England and Wales High Court (Technology and Construction Court) Decisions

In The High Court of Justice
Queen's Bench Division
Technology and Construction Court

		St Dunstans House 1 Fetter Lane London
		20 February 2004

1. Introduction and assumed facts

1. This judgment is concerned with two issues of law that arise in proceedings brought by the claimant, a developer ("ETPL"), against the defendant, its architects ("Nilsson"), and in consequent contribution proceedings brought by those architects against the part 20 defendant, the contractor ("Charter"). These issues are being determined before other issues in this dispute pursuant to the court's powers of case management provided for by CPR 3.1(2)(i) and (j) by reference to an agreed statement of assumed facts which has been derived from the detailed pleadings that have already been served.
2. ETPL is a single-purpose development company that was incorporated for the specific purpose of developing a row of Grade II Georgian houses situated in Earl's Terrace, Kensington, London. Nilsson are architectural consultants who were engaged in about 1994 by ETPL in connection with this refurbishment project. It was incorporated in 1995. The project was initially split into phases and, in 1995, a contractor was engaged under a design and build contract to carry out works to 21 of the houses. This contract was terminated in November 1996 with some of the houses in phase 1 nearing completion and with the major structural works in phase 2 also complete. Soon afterwards, ETPL engaged Charter for the remainder of the works for phases 1 and 2 under a Prime Cost Contract. In March 1998, it was agreed by ETPL and Charter to amend this contract by adding the phase 3 works for a lump sum of £13.9m, a sum that only related to phase 3.
3. The houses comprising the Terrace, which are set back from Kensington High Street by a public carriageway and which also back onto Edwardes Square, were, in 1994, in very poor condition. They were, at that time, occupied by occupiers holding various interests in the properties and ETPL's intention was to purchase most of these properties and the occupation interests within them and then restore and refurbish them to a high standard. ETPL was, however, ultimately able to purchase all the houses in the terrace so that the refurbishment scheme was enlarged to include a 76-space underground car park and the entire reconstruction of three of the properties. As refurbished, each property was to have a rear basement extending beyond the existing building line and underneath the rear garden that contained either a games room and cinema or a swimming pool and access to the underground car park from the lower ground floor at the front. The current dispute is concerned with the causes and consequences of, and the responsibility for, water penetration into the rear basement structure of 11 of the 25 houses in the Terrace including the delay in investigating and remedying that damage.
4. Nilsson was incorporated in 1995 having first been engaged by ETPL in or prior to 1994 to provide architectural services. It is accepted by all parties that, if there is any liability for the architectural services that were undertaken on the ETPL refurbishment project throughout the period from or before 1994, it is Nilsson in its incorporated state that would carry that liability.
5. The project was split into three phases comprising a first phase of five houses, a second phase of seven houses and parts of a further two houses and a third phase comprising the remaining houses and parts of houses, the underground car park and other external works, Initially, in August 1995, ETPL engaged a contractor to carry out works to 21 of the houses under a design and build contract that contained employer's requirements prepared by Nilsson that included a benchmark for design, quality and performance that was worded in general terms. The contractor engaged a separate architect to undertake the detailed design of these properties. This construction contract was terminated in immaterial circumstances in November 1996 at a time when some of the houses in phase 1 of the project were nearing completion, the major structural works in phase 2 were also complete and the houses in that phase had reached various stages of completion.
6. In November 1996, ETPL engaged Charter to carry out the remainder of phases 1 and 2 under a prime cost contract which necessitated ETPL appointing a design team to provide detailed designs and to supervise the works. This contract was extended informally in June 1997 to cover phase 3 but no new contract was signed. However, in March 1998, ETPL and Charter agreed to amend the prime cost contract by providing that the phase 3 works would be carried out for a lump sum of £13.9m.
7. The water penetration into the rear basement structures was caused by the design or execution of the interface between the non-adhesive proprietary bentonite membrane and adjacent structures. The membrane was laid as a waterproofing system over the precast concrete planks forming the roof of the basement structure. This interface was formed by turning the membrane up the adjacent structures and the upturned membrane was terminated too low, thereby allowing water penetration below the membrane. Having gained access, the penetrated water was able to travel freely across the roofs. This easy passage should not have been possible but for the membrane being laid upside down with no bentonite granules being placed beneath it. Having traversed across the roofs, the penetrated water was able to enter into the structure freely when this should not have been possible but for a third series of difficulties, principally joints between adjacent concrete slabs that were inadequately filled.
8. The use of precast concrete slabs and the proprietary membrane was as a result of a design change following the termination of the first design and build contract and this method of construction was only used on the phase 3 houses, being those numbered 6 - 11 and 20 - 24. Responsibility for the consequent detailing of the membrane upstand and the for the execution and supervision of an appropriate waterproof detail is in dispute but the issues I am concerned with are being conducted on the basis that Nilsson failed, in breach of contract and of its duty to undertake its design work with reasonable skill and care, to provide Charter with any appropriate details showing the termination of the membrane upstand at the correct levels and incorrectly relied on the supplier of the proprietary membrane to produce appropriate and detailed designs showing the required detail. As a result, only inadequate supplier's sketches were provided to Charter for the execution of the membrane installation. Nilsson is also liable and in breach of both contract and duty, in failing to supervise and inspect the work so as to allow it to be installed and covered over with the workmanship errors, that were causative of the water penetration and which were associated with its installation, remaining undetected.
9. In turn, Nilsson is conducting these issues on the basis that Charter failed to instal the membrane in accordance with the designs that they were supplied with which, if properly interpreted, provided for the requisite upstand and for the correct laying of the membrane in association with a fill made up with bentonite granules.
10. The discovery of water penetration occurred at a late stage in the development works. The statement of assumed facts states:

