England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM SOUTHAMPTON COUNTY COURT
MR RECORDER GIBNEY

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th February 2011

Sir Anthony May:

1. Between June and December 2006 the defendants, at least in one of the proceedings, Woodlands Oaks Limited, carried out building works for Mr and Mrs Conwell at their property at Rudley Home, Bunns Lane, Hambledon, Waterlooville, Hampshire. The parties had an oral contract for these works of the simplest kind. The Conwells were to pay the costs of the works to the defendants plus 5%.
2. When the works were purportedly complete the parties got into dispute after Woodlands had delivered their bill, about first of all the cost and, secondly, defects. These disputes were eventually determined before Mr Recorder Gibney in the Southampton County Court. He gave an eventual judgment on 10 March 2010 from which each party appeals with leave to this court.
3. The Recorder determined that the proper cost of the works was £274,554.77 excluding value added tax. He reached this amount by adding, quixotically, 1%, not 5%, to the cost which he had with the surveyors determined. The Conwells had paid £145,000 on account, so the Recorder gave judgment for Woodlands Oak for £129,544.77 plus VAT on their claim.
4. On the Conwells' counterclaim for defects the Recorder originally determined that they should recover £29,345 plus VAT for under-floor heating defects and £39,350 plus VAT for roof defects and £1,100 plus VAT to replace a lintel, making a total of £69,795 plus VAT,.
5. He originally, in a distributed judgment, overlooked a further sum of £13,000, which did not attract VAT, for alternative accommodation which the Conwells were going to have to hire while the remedial works were done, but he included that amount in his eventual order and judgment after the omission had been drawn to his attention by means of a draft notice of appeal. The balance owing to Woodlands Oak was thus reduced to £65,734.11.
6. The Conwells had in addition claimed for the cost of rectifying snagging items. They had not given Woodlands Oak the opportunity to rectify these defects which, so the Recorder found, Woodlands could have put right by subcontractors at no cost to themselves and, more importantly, no cost to Mr and Mrs Conwell. The Recorder held that the Conwells had failed to mitigate their loss and awarded them nothing for this. Each party quarrels with various aspects of these decisions.
7. The Conwells' first ground of appeal is that the Recorder was wrong to indicate a provisional decision part way through the trial on the 23 October 2009 to the effect that Mrs Conwell is a party to the contract as well as her husband and that the contract did not, as the Conwells had contended, have a term limiting the amount payable to Woodlands Oak to £200,000 inclusive of VAT.
8. He expressed these variously as firm conclusions or as indications. He also at the same time indicated that he was satisfied that the basis of the contract was cost plus 5%.
9. It is contended that what happened on 23 October was a procedural error, which I think it probably was. It was certainly premature and ill advised to indicate these decisions, provisional or otherwise, before the case had concluded and the parties' submissions had been made. The Recorder had not then heard full submission and there might have been, as there in the event was not, more relevant evidence.
10. As to the finding that Mrs Conwell was a party to the contract, the Recorder subsequently received further written and oral submissions on this point, but there was no further evidence on the topic. He reverted to the matter in his eventual written judgment and held that he was satisfied that Mr Conwell had made the agreement as agent for himself and his wife. Mr Kennedy, for Woodlands, says that the evidence in this respect was overwhelming.
11. The first ground of appeal, as I say, is that not only was there a procedural error on 23 October 2009 but the error was such that it vitiated the Recorder's subsequent decisions on the subject. The suggestion is that it induced an appearance of bias and that the appearance of bias was such that this court ought to set aside not the whole judgment, as might be expected, but those parts to which the discussion on 23 October related.
12. The transcript of what happened on 23 October indicates this. The Recorder said this:

"I certainly think it would shorten matters if I identified one or two matters about which I can express firm views irrespective of any other evidence that is forthcoming."

And the three matters were the contracting parties, whether there was a contractual cap of £200,000 and whether the contract was on a costs plus 5% basis. He then said:

"I am content that those three findings feature for the purpose of your closing submissions but I indicate now that what constitutes costs plus may yet require further elucidation by both of you."

