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Cite as: [2000] EWCA Civ 265

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Case No: A2/1999/0606

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
BRISTOL MERCANTILE COURT
(His Honour Judge Jack QC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 20 October 2000

B e f o r e :
LORD JUSTICE KENNEDY
LORD JUSTICE WALLER
and
LORD JUSTICE JONATHAN PARKER
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	UYB Ltd	Appellant/ Applicant
	- and -
	British Railways Board	Respondent

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2HD
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
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K Lewison Esq QC, Mr Gary Cowen (instructed by Eversheds) appeared for the Applicant
J Gaunt Esq QC, Mr Jonathan Small (instructed by Kennedys) appeared for the Respondent

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JUDGMENT
As Approved by the Court
Crown Coyright

LORD JUSTICE WALLER:
Introduction.
1. This is an appeal with permission of the trial judge from two judgments of His Honour Judge Jack QC in the Bristol Mercantile Court.
2. There are two issues raised in the appeal:
(i) Did the judge correctly apply the principles on which he awarded the plaintiff company (UYB) £365,789 by way of damages (the subject of his judgment delivered on 16 April 1999)?
(ii) Did he correctly exercise his discretion about interest when he excluded from the interest calculation the period from service of the writ on 15 December 1995 to the service of an expert's report on 8 December 1999 (the subject of his judgment delivered on 30 April 1999)?
The Facts
3. There is no challenge to the judge's findings of fact in the first judgment. That being so, it is possible to state the background to the claim quite shortly and I am indebted in large measure to the skeleton argument for the appellant for the following summary.
4. UYB is a company of which Mr Nino Jones and Mr Darryll Kent-Morris were the directors at the relevant time. It was formed for the purpose of opening and running a leisure business. The premises in which the business was to be carried on were two railway arches at Bristol Temple Meads station. In order for the business to be carried on there it was necessary for UYB to obtain planning permission and a liquor licence (including a special hours certificate).
5. An application for planning permission was made on 2 February 1992. The description of the development was use as "cafe wine bar discotheque". The application was supported by the defendants (BRB) especially the wine bar. Planning permission was granted on 6 March 1992.
6. An application for a liquor licence and a special hours certificate was made in March 1992. A provisional licence was granted on 25 May 1992. For the purpose of obtaining a licence, and in case they were required by the justices, profit projections were prepared.
7. Negotiations for a tenancy agreement as between UYB and BRB progressed during May and June 1992. On 2 July 1992 BRB wrote stating that they would grant UYB a 25 year licence. A three year tenancy was in fact completed on 24 July 1992.
8. It was necessary for UYB to fit out the arches. The arches were originally dry. But during the course of the fitting out work, BRB arranged for work to be carried out to the roadway above the arches. In the course of that work alterations were made which (for reasons which remain obscure) caused water to penetrate the arches in considerable quantities. Complaints were made to UYB to BRB during the summer of 1992. At the end of August 1992 there was a fire in one of the arches, probably caused by water getting into the electrics. The judge found that but for the problem of water penetration, the club would have opened on 1 October 1992.
9. As a result of the water penetration the arches became unusable, and the fitting out had to be halted. BRB gave up the search for a solution to the problem in November 1993. The judge found that by 11 November 1993 there were no prospects of the night-club project going ahead. He rejected the evidence of Mr Jones and Mr Kent-Morris that they continued to think that the club might still open.
10. The way the judge expressed his findings of fact at this stage are not unimportant. At page 27 he posed the question as to what steps were taken as from November 1993 and said as follows:-
"I accept that Mr Jones and Mr Kent-Morris looked at other property within Temple Meads, which was not suitable. It is unclear when this was. I think that otherwise they made little sustained effort to find other premises. No documentary evidence was produced. I think that they felt that the arches offered them a particular opportunity, which they were unlikely to match elsewhere. It is clear from Mr Kent-Morris's clothing venture that he had given up any close involvement with the night-club scheme. I think that they both lost interest in the idea and were content to pursue the claim for compensation. In 1993 and 1994 Mr Jones and initially also Mr Kent-Morris concentrated on Superstaff. In the year to 30 April 1994 Superstaff more than doubled its profits to £272,842 and in the year to 30 April 1995 it achieved £221,531. In late 1993 Mr Kent-Morris went his own way with the clothing business."