"The discovery of the defects, the investigation and subsequent remedial work took time and involved noisy and unsightly work to the rear of the premises. Such matters caused a delay to ETPL's project (or parts of it) of 15 months, from 30 June 1998 to 30 September 1999 and resulted in funds being held in the project for a longer period than they would otherwise have been."

This statement does not clearly identify the nature of the delay that occurred, what is meant by "ETPL's project" and what part of that project was delayed, why ETPL's funds were held in the project for a longer period as a result, what that holding period was and what it was that ultimately triggered the release of the funds from the project.

11. For the purposes of these issues, I conclude that I must decide the issues on the assumed basis that construction work would have been completed and the houses handed over to ETPL in a satisfactory state on 30 June 1998 whereas, in fact, that handover did not occur until 30 September 1999. The intervening 15 months is to be assumed as having been taken up in investigating and deciding upon the causes of the water penetration and in undertaking extensive, unsightly and noisy remedial work involving a long term solution to the waterproofing problems and the reinstatement of the damage caused by the penetration and the remedial work. Any commercial use of the houses and any sale was delayed by a 15-month period. This 15-month delay was caused by the 15-month period of remediation but it was not necessarily spanning the same 15-month period as the 15-month remediation period.
12. The construction and sale of the houses numbered 1, 3, 5 and 25 and the construction of the underground car park were not affected by this delay. The agreed statement of facts makes no mention as to whether or not the houses numbered 2, 4 and 12 -19 were affected by this delay but the claim is based on the total costs of the development including these properties even though these were not subject to the membrane, water penetration and remedial work that grounds the claim for direct costs.
13. It follows that the claim for the recovery of holding costs for these additional properties is based on an allegation that the recovery of the development costs associated with them houses was delayed by the water penetration remedial works at the adjacent houses although these additional houses were not themselves subject to such remedial works.

2. ETPL's claim

14. ETPL has made a claim against Nilsson alone. This claim was started by the issue of a claim form and particulars of claim on 1 May 2003. The basis of ETPL's claim is that the contractual engagement, which was not set out in a formal written contract, required Nilsson to provide a full architectural service to ETPL which included the provision of design drawings, details and specifications; additional information in relation to the design; and the provision of on site services including the regular inspection of the workmanship to ensure that the work was being carried out in accordance with the design. These services were provided by Nilsson on the basis that it had been specifically engaged in relation to the project, namely the development of a specific row of Georgian Grade II terraced houses by a single purpose development company which would be carried out by that developer purchasing the properties in poor condition and developing them to high standard and then selling them at the top end of the residential market.
15. The breaches of contract and duty alleged against Nilsson have already been summarised and are set out in the statement of agreed assumed facts. ETPL alleges that Nilsson was aware of the workmanship defects from mid-June 1998 onwards but failed to require their rectification. Moreover, it was also aware of the problem of leakage generally from that time but failed to investigate and diagnose the proper causes of the leakage or to propose adequate remedial works so that the entire process of investigation, renewal and repair took twelve months which was substantially longer than was reasonably necessary and was substantially wasted time. The additional costs resulting from this delay and wasted time are subsumed within the loss and damage being claimed.
16. The loss and damage suffered by ETPL is claimed as damages for breach of contract and duty and falls under seven heads. In summary, there are three categories of loss which are as follows:

(1) Direct building and remedial costs. There are four heads of such loss: the direct remedial costs of executing the remedial scheme devised by Nilsson and undertaken by Charter at an approximate cost of £890,000; remedial electrical and mechanical work at an approximate cost of £17,700; (iii) garden works at an approximate cost of £179,000; and (iv) the cost of engaging professionals to design and supervise the remedial works including architectural consultants, landscape designers, structural engineers and quantity surveyors at an approximate cost of £233,000.

