England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

		Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ
		Date: 22/06/2011

HH Judge Pelling QC: :

Introduction

1. This is an application by the Defendants for summary judgment dismissing the claims that have been advanced in Paragraphs 28.1 and 29.1 of the Amended Particulars of Claim or alternatively for an Order that those paragraphs be struck out.

Background

2. The claim is for damages for breach of a contract of retainer by which it is alleged that the Claimant and the other directors of Club Travel 2000 Group Limited ("CTG") retained the Defendants to assist in raising investment capital in order to enable a subsidiary of CTG to satisfy the requirements of the Civil Aviation Authority in connection with the obtaining of an Air Operator's Licence. The detailed circumstances which led to this need are summarised in Paragraphs 7 to 13 of my judgment in Club Travel 2000 Holdings Limited v. Murfin (2008) 6^th November ("the Warranty Claim") .
3. On 30^th April 2004, an agreement was entered into, known in these proceedings and the Warranty Claim as the "SPA". Under that agreement, the Claimant and others sold their respective shares in CTG to a purchaser vehicle which became Club Travel 2000 Holdings Limited ("Holdings") and which was controlled by a Mr Warr. The consideration for the shares was the issue by Holdings to the Claimant of what were called the Series A Loan Notes. The loan notes had a nominal value of £2 million but could be redeemed only if certain profit thresholds were achieved in the 2004 and 2005 accounting years. In fact those thresholds were never crossed and it is common ground between the parties before me that in consequence no sums ever became payable to the Claimant under the Series A Loan Notes.
4. The SPA contained a warranty by the Claimant by which he warranted to Holdings that the losses of the target company in the period 1^st January to 30^th April 2004 did not exceed £1.1 million. The losses made by the target exceeded that figure and the Warranty Claim was commenced against the claimant alleging breach of warranty amongst other allegations that it is not necessary to dwell upon further. In the Warranty Claim I found that the losses during the relevant period had been £2,034,411 and thus exceeded the warranted figure by £934,411.
5. Clause 2.6 of the SPA provided that:

"The whole or any amount due to the Purchaser in respect of a Settled Claim shall be set off by the Purchaser against the Series A Loan Notes whether due for payment or not in the order of redemption of the Series A Loan Notes. The Purchaser shall have a right of recovery against the Warrantor for settled Claims but only after all the Series A Loan Notes have all been repaid or cancelled following set off in accordance with this Clause 2.6. …"

"Settled claim" was defined as meaning a claim in respect of a breach of warranty which had either been agreed as fully and finally settled between the parties or one that had been determined by judgment of a court and in respect of which there was no appeal available. Whilst there was an appeal against a costs order which was compromised without a hearing there was no appeal as to the substance of my conclusions. It was common ground by the time of the trial of the Warranty Claim before me that the Series A Loan Notes would never become redeemable. I concluded that the Claimant was nevertheless entitled to set off the sums otherwise due from him to Holdings for breach of warranty (£934,411) against the nominal value of the Loan Notes. My reasoning for this conclusion is set out at Paragraphs 38 to 47 of my judgment in the Warranty Claim.

6. The significance of this for present purposes is this – had the Series A Loan Notes been redeemable, then the effect of my judgment is that the Claimant would have had to give credit to Holdings of up to £934,411 against the sums otherwise due under the loan notes and would have suffered a loss in that sum. However, since the Loan Notes were not redeemable the effect was that although there had been a breach of warranty there was no sum that ever became payable to Holdings because the whole of the sum otherwise due for breach of warranty fell to be set off against the nominal value of the otherwise unredeemable loan notes.
7. In these proceedings the Claimant alleges that he gave the warranty that I have referred to as a result of negligent advice from the Defendants. It is to be assumed for present purposes that this is so. Aside from a claim for irrecoverable costs (in respect of which there is no challenge on this application) the Claimant claims by way of damages the sum of £934,411 which is pleaded in Paragraph 28.1 of the Amended Particulars of Claim in the following terms:

"… the claimant has suffered loss and damage namely … his liability to Holdings in respect of his breach of the Losses Warranty found … to be £934,411 …"

