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Cite as: [2000] EWCA Civ 203
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Case No: QBENF 98/1640 CMS 1
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE QUEENS BENCH DIVISION MERCANTILE
LIST (LIVERPOOL)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 28th June 2000
LORD JUSTICE NOURSE
LORD JUSTICE POTTER
and
MR JUSTICE FERRIS
- - - - - - - - - - - - - - - - - - - - -
(1)
JAMES JACKSON |
Appellants | |
- and - |
||
THE ROYAL BANK OF SCOTLAND |
Respondent |
-
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Miss Geraldine Andrews (instructed by WMA Merrick & Co, London for the appellants)
Mark Hapgood Esq QC and Thomas Keith Esq (instructed by Hammond Suddards, Manchester, for the respondent)
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE POTTER:
INTRODUCTION
1. This appeal and cross-appeal arise out of the judgment of HH Judge Kershaw
QC sitting as a judge of the High Court in Manchester. The judge held the
defendant ("the Bank") liable to the claimants who were partners in a business
partnership under the name of "Samson Lancastrian" ("Samson") for breach of
contract and breach of confidence as a result of the bank, by a mistake,
sending documents to one of Samson's customers ("Economy Bag"), to whom Samson
had sold a consignment of imported dog chews from a Far Eastern supplier, as a
result of which Economy Bag ceased to trade with Samson and entered into a
direct relationship with Samson's supplier, thus cutting out Samson and
depriving them of their intermediate profit which had been a substantial source
of profit to Samson in their previous relationship with Economy Bag.
2. Three main issues arise. The first is that raised by paragraph 1 of the
Bank's Respondent's Notice and concerns the characterisation of the legal
relationship between Samson and Economy Bag. Samson contended, and the judge
found, that the relationship was that of seller (Samson) and buyer (Economy
Bag) and damages were awarded on that basis. The Bank contended and contends
on this appeal that the relationship was that of principal (Economy Bag) and
agent (Samson), it having been common ground at the trial that, if the
relationship was indeed one of principal and agent, the claim would fail in its
entirety because the claim for loss of profit based on the mark-up to which I
have referred was a secret profit undisclosed to Economy Bag, in respect of
which the court should deny a remedy on policy grounds. The second issue,
raised both by the Notice of Appeal and by the Respondent's Notice, is whether,
in making his award of damages, the judge was correct in his findings on
causation remoteness and quantum. The Bank contends that the damages awarded
were too remote, not having been reasonably foreseeable to the bank as a result
of its breach of duty. Samson contends that the award was inadequate on the
evidence placed before the judge. The third issue relates to the rate of
interest ordered by the judge upon his award of damages, namely 6% over base
rate. Following oral argument on 6th and 7th March 2000,
when judgment was reserved, Samson requested the court to reconvene in order to
hear further argument on the third issue. On objection by the Bank, that
request was refused. Instead, the court directed that the issue should be
addressed in further written submissions by counsel, which were not completed
until 7th April 2000.
THE FACTS
3. The plaintiffs were partners in a business which imported goods from
countries in the Far East, including Thailand, and sold them to customers in
the United Kingdom. In 1990 they were introduced to Mr Taylor, who traded in
partnership with a Mr Holt as Economy Bag. Economy Bag sold a variety of
goods, in particular dog chews which, at the time of their introduction to
Economy Bag, they were buying loose in bulk and packing themselves for
wholesale and resale supply. They wished to eliminate their packing operation
and to find a source of supply of dog chews, ready-packed in packaging which
bore their trade name.
4. The plaintiffs went to Thailand and found a potential supplier, obtaining
samples and prices. Upon return, they showed samples and quoted prices on a
CIF Manchester basis which were acceptable to Mr Taylor. Mr Jackson explained
and Mr Taylor agreed that the business would have to be done on the basis that
Economy Bag would pay under transferable letters of credit so that Samson would
have security in a situation where, if Economy Bag defaulted, Samson would be
left with dog chews in packets labelled specifically for Economy Bag with
consequent difficulties of disposition in the market.
5. By coincidence, the Bank was banker to both Samson and Economy Bag. Economy
Bag placed an order with Samson and instructed the Bank to issue to Samson a
transferable letter of credit subject to UCP 400, issued in favour of Samson in
the sum of some $48,000. Having placed the order in Thailand, Samson were let
down by their suppliers and had to revisit Thailand to find another supplier.
They found Pet Products Limited ("Pet Products"), of which the managing
director was a Mr Veerochai. Pet Products fulfilled the order consigning the
container to Manchester. After the order was placed, but before the goods
arrived in England, Economy Bag asked, and Samson agreed, that because of
Economy Bag's inexperience in such matters, Samson would deal with the import
formalities and arrange carriage from Manchester to the premises of Economy Bag
near Preston, for which it would make an inclusive handling charge of 5% of the
CIF price. The transaction was completed successfully on this basis and
thereafter a substantial number of similar transactions followed.
6. At all stages, so far as Samson was concerned, they bought as principal from
Pet Products and re-sold as principal to Economy Bag, marking up the price
which they paid to Pet Products by a percentage which varied from time to time,
and using the Bank as their bankers for the purposes of the transaction. They
did not disclose their percentage mark-up to Economy Bag, keeping the price at
which they purchased to themselves and, from Samson's point of view, it was a
virtue of the transferable letter of credit arrangements that they concealed
the mark-up from Economy Bag, because the price paid under Economy Bag's
successive letters of credit was paid, (inter alia), against Samson's invoice
and not Pet Products'. The letters of credit provided, so far as material, for
payment on production of a commercial invoice, an insurance policy/certificate
for invoice amount plus 10%, and a packing list. Partial shipments were
allowed. The insurance policy in each case showed Pet Products as the assured,
but the amount of the insurance shown was the amount of Samson's commercial
invoice plus 10%. The packing list was on Pet Products stationery; however, it
did not show either the unit price or the total invoice price from Pet Products
to Samson. Thus, while the identity of Pet Products as original supplier was
available to Economy Bag upon perusal of the documents submitted under any of
its letters of credit, neither the unit price, nor total price charged by Pet
Products to Samson was apparent and Economy Bag were unaware of any mark-up
made by Samson.