11. What however the judge also concluded in relation to UYB's obligation to mitigate its loss was:-
"I conclude that if Mr Jones and Mr Kent-Morris had been as energetic as they were at the start of the scheme when they found the arches, they would have found somewhere within a period of between 18 months and 2 years. This is not a precise finding: but a more precise finding on the scant evidence which I have is unrealistic."
The proceedings
12. UYB issued a specially indorsed writ in August 1995. It claimed damages both in contract and in tort for the failure of BRB to supply the premises in accordance with their obligation under the lease. The writ alleged that UYB had suffered loss and damage and the particulars given were:-
"The plaintiff has been prevented from opening the property as a wine bar, cafe or discotheque and has suffered loss of profits from August 1992 to date. The plaintiff estimates that its profits would have been not less than £62,500 per annum."
13. As far as the pleadings and open correspondence was concerned the position was as follows. A defence was served on 23 February 1996. It denied liability and relied on an exemption clause in the lease. So far as quantum was concerned it put UYB to proof of the profits lost.
14. On 12 March 1997 UYB applied for the determination of a preliminary issue whether BRB was entitled to avoid liability by reliance on the exemption clause. On 6 May 1997 it was ordered by consent that BRB was not entitled to avoid liability by virtue of that clause.
15. Following repeated applications by UYB for discovery, on 14 May 1998 BRB submitted to judgment on liability with damages to be assessed. In June 1998 UYB applied for permission to amend their statement of claim and permission was granted on 9 July 1998. By the amendment UYB asserted that they had an expectation of a tenancy for 25 years and asserted "by reason of the defendants' breaches the plaintiff has lost the right alternatively the expectation of being able to continue in possession of trade in the property for 25 years and is entitled to be compensated accordingly."
16. On 8 December 1998 UYB served experts' reports from their surveyor and accountant. The claim now advanced was
loss of net profits to end 98: £4,838.339;
loss of profits for residue of 25 year lease:
£734,009 x 10: £7,340,090
total £12,178,429.
17. BRB, having at one stage by an amendment dated 7 August 1998, sought to suggest that UYB had failed to mitigate its loss by unreasonably failing to open the club in the arches or by unreasonably failing to take measures to alleviate the water penetration, by a further amendment dated 17 February 1999 asserted that (a) from November 1993 UYB unreasonably failed to seek other premises from which to operate the proposed business; and (b) consequently UYB was not entitled to the alleged loss from expiry of a reasonable time in which to find alternative premises.
18. At the trial BRB disputed UYB's method of assessing damages and submitted, as one alternative, that the proper measure was (1) losses suffered from opening until abandonment of the venture; plus (2) the value of the business as a going concern as of that date less (3) the cost of setting up the business which had not in fact been incurred. It was apparently in response to that way of putting the case that UYB pleaded further alternative cases one of which was that if they were not entitled to lost profits they were entitled to loss and damage calculated by reference to the capital value of the asset lost namely the proposed 25 year lease of the premises for the benefit of the licenses granted to UYB. They alleged that the capital value of the lease alone was £250,000 or £1.2m for the business as a going concern. In the alternative they claimed wasted expenditure.
The judge's judgment relating to the assessment of damages
19. The judge found that the venture would have been profitable. He did not however accept the evidence called by UYB on the extent of the profits. Indeed he was highly critical of much of that evidence. His key findings were first that contrary to UYB's case that the night-club would have been ready from August 1992 it would not in fact have been ready to open before 1 October 1992 even in the absence of the water problem which had occurred. He found that following the meeting on 11 November 1993 "it was wholly clear that the club and cafe venture was never going to proceed." As already indicated he found that if Mr Jones and Mr Kent-Morris had attempted to mitigate their loss they would have found somewhere within a period of between 18 months and 2 years from 11 November 1993. He accepted the submission on behalf of BRB based on Owners of the Dredger Liesbosch v Owners of the Steamship Edison [1933] AC 449 that the appropriate basis for quantifying UYB's loss was as follows:-
(1) by an assessment of the profits lost between the date the premises would have opened in 1992 had there been no water problem (ie October 1992) and 11 November 1993;
(2) by an assessment of the value of the hypothetical business in November 1993; and
(3) by the deduction from (2) of such loss as should have been avoided by steps taken in mitigation.