The Parties' Submissions

8. Although the Defendants' case has been put in a number of different ways their essential point is that the Claimant has not suffered any loss or damage in the alleged sum even assuming all allegations made by the Claimant are resolved in his favour. Whilst it is true to say that there is a principle that damages ought to be assessed at the date of breach, that is not the invariable rule and it is a rule that will be departed from where as here the justice of the case requires it. Even if that is wrong, it is submitted that the Court would nevertheless be obliged to take account of matters after the date of breach when arriving at the actual loss suffered. Either way, it is submitted, no loss in the sum claimed has been suffered and the contrary is not sensibly or realistically arguable. On this analysis issues concerning remoteness do not arise because no relevant loss has been suffered and for similar reasons the principles concerning mitigation of loss have no application.
9. The Claimant's case is that "C's loss occurred when, in reliance upon D's negligent advice, he gave the Losses Warranty …" and at that time, as is common ground, the parties could not know whether the Series A Loan Notes would become redeemable or not. The set off that occurred is res inter alios acta and/or is extraneous and irrelevant in law and in the result on the factual assumption made for the purposes of this application the Claimant would be entitled to recover the sum claimed as damages for breach of contract or negligence.

Discussion

10. It will be necessary to consider at least some of the authorities referred to by the parties in due course. However, it is convenient to start by considering the issue free of the authorities that the parties have referred me to. This is a claim for damages for advice which it is to be assumed for present purposes was given negligently and which caused the Claimant to give the Losses Warranty when otherwise he would not have done. In those circumstances the Claimant is entitled on conventional reasoning to recover the sum of money that would as nearly as possible put him in the same position he would have been in had the actionable wrong not occurred.
11. It is not alleged that the Claimant would have entered into the SPA on terms that were different from those that in fact applied other than that he would not have given the warranty. It is to be assumed for present purposes that Holdings would have been willing to contract on that basis. Assuming that to be so, the only consideration that he would have received for his shares would have been the Series A Loan Notes. He would thus have received nothing for his shares in the events that have happened irrespective of whether he had given the warranty or breached it. Whilst it was uncertain what the Loan Notes were worth on 30^th April 2004, that uncertainty was not in any way affected by either the giving of the warranty or its breach. The consequence of the Claimant being correct in relation to the issue I am now considering is that he will receive £934,411 that he would not have received even if he had not given the Losses Warranty.. This would be a surprising outcome. I now turn to the authorities.
12. It is common ground that although damages are generally assessed at the date of breach, that is only so unless justice requires that some other date be selected – see Paragraph 24 of Mr Sephton's written submissions, relying on Smith New Court Securities Limited v. Scrimgeour Vickers (Asset Management) Limited [1997] AC 254 per Lord Browne-Wilkinson at 265 and Paragraph 52 of Mr Allen's submissions citing the well known case of County Personnel v. Alan R Pulver & Co [1987] 1 WLR 916.
13. Although Mr Sephton says that justice requires that damages in this case should be assessed as at the date of the breach and without reference to anything that happened afterwards, it is not immediately clear why that should be so since the only effect of adopting such a course would be to give to the Claimant a windfall benefit. A similar situation arose in Kennedy v. Van Emden [1996] PNLR 409. There the Claimant purchased a lease which could not be resold at a premium as the result of negligence by the Defendant solicitor. Between purchase and trial the law changed so that the lease could be sold at a premium. The Claim for damages based on overpayment was dismissed at first instance and that conclusion was upheld by the Court of Appeal. In reaching that conclusion Nourse LJ observed that "… damages are assessed in the real world. Compensation is a reward for real not hypothetical loss. It is not to be made an occasion for recovery in respect of a loss which might have been, but has not been, suffered.". As Ward LJ said, after noting the general principle to be as I have summarised it in paragraph 8 above, "… the justification, therefore, for a departure from the general rule seems to be the dictates of fairness and justice as much to defendant as to plaintiff". Schiemann LJ concluded that "… the task of the judge on the date of judgment was to award to each plaintiff that sum of money which would on that date put him as near as a money award could do so in the position he would have been in on that date had their been no negligence on the part of the solicitor.".
14. Notwithstanding these statements of principle, Mr Sephton maintains that direct loss was suffered on 30^th April 2004 and that damages should be assessed by reference to the loss as at that date which he maintains was £934,411. I do not agree that this is in any sense a correct approach. First it ignores the scheme of the SPA. In summary the scheme of the SPA is to cap liability for breach of warranty and to require that any liability for breach of warranty be set off against the liability of Holdings under the Loan Notes irrespective of whether in fact Holdings ever become liable thereunder. The effect of the scheme is that no loss is suffered unless and until a point is arrived at when a sum would be payable under the loan notes but is not because it is set off against sums that have become due in respect of a breach of warranty claim or a sum becomes due for breach of warranty that exceeds the sums actually due under the loan notes. The scheme I have referred to is achieved by providing that (a) no more than the sum due under the Loan Notes would be recoverable as damages for breach of warranty (Sched. 8, Para. 1.1), (b) no sum was payable in damages save by reduction or deemed reduction of the deferred consideration (that is the sum due under the Loan Notes) unless that was no longer possible because for example sums due under the loan notes had been paid out (Sched. 8, Para.10.1), (c) any sum due in respect of a Settled Claim as defined was to be set off against the loan notes whether due for payment or not (Clause 2.6) and (d) no right of recovery could arise in respect of even a Settled Claim unless all the loan notes had been repaid or cancelled (Clause 2.6). Thus in relation to any Settled Claim as defined, a true loss is suffered only (a) if and when a sum became due and payable under the loan notes after a claim had become a Settled Claim or (b) a Settled Claim became due after the loan notes had otherwise been redeemed or cancelled. Unless and until that happened no loss can be or is suffered.