(2) Compensation. There are three heads of such loss: the storage costs of kitchen units that were to be installed at an approximate cost of £2,000; compensation to adjacent tenants for nuisance claims arising out of the carrying out of the remedial works at an approximate cost of £16,300 and the costs of the delay and disruption that the mechanical and electrical contractor directly contracted to ETPL incurred during the remedial works at an approximate cost of £568,000.

(3) Holding costs. This claim is the subject of these two issues and is currently approximately £5.981m.

17. It is helpful to set out verbatim the pleaded manner in which this claim is put forward which is incorporated into the summary of assumed facts:

"1. The discovery of the defects, the investigation and subsequent remedial work caused delay to ETPL's project (or the greater part of it) for 15 months from 30 June 1998 to 30 September 1999. This was because the process of investigating and remedying the waterproofing direct was extensive and involved noisy and unsightly work that would clearly have deterred potential purchasers from buying the properties. The costs relating to the properties of numbers 1, 3, 5 and 25 and to the car parking spaces were not affected by the delay.

2. As a result of the 15-month delay to the project, ETPL's funds were held in the project for 15 months longer than they would otherwise have been.

3. Nilsson knew at all times material to the making of this claim:

(a) ETPL was a development company, established for the specific purpose of developing the properties.

(b) The project was a commercial development. Nilsson at all times knew that the project was funded as to the costs of purchase and development by Earl's Terrace.

(c) Any delay to completion of the project would result in funds being held in the project for longer than they would otherwise be. Nilsson at all times also knew that any delay to completion of the project would result in the loss of use of those funds.

(d) The development project was high-risk. Any capital invested in the project by ETPL was similarly at risk, while the cost of commercial borrowing for a company such as ETPL would reflect the risks to the lender.

4. ETPL had in fact funded the project by means of a Construction Credit Agreement dated 15 April 1996 between Vastint Holdings BV ("Vastint') and ETPL. ETPL is a wholly owned subsidiary of Prime Property Holdings Limited which is a wholly owned subsidiary of Vastint.

18. By 30 June 1998, the total funding provided by ETPL was £54,782 (exclusive of interest). Of that sum, £48,023,467 is said by ETPL to have been attributable to the part of the project affected by the delay.
19. LIBOR + 2 per cent is a reasonable commercial rate of interest that would compensate a developer such as ETPL for borrowing or lost investment as a result of delay. ETPL contends that it is entitled to be compensated on that basis.
20. During the period of delay, the value of the houses whose sales were delayed increased such that when they ultimately came to be sold, ETPL acquired a greater price for them than it would have obtained but for the delay.'
21. The summary of assumed facts also contains this additional factual statement:

"The material terms of that [Construction Credit] agreement provided that:

(a) £20m of funding would be provided interest free;

(b) funding over and above £20m would attract interest at 10 per cent per annum from the date of the provision of such further funding.

22. The agreement between Vastint and ETPL, which is annexed to the statement of assumed facts, if considered in full, reads as follows:

"The following sets out in writing the terms of agreement by which Vastint has lent funds to Properties for the development of Earl's Terrace:

A. Initial Funding Draw Down Facility £20,000,000)

Vastint has agreed to provide an initial funding facility of up to £20,000,000 to ETPL to be called upon in tranches as required and requested by ETPL. Subject to the following outstanding sums shall be repayable on such terms and in such amounts as is mutually agreed by the parties.

i) The outstanding sums are to be interest free.

ii) The purpose of the facility is to acquire and develop Earl's Terrace.

iii) Vastint will advise annually on the date of approval of the audited financial statements of ETPL, whether the outstanding sums are to remain outstanding for a further 12 months or otherwise to be repaid.

iv) Vastint will secure outstanding sums by way of a fixed and floating charge over the assets of ETPL.

v) Further draw down facilities may be negotiated from time to time in addition to the initial Funding Draw Down Facility.

B. Development Funding

i) Vastint has lent monies, and may make further loans of such amounts by way of Development Funding as may be required for the development and refurbishment of Earl's Terrace. It is the intention that the principal amounts of the Development Funding will not at any time exceed the amounts outstanding at that time under the initial Funding Draw Down Facility.

ii) The Development Funding is to carry interest at 10 per cent accruing annually from inception or as appropriate from the date of such further loans as may be made, payable gross by ETPL subject to the agreement of the Inspector of Foreign Dividends, or otherwise net after deduction of tax at basic rate.

iii) ETPL has the right to attribute any repayments to Vastint first against capital and then as to interest.