20. The judge then carried out his own calculations and came to the conclusion that the profits in a full year's trading would have been £198,848 but that for the first year's trading profits they would have been lower and he assessed them at £168,000. He held that an appropriate multiple of profits should be applied in assessing the capital value of the lost business and that that should be 1.65. In the result he awarded (a) £168,000 for the period October 1992 to October 1993; (b) £23,000 for the six weeks between 1 October and 11 November 1993 and (c) £328,350 for the value of the business as at November 1993 being £199,000 x 1.65, total £519,350 from which he deducted the investment saved and interest saved reaching a net loss of £365,789.
Method of assessment of compensation
21. The Judge deals with the authorities from which he obtained the principles that he was to apply from pages 19 to 26 of his judgement. He recognised the overriding principle in the following words:-
"The general principle underlying the award of compensatory damages has often been cited from the speech of Lord Blackburn in Livingstone v Rawyards Coal Co. (1880) 5 App. Cas. 25 at 39: the measure is -
`that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation"
22. As already indicated the main competing arguments before him were on behalf of UYB that he should award damages by assessing the loss of profits which it was being suggested would have been lost over 25 years, and on behalf of BRB that since where a profit earning chattel was destroyed, the measure of damage, at least prima facie, is the value of the chattel taking account of its profit-earning ability, that principle should be applied to a situation in which it could be said that the leases and business had been destroyed as at 11^th November 1993. The Liesbosch was relied on in this regard.
23. It was recognised that in order to comply with the general overriding principle there might have to be some compensation assessed by reference to loss of profits for the period it would take to replace the profit-earning chattel, and it was suggested that the same principle should be adapted to the destruction of a business case. It was further argued by BRB that UYB were bound to take steps to mitigate their loss, and that the judge should find that other premises could have been found for the venture within a reasonable time scale from 11^th November 1993.
24. But before the judge it would seem that UYB did not argue that if the judge chose as the appropriate measure of compensation the value of the business as at the date of destruction ie 11^th November 1993, he should in addition award loss of profits for whatever period he chose as the period by the end of which UYB should reasonably have found another place to start the business destroyed.
25. In the Court of Appeal UYB did not challenge any of the findings of fact of the judge, but they sought to argue on the following lines. Through Mr Kim Lewison QC, they submitted that on the judge's findings, if (a) loss of profits between October 1992 and November 1993, and (b) the value of the business as at 11^th November 1993 was an appropriate way of assessing UYB's loss, and if the judge was right in saying that UYB should reasonably have found other premises from which to start their business within 18 months to two years, UYB were also entitled to receive an award assessed by reference to the loss of profits over the period of 2 years or 18 months, that being the period during which UYB would be without the business.
26. The difficulty with that argument is that if UYB had found other premises at the end of the 2 year or 18 month period, damages would have been assessed not by reference to the value of the business, but on the basis of the loss of profits over the period during which UYB had been delayed in starting their business. If there had been a delay in starting the business, but it had been started, either UYB would still have the business and it would not have been destroyed, or they would have sold the business and received its value, and all that they would be entitled to be compensated for would be the period of delay in the start up ie profits for that period. So on this basis the assessment would have been no different from that used for the period October 1992 to November 1993, save that it would certainly be arguable that no deduction should be made for start-up costs which would be incurred at the new premises in any event. But even with that adjustment the award would be in broad terms for two and a half or three years loss of profits, and not significantly different from the judge's award which was for one year (plus six weeks) October 1992 to November 1993 plus 1.65 years of profits.