15. If this analysis is correct then on the facts of this case no loss was ever suffered because there was never a time at which a sum became due to the Claimant under the loan notes which was not paid because it was set off against the sum due from him for breach of warranty. If this analysis is correct it is a complete answer to Mr Sephton's reliance on Burdis v. Livsey [2002] EWCA Civ 510 [2003] QB 36. I say that because the critical distinction between that case and this is the point identified in Paragraphs 84-85 of the judgment – when a vehicle suffers physical damage the owner suffers an immediate loss representing a diminution in value of the vehicle. The compensation the claimant in such a case is entitled to is the diminution to the value of the vehicle that results. Whether the vehicle is repaired or not is wholly immaterial. However on the analysis set out above, no loss at all occurs unless and until a sum otherwise due under the loan notes is not paid because it has been set off (or withheld under clause 2.9 pending determination of a notified warranty claim) and thus the approach identified in Burdis is not engaged in a claim such as this.
16. Even if this analysis is wrong and the true position is that a loss is suffered on the date when the alleged breach occurred albeit one that is contingent or prospective, that is no reason to ignore the events that occurred between then and the notional trial of a claim such as that I am now concerned with. If, notionally, a trial had taken place on the date of the breach a court would have had to assess damages by making a judgment as to possible future events. However, this case, like Kennedy, is devoid of such uncertainties. As Schiemann LJ said in that case "… there is no advantage in the court, sitting at a time when all the facts are known, putting itself notionally into the position of ignorance it would have been in had it been assessing damages on the day after the wrong was inflicted. This would be to add pointless and avoidable uncertainties. …". As things have turned out the Claimant is in exactly the position he would have been in but for the allegedly poor advice and, indeed, was in such a position before the commencement of these proceedings. Thus, even if the view is taken that a loss was suffered at the instant of breach, the court must apply what is referred to in some of the cases as the Bwllfa principle (see Bwllfa & Merthyr Dare Steam Collieries (1891) Limited v. Pontypridd Water Works [1903] AC 426) and admit evidence of what has happened between breach and trial. This approach eliminates what would otherwise be obvious over compensation. Again Burdis v. Livsey (ante) is no answer to this point. In that case Miss Burdis recovered damages because it was not a condition precedent to the recovery of compensation for that loss that the car was repaired and thus what happened after the accident was in law irrelevant. Her claim was for damages for diminution in value and the question whether her car was repaired and if so by whom and on what terms was, therefore, irrelevant. That is not this case. Here there was no immediate loss only prospective, contingent or future loss. The loan notes received the equivalent of physical damage to a vehicle only once a sum became payable under the loan notes that was not payable because it was set off against a Settled Claim..
17. Mr Sephton submits that this approach is contrary to that which I am required to adopt by applying the Court of Appeal decision in Gardner v. Marsh & Parsons [1997] 1 WLR 489. I reject that submission. First, if and to the extent that there is a conflict between that decision and the decision of the Court of Appeal in Kennedy, I regard Gardner as having been decided per incuriam the decision in Kennedy. Kennedy was heard and judgment delivered on 27^th March 1996 whereas Gardner was heard on 15^th and 16^th October 1996 with judgment being delivered on 13^th November. Secondly, the key difference between the two authorities would appear to be that the repair of the property was not regarded in Gardner as part of a continuous transaction of which the purchase of the lease was the inception – see Hirst LJ at 503H. The notion of an independent or disconnected transaction that was a feature of Gardner simply does not arise here and did not arise in Kennedy. The loss could only be suffered by operation of the terms of the SPA taken as a whole. The effect of the warranty cannot sensibly or fairly be taken in isolation from all the other relevant provisions within the same agreement. In any event, it is clear that it was not the intention of the Court of Appeal to lay down any general principle in that case – see in particular the remarks of Hirst LJ at 503F and Peter Gibson LJ at 510A. In those circumstances, I regard Gardner as a case that depended on its own facts for its outcome.
18. The other case on which Mr Sephton placed great reliance was Hussey v. Eels [1990] 2 QB 227. I derived no assistance from that case. Aside from the fact that it, like Gardner, was a mitigation case where it was held that there was no relevant continuous transaction, it does not assist because as I read the facts there was no element of double recovery. The Claimants in that case recovered £17,000 being the difference between the price they paid and the value of the property they purchased in the condition represented. Thereafter, without repairing the property, they sold it for redevelopment at a profit in excess of two years later. The short point is that had the property been as represented, they would still have been entitled to apply for planning permission and made a profit. This is in essence the point made by Mustill LJ at 233C-E. The claim was for damages to compensate them for what they had purchased not being as represented which was an entirely different issue. That has nothing to do with a case such as the present where as I have said either no loss was suffered unless and until a sum became due pursuant to the loan notes that was not paid because of a set off against the sums due in respect of the Settled Claim or alternatively any damage suffered as a result of the breach was purely prospective with the actual loss depending on how any entitlement under the loan notes worked out. The notion that the set off is to be treated as the equivalent of selling a property that suffers from a defect that diminished its value from what had been paid for it seems to me to be entirely unreal.