7. Once the arrangements were in place Economy Bag decided to leave the
administration of its own documentation to Samson. The Bank was instructed by
Economy Bag on 26th March 1991 to instruct its International Division to
forward all relevant documents to Samson upon application and as soon as they
were received from Thailand. The Bank followed those instructions and Economy
Bag never asked Samson for any documents sent by the Bank to Samson in
pursuance of that instruction. The timing of the deliveries was such that only
in relation to the first transaction were the documents sent to Economy Bag.
On 22nd May 1991 Economy Bag wrote to the Bank.
"To confirm that Barry Davies of Samson Lancastrian is "de facto" agent to
ourselves as regards import procedures and documentation.
I therefore authorise him to speak directly to both Deane Branch and
International Division on our behalf, on all matters concerning imports,
etc."
Further, on 22nd October 1991 Economy Bag signed a banking document
which read:
"Payments for documents with discrepancies can now be authorised by Samson
Lancastrian direct .... and need not be referred to Economy Bag"
8. Thereafter, Economy Bag did business on an increasing scale with Samson,
supplying dog chews from Pet Products whenever requested by Economy Bag until
March 1993. Thirty-three contracts over a trading period of 26 months yielded
a profit to Economy Bag on varying mark-ups of $110,371 excluding the 5%
commission which was itself largely profit. The relationship ended when, upon
completion of a purchase of dog chews pursuant to an order from Economy Bag
made on 7th January 1993, the Bank, under cover of a letter dated
15th March 1993, despatched to Economy Bag rather than to Samson, a
completion statement containing Pet Products invoice to Samson, thereby
revealing the substantial profit being made by Samson (which on that
transaction was a 19% mark-up, plus 5% "commission"), which was as much, if not
more, than Economy Bag were netting as distributors. Mr Taylor was angry at
this. His answer in evidence which the judge accepted as reflecting the
position was as follows:
"I think over the period we dealt with Samson we'd sort of lost sight of the
deal we'd come into. I suppose if you were to take a step back from it, we
knew he was making profit but I think confronted with the amount of that profit
it was hurtful to say the least."
9. He thereafter terminated the business relationship. Economy Bag then
proceeded to do its dog chew business direct with Pet Products. Discovery in
the action revealed that in the year ending March 1994 Economy Bag purchased
fifteen shipments worth US$257,944; in March 1994/95 twenty-eight shipments
worth US$468,296; in March 1995/96 twenty-three shipments worth US$462,467 and
in March 1996/97 twenty-five shipments worth US$645,429. At trial, Mr Taylor
indicated in evidence that its business with Pet Products had continued on that
scale and that Economy Bag also did business with other Far Eastern suppliers
which, had the relationship with Samson continued, would have been done through
Samson.
THE JUDGMENT BELOW
10. The judge found that the Bank was in breach of an express or implied
contractual obligation of confidence as Samson's bankers not to disclose to
Economy Bag documents relating to the purchase of the goods by Samson from Pet
Products, including in particular the invoice raised by Pet Products addressed
to the defendant. There is no appeal against that aspect of the judgment.
That finding was unimpeachable on the basis of the agreed evidence of the
banking experts on each side to the effect that the majority of transferable
letters of credit are used for the benefit of middlemen who wish to conceal
from their customer the identity of their suppliers or the amount of their
mark-up and that banking practice envisages that confidentiality be preserved
for the protection of the middleman's interests in that respect.
11. The judge rejected the submission on behalf of the Bankthat the
relationship between Economy Bag and the plaintiffs was in reality that of
principal and agent, as opposed to seller and buyer. That submission was based
upon the fact that, after the placing of the first order, which was plainly one
of purchase, by Samson from Pet Products and resale onto Economy Bag, Samson
took a 5% "commission", so described by them in their invoices to Economy Bag,
which itself represented profit to them, given that clearance and haulage
charges, VAT and import levy were all invoiced separately. Further, Samson did
nothing to make clear that they were charging a greater mark-up and, on
occasions, wrote letters which appeared to describe their own prices as those
of Pet Products. It was submitted for the Bank that these facts demonstrated
(a) that Mr Taylor was in fact ignorant that any mark-up was being charged at
all and thus that anything but "commission" (only consistent with agency) was
being paid; (b) the reason why Mr Taylor was so angry on discovering the true
situation.
12. The judge stated his conclusion on the issue of agency as follows:
"I accept [Samson's] submission that what matters is not what the parties call
themselves but the substance of the relationship. Not surprisingly, each side
was able to find passages in the evidence and the documents which support its
contention. The crucial witness was Mr Taylor .... . He did not find it easy
to give evidence. Both sides were able to find support from parts of his
evidence. It was when he gave evidence that I was particularly grateful to the
parties for their agreement that there should be a Palantype record of the
evidence, because I was relieved of the need to take a full note and better
able to watch him. I have reached the conclusion that he knew that the
plaintiff was making a profit in addition to the 5%, but not how much, but what
astonished and aggrieved him was the discovery that the plaintiff, with no risk
and no capital outlay, was making a significantly larger profit than Economy
Bag, that he over-reacted to the discovery, and that he now realises and
regrets that he did so."
The judge then quoted the answer of Mr Taylor already set out at paragraph 9
above and went on
"I appreciate Mr Taylor's evidence was not consistent. I appreciate that in
the light of his inconsistency when questioned by counsel I put the point to
him myself ... I appreciate that faced with such confusion I do not have to
prefer one version to another, but could conclude that Mr Taylor's evidence is
unreliable and cannot form a basis for any finding at all. However, with all
that in mind, I have reached the conclusion that the answer which I have quoted
reflects the true state of mind of Mr Taylor, and is consistent only with the
plaintiff being a middle-man and, not an agent ...