He a little later went on to say this:

"Which is why I had some reservations about the third point. Obviously I have expressed that in an ex tempore way. If one or either of you through your instructing solicitors care to reduce that as the preliminary indications given, that can feature as part of your skeleton arguments and obviously arguments addressed around those with that final caveat that I indicated to you. I apprehend that it may or may not be necessary, but I suspect it will be, that there will be argument as to what constitutes costs plus in the context of this case."

13. When it came to his judgment the Recorder said in paragraph 9 that he made a finding of fact as to who was the contracting parties initially on the preliminary basis on 23 October at the end of the fifth day of the trial, "having heard what I understood to be all the relevant evidence on the issue. I did so", he said, "without affording either counsel the opportunity to address me on the propriety of so doing. I subsequently received written submissions on the point from both counsel and heard oral submissions at the resumed hearing on 16 November 2009". He had his attention drawn to and had considered a number of cases, and then he said:

"I do not consider that I gave an ex tempore judgment on this issue on 23 October 2009 but rather I made preliminary findings of fact I do of course recognise [and then he quotes from a case] As a general rule tribunals should be careful to ensure that the parties have an opportunity to make submissions on any matter that affect the outcome of the case."

14. Mr Darton submits that there was a procedural irregularity which gave an appearance of bias which affected the three decisions for which indications were given on 23 October. The evidence, he accepts, was complete apart from expert evidence and the expert evidence did not in the main bear on this; but he accepts that on 11 November of that year the Recorder invited and received further submissions and that he received submissions not only in writing but also orally, and there was a further hearing in which written submissions were elaborated orally and he suggests, however, that the firm findings indicated by the Recorder on 23 October were such as to leave no room for appearing not to have a closed mind.
15. He suggests that in the eyes of a fair minded and informed observer there would appear to have been a sufficiently firm decision for the Recorder to find it difficult to reverse it once he had heard written and oral submissions.
16. In my judgment there is no proper basis for setting aside these parts of the Recorder's conclusion because of what he said on 23 October. Certainly he expressed what he has said as a firm view, but I do not read the passage as a whole as shutting out submissions on the issues. He uses the expression "preliminary indications" and he did in fact entertain both written and oral submissions and gave a reasoned judgment in his written judgment. There was not in my judgment, as a result, an appearance of bias, and in my view the first ground of appeal should fail.
17. As to the case that there was an agreed price cap of £200,000, the Recorder rehearsed the evidence in some detail in paragraphs 17 to 21 of his judgment. He then said at paragraph 22, under the heading "My Finding":

"I have no hesitation in preferring the evidence of Messrs Grant and Warren on this issue."

And he went on to indicate why in quite some detail in paragraph 22, which I will not read out in detail. He said that Mr Stent he found to be "quite unreliable and inconsistent and Mr Clark remarkably vague" and those were, in the main, the contending witnesses. This was, in my view, an unimpeachable evaluation of oral evidence which speaks for itself; there is no basis for this court disturbing it. The fact that the Recorder anticipated this finding before the conclusion of the trial and for the reasons that I have given provides no basis for this court to reach a different conclusion.

18. The Conwells' second ground of appeal is that the Recorder was wrong not to award them the agreed costs of rectifying the snagging works because they had failed to notify Woodlands Oak to give them the opportunity of rectifying them themselves. The Recorder found in paragraph 42(ii) that the Conwells were aware of the snagging items but did not notify Woodlands Oak; that Woodlands Oak had the resources to rectify them but were not given the opportunity, and that the Conwells failed to mitigate their losses. They could not recover more than it would have cost Woodlands Oak, which was nothing, because they would have got their subcontractor to do the work at no costs to them. This series of findings is said to have been reached by misapplication of an authority called Pearce & High Ltd v Baxter [1999] 66 Con LR 110 because the parties' oral contract contained no term, as the contract in Pearce & High had, entitling Woodlands to be given notice or to return to site to remedy defects, some of which Woodlands Oak disputed.
19. It is necessary to look in just a little detail at what the Recorder said on this subject in order to address the submission that he proceeded under a mistake of law. In paragraph 41 he set out in nine numbered subparagraphs the law as he understood it. Those subparagraphs included that an employer is under no obligation to allow a contractor to return to repair defects once building works are complete, although the position may be otherwise if the contractor makes a reasonable offer to complete works. Then in the next subparagraph:

"(vii) The Defendants are under a duty to take all reasonable steps to mitigate their losses and if they fail to do so their damages will be reduced accordingly…

(viii) The burden of proof is on the Claimant to show that the Defendants could reasonably have mitigated their loss and what the loss would have been had they done so."