Conclusion

19. At an early stage in the hearing, I enquired of Mr Sephton whether there was any factual enquiry that could affect the outcome of the analysis that both parties invited me to undertake. Had he been able to identify any such facts, I would not have thought it right to deal with this issue in the way it has been brought before me. However, all the relevant facts are either admitted or conceded as being ones that have to be assumed for the purposes of the present application. In those circumstances the question becomes whether assuming the Claimant was able to prove all the facts alleged at a trial, he would in law be entitled to recover £934,411 or any part of that sum.
20. In my judgment he would not. That is so because no loss was suffered as a result of the breach of warranty because at no stage did any sum become due to the Claimant under the loan notes. Alternatively if loss occurred on the date when the warranty was given or when a claim was notified, the loss that was recoverable would depend on whether any sum ever became payable under the loan notes. However, it had become entirely clear by the date when the trial of the Warranty Claim commenced at the latest that no sum would ever become due under the loan notes. In those circumstances, a court assessing damages in these proceedings would be bound to look at what had happened after breach in order to arrive at a correct damages figure. On this basis it is inevitable that the Court would assess the recoverable loss in respect of the head of claim now being considered at nil.
21. In those circumstances, I grant summary judgment in favour of the Defendants dismissing the claims advanced in Paragraphs 28.1 and 29.1 of the Particulars of Claim.