C. Repayments

The Development funding is repayable on demand.

D. Events of Default

The loan will immediately be repayable in the event of ETPL receiving a winding up petition, a Receiver being appointed, the company being unable to pay its debts or other such similar events.

This agreement puts into effect the terms agreed by the parties with effect from 10 May 1994."

23. ETPL's losses are quantified in an attached appendix to the particulars of claim. In summary, ETPL's loss is calculated by applying an appropriate interest rate (LIBOR + 2 per cent) to the amount of ETPL's investment, the recoupment of which was delayed for the 15-month period. Essentially, ETPL's investment is shown in the schedule to be the total "loan advance" which is defined to be the acquisition and development costs for the entire development less the advances for nos 1, 3, 5 and 25 and the car parking spaces. Interest on that sum has been claimed for the 15-month period from 1 July 1998 until 30 September 1999, has been compounded at 3-monthly rests and totals £5,981,240. On this sum, interest is claimed pursuant to the Supreme Court Act 1981 from 1 October 1999 until judgment which will be a period of about five years if the other issues in this case must first be resolved at a second trial.
24. Nilsson served a defence and, at the same time, joined

Charter as a part 20 defendant. The basis of its claim against Charter is that, if ETPL's claims succeed against Nilsson, the factual basis upon which ETPL would have succeeded would amount to breaches by Charter of its contractual and common law duties it owed to ETPL, particularly its duties to carry out the works in a proper and workmanlike manner and with the care and skill reasonably to be expected of competent contractors, to provide a standard of workmanship equivalent to that described in the specification and to make good any defects which appeared in the defects liability period and which were due to materials or workmanship not in accordance with the terms of the contract. In consequence, Nilsson claims under the Contribution Act 1979 an indemnity for, or a contribution towards, its liability to ETPL since Charter's liability to ETPL would be for the same damage as Nilsson would have been held liable for.

3. The issues

25. At the first case management conference, all three parties applied for a trial of two issues concerned with the recoverability of ETPL's claim for so-called holding costs and for that trial to be conducted on the basis of the pleaded issues without discovery or evidence and against an assumed factual background drawn from ETPL's pleaded case. The facts that were being assumed would not necessarily bind the parties if subsequently issues of scope of duty, liability and quantification of damages were tried out although, of course, those issues would have to be tried in accordance with the current pleadings unless these were subsequently amended with the court's permission.
26. It is highly unusual for a court to try issues of law concerned with the recoverability of damages in a professional negligence action before any findings have been made as to scope of duty or breach and it is also unusual to determine as an issue of law an issue which is fact sensitive and where the factual background is assumed and not proved and the assumptions being made are solely for the purpose of the determination of the issues. The reason why the parties made the application that they did was that the holding costs claim was, in size, about two-thirds of an overall claim of nearly £9m and the recoverability of this claim raised an initial short legal issue of principle of some difficulty. The parties informed me that they had unsuccessfully attempted to mediate a settlement and that exercise had highlighted this issue of principle which, if resolved by the court, could well enable the parties to compromise the whole dispute without further recourse to expensive preparatory steps and a lengthy trial.
27. In those circumstances, and with the overriding objective of seeking to ensure a saving of expense and the dealing of the case proportionately and expeditiously, I agreed to exercise the court's case management powers to direct a separate trial of these issues.
28. The wording of these issues, which was agreed by all three parties, is as follows:

"In so far as ETPL is able to demonstrate that funds were held in the project for a longer period than they would otherwise have been due to any delay in the project arising from the pleaded failures of Nilsson

1. Is ETPL entitled to be compensated

(i) by applying the interest rate of LIBOR plus 2 per cent claimed at paragraph 51.3(5) of the particulars of claim [set out at paragraph 14(3) (e) above] to the funds that it had invested in the project for such period of delay or

(ii) by applying an interest rate which reflects the actual cost to ETPL of borrowing the funds that it had invested in the project for such period of delay?

2. Is ETPL obliged as a matter of principle to give credit against any sum claimed in paragraph 51 of the particulars of claim [summarised in paragraph 13 above] for the sums identified in paragraph 46(o) of Nilsson's defence?"

29. Paragraph 46(o) of Nilsson's defence reads:

"... in so far as ETPL might be entitled to recover any sum from Nilsson to compensate it for the fact that funds were held in the project for a longer period than (on ETPL's case) would otherwise have been the case, ETPL must give credit against such sum for any corresponding benefit it has gained by reason of the delay in the completion and sale of the houses in Earl's Terrace. In particular, ETPL must give credit against any such sum for any increase that occurred in the vale of the 'delayed sale' houses during that period of delay."