I have found as a fact that it was only after the first contract between the
plaintiff and Economy Bag .. had been formed that a further agreement was made
between them in relation to the import formalities and onward carriage from the
Manchester Container Port. The sequence is not consistent with agency. If no
such separate agreement had been made there would have been no agreed basis for
any remuneration of the plaintiff at all. I do not think that either the
plaintiffs or Economy Bag would have made an agreement for the plaintiffs to
act as Economy Bag's agent without making express provision of the amount of
the plaintiffs' remuneration. The favours which the plaintiffs did by placing
a few orders with Pet Products without requiring a letter of credit from
Economy Bag are also more consistent with the plaintiffs being middle-men than
agents."
13. So far as damage was concerned, the judge first dealt with and rejected the
argument for the Bank that the damage claimed was too remote. He then referred
to the rule in Hadley -v- Baxendale and, in particular, the decision of
the Court of Appeal in Kpohraror -v- Woolwich Building Society [1996]
All ER 119. He stated :
"I hold that loss of the type which the plaintiff claims arises in the normal
course of things from either of the types of breach of contract alleged by the
plaintiffs i.e. breach of an express (or, alternatively, implied) term of the
contract to transfer the letter of credit and breach of the banker/customer
contract. I hold that there was nothing to take that consequence beyond what
would arise in the normal course of things from breach of the transferable
letter of credit contract or the general banker/customer contract between the
parties."
He then, approached the matter on the basis that, having received evidence of
the level of Economy Bag's trade with Pet Products in the years following March
1993 (see paragraph 9 above), he should assess the damages on the basis of
Samson's loss of the chance of profit on those sales, quoting in particular
Stuart-Smith LJ in Allied Maples Group Limited -v- Simmons & Simmons
[1995] 1 WLR 1602 at 1614D:
"....the plaintiff must prove as a matter of causation that he had a real
substantial chance as opposed to a speculative one. If he succeeds in doing
so, the evaluation of the chance is part of the assessment of the quantum of
damage, the range lying somewhere between something that just qualifies as real
or substantial on the one hand and near certainty on the other."
The judge went on:
"In this action the plaintiff claims for damages for loss of opportunity - the
opportunity to continue to make profits by trading with Economy Bag. Mr Keith
rightly accepted that there was a significant chance of the business
relationship continuing but for the defendant's mistake. The plaintiffs had
succeeded in proving damage. The difficulty lies in the assessment of the
damages for the loss of profit in what was potentially a series of separate
events. At the best from the plaintiff's point of view Economy Bag might have
continued for many years to do a large volume of trade at a high mark-up, but
there were many uncertainties, of which some presented more risk than others to
that opportunity."
14. The judge then elaborated upon the uncertainties, starting with the
likelihood that Samson and Economy Bag would have continued to trade for a
substantial number of years, expressing himself so satisfied. He then referred
to the possibility that, although both were still trading, Economy Bag might
not have continued to place orders with the plaintiffs, observing that by 1993
Economy Bag was under the pressure of increasing competition at having to keep
its prices down in order to maintain or increase sales. It thus had a motive,
in and after 1993, to cut out Samson altogether or to continue to buy but to
undertake the import formalities themselves. He observed that, upon discovery
of the true situation, Economy Bag was quickly able to deal directly with Pet
Products, by now having the commercial self-assurance to set about doing so.
He also observed that, while Mr Taylor had recognised the value of a long-term
relationship with his supplier, shortly before the Bank's mistake came to
light, Samson had started to sell pet food to M6 Cash & Carry, which might
have affected the trading relationship with Samson if Economy Bag had
discovered that they were selling goods to other buyers in the area. Samson
were also themselves planning to open a retail outlet in Wigan which might have
caused Economy Bag to perceive that Samson was competing in the retail
business, thus reducing Economy Bag's loyalty to Samson.
15. The judge set out the figures for the profit which Samson projected
(excluding the 5% commission charge) on the basis of the figures shown at
paragraph 9 above. These were as follows (the average percentage mark-up
appearing in brackets): 1993/94 $38,831 (12.9%); 1994/95 $73,839 (15.8%);
1995/96 $82.429 (17.8%); 1996/97 $135,227 (21%). He then set out further
figures projected from March 1997 through to 2007. The judge made a number of
comments about the overall trends in the figures and the likelihood of their
being maintained and then observed:
"My jury function seems to me to require that I should assess damages on the
basis not only of many possibilities which cannot be individually evaluated but
also on a basis that some of the possibilities might, if they become realities,
themselves increase the likelihood of others. On the other hand once I
conclude, as I do, that there was a significant chance that the plaintiff's
business relationship with Economy Bag would have continued for some time,
there must be an award of damages .... . Because of the hazards which I have
mentioned the likelihood that the business relationship would have come to an
end increased as time passed. While the business relationship continued the
plaintiff's profit might have increased through increased turnover but might
have reduced, as a percentage and even in money terms, because Economy Bag
acquired the motive and the means to squeeze the plaintiff's profit margins. I
must therefore attribute an appropriate sum by way of damages for each year in
which the plaintiffs have shown that damages should be awarded."
He then went on to identify the years in respect of which he made his award as
follows:
"The years are 1st April to 31st March, which should be
sufficient to enable the parties to agree a calculation of interest.
1993-1994 $27,000.00
1994-1995 $$43,000.00
1995-1996 $29,000.00
1996-1997 $26,500.00 $124, 500.00"
16. It is thus apparent that the judge having started on the basis of the
actual business done and anticipated by Economy Bag since the breach, treated
Samson as having proved a real or substantial chance, as opposed to a merely
speculative chance, of a further four years' repeat business with Economy Bag,
reducing Samson's projected profit figures according to some progressive
formula, the details of which were not divulged by the judge and the logic of
which is not apparent. On a calculation effected by Miss Andrews, who now
appears for Samson, it seems that (taking the judge's loss of profit figures
set out at the beginning of paragraph 15 above, adding Samson's 5% commission
fee and deducting the flat rate for overheads) the judge awarded the following
percentages of Samson's projected loss of profit based on Economy Bag's
purchases made directly from Pet Products: 1993/94-57%; 1994/95-46%;
1995/96-29%; 1996/97-16%. The implication of the judgment (borne out by that
calculation) is that thereafter Samson's chance of repeat business became so
speculative as not to merit compensation.
