England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
(Queen's Bench Division)

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 June 2008

Mr. Justice Forbes:

1. This is an appeal that arises out of a building dispute which was tried before His Honour Judge Dower in Norwich County Court on the 3^rd March 2008. The appeal raises an issue with regard to the correct method of assessing damages payable to a contractor following the wrongful termination of the contract in question.
2. The factual background is that the Respondent, Bonus Flooring Ltd., was engaged by the Appellant, P J Spilling (Builders) Ltd., to carry out laying an area of concrete consisting of two large slabs at a site in Beckells, Suffolk. The contractual period was one week. The quoted price for the job was £18,667 plus VAT.
3. The Respondent ("Bonus") was not responsible for designing or specifying the particular mix of concrete that was to be laid on site. It was Bonus' task to lay and finish the concrete slabs.
4. The contractual responsibility for the concrete mix was that of the Appellants ("Spillings"). Unfortunately, during the course of the work, the concrete mix turned out to be unsatisfactory. As a result, Bonus was unable to finish the concrete slabs in a satisfactory fashion. The contract was terminated by Spillings, who took the view that the defective state of the concrete was the contractual responsibility of Bonus.
5. In due course, Bonus brought a claim against Spillings, alleging that the termination of the contract was wrongful and claiming its costs and loss of profit as a result. For its part, Spillings brought a counterclaim claiming the costs associated with the defective concrete and its replacement.
6. The case came before His Honour Judge Dower as a fast-track case. He heard the matter on the 3^rd March 2008 and handed down judgment on the 17^th March 2008. It appears from the judgment that the Judge came to the conclusion that Spillings was not entitled to terminate the contract. No appeal is made against that determination.
7. The Judge then went on to hold that Bonus was partly responsible for the fact that the whole of the concrete had been poured because of Bonus' failure to stop the pouring of the concrete once it realised that the concrete mix was not of a suitable standard.
8. As a result of his conclusion that Bonus incurred some responsibility for failing to stop the concrete pour, the Judge deducted certain remedial costs from Bonus' claim. He identified those costs in the course of his judgment as follows: (I quote from page 116 of the court bundle):

"Despite the limited design obligation upon the Claimants [i.e. Bonus] they were responsible for making sure that any concrete that was poured was workable. They cannot supervise the pouring and complain afterwards that an adjustment should be made. The time for realising that there should be an adjustment is before that pour is completed. I therefore find that the Claimants cannot claim to be paid for the area of concrete that was unsatisfactory and for the remedial measures in respect of that. If I turn to the counterclaim I therefore deduct from the claim the first two elements; that is to say, the cost of removing the defective concrete in the sum of £2,200 and the replacement concrete in the sum of £4,680. VAT has to be added to those two sums. Those are proper deductions and amount to £8,084".

9. The Judge then turned to calculate the amount that was due to Bonus having regard to that finding, and also to his conclusion that other aspects of the defence and counterclaim could not succeed. The Judge turned to the claim, which was for a total sum of £18,667. That is particularised in paragraph 8 of the Particulars of Claim as amounting to four days of labour, in the sum of £7,958; materials at a total cost of £5,715; subsistence in the sum of £1,400, and cost of engineers at £1,160, making a total of £16,233 plus VAT.
10. In the Particulars of Claim, Bonus gave credit for a part-payment made by Spillings in the sum of £7,314.29, which left a sum outstanding of £11,759.48 including VAT. That was the figure which the Judge then turned to in his judgment. He dealt with two additional claims in respect of attendance on Friday and bad weather. He dismissed those additional claims, which amounted to some £3,000. He therefore concentrated on the figure of £11,759.48. From it he deducted the £8,084. He arrived at the balance of £3,675.48, which was the sum which he then awarded to Bonus.
11. I have taken time to go through these figures because it is quite clear that the Judge's approach to the calculation of Bonus' damages was by reference to the costs that Bonus claimed that it had incurred in reliance upon carrying out the contract, before its wrongful termination by Spillings.
12. If there is any doubt about that, it is resolved by the Judge's extremely short judgment on quantum, which is to be found in the bundle at page 119. This judgment was dated the 3^rd April 2008, and was the result of representations made to him in the light of his earlier judgment. In his short judgment of the 3^rd April 2008, the Judge said this:

"I have concluded that my figures are correct for the reasons given by the Claimants, particularly paragraph 11.3".