And then this final subparagraph:

"Where the Employer fails to give the contractor an opportunity to rectify defects in the work, that amounts to a failure to mitigate the losses."

And the case of Maersk Oil UK Ltd v Dresser-Rand (UK) [2007] EWHC 752 TCC is referred to for that last proposition.

20. I am in no doubt that the last proposition misstates the law. What it should have said was "where the employer fails to give the contractor an opportunity to rectify defects in the work that may amount to a failure to mitigate the losses".
21. The Recorder then proceeded to deal with the under-floor heating and, in a separate subparagraph, the works to the roof which he found were defects and for which he awarded damages, and in relation to the roof details he said:

"The Defendants do intend to repair their roof. Although anxious to ensure that the job was done within their means I am satisfied that they would not want to leave the family home with an unsatisfactory roof. Although I consider that Mr Whitehorn's offer to repair was genuine I do not consider that the Defendants acted unreasonably in refusing it. Past experience of Mr Whitehorn's roofers and no enforceable guarantee justifies an insistence on third party contractors."

22. It is important to stress that finding because it indicates that the Recorder was well aware that the mere fact that an employer does not give the contractor an opportunity to rectify defects in the works will not always amount to a failure to mitigate the losses. There may well be circumstances in which it is entirely reasonable not to give the contractor that opportunity, and the Recorder so found so far as the roofing defects were concerned.
23. When, however, it came to the snagging items, he said this in paragraph 42(iv):

"As regards the snagging and other patent items identified on the Scott Schedule I find on the evidence that:

a) the Defendants were aware of the 'snagging' and other patent items (because they were in occupation of the house and the claimant was not);

b) the Defendants failed to notify the Claimant of these items;

c) the Claimant had the resources to remedy the defects;

d) the Claimant was not given the opportunity to return to site to rectify these items;

e) the Claimant was denied the opportunity to request his own work as sub-contractors to return to the site to rectify defects in their own works;

f) therefore, the Defendants failed to mitigate their losses in respect of these items (ie those items which were reasonably apparent to the Defendants in the occupation of the house)."

That, so far as it goes, is a straightforward application of the law except in one respect, which I have indicated and which the Recorder correctly set out, about mitigation of loss, and he is there making findings of fact, the effect of which was that he held that the defendants had failed to mitigate their losses and that there would have been no cost to them if they had given the claimant the opportunity to rectify the defects. He then went on to say that "In the circumstances, the Defendants are not entitled to recover more than the amount it would have cost for the Claimant to rectify the defects", and he refers to Pearce and High Limited v Baxter [1999] Building Law Reports, page 101.