THE QUESTION OF AGENCY
17. In arguing that the judge was wrong to find that the relationship between
Samson and Economy Bag was that of seller and buyer rather than principal and
agent, Mr Hapgood has drawn our attention to a number of points of detail on
the evidence in order to demonstrate error on the part of the judge. His
difficulty has essentially been two-fold. First, he was obliged to accept the
finding of the judge that the original contract was one of buyer and seller and
that the 5% handling charge had been agreed as consideration for Samson dealing
with the import formalities and the carriage arrangements. In the light of
that, the only way in which he could put his case for agency was to say that in
some way, and without discussion, the original relationship of buyer and seller
should be regarded as having evolved into agency thereafter, simply in the
light of Samson's subsequent reference to the 5% figure as "commission".
Second, he has been unable to demonstrate any misunderstanding on the part of
the judge of the evidence which was before him.
18. Put as its highest, Mr Hapgood's submission could only be that the judge's
findings on this issue were against the weight of the evidence. Yet, Mr
Taylor's evidence was that he regarded Samson, not Pet Products, as Economy
Bag's supplier and, in giving the evidence quoted at paragraph 8 above, Mr
Taylor acknowledged that he knew, or must have known, that Samson were making a
mark-up; he simply did not appreciate how large it was. Finally, although Mr
Hapgood rightly submitted that the fact that the parties used transferable
letters of credit did not preclude the existence of a relationship of agency
(because such letters of credit may be used by applicants and first
beneficiaries who stand in a relationship of principal and purchasing agent),
it was the agreed evidence of the expert witnesses that the majority of
transferable letters of credit are in practice used for the benefit of
middle-men who wish to conceal the identity of their supplier or the amount of
their mark-up. I can see no justifiable basis for interfering with the
findings of the trial judge upon the issue raised by the Respondent's Notice.
DAMAGES
19. Both sides appeal against the judge's assessment of damages. Miss Andrews
for Samson submits that a far higher figure should have been awarded. On the
basis that the judge rightly found on the evidence that there was a significant
chance of the business relationship between Samson and Economy Bag continuing
for some time but for the Bank's mistake, she makes the following criticisms of
the judge's approach. First, she says there is no indication to show how the
judge reached the figures at the end of his judgment, there being no consistent
pattern in the discounts applied to reach the annual figures for loss of
profit, nor any easily discernible relationship between them. Second, she
submits that the assessment is remarkably low. She complains that the judge
awarded no more than one third of the net profit figure for the four years in
question. She submits that, the judge being satisfied that Samson had
established a real or substantial chance of obtaining Economy Bag's future
business, that finding should lead to at least a fifty per cent figure for the
years to which it applies. She further submits that a proper approach would be
one similar to the assessment of a chance in personal injury cases, namely to
evaluate the potential future benefit and then apply a discount to reflect the
uncertainties of achieving it, as well as any discount to reflect the value of
receiving an accelerated capital payment in respect of any period after trial.
Finally, she argues that, in the light of the evidence of Mr Davies that he
intended to retire at the age of sixty-five in 2010 unless he made enough money
to retire earlier, plus the observation of Mr Taylor that, but for the Bank's
mistake, Samson would have gone on enjoying Economy Bag's business, the judge
should have based the loss of profits claimed on a much longer period than the
four years in fact taken.
20. In connection with the discount applied to reach that short period, Miss
Andrews made a number of specific points. First, she complained that the
reference to Economy Bag acquiring the motive to squeeze Samson's profit
margins by taking over the import and carriage aspects themselves was never
even put to Mr Taylor or Mr Davies and was contrary to Mr Taylor's evidence
that he was happy with Samson's service and charges and, but for the Bank's
error, would have continued giving them orders. Further, in referring to
Economy Bag's perception that Samson's recent plans in relation to retail sales
might have caused Economy Bag to reconsider their loyalty, the judge appears to
have misunderstood the state of the evidence before him. Mr Davies had given
unchallenged evidence that the product sold to the public by Samson at the
Wigan retail outlet was totally different from any product sold by Economy Bag
and, in any event, Mr Taylor knew about the plans and did not object to them.
Second, the judge placed importance on the answer to a question put to Mr
Taylor in cross-examination as to whether Samson had sold a quantity of pet
foods to M6 Cash & Carry. Mr Taylor said he did not remember, but he would
accept what was put to him. The matter was not taken further at that stage.
Had it been so, the evidence would have shown that the M6 Cash & Carry was
over one hundred miles away from Economy Bag's area of activity and in any
event the products were not competing. In this respect Miss Andrews applied to
put in additional evidence by way of witness statements from Mr Taylor and Mr
Jackson (Mr Davies' partner in Samson) to correct the position, on the grounds
that there had been no opportunity at the trial below, given that the judge's
misunderstanding was not appreciated until he gave his judgment. We indicated
in the course of the hearing that we would rule on that application when giving
judgment. Since the points made seem to me good, and since it does seem to me
that the judge misunderstood the position confirmed by the additional evidence,
I consider that such evidence should be admitted.
21. Miss Andrews submitted that a proper approach to the assessment, based on
the particular evidence given, would have been to take the period of ten years
from the date of breach, basing calculation of the loss of profits on the
actual trading figures for 1993-1997 and projecting the next six years (in
respect of which she was prepared to accept a nil rate of growth), and then to
discount the resulting total profits by a percentage to reflect various
legitimate imponderables, including the chance of an earlier severance in the
trading relationship and (where applicable) the accelerated receipt of money.
On the evidence before the court, she submitted that the discount should not
have been as much as, let alone more than, 50%. A fair discount would have
been no more than 25%, which would produce a figure for damages of around
US$1,000,000. Alternatively, if, as the judge appeared to consider was the
case, the relationship would have lasted only four years, the damages should
have been assessed at some US$400,000, being a conservative (undiscounted)
estimated net profit figure for those four years.