30. The parties have agreed that the first issue should be decided not only on the basis of the assumed facts that I have already summarised but also on three alternative bases as well, being bases where salient assumed facts have been changed from the core assumed facts set out in the schedule. Further, the second issue is also to be decided on two further alternative bases. These alternative findings are to cater for the possibility that the relevant core findings at the second trial will be in line with the alternative bases and not in line with the facts assumed in the schedule of assumed facts. I will identify these alternative assumed facts when I come to decide whether these alternative bases make any difference to my answers to the two issues.
31. These issues and alternative issues arise in both ETPL's proceedings against Nilsson and in Nilsson's part 20 proceedings against Charter from whom it is claiming an indemnity or contribution. Charter notified the court that, in relation to the notional proceedings between ETPL and Charter which found Nilsson's contribution claim, it acknowledged that the two issues that I am asked to decide in the action between ETPL and Nilsson are to be answered in the same manner in the contribution claims brought by Nilsson against Charter. It follows that Charter, who participated in the hearing of the issues, will be bound in the part 20 proceedings by the answers provided to these issues.

4. The scope of the issues

32. ETPL has pleaded that the additional holding costs on which its claim is based represents losses arising naturally and in the ordinary course of events as a result of Nilsson's breaches of contract and negligence. By implication, ETPL also alleges that holding costs fall within the scope of Nilsson's alleged duty owed to ETPL. Nilsson, in its defence, contends that it only owed limited architectural duties to ETPL that did not include the production of, or advice about, any of the relevant membrane details or any inspection or supervision of Charter' s workmanship involved in the installation of the membrane. Nilsson accepts that it played a limited role in identifying the causes of the water penetration but denies any more extensive role and asserts that it performed its role reasonably and with reasonable skill and care.
33. Thus, there is an unresolved dispute as to the extent and scope of Nilsson's duty but, for the purposes of these issues and given the facts to be assumed in deciding them, Nilsson and Charter both accept that the assumed facts disclose that ETPL is, in principle, entitled to be compensated for any financial losses that it has suffered as a result in the sale of an affected house that can be proved. I will, therefore, assume that the nature of Nilsson's assumed terms of engagement includes within their scope responsibility for the holding loss being claimed by ETPL.
34. The issues arise as a result of five controversial features of ETPL's claim. The first controversial feature is that ETPL is claiming, as a consequence of the assumed negligent design and supervision, that its development costs were held in the project for a period of 15 months longer than would have been the case but for that assumed negligence without seeking to show that the reason for that delay was the need to postpone the sale of the affected houses and the recovery of the proceeds of sale. As a concomitant of this, Nilsson contends that ETPL will be unable to prove, on the basis of the case it has pleaded and proposes to advance, that the so-called development costs were held in the project at all or for longer than they would otherwise have been.
35. The second controversial feature of ETPL's claim is that ETPL did not itself advance all, or at least the substantial part of, the development costs and is not, or at least is largely not, having to finance any borrowing or lending of that advance. Therefore, any additional holding costs incurred as a result of the delay were not incurred or lost by ETPL so that, it is argued, these may not be claimed or recovered by ETPL.
36. The third controversial feature of ETPL's claim is that such holding costs as it directly incurred are those arising from the loans made by Vastint under the Construction Credit agreement. These loans were in part interest free, although subject to a provision allowing ETPL and Vastint to agree that interest should be paid and to the rate of interest, and in part at a higher than normal rate of 10 per cent. However, the loans were not unduly soft since, additionally, they were repayable on demand and were secured by way of a fixed and floating charge over ETPL's assets which were largely if not entirely the Earl's Terrace development.
37. The fourth controversial feature of ETPL's claim is that the interest claimed is notional in the sense that no-one has been charged LIBOR + 2 per cent. ETPL is using that basis of calculation as representing a reasonable basis of assessing the loss of the use of its holding costs for a 15-month period since its actual loss would be difficult to ascertain and potentially unreasonable in its amount.
38. The fifth controversial feature of ETPL's claim arises because of the unusual way in which market in luxurious, top of the price range London housing stock fluctuated in the period from 1997 to 2000. Nilsson contends that that market had slumped and was stagnant in 1997 and 1998 so that ETPL would not have attempted to sell, and would have been unsuccessful in selling, the bulk of the houses in that period unless it had taken a huge and unacceptable reduction in the asking prices that it proposed to seek. Thereafter, the market recovered very rapidly so that ETPL was able to sell the houses in and after 1999 at significantly increased levels to those available in 1998. Thus, the sales would have been delayed in any event until the time they occurred and any delay caused by Nilsson's assumed negligence has been to ETPL's advantage since it was able, in consequence, to sell the houses at a significantly enhanced price compared to those obtainable 15 months earlier.
39. It is as a result of all these features of ETPL's claims that Nilsson and Charter contend that the claimed loss is irrecoverable since, in reality: (1) no loss occurred at all; or (2) as an alternative, no loss was incurred by ETPL; or (3) as a further alternative the claimed loss is irrecoverable as being a claim for interest as damages; or (4) as a yet further alternative the claimed loss was eliminated or greatly reduced in size since ETPL must give credit for its increased recovery of sale proceeds following the delayed sales and this necessary credit would eliminate or significantly reduce ETPL's loss represented by its claimed holding costs.