27. This indeed was well recognised by the judge at page 24 of his judgement when he said :
"The problem in the present case comes if it is assumed that in November 1993 not that the club opened but it became clear that the premises were irreparably unsuitable and that the venture had to be abandoned. At that point UYB came under a duty to mitigate its on-going loss by seeking alternative premises or possibly an alternative venture in which to employ its resources. If this had been done successfully and a club opened at another venue with the same prospects in a year's time, the court would have to assess the company's loss of earnings until then. But the second venue might not be as advantageous as the arches, so that there was a continuing loss after the new club opened. The problem would then be the same as would exist if the court held that no opportunity to mitigate the on-going loss arose".
28. Once it was put to Mr Lewison that in one sense what he was seeking was damages for the delay in being able to commence UYB'S business, and that the calculation of such a loss would produce two and a half or three years loss of profits and not as his argument produced two years on top of 2.65 years, he recognised the force of the point and was inclined to limit his argument to obtaining the deduction which the judge had made for start-up costs in relation to the first year's profits.
29. What in my view this case demonstrates is that in relation to the assessment of damages each case depends on its own circumstances, and it is the overriding principle quoted above which is important. It is thus of significance that the judge's finding in relation to mitigation was simply that if UYB, or more accurately Mr Jones and Mr Kent-Morris, had tried to find other premises in which to carry forward the venture which they had hoped to pursue on BRB's premises, they would have been able to do so within a period of 18 months to two years. But it was his further finding that they did not try to do so, and that indeed they took up their interests in other business ventures which were profitable.
30. It was accordingly his view that it was not right to assume that having commenced the venture, they would proceed with it rather than dispose of the business. Furthermore, although the judge does not find that if the night-club venture had been commenced it would have been impossible for Mr Kent-Morris and Mr Jones to pursue other interests, he said this at page 25:
"There is also here a further and very real uncertainty as to the two shareholders. UYB was and is very much the alter ego of Mr Jones and Mr Kent-Morris. In late 1993 Mr Kent-Morris began his clothing business. In 1994 he sold his share in Superstaff to Mr Jones. Would the business at the arches have continued in UYB's hands or would it have been sold? Mr Kent-Morris had intended at least initially to put in considerable hours and that it was intended that one or other would always be present. There is an unreality about the business remaining in UYB's hands and earning substantial profits over a substantial period."
31. To reflect his findings the judge formed the view that if UYB received the value of the business which, on his findings, they would have built up as at the date it became clear that it could no longer be pursued, UYB would be properly compensated. He was of the view that the circumstances of the particular case were and are such that awarding the value that the business would have had provided a fair measure of the loss suffered.
32. The date he chose for his evaluation was the date when it should have been clear that all expectations for starting the venture at BRB's premises were dashed. But that date would also appear to coincide closely with the date when the persons who were UYB both went off into other ventures which were themselves profitable.
33. It seems to me that the judge was entitled to choose the method of assessment that he did. The logic of his assessment was to say 11^th November 1993 was the date when the expectations were destroyed, and when as a fact Mr Kent-Morris and Mr Jones, instead of attempting to fulfil the same expectations at different premises, decided to pursue other ones more vigorously than they otherwise could have done. To give UYB the value of those expectations as at that date together with those profits which they would have achieved by that date achieves as it seems to me, adequate and proper compensation. That it does so can in my view be tested in the following ways:
1. First if instead of choosing as the date the moment when the expectations were finally dashed, he had chosen the date when he could have expected UYB to dispose of the business, he would have had to wrestle with the possibility that Mr Kent-Morris and Mr Jones might not have started or pursued with the same vigour their other businesses at the end of 1993, and would have proceeded with the venture at BRB for a further period. It was not easy to assess what that date would be. But also to award the value at some later date would allow the profits earned in the other businesses (which on this basis would not in fact have been earned possibly at all but certainly to the same degree) to be retained, as well as the value of the business at the later date unless of course some adjustment was carried out. Such calculation and adjustment does not seem to me to be likely to reach any higher figure than that awarded by the judge.