22. The submission of Mr Hapgood upon the cross-appeal was an attack upon the
principle, rather than the detailed figures, of the judge's assessment. First,
he submitted that, upon the facts of the case, the damage was too remote, in
the sense that, on the information in the possession of the Bank, it was not
within the Bank's actual or reasonable contemplation that disclosure of the
profit being made by Samson would be likely to result in the termination of the
trading relationship between the appellant and Economy Bag. The documents
showed that Pet Products knew the identity of Economy Bag, who had instructed
the bank to send all documents submitted under the credits to Samson for
checking, describing Samson as their "'de facto' agent as regards import
procedures and documentation" and giving Samson authority to waive
discrepancies in the documents. Whether or not the relationship between Samson
and Economy Bag was in fact one of agency, the Bank was entitled to think that
it was characterised by mutual trust and confidence and thus there was no
reason for the Bank to suppose that breach of its duty of confidence to Samson
would result in any damage at all. Mr Hapgood submitted that the real reason
for the loss of business following the Bank's error was Mr Taylor's feeling of
anger and betrayal when he learned of the high level of Samson's mark-up and
that such a reaction was on any view outside the reasonable contemplation of
the Bank (c.f. Kpohraror -v- Woolwich at 126g-127d).
23. For much the same reasons Mr Hapgood submitted that the Bank's breach of
duty was not the effective cause of any loss, that cause being the inherently
unstable nature of the relationship between Samson and Economy Bag, and of
Samson's concealment of its profit level. He submitted that the kind of loss
which Samson was in principle entitled to recover was any loss suffered in the
actual transaction covered by the credit, as to which it had suffered none.
Finally, Mr Hapgood submitted that, if any award were to be made, it should be
an award simply of general damages for injury to Samson's business for reasons
analogous to those where a bank fails to honour a trader's cheque or draft,
thereby causing loss to his business reputation, in respect of which damages
may be awarded without proof of actual damage (see Wilson -v- United
Counties Bank Limited [1920] AC 102 per Lord Birkenhead LC at 112), which
head of claim was extended in Kpohraror -v- Woolwich to a banker's
customers generally (cp. 124a-125f per Evans LJ).
24. In considering the appropriate measure of damages to be awarded in this
case, the court has been faced with a position in which the logic behind the
arguments of both sides, if ruthlessly applied, would lead to extreme results.
On the one hand, the arguments of Miss Andrews, based on the loss of the chance
of earning profits over the lengthy period of years for which she has argued
would have the following effects. First, it would lead to a figure for damages
which appears to be out of all proportion to the nature of the Bank's mistake.
Second, the application of such an approach in other cases of repeat orders
allegedly lost following breach by a bank of its obligations in respect of
commercial credits would give rise to the likelihood of "open ended" claims in
a field, namely the financing of sale of goods, in which generally a
restrictive approach is adopted in respect of claims for consequential loss.
On the other hand, if Mr Hapgood's principal argument is accepted, it would
lead to a situation in which a bank, despite its breach of an obligation which
is by the common acknowledgement of experts, designed to protect its customer
against the risk of precisely that which is proved to have occurred in this
case (i.e. loss of repeat business), would be obliged to pay no more than
nominal damages in cases of this kind, thus giving rise to the undesirable
phenomenon of a wrong without effective remedy.
25. I would reject Mr Hapgood's arguments in that respect. Subject to
questions of proof and the method of quantification, I consider that, in cases
of this kind, a claim in respect of loss of chance or opportunity of repeat
business should in principle be available if the requirement of the rule in
Hadley -v- Baxendale, namely that such loss was "reasonably foreseeable
as liable to result from the breach" is satisfied: see Victoria Laundry
(Windsor) Ltd -v- Newman Industries Limited [1949] 2 KB 528 per Asquith LJ
at 539, as qualified in The Heron II [1969] 1 AC 350 so as to
distinguish the rule in contract from the rule of `reasonable foreseeability'
applied in tort cases. In the latter decision, the test of foreseeability in
contract was stated to be that reflected in terms such as "not unlikely to
occur" (per Lord Reid at 388) and a "serious possibility" or "a real danger"
(per Lord Pearce at 415 and per Lord Upjohn at 425). I would leave open,
without deciding, the question whether the judge was correct, bearing in mind
the agreed rationale of the duty of confidence in commercial credit cases (see
paragraph 10 above), that proved loss of repeat orders is ipso facto
loss of a type which, without more, justifies an award of general damages under
the first limb of the rule in Hadley -v- Baxendale (see paragraph 13
above). I do not think it necessary so to decide because, in this case, the
Bank was not dealing with a `one off' transaction, but was apprised of a course
of dealing between the parties for two years prior to the breach, from which it
knew that Samson and Economy Bag enjoyed a continuing and increasing trading
relationship in a commodity supplied to the apparent satisfaction of both
parties, and it had no reason to think that such relationship was about to
end.
26. That said, however, the question of the appropriate method of
quantification and, in particular, for how long it was or should have been in
the reasonable contemplation of the parties that the trading relationship would
continue is a different matter.
27. Before turning to those questions, I should say that I reject Mr Hapgood's
argument (see paragraph 22 above) that the Bank had no reason to suppose that
its breach of confidence would result in any damage at all, or that Mr Taylor's
reaction was such as to put the termination of the trading relationship out of
the reasonable contemplation of the Bank. The very nature of the obligation
and the admitted duty of confidence in such cases arises from the acknowledged
need to protect the Bank's customer from disclosure of his level of profit and
the danger of any consequent decision by his purchaser to go direct to the
customer's own supplier. Whether that decision was in fact taken for reasons
of anger or from less complicated commercial motives, does not seem to me to be
relevant to the broad question of whether such loss of business (in the form of
repeat orders) was in the reasonable contemplation of the parties as a result
of the Bank's breach. For the same reason, I would reject Mr Hapgood's
argument that the effective cause of the loss of any repeat business was the
peculiar nature of the relationship between Samson and Economy Bag prior to the
Bank's breach. The fact that Mr Taylor felt angry and betrayed because of the
revelation as to the high level of Samson's mark-up was not a reason acting
independently of the breach. It was a state of affairs immediately
precipitated by it and was in no sense an intervening or concurrent cause which
ousted or overwhelmed the original breach as the effective cause of Mr Taylor's
decision to eliminate the mark-up, once revealed.