5. Issue 1 - Are holding costs recoverable as damages?

5.1 Introduction

40. The basis upon which these issues are to be decided is that Nilsson, in performing architectural services that included design, design checking, supervision and inspection services of the rear basement roof membranes and Charter, in carrying out this installation work, were in breach of contract and duty that has caused ETPL recoverable loss. This loss is to be quantified by reference to ETPL's directly incurred loss arising from the physical damage caused by those breaches. This is quantified by reference to the cost of the work involved in replacing and reinstating the basement waterproofing system and the water damage that was caused.
41. ETPL's loss is additionally sought to be quantified by reference to the consequential loss that is alleged to have resulted from the delay in completing the construction of the houses caused by the original defects in the waterproofing system and the necessary replacement work. That consequential loss is pleaded as being the loss caused by the funds spent on the development "being held" within the development project for 15 months longer than they would otherwise have been. The loss is also pleaded as being "the lost use of those funds" and/or "the cost of providing those funds" which is to be compensated by "an award of damages reflecting the cost to a developer such as ETPL of borrowing to supply the funds" withheld from it as a result of the delay.
42. The funds were provided to ETPL by Vastint and were secured on the development. Part but not all of the funding carried interest at 10 per cent and the balance was subject to possible agreement to carry interest but, without agreement, would not carry interest. The whole loan was subject to repayment on demand. How Vastint, an off-shore company, obtained and funded the sums loaned to ETPL is not pleaded but ETPL is the wholly-owned subsidiary of an UK company which is wholly-owned by Vastint, which is an off-shore company registered in the British Virgin Islands.
43. It follows that the consequential loss claimed by ETPL involves it in seeking to establish three matters:

1. the 15-month delay to the completion of the houses caused by the remedial works caused the funds put into the development being held in the project for that period, being a 15-month period longer than they would have been held had there been no defects or consequent delay;

2. ETPL's inability to recover these funds for the period whilst they remained locked into the development meant that the funds could not be put to commercial use elsewhere during the delay period;

3. ETPL's inability to recover these funds also meant that an additional cost was incurred by way of interest charges in providing part of those funds during the delay period.