13. Paragraph 11.3 of the Claimants' written submissions were to the effect that Bonus was entitled to the costs that it had incurred in carrying out the work, less the deductions that the Judge had seen fit to make.
14. On behalf of Spillings, Mr. Webb submitted that, by approaching the calculation of damages in the way that he did, the Judge had fallen into error. First, Mr. Webb submitted that the Judge had plainly calculated damages by reference to a claim based on what is called the "reliance loss approach"; that is to say, the Claimants' actual costs incurred in carrying out the contract prior to wrongful termination (the "reliance loss approach"). Mr. Webb very properly accepted that, in principle, an innocent party to a contractual dispute does have an unfettered choice as to the measure of damages that it chooses: either the "reliance loss approach", or what is often described as the "expectation approach". The "expectation approach" can be summarised as follows; that the innocent party is entitled to be paid the contract sum, less any costs that would be incurred by it in completing the contract following the wrongful termination: see CCC Films (London) v Impact Quadrum [1985] QB 16 at 32A-C; see also Chitty on Contracts current edition at paragraph 26.-063 and 063.
15. Mr. Webb submitted that whilst an innocent party does have an unfettered choice as to which approach is adopted, there is an important caveat to it. He submitted, rightly in my view, that a claimant cannot, by electing the reliance loss approach, recover more than the contract price. Furthermore, a claimant is only entitled to damages for wasted expenditure if the expenditure would have been recovered had the contract as a whole been performed. Mr. Webb submitted, correctly in my view, that if a claimant would have made a loss on full performance of the contract then the "reliance loss approach" cannot be followed for the purposes of calculating damages.
16. Mr. Healy, on behalf of Bonus, agreed with the foregoing propositions. He was plainly right to do so. In Chitty on Contract the matter is stated succinctly in this form at paragraph 26-064:

"By suing for damages for his costs in performing in reliance on the contract the claimant cannot recover more than he would have been entitled to if the defendant had not broken the contract. The precise arithmetical method of implementing this principle has not yet been decided, but it is submitted that the claimant should be entitled to claim his performance expenditure actually incurred to the limit imposed by the gross return or price due to poor performance. The onus of proof is on the defendant to show, on the balance of probabilities, that the claimant would have made a loss on full performance of both sides of the contract and so would not have recouped all of his own costs in performing his side".

17. Accordingly, Mr. Healy accepted that if Spillings proved that Bonus would have made a loss on full performance of both sides of the contract then the reliance on expense incurred approach to calculation of loss was inappropriate and not open to the Claimant.
18. It was Mr. Healy's submission that Spillings had never actually demonstrated that this was a loss-making contract. Mr. Healy said that the Judge had not made a specific finding to that effect. Rather, the Judge had made a finding somewhat short of an outright conclusion that this was a loss-making contract. What the Judge said was this, at page 117:

"I am further not persuaded that there is any claim for loss of profit. This contract was run on very close to unprofitability. There was very little margin left. I cannot see how that figure is substantiated. I therefore deny them damages on those two points".

19. In that short passage the Judge dismissed Bonus' claim for loss of profit.
20. I accept that Mr. Healy is right in saying that the Judge failed to make a clear and express finding but, in my judgment, it is quite clear from his conclusion that he had reached a decision to the effect that this was a non-profit-making contract. He did not go on and say in terms that it was a loss-making contract, but he undoubtedly concluded that there was no profit remaining in this contract which he could award as damages to Bonus in addition to Bonus' claim for its costs incurred in reliance on the contract.
21. It is unfortunate that the Judge did not go on and make the matter expressly clear in his judgment, because it is very clear from the evidence in the case that this was not only a non-profit making contract, but was clearly a contract which, if it had been completed, would have resulted in Bonus incurring a substantial loss.
22. It is necessary only to refer to part of the cross-examination of Mr. Howlett, the principal witness called on behalf of Bonus by Mr. Webb, at pages 72 and 73 of the transcript, which reads:

"Mr. Webb: Do you accept that if the works had continued you would have gone substantially over the contract price if these costs are to be accepted? I will rephrase that. Do you accept that if these costs are to be accepted the inevitable outcome is that by the time that another pour had been carried out and works had been completed your costs would have substantially exceeded the contract price?

Answer: Yes, I would have thought so".

23. It is quite clear from the transcript that Mr. Howlett accepted that this was a loss-making contract if the Claimant was unable to recover certain of its additional costs that it was hoping to recover, at least some of which were dismissed by the Judge in the course of his judgment.
24. I am entirely satisfied that it is clear that Spillings did establish that this was a loss-making contract and that, therefore, when the Judge calculated the amount recoverable by Bonus by reference to Bonus' costs incurred in reliance on the contract, the Judge fell into error.
25. In my view, Mr. Webb is right. This was a case where the Judge was bound to approach the question of damages essentially by reference to the expectation method, namely by reference to the contract price, together with proper additional extras, less the cost to be incurred by the Claimant in completing the works after the date of the wrongful termination. That was not the approach the Judge adopted. I am afraid he failed to explain clearly why he did not. His conclusions, both in the judgment and in his subsequent quantum decision, are very sparse and not adequately reasoned. However, there is no doubt in my mind that he did fall into error in the way submitted by Mr. Webb.
26. The result is most unfortunate. The appeal must be allowed. Despite the best efforts of the parties to try to persuade me that there are ways in which I can make a finding with regard to the appropriate amount, I regret that I am not in a position to do so, having regard to the paucity of the Judge's reasoning. It is most regrettable that this is the case because the costs involved in this litigation are already quite out of proportion to the amounts involved. I sincerely hope that the parties can now resolve the final outstanding matters by agreement rather than have the matter dealt with further by another Judge to decide the issue of quantum correctly. However that may be, my decision at this stage is that the appeal is to be allowed, and that the matter is to be remitted to the County Court for redetermination by another Judge. It is a matter of great regret that this case has to return to the County Court. I really do feel that if ever there was a case where the parties were well-advised to resolve their outstanding differences by agreement, this is it.