28. I now turn to the judge's method of quantification. It does not seem to me
to follow, as the judge appears to have held, that simply because there was a
potential liability for loss of repeat orders, that liability was open-ended.
The period over which the damages fell to be assessed on the basis of the lost
likelihood or opportunity of repeat business was that period which would have
been in the reasonable contemplation of the parties on the basis of their
shared knowledge at the time of contract. Yet the judge assessed the period
not on that basis, but on the basis of what emerged ex post facto at trial as
the likely period over which Economy Bag would in fact have continued to trade
with Samson.
29. The rule in Hadley -v- Baxendale is necessarily stated in general
terms, by reference to categories of loss. However, it is a rule as to
remoteness, applied as a method of limiting damages for breach of contract and
operating as the yardstick by which to measure the cut-off point for recovery
in any given case. Thus, when a defendant has no knowledge of special
circumstances, he will be liable under the first limb of the rule for loss
arising `in the ordinary course of things' (of which knowledge is imputed to
every defendant), and no more. Where the claimant (upon whom the burden lies)
asserts knowledge of special circumstances on the part of the defendant leading
to additional loss, the defendant will still only be liable for so much of the
loss as he should have anticipated on the facts known to him, but not for
damage arising from circumstances of which he was unaware. In many cases
however, there is no clearly defined line between the limbs of the rule, the
defendant's liability under the second limb increasing over that to which he is
subject under the first limb according to his degree of actual knowledge. As
observed by Evans LJ in Kpohraror -v- Woolwich at 127j-128b:
".. the starting point for any application of Hadley -v Baxendale is the
extent of the shared knowledge of both parties when the contract was made ....
. When that is established, it may often be the case that the first and the
second parts of the rule overlap, or at least that it is unnecessary to draw a
clear line of demarcation between them. This seems to me to be consistent with
the commonsense approach suggested by Scarman LJ in H. Parsons (Livestock)
Limited -v- Uttley Ingham & Co. Limited [1978] QB 791 at 813, and to be
applicable here."
Thus, in that case, the bank was held liable for injury to the customer's
business reputation because it knew that he was a trader, but not for further
business opportunities alleged to have been lost by reason of circumstances of
which the bank was unaware on the basis of the limited facts known to it.
30. In this case, the court is dealing with a case which is superficially not
dissimilar from Kpohraror -v- Woolwich, in the sense that the case for
Samson is one for loss assessed on the basis that the claimant would have
obtained, or had a substantial chance of obtaining, repeat business in the form
of specific transactions over a future period of time of which the Bank had no
actual knowledge. Despite his remarks above quoted, Evans LJ did in fact
consider the claimant's claim under each limb of the rule in Hadley -v-
Baxendale. He made clear (at 126j-127b) that it was not a case where the
defendant bank was said to have had knowledge of any `special circumstances' so
that the second limb applied, and, so far as the first limb was concerned he
held that, on the bank's limited knowledge of the description which the
claimant applied to himself and the purposes for which he intended to use his
account, it could not be said to be a `not unlikely' consequence of the
defendant's breach that any business loss would occur. The only damages
payable therefore were payable in respect of the claim for general damages for
injury to the claimant's credit and reputation caused by the bank's wrongful
dishonour of his cheque, a category of case in which it has long been
established that there is an irrebuttable presumption of injury in respect of
which an award of substantial (as opposed to nominal) damages may be given
without proof of special (i.e. actual) damage: see Wilson -v- United
Counties Bank Limited [1920] AC 102 per Lord Birkenhead at 112 and
Kpohraror -v- Woolwich at 123b-124c. In such a case the award of
general damages is made on the basis that there can be no accurate assessment
of the pecuniary loss (if any) suffered and, as with awards in tort for injury
to reputation in defamation or for pain and suffering in cases of personal
injury, there is no measure by which they can be assessed, except the opinion
and judgement of a reasonable man.
31. In this case, however, as presented at trial, in respect of the years
1993-1997 the claim was one for loss of business profits made up of specific
transactions where, at the time of the defendant's breach, none of the
transactions had yet been concluded and the claimant's opportunity for profit
depended on the chance or contingency that a third party (Economy Bag) would
act so as to enable the claimant to make that profit. It was no doubt on that
basis that the judge accepted the submission of Miss Heilbron QC, who appeared
for Samson below, that the claim for loss of profits (which by the time of
trial was based on transactions which were identifiable and identified in the
form of invoices obtained from Economy Bag disclosed by Samson) should be dealt
with on the loss of chance basis elucidated in Allied Maples -v- Simmons
& Simmons at 1611B-1614D. That principle however, properly regarded,
is a principle or method of quantification, and not a rule as to
remoteness, of damage. It is thus subject to, and may be constrained
by, the rules as to remoteness laid down in Hadley -v- Baxendale, so
that, whatever the judge's view of the percentage chance that, but for the
Bank's breach, Samson would in fact have been Economy Bag's supplier in
the respect of the transactions in the following years, the cut-off point for
the Bank's liability was the end of such period as was within the reasonable
contemplation of the Bank at the time of breach.
32. As to that, the Bank's knowledge of the background and details of Samson's
trading relationship was limited to the period of time and the individual
transactions conducted prior to breach. Apart from those bare facts, it had no
further information and thus no reason to suppose that Economy Bag was
motivated by other than ordinary commercial considerations in relation to the
conduct of its future business or that it would continue placing orders with
Samson for any longer than it was satisfied that it was in its commercial
interest to do so. The length of that period would in turn depend on a number
of factors and imponderables all outside the Bank's knowledge, there being no
evidence to show it was aware of the particular background to the parties'
business relationship or future intentions, save that the previous two year
relationship had apparently been a successful and expanding one.