44. The evidence needed to prove these matters or to support these allegations is not summarised in ETPL's pleading or the statement of assumed facts. Furthermore, the pleading does not indicate whether ETPL itself incurred the losses referred to or whether these losses were incurred, wholly or in part, by Vastint. ETPL's pleaded case also asserts that ETPL is entitled to recover the consequential loss that is alleged to have been caused to both it and ETPL and that that loss may be proved by ETPL establishing what it would have cost a developer in a similar situation to ETPL to borrow an equivalent sum for the 15-month period during which the remedial work was being undertaken.
45. No indication is given as to whether the resulting calculated figure of nearly £6m is similar to, or different from, a combination of the cost incurred by ETPL and Vastint of funding the development costs in the 15-month period by all who participated in that financing exercise and the loss resulting from the funds being unavailable for commercial use in that period. Furthermore, no indication is given as to what use might have been made during the 15-month period in question of the nearly £50m or who would have used this fund, who would have benefited from that use and what the benefit was that might have resulted.
46. The loss in question is described in the particulars of claim as being "holding costs". This is something of a misnomer. The loss that is referred to arose because the remedial work held up and delayed the completion of the project and the start of ETPL's making commercial use of the property. The effect of this delay was twofold: it prolonged the time over which the money used to fund the development had to be borrowed which, in turn, increased the interest that had to be paid for such borrowings and it delayed the recovery of those funds so that they could not be put to an alternative and profitable commercial use. The reason why these delays occurred is not pleaded. This reason could have been that the delay itself delayed the recovery of the proceeds of sale of the property. It could also have been that replacement sources of funds were to be obtained, at no cost to ETPL, which were dependent upon the successful completion of the development.
47. These losses could not have been avoided since the loan agreement provided that all loans from Vastint to ETPL for the purpose of funding the development were to be secured on the development by way of a fixed and floating charge over ETPL's assets until they were repaid. Thus, the losses would continue until these development funds had been replaced and the security released.
48. ETPL's additional potential losses, which are not claimed or relied on and may not have been incurred, might also have included such heads of loss as the loss of rental or other income derived from the properties in the period of delay, or a reduced recovery from the sale of the properties because of a fall in their value in the same period or damages payable to purchasers of the properties as a result of delayed completion or delay in providing vacant possession caused by the delays in question. Had these losses been incurred and claimed, further additional difficult questions as to their recoverability in law would undoubtedly have arisen.
49. It is to be noted that the period of delay in relation to all these actual or potential losses is not the same. Although the length of the period is the same - 15 months - the start and end dates differ. Thus, in relation to the claims based on the delayed return of funds locked into the development, the start date of the period of the claim would be the delayed date or dates upon which the proceeds of sale were obtained by ETPL compared with the earlier dates upon which they would otherwise have been recovered. The marketing campaign needed to sell the houses could not have started in earnest until the houses had been completed and, in consequence, their proceeds of sale would not have been achieved on the completion of the development but on various dates after completion and the subsequent marketing campaign for the houses. Thus, the period of delay would not be the same as, and would start later than, the 15-month remedial period for the defects. However, if there had been any claim based on ETPL being kept from a commercial use of the houses, for example because of an inability to let them, such a period of delay would equate to the period during which the remedial works were carried out since the premises could have been let as soon as that period had ended.
50. Nilsson asserts that the issues that I have to decide must proceed on the basis that ETPL does not intend to establish as a fact that its recovery of the development costs was delayed by 15 months and is instead proceeding on the basis that ETPL may base its claim on its loss of the use of the houses for that period. Thus, it is to be assumed that ETPL will not attempt to prove that the houses could and would have been sold 15 months earlier than they were sold nor that the proceeds of sale were paid to ETPL by the purchasers 15 months later than the sale proceeds would otherwise have been paid to ETPL.
51. Nilsson's approach to the issues would not appear to be justified since ETPL, in its submissions, contended that the loss it was claiming was similar to the recoverable loss that may be claimed by the owner of a chattel or of a building as compensation for being deprived of the opportunity to use or occupy the chattel or building in question. ETPL also contended in is pleading that ETP was delayed by 15 months in recovering the development funds.
52. I must also consider whether ETPL must establish that it was the party that incurred either or both of the types of loss referred to in the pleadings if it is to recover damages or whether it is sufficient for it to show that loss of that type was incurred by either it or Vastint. Finally, I must consider whether ETPL's recoverable loss must be proved directly or whether it is sufficient for ETPL to show what foreseeable loss might have been incurred by a developer faced with the assumed duties and breaches and by adopting that notional loss as its own.
53. It is only if ETPL successfully surmounts all these hurdles that I must consider whether, if it is shown that the purchase price of the houses rose in the intervening 15 months, Nilsson and Charter are entitled to take advantage of that price rise by having the damages otherwise payable reduced by a credit equal to the increase in the proceeds of sale resulting from the rise in sale prices in the 15 months between June 1998 and September 1999.

5.2 Parties' contentions - Issue 1

54. ETPL contended that its claimed consequential loss was an income loss being the loss resulting from its capital lying idle for 15 months. This loss was the loss of its opportunity to use the money commercially elsewhere in that period. This loss arose whether or not the money was borrowed and whether or not it had been funded by Vastint since, even if Vastint was the source of the funds, the loss is taken to have been that of ETPL as the party to whom Nilsson owed its contractual duties.
55. Nilsson contended that the only consequential loss that ETPL is entitled to recover is loss directly incurred by ETPL in funding the project during the period of delay. Nilsson used the term 'special damages' to describe this recoverable loss rather than the term used by ETPL to describe the loss it was claiming, namely 'consequential loss'. Thus, Nilsson contended, ETPL's recovery was confined. It must first plead and prove that the house sales were delayed by the 15-month remedial period and then prove what additional interest ETPL had been incurred in that period in borrowing the development funds. Furthermore, it is not entitled to recover any direct loss incurred by Vastint since such loss is extraneous to the contractual relationship between Nilsson and ETPL. Moreover, the loss actually claimed by ETPL is equivalent to a claim for interest, a claim rarely allowed in law and certainly not allowed in the circumstances of this case. Charter supported these submissions with brief but illuminating supplementary written and oral submissions to the same effect.
56. ETPL responded by contending that loss of opportunity and loss of use were separate and distinct types of loss to loss caused by additional funding costs and it was this loss, whose recoverability was denied by Nilsson, that was being claimed. It mattered not that the loss was wholly or partially that of Vastint since the ultimate source of the funds was immaterial in law. Loss of use claims are traditionally quantified by reference to interest recoverable on the funds tied up for the relevant period as an exception to the usual principle that interest is not claimable as damages.