2. If the assessment is calculated on the basis that the failure of BRB to supply the premises simply delayed the start-up of the venture, then on UYB's best case that calculation would produce a little over two years and six months, plus two years of profits without deduction for start-up costs as already indicated. But that would be on the basis that it must be assumed that UYB would have commenced the venture in November 1995. That however is not what they did. Mr Kent-Morris and Mr Jones in fact pursued other ventures during 1993 and 1994, and made profits in those ventures which they would not have made if they had been pursuing the night-club venture. Their pursuit of the other ventures would seem on the judges' findings, even though he does not quite put it this way, to have been a step that was taken to mitigate the loss. In certain passages of his judgment he suggested (in my view rightly) that UYB were bound to take such steps if they did not pursue the night-club venture. At page 24 he said "At that point UYB came under a duty to mitigate its on-going loss by seeking alternative premises or possibly an alternative venture in which to employ its resources". At page 28 he said "If it had not been possible to find alternative premises from which to operate a night-club, I do not think that UYB would have been entitled to do nothing while watching its claim rise. There was a duty to find an alternative outlet for its human and financial resources". On one view the new business ventures gave the opportunity to start creating something with a capital value and BRB's conduct had simply delayed the moment when that process could be started. On that basis it could be said that all UYB were entitled to was that which compensated them for the delay in commencing to make profits in some business venture or another ie for the period October 1992 to the end of 1993 or the beginning of 1994 when Mr Kent-Morris and Mr Jones put their efforts into the other business ventures. I appreciate that I am not drawing a distinction between UYB and the two individuals behind UYB, but the reality was that it was the two individuals who were the profit earners and the new businesses could just as easily have been carried on through UYB as by the two individuals through different companies. On this basis the sum awarded would be much less than the judge awarded.
34. I should not in anyway be understood to be saying that the above "cross checks" are methods of calculation which the Judge should have used. It simply seems to me that they demonstrate that the method he did use did fairly compensate UYB for the destruction of their expectations in November 1993, and that there is no legitimate basis on which UYB can complain as to the quantum of damages awarded by the Judge.
35. I would dismiss this aspect of the appeal.
Interest
36. The only point pursued by Mr Lewison on the appeal was that the judge was wrong to rule that albeit interest should run from 11^th November 1993, there should be deducted from the interest calculation the period from service of the writ on 15 December 1995 to 8^th December 1998 the date of service of Mr Pomeroy's report (the report which quantified the claimant's claim for the first time at over £12 million).
37. Mr Lewison recognised that in assessing the period of interest the judge was exercising a discretion, and that he would have to demonstrate that the judge had misdirected himself or that his conclusion was "outside the generous ambit within which a reasonable disagreement is possible" see the House of Lords decision in G v G [1985] 1 WLR 647 at 651H.
38. The judge's reasons for disallowing the period of interest can be summarised as follows:-
1. The original pleaded claim was for loss of profits at the rate of £62,500 per annum which on the approach he had taken to damages would have lead to an award of only £15,000. The respondents had paid into court £40,000 on 19th March 1996, a further £65,463.22 on 7^th August 1998, and £19,536.78 on 19^th February 1999 total £125,000;
2. The "true" claim did not emerge until December 1998 (on delivery of the Pomeroy report);
3. It is essential that a defendant knows the "value" or "magnitude" of the claim he is facing at the earliest moment;
4. It seemed probable that Mr Pomeroy was only provided with the figures on which to make his calculations in the latter part of 1998, and there was no reason why Mr Jones and Mr Kent-Morris should not have done the calculations which they eventually made in 1998, in 1995 or earlier.
39. Mr Lewison really concentrated his attack on one aspect. Mr Lewison submitted that the judge misdirected himself by refusing to look at and have regard to an initial advice from UYB's accountants disclosed on 25^th October 1996 "on an entirely without prejudice basis". No objection was taken by Mr Gaunt for BRB to us looking at that draft, and indeed it is summarised in BRB's skeleton at paragraph 2.4 in the following way:-
"It stated that the Claimants' loss "can be arrived at in two ways":
value of the proposed business if sold as a going concern after a short period of trading;
loss of the on-going profits in the proposed business.
It expressed the view that on the first basis and assuming a 25 year lease, David Morgan's valuation of £6000,000 was reasonable; on the second basis, it spoke to a figure of £1.958m., calculated by multiplying an estimated net operating profit ("NOP") of £112,500 by 17.41, being the 25 year term discounted at a rate of 3%".