33. In those circumstances it seems to me that there was no sufficient basis on
which the judge could or should have predicated his award covering a period
anything like as long as four years. As I read his judgment, he only did so
because, once satisfied that any award would have to be assessed on a loss of
chance basis, he treated the period to be covered by his award as dictated
simply by the point at which, on taking into account all the imponderables he
thought relevant, and a variety of facts before him which were outside the
Bank's knowledge on the date of breach, the chance of profit reduced to a level
which became merely speculative in the sense used by Stuart-Smith LJ in the
Allied Maples case at 1614D. Had the judge focused upon the Bank's
limited knowledge of the facts at the date of breach, he would have concluded
that it could reasonably foresee a substantial loss of business in relation to
orders likely to be placed by Economy Bag in the near future but with a cut-off
point far shorter than the four year period at which he arrived by the route
which he adopted.
34. In the course of the hearing before us, both parties indicated to the court
their desire that if we were of the opinion that the judge fell into error in
his general approach to the question of damages, we should ourselves perform
the exercise of assessing the damages recoverable so as to avoid the need for
remission to the judge. In my view, the judge having noted all the
difficulties of assessment with which he was faced by adopting the approach
which he in fact applied (see paragraph 15 above) essentially failed to see the
wood for the trees. He could and should have approached the case on the broad
basis that, while it could reasonably be contemplated that the established
relationship of Samson and Economy Bag would have continued for a time, and
thus that some award of damages for loss of future business fell to be made,
that time should in all the circumstances be limited to a period of one year
from the date of breach, all loss thereafter being regarded as too remote. On
the other hand, when quantifying the chance that Samson would have supplied
Economy Bag during that year with the goods which Economy Bag proceeded to buy
direct, it seems to me that the judge was in error on the facts before him at
trial to make the large discount for uncertainty which he did. Further,
(assuming no breach by the Bank) there was no reason on the facts available to
the judge to suppose that prices charged by Samson or the business conditions
or commercial considerations applied by Mr Taylor would in the short term be so
altered as to make Economy Bag inclined to cut out Samson as its supplier. As
I have indicated in paragraph 20 above, I am satisfied that the judge
misunderstood the evidence in respect of certain matters which he made the
subject of discount when he assessed the loss of chance.
35. On the assumption that the evidence (as I read it) showed that, but for the
Bank's error, Samson was virtually certain to have retained Economy Bag's
business in dog chews for the year 1993/94, the loss of profit on the figures
adopted by the judge would have been $38,831, to which should be added 5%
commission, less overheads, giving a total of $47,278.15. I would round down
that figure to $45,000.00 to reflect the small degree of uncertainty inherent
in even the closest of trading relationships and would award that sum together
with interest by way of general damages for loss of profit.
INTEREST
36. The judge made his award of interest on the damages assessed having
received an affidavit from the Bank relating, inter alia, to the state of
Samson's accounts and heard evidence from Mr Davies as to the financing of
Samson's business, followed by detailed submissions from counsel. The judge
made an award at the rate of 6% over base rate, that being the rate payable by
Samson upon its business current account at the Bank, out of which its
day-to-day trading had been financed, in conjunction with a dollar account.
The latter account received the monies derived from the trading with Economy
Bag in dollars, the profits from which were transferred from time to time into
the business account to support the business by payment of expenses and
partners' drawings. Economy Bag was the principal customer and source of
income for that business, which effectively ceased upon Economy Bag's
defection. At that time, the business current account was in overdraft to the
tune of £14,000 but was expected to reduce as trade continued. This
expectation was reflected in internal correspondence of the Bank some twelve
months after its breach in which the view was expressed that, but for the
Bank's error and the consequent loss of profit, which the Bank put at some
£4,000 per month, the business account would have been well in credit.
However, in the interim, interest had accumulated, being debited at the 6%
above base rate compounded on the usual banking basis. Although the Bank
ceased showing further debits in the account following transfer of it and other
Economy Bag accounts to the Bank's Edinburgh Office pending litigation, it made
clear before the judge that it continued to treat Samson as liable for
accumulating interest at 6% above base rate, which it reserved the right to
debit. On that basis, the amount due at trial by way of the outstanding
balance on the business account was, in round figures, £23,800.
37. In addition to the business trading account there was a business `term
loan' account in connection with a mortgage for a warehouse purchased by Samson
for the proposed use of the business. The rate on that account was 4% over
base, the loan being repayable over seven years and secured on the warehouse.
38. In making her submissions as to the rate payable, Miss Heilbron recognised
that interest is generally awarded on a conventional basis at a rate which
ignores the position of the individual plaintiff, the usual award in the
Commercial Court being 1% over base rate from time to time. However, she
submitted that, in the instant case, the court should exercise its general
discretion to make an award at a rate higher than the conventional rate so as
to recognise the position of the plaintiff personally. In that respect she
relied upon two particular matters. First, a passage in McGregor on
Damages (16th ed) at paragraph 675, where, having referred to the awards of
2% over base rate made to Lloyds Names in Brown -v- KMR Services [1995]
2 Lloyd's Rep 513 and Deeny -v- Gooda Walker (No.3) [1996] LRLR the
following statement appears:
"The reason given was that this "represented what individual Names are likely
to have to pay when borrowing money". This trend may well continue. It is
only fair to plaintiffs, if they have to borrow, that the interest rate awarded
should reflect their borrowing rate, though even two per cent over base rate
will never achieve a full indemnity for a borrowing plaintiff while the
requirement that the interest be single (sic) and not compound stands."
Second, Miss Heilbron relied upon the letter from the Bank indicating its view
that, but for its conduct, the overdraft upon the business account, which
represented Samson's actual borrowing rate for the purposes of financing its
business, would have been eliminated within a year.
39. In his submissions for the Bank, Mr Keith, who was then dealing with an
award of damages of some £80,000 spread over a period of four years,
argued that the matter should be dealt with in the conventional way and
resisted the suggestion that the business account rate was appropriate.
