller for this amount, arguing that the latter was liable for those consequential damages.

The court held that a “manufacturing seller” of goods, which turn out to be latently defective, is liable to the purchaser for any consequential damages caused by the latent defect in the goods sold, even if that seller had professed no particular skill or expertise in the manufacture of those goods and even though he was ignorant of the latent defect.

The court also held that the aggregate and sand at issue in this case had, in law, been “manufactured” by the seller in the sense that the seller had not merely dug up sand or pebbles from a river bed, but had subjected these raw materials to a process involving crushing and sorting and in so doing had changed their nature into a new product.

In the result, the Supreme Court of Appeal overturned the contrary decision of the High Court, and held that the seller of the sand and aggregate was liable to the purchaser for the consequential damages that the latter had suffered as a result of the latent defects in the sand and aggregate.

Contracting out of liability

Importantly, the Supreme Court of Appeal affirmed in this case that a "manufacturing seller" is entitled to contract out of such liability, by including a clause to that effect in the contract of sale. In the present case, no such contracting out of liability had occurred.

Any seller of goods – particularly a seller who manufactures the goods which he sells – would therefore be well advised to draw up a contract, which contains a clause which excludes liability for latent defects and for consequential damages flowing from such latent defects.

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