40. It seems that during the trial Mr Gaunt made a not very strenuous attempt to put the draft report to Mr Morgan in order to demonstrate the change that had taken place between the draft and the report of Mr Pomeroy and a claim to privilege was made. That claim, so we were told, was a claim to legal professional privilege, but in any event the document did not go into evidence.
41. Before us Mr Lewison argued that it should have been permissible for UYB to refer to that draft report despite its without prejudice nature, (waiving presumably the legal professional privilege previously claimed), once BRB were asserting that BRB did not know the size of UYB'S claim until 1998. It was submitted the judge had misdirected himself in not looking at the same.
42. Mr Gaunt's response was to argue that the document was a draft and delivered on an entirely without prejudice basis and should not have been referred to. He submitted that the draft figures were so different from what was ultimately disclosed in the Pomeroy report that production of the draft did not demonstrate that BRB knew of the "magnitude" of UYB's claim in 1996. Furthermore he submitted that in any event looking at it should and would not have made any difference to the way the judge exercised his discretion because the 1998 Pomeroy figures were so different. He also pointed out that when the judge came to deal with costs and the question whether some of the pre-trial costs of UYB should be disallowed, he did not disallow the same because as the judge said "I have taken account of that in the award of interest and that is sufficient". So, he submitted, this was an exercise of discretion in the round.
43. I do not think that the question whether the "without prejudice" draft report should be admitted at the stage when interest was being considered is easy to answer or as easy to answer as Mr Lewison would suggest. No authorities were cited to us and my researches, aided by Rachel Chapman, a Judicial Assistant, can find no case absolutely in point. The well known authority on "without prejudice" documents Rush v Tompkins v GLC [1989] AC 1280 HL discusses the principles lying behind the without prejudice rule, and stresses the importance of the rule being observed so as to enable parties to discuss matters freely in settlement negotiations. The House of Lords there approved Cutts v Head [1984] CH 290 which recognised that unless a without prejudice letter was marked "without prejudice save as to costs" it was not admissible on the costs hearing after the trial. Of course there are exceptions to the admissibility of matters covered by the without prejudice umbrella eg where improper threats are made in such negotiations. But in Forster v Friedland [1992] CA Transcript 1052 Hoffmann LJ said:-
"There are clear cases of improper threats, but the value of the without prejudice rule would be seriously impaired if its protection could be removed [for] anything less than unambiguous impropriety."
44. Mr Lewison submitted, however, that in a situation where BRB are asserting that they did not know the size of the claim, when in without prejudice negotiations they had been told of the size, the public policy which supports the inadmissibility of such negotiations should give way to the public policy of one party not being able in effect to assert a fact that is not true. That at first sight may seem a powerful argument but the difficulty is that it may often be possible to dress up an argument that something said in without prejudice negotiations could demonstrate that what is being said at a trial is untrue, and thus caution must be exercised. In any event BRB were not being told the "size of the claim" that was ultimately to be made. The draft was a draft, and the figures were quite different from that which ultimately was disclosed by the Pomeroy report. The magnitude of the claim being made at the trial was not known until 1998, and the maximum that could be said was that in some without prejudice negotiations a much higher figure was being claimed than the original statement of claim disclosed.
45. I am thus not in fact persuaded that the judge was wrong not to have regard to the without prejudice report. But, in any event, even with knowledge of that report the criticism made by the judge was still fully justified - the calculations produced as he surmised in 1998 could have been produced in 1995 or earlier. That report demonstrated that they had not been produced by October 1996 even though they should have been. I do not myself think that the production of that without prejudice report would have affected the view of the judge.
46. The fact is that the judge after a lengthy trial awarded what on one view would seem substantial damages to UYB, but had formed a very poor view of the way in which UYB had come to make a vastly inflated claim at a very late stage, and indeed had attempted to support that claim in evidence which he rejected. He was in my view entitled to exercise his discretion in the way he did. In a careful judgment which covered interest and costs his reasoning cannot in my view be criticised. I would dismiss the appeal on this aspect also.
Lord Justice Jonathan Parker:
47. I agree.
Lord Justice Kennedy:
48. I also agree.
Order: Appeal dismissed with costs.
(Order does not form part of approved judgment.)