When will a Vendor be Responsible for Errors in a Manufacturer’s User Manual?

Summary

During the Covid epidemic in 2020, the Health Administration Corporation (part of the Ministry of Health of the State of New South Wales) purchased a large number of clinical respiratory ventilators for a price in excess of A$20 million.  The Vendor was a company in Australia, which in turn obtained the ventilators from a manufacturer in China.  Owing to the urgency of the acquisition, the sale agreement was concluded before an actual example of the ventilators had been inspected or tested.

After the ventilators arrived, the HAC tested them and concluded that they were not suitable.  The HAC rejected the ventilators and demanded a refund of the purchase price.  One of the issues at trial was whether the vendor was responsible for statements in the manufacturer’s User Manual which were found to be misleading or deceptive.   The courts both at first instance and on appeal concluded that in this case the vendor had handed over the User Manual in its capacity as a principal trying to conclude a commercial deal, not as agent for the manufacturer.[i]

The decision raises the issue of how a vendor should pass on manufacturing documentation to a purchaser of its products during sale negotiations.

Background

In April 2020, the Health Administration Corporation (an instrumentality of the State government of New South Wales) (“HAC”) negotiated the purchase of “Shangrila 510S Integrated Respiratory Work Station” ventilators from a vendor company in Australia (“MDT”). The Ventilators were manufactured by a foreign company based in Beijing, China (“BAC”).  HAC’s medical adviser reviewed technical information about the Ventilator, including a User Manual supplied by MDT (but produced by the overseas manufacturer, BAC).  On the strength of this review, he recommended the Ventilators be acquired. In April 2020, HAC entered two agreements with MDT to purchase 348 Ventilators for $20.79 million. HAC paid half the purchase price ($10.395 million) and MDT delivered the Ventilators.

After delivery, HAC conducted several rounds of testing and found the Ventilators did not meet performance requirements identified in the User Manual. On 7 September 2020, HAC’s solicitors gave formal notice of rejection of the Ventilators, terminated the agreements, and demanded that MDT refund the $10.395 million.   Proceedings were commenced in the Supreme Court of NSW Commercial List. The primary judge, Stevenson J, found in favour of HAC.  MDT appealed to the NSW Court of Appeal, which again found in favour of HAC.   As a result, MDT was obliged to refund the $10.395 million to HAC, as well as interest.

In what capacity did the vendor hand over the manufacturer’s User Manual?

The judgment covered a number of issues, but a key issue involved the User Manual which the vendor (MDT) had given to the purchaser HAC during negotiations.  The primary judge found that a number of statements in the User Manual were misleading or deceptive, in contravention of sections 18 and 29 of schedule 2 of the Competition and Consumer Act 2010 (Cth)].[ii]

The vendor disclaimed responsibility for the contents of the User Manual, which was after all a document originated by the overseas manufacturer.  However, the Court of Appeal agreed with the primary judge that the vendor had offered the manufacturer’s User Manual to the purchaser as a principal, not as agent for the manufacturer.

The vendor had represented itself as the exclusive distributor in Australia of the Shangrila Ventilators.  It was aiming to conclude a contractual relationship with the HAC on its own account, for which it would be paid millions of dollars.

The Court of Appeal held that in the context of these negotiations it would have been obvious to the vendor’s personnel engaged in the negotiations that the purchaser HAC would rely on the contents of the User Manual as accurately and comprehensively explaining how the Shangrila Ventilator was to be used and what its functionality was.

The Court of Appeal contrasted this situation with other cases such as that of an internet search engine, or a real estate agent who handed over information given to him by his principal.  Unlike a search engine, this vendor had provided the User Manual in order to induce HAC to enter into a commercial transaction, in circumstances where a reasonable person would have understood that HAC would rely on the User Manual in determining the functionality of the Ventilators.[iii]

In this sense, the Court of Appeal agreed with the primary judge that by providing the User Manual in this way, the vendor MDT had “adopted and endorsed its contents”.

Conclusion

This case was somewhat unusual in that the purchaser had no opportunity to examine a ventilator before purchase.  However, such cases do occur in the course of commerce, and this case shows that special care is needed when a vendor attempting to close a deal passes on a manufacturer’s manual to the potential purchaser.  The vendor should make clear the basis on which such a document is handed over, and consider the liability that it may incur if the manual turns out to contain misleading or deceptive statements.

Even if the vendor’s standard terms and conditions state that the vendor does not endorse or adopt the manufacturer’s manual, those terms and conditions may not yet be applicable during pre-contract negotiations.

The vendor in this case did not protect itself by disclaiming responsibility for representations in the User Manual, nor by suggesting that the purchaser should make its own enquiries with the manufacturer.  In view of the particular circumstances of urgency and where the purchaser HAC was unable to inspect the ventilators before executing the sale agreement, it may have been prudent to do so.

This article is for general information purposes only and does not constitute legal or professional advice.  It should not be used as a substitute for legal advice relating to your particular circumstances.  Please also note that the law may have changed since the date of this article.

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[i] Medical Device Technologies Pty Ltd v Health Administration Corporation [2024] NSWCA 142 (11 June 2024)

[ii] The Court of Appeal agreed with the primary judge that the User Manual was misleading or deceptive in that it represented that it was possible to pre-set tidal volume, operate in volume and pressure control modes, and achieve reliable oxygen concentration on the Ventilator, however these could not be achieved to standards reasonably understood as applicable to clinical practice.  They may have been applicable to use as an emergency transport ventilator, however the courts found that there was a representation that the ventilator was suitable for use in an ICU or common ward, and that this was not the case.

[iii] See judgment at para 364, cf Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435; [2013] HCA 1 and Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60

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