24. This is said to indicate an error of law; an error of law to the effect that the Recorder was wrongly translating a contract where there was an express defects liability clause, as there was in Pearce and High, to a contract where there was no such express clause, and that he was making the decision he did on a misunderstanding as to the law. In my judgment that is not a sustainable submission. The sentence which I have read in subparagraph 5 of paragraph 42 is not saying "I am applying Pearce and High to the facts of this case"; it is simply indicating that the consequences of not giving the contractor an opportunity to rectify defects, when for one reason or another he should have been given that opportunity, would be that the defendants are not entitled to recover more than the amount it would have cost the claimant to rectify the defects. That is a proposition which applies just as much to a contract with an express defects liability clause as it does to considerations, which I am satisfied the Recorder was undertaking, of whether or not the Conwells had failed to mitigate their loss.
25. Accordingly, in my judgment the Recorder's finding here should stand. It should stand because he materially applied the correct law as to mitigation of loss to the facts of this case and made findings of fact which resulted in the recovery of no loss because the defendants failed to mitigate the loss, and accordingly for those reasons, in my judgment, the Conwells second ground of appeal should fail.
26. Woodlands Oak have three grounds of appeal. The first ground is that the Recorder was wrong to award them costs plus 1% when he had correctly held that the contract was for costs plus 5%. There is no dispute but that the contract was a contract for costs plus 5%; each party had pleaded to that effect. The Recorder said, in paragraph 33 of his judgment, that "this was a costs plus contract with a percentage mark up for profit head office overheads, secretarial input, et cetera". He took account of evidence that there was no intention to make a profit and very little evidence of significant office costs or input. He therefore considered that a percentage mark up of 1% properly reflected those costs. But, as I say, he had already found at paragraph 22 that the agreement was for costs plus 5%; neither party had argued otherwise. Both parties had pleaded that the agreement was for costs plus 5%.
27. The Recorder's starting point in paragraph 31 of his judgment was Mr Archer's analysis, which the Recorder had said in his paragraph 27 included 5% and there amounted to £293,757.66.
28. In paragraph 31 the Recorder reduced the management and site supervision costs in that valuation from £2,875 per month to £1,500 per month. The Recorder's calculation in his paragraph 32, which reached a total of £271,836.41, was Mr Archer's figures adjusted for the reduction in his previous paragraph, but that did not include Mr Archer's 5%. Accordingly, the starting figure in paragraph 32 of the judgment was a calculation of costs without the addition of the contractual 5%. There is no doubt at all that the first two of the three items that went to make up the £271,836 were costs of the works. They were in Mr Archer's calculation and the Recorder records that they had been accepted or were not disputed by Mr Dant. There was some question, certainly in submission before us whether the amount of £8,653.75 was for management and site supervision costs, was for costs properly so understood, and it is certainly correct that on page 154 (if nowhere else) of volume 1 of the documents Mr Archer has calculated his version of management and site supervision costs which, it will be remembered, the Recorder reduced by making estimates of the costs of five people being involved in management and site supervision costs. But I am in no doubt that the Recorder was there determining what in his judgment were proper amounts to be included as costs within the terms of this contract because he said at the outset of paragraph 32 "this in my judgment reduces the costs element reasonably due under the contract to the following", and he then set out those three amounts.
29. It is in my view quite evident on the face of the judgment that the Recorder was not applying the terms of the contract that he had found existed when he added 1% and not 5% in paragraph 33 of his judgment. Mr Darton seeks to rescue the 1% by submitting that the Recorder reached a tenable result by determining what he regarded as approximately the correct calculation of costs plus 5% and reducing the 5% because the costs elements that he had chosen, or some of them, were rather high. The evidence certainly was that there was not intended to have been any profit, and Mr Darton makes submissions to us with reference to the opening words of paragraph 30 of the judgment, where the Recorder said, in view of Mr Dant's evidence as to the value of the claim, "I do not address the balance for the defendant's earlier written submissions on the incurred costs save one to recognise and accept that costs must be fairly attributable to the works". From this Mr Darton seeks to glean a rationalisation of what the Recorder did by saying that he was making a reduction in the total amount so as to reach an eventual amount of £274,554.77 in order to accommodate certain elements of submission and doubt about whether elements were or were not properly to be regarded as costs in a way that he had not systematically done during the course of his judgment.
30. I do not accept these submissions, which I find entirely unpersuasive. It seems to me that the face of the Recorder's judgment is entirely clear. He is accepting, subject to one reduction, Mr Archer's calculations; he is finding explicitly that management and site supervision costs, which he had reduced to £8,653.75, were part of the costs element reasonably due under the contract and he has no sustainable reason, in my judgment, for not adding the contractual 5% to the resulting costs.
31. Accordingly, and for these reasons, in my judgment, the Woodlands first ground of appeal succeeds.
32. Woodlands second ground of appeal is that the Recorder was wrong to amend his original draft judgment to add the £13,000 for accommodation costs. He had recorded in paragraph 34(iv) that £13,000 was an agreed amount between experts for alternative accommodation assuming that repairs took six months. It is said that there is no finding that Woodlands Oak were liable for this, but we are told, and Mr Kennedy accepts, that the experts had in fact agreed that alternative accommodation was going to be required when the remedial works were carried out. They had not only agreed the amount, they had agreed that the sum should be payable.
33. It is said that this was not the Recorder correcting an error but having second thoughts. The Conwells had thought they needed to appeal the original omission of this amount, and it is said that the Recorder had no power to amend his decision. In my judgment, this is a thoroughly unpersuasive point where Woodlands Oak are seeking to take advantage of a windfall error. The Recorder was awarding damages for substantial defects, roof and under-floor heating included, which would obviously require the Conwells to vacate the premises and, as we are told, the surveyors had so agreed. The Recorder clearly intended to hold that they were entitled to the costs of alternative accommodation or, if he did not, he should have done. The £13,000 should be included in their damages and lawyers' dialectic should not secure a different result, especially when the experts had agreed not only the amount but the fact that alternative accommodation was necessary.
34. In my judgment, this ground of appeal should fail.
35. The third ground of Woodlands appeal is that the Recorder wrong to award interest on the counterclaim because at the date of judgment the successful amounts of the counterclaim had not been incurred and were up-to-date costs. We have been referred, and it is sufficient to refer, to a passage in the judgment of Wilson LJ in a case called Aerospace Publishing Limited v Thames Water Utilities  [2007] EWCA Civ 3, where we have the following two paragraphs, 93 and 94:

"In my view there is a fallacy at the heart of Mr Rainey's argument.  It jumps from the true proposition that no remedial costs have yet been incurred to the false proposition that no loss has yet been incurred.  The loss was incurred on 3 July 2001 and the fact that in the end the judge – correctly so we are holding – favoured a computation of most of the loss by reference to the cost of a restoration not yet conducted does not alter the date of the loss.  Informing therefore the judge's exercise of discretion to award interest under s. 35A of the Act of 1981 should have been "the basic principle … that interest will be awarded from the date of loss". So said Robert Goff J. in a passage undisturbed on appeal in BP Exploration Co (Libya) Ltd v. Hunt (No. 2) 1 All ER 925 at 975j; and he proceeded to add that "the mere fact that it is impossible for the defendant to quantify the sum due until judgment has been given will not generally preclude such an award.

So far so good for the proposition advanced that the interest on the counterclaim should be awarded from the date of completion, that is to say the date of the loss the Recorder in fact awarded it. Wilson LJ went on to say:

"The basic principle is, of course, not immutable.  Had the evidence enabled him to do so, Mr Rainey might have argued that the costs of restoration included in the award were calculated by reference to figures which obtained in 2005 and thus that an award of interest would duplicate an allowance already built into it.  But he never so argued.  On the contrary it was Mr Young who, as part of his application for an award of interest, argued – apparently without challenge – that such costs were calculated by reference to figures which obtained in 2001 and which had indeed been finally presented to Thames Water as early as 2003."

36. So that paragraph gives Mr Kennedy the opportunity of arguing as he does that interest should not be awarded on the counterclaim for a combination of two reasons. First, because the remedial works had not been carried out at the date of the judgement: that was the part of the submission which would fail under paragraph 93 of Wilson LJ's judgment; but secondly and also that the remedial costs themselves were calculated at contemporary rates and not at the rates prevailing nearly three years earlier when the works were contemplated. On the basis of Wilson LJ's paragraph 94 there is argument to that effect, but that however, in my judgment, would produce an unjust result.
37. The claimant's themselves were awarded interest on the whole of their claim as determined by the Recorder and not on the balance of their claim after setting off the counter claim, and the result would be unjust because it would leave awards of interest to the claimants on a full amount which, once the counterclaim was set off, they were not entitled to receive. The award of interest is discretionary, and in my discretionary judgment the Recorder's award of interest should stand. Strictly, I think, an intellectually more satisfactory result would have been if the claim was set off against the counterclaim with reduced interest being awarded on the balance after set off, but the recorder did not do that, and we only have before us an appeal by the claimants. There are rough edges I confess to this discretionary result, but I think that it is what justice requires in the circumstances of this case.
38. Accordingly, in my judgment Woodlands Oak's third ground of appeal should fail.
39. The result of that is that the only ground of appeal that succeeds is Woodlands Oak's first ground of appeal, that relating to the addition of the 5%. In my judgment, the other four grounds of appeal on each side should fail.

Lord Justice Richards:

40. I agree.

Lord Justice Hughes:

41. I also agree.

Order: Appeal allowed in part