However, he did so largely upon the basis that the debit balance of the
business account as at trial (6% compound interest having been applied)
represented little more than one quarter of the overall award. Mr Keith was
content to put the matter in this way. Having referred to the decisions of the
Commercial Court in Brown and Deeny to raise the conventional
rate to 2% over base in relation to Lloyds Names as a class, he said:
"As a broad brush approach, they felt 2% over base was right. I would say that
this is an appropriate case for 2 or 3% over base overall or Your Lordship
could divide it up between the different awards of damages for the different
years, taking into account the interest that has been paid on the business
overdraft. But, otherwise, My Lord, I would say there is no justification for
going right up to base plus 6%, even though that is what has been charged on
their [business] overdraft by the bank."
The judge ignored that via media approach and said:
"The main contenders are Mr Keith's submission that [I] should follow
Commercial Court practice and award 1% over base from time to time and Miss
Heilbron's submission that I should award a higher rate than that because it is
not just in this case. The plaintiffs have had to borrow and have had to pay
more than that rate of interest, because they have been out of pocket because
they've not had their damages. They haven't gone out and borrowed, they have
been left, as it were, with balances, overdrawn balances, particularly on the
business current account, on which the defendant has levied interest at its
base rate plus 6%, in the case of the business current account. Therefore,
that is the obvious rate to choose.
In the peculiar circumstances of these plaintiffs ... I am bound to say that
that is the submission that I prefer. We all know perfectly well, that
interest can't within the constraints placed upon the courts at the moment ever
be an exact mathematical calculation which will or should even be designed to
compensate the plaintiffs exactly for losses."
40. That last observation is, of course, correct. Further, it is desirable
that, save in exceptional circumstances, interest on damages should be awarded
on the basis of a conventional rate. That is largely because it is an
important aspect of litigation that the amount of a claimant's claim should, so
far as possible, be readily calculable in advance and according to well
established rules in order to encourage the settlement of disputes, whether by
agreement or, (following proceedings) by a payment into court which, in the
absence of indication to the contrary, will be treated as inclusive of all
interest until the last date on which it could be accepted without needing the
permission of the court: see CPR Part 36.22. Additionally, it will generally
be neither convenient nor appropriate for the court following trial and
judgment to proceed to a further `mini-trial' consisting of an inquiry into the
level and nature of the individual claimant's borrowings from the time of the
wrong complained of, the interest incurred upon those borrowings, and the
extent to which those borrowings are directly attributable to the defendant's
wrong. Such a process may well be necessary where interest has been pleaded as
part of a claim for special damage, but is generally unnecessary and
undesirable when the claim is made in the ordinary course following judgment.
In such circumstances the usual practice is to make a discretionary ruling
following brief argument from counsel.
41. As applied in commercial cases, the contractual rate is flexible to the
extent that it does not preclude affidavit evidence "as to the rate at which
persons with the general attributes of the plaintiff could have borrowed the
money" (see Shearson Lehman Hutton -v- Maclaine Watson & Co (No.2)
[1990] 3 All ER 723, 733, per Webster J, and Tate & Lyle Food and
Distribution -v- Greater London Council [1982] 1 WLR 149, 154, per Forbes
J. In such cases, it may well be that a higher award than the conventional 1%
over base rate made in the Commercial Court will be appropriate. Nonetheless,
the rate remains based upon broad considerations appropriate to plaintiffs of
the class concerned, rather than the particular borrowing arrangements of an
individual plaintiff who, while within that class, may, by reason of his
particular creditworthiness or his inability to "shop around" for alternative
arrangements, have sustained losses which render an award made on that basis
inadequate to compensate him for being kept out of his money.
42. Applying that approach, the judge's award of 6% over base rate could not be
justified in the sense that there was no general evidence before him as to the
borrowing rates available to small business men over the period so as to
justify the exceptional `uplift' adopted. The rate applicable to the
plaintiff's business account, without more, would not suffice for that purpose.
Further, the terms of the judgment as to interest totally fail to make clear
how the judge could have regarded the existence of an overdraft of no more than
£14,000 on the business current account as justifying an award at base
rate plus 6% on the full judgment sum of £78,879.
43. Since this court has re-assessed and reduced the damages to a level
properly payable in respect of one year's loss of business, it is appropriate
that it should exercise its own discretion in respect of the award of interest.
Having studied the evidence before the judge, it seems to me that he was led
into an exercise of discretion which depended upon an investigation of Samson's
overall financial position and personal borrowing arrangements, rather than
consideration of the rates of borrowing available to small businesses of
Samson's type. Such investigation (even if appropriate) was, in any event,
incomplete. The evidence explored only the operation of the accounts I have
mentioned, and did not extend to what other accounts may have been held
elsewhere, nor whether personal accounts in the names of the partners might
have provided funds available to pay off the overdraft on the business account.
There was some evidence of other borrowings by Samson from the Bank, notably
the term loan account debit balance, which the judge rightly excluded from his
consideration because it was financed by and for the benefit of the individual
partners and not the business of Economy Bag. The rate charged upon that
account was 4% above base. However, the judge was wrong thereby to assume (if
he did so assume) that the business loan account was appropriate evidence of
the rates of borrowing generally available to traders such as Samson to replace
the monies lost to it while awaiting the award of damages. Nor is any such
evidence available to us. However, bearing in mind the concession made before
the judge that, in all the circumstances of the case, it was an appropriate
case in which to award 2 or 3% over base overall, I would award interest upon
damages at the rate of 3% over base rate.
44. I would therefore dismiss the appeal and allow the cross appeal in the
manner and to the extent indicated in paragraphs 35 and 43 above.
Mr Justice Ferris: I agree with the judgment of Potter LJ and with the
manner in which he deals with each of the various issues which are raised in
this appeal
Lord Justice Nourse: I also agree
Order: Appeals dismissed and cross appeal allowed in the manner and to the
extent indicated in paragraphs 35 and 43 of Potter LJ's judgment; application
to adduce fresh evidence granted; orders made in the terms of draft minute of
order; leave to appeal to the House of Lords refused.
(Order does not form part of the approved judgment.)