5.3 Discussion of law

57. In a case involving loss arising from damage to or defects in building work caused by negligent contractual breach by a contractor or construction professional, there is a linkage between the scope of the duty, the breach, remoteness and foreseeability of damage, nature of damage and recoverable damage. Subject to any limitation impose by these tests, a claimant is entitled to recover a sum of money that will put it in the same position as it would have been in if it had not sustained the wrong in question and if the contract had been performed properly. This is the classic formulation for recovery for damages suffered for breach of contract or for negligence.¹ The normal measure of damages is the cost of reinstatement unless this is not a reasonable or foreseeable basis of damages when the difference in cost between the contracted for and provided work or the diminution in value of the completed work will be taken.² Where it would be unreasonable to undertake repairs and the reduced cost of construction and the diminution in value are both negligible, a claimant may recover an assessed value of the diminution in amenity value, at least where the claimant is a domestic householder claiming in respect of a dwelling house.³

¹ Livingstone v Rawyards Coal Co (l889) 5 App Cas 25, HL at page 39 per Lord Blackburn, Radford v De Froberville [1977] 1 WLR 1262, Ch D at pp 1268, 1269 - 1270 and 1271 per Oliver J approved by Lord Lowry in Swingland Ltd v Gibson [1991] 2 AC 223, HL at pp 237 - 238.

² East Ham Corporation v Bernard Sunley & Sons Ltd [1966] AC 406, HL.

³ Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, HL.

58. Greater difficulty arises when additional loss results from the defects. This loss is often referred to as consequential loss, indirect loss or special damages although these terms are not necessarily interchangeable.
59. ETPL describes its claim as being one for consequential loss. This term is usually used to describe loss that has not arisen directly, usually the repair costs of the consequences of physical damage, and is also usually economic loss and usually includes such heads of damage as loss of profit, loss of interest and loss of income. Such loss is often irrecoverable because it is regarded as being too remote or unforeseeable or not within the scope of the defendant's duty that founded the claim. This irrecoverability is often based on the reluctance of a court to allow recovery of pure economic loss where no physical damage has been caused since there is always concern to keep the amount of recoverable damages within proportionate bounds. ETPL's claimed loss is properly described as consequential.
60. Nilsson describes the loss being claimed by ETPL as being special damages. Such damages are usually the direct but quantifiable damages additionally recoverable when general damages are claimed. General damages claims include those for personal injury, loss of employment rights, acts or discrimination, harassment, illegal eviction, defamation and various kinds of infringement of personal freedoms. Special damages can be both physical and economic. It is, therefore, a misnomer to describe ETPL's claims as being for special damages.
61. Indirect damages are those which are only loosely connected with the damage in question and the expression is usually used in an insurance context to seek to limit the extent of insurance cover. The damage can be physical or economic. ETPL's claims might or might not be for indirect damage but since they are not being pursued in an insurance context, it is not necessary to consider further this potential way of describing them.
62. Overall, the law seeks to define the boundary between recoverable and irrecoverable loss by loosely drawn principles of recovery. The loss must be foreseeable and within the scope of the defendant's duty, it must have been caused by the breach in question, it must not be too remote, it must not, where negligent acts or omissions are in question, amount to pure economic loss and it must be fair and reasonable to impose a duty to avoid that loss. These rules or principles must be imposed, however, in a way that allows recovery for loss actually incurred and does not allow recovery where there has been no, or no discernible loss. This creates further difficulties in some cases since it is sometimes unclear whether the claim relates to a loss which is sufficiently discernible or quantifiable in monetary terms to allow recovery.

5.4 Loss of use of development

63. Nilsson contended that ETPL's loss claimed in this case is, in reality, ETPL's loss resulting from the delayed return of the development costs resulting from the delayed receipt of the proceeds of sale. Such a loss is, and can only be, the additional loan interest payable by ETPL in the period of delay between the date the proceeds of sale should have been received but for the delay caused by the remedial work and the actual date of receipt. However, such a claim would necessitate ETPL in pleading and proving that it would have attempted to sell the houses, that it could have sold the houses on an earlier date than it did and that it would then have used the proceeds of sale to discharge the borrowings advanced to fund the development. If necessary, ETPL could establish that it had lost the chance of earlier sales and its claims assessed on that basis. However, Nilsson is not attempting to plead or prove any of these essential factual foundations of its claim.
64. In support of these contentions, Nilsson relied on Blue Circle Industries v Ministry of Defence4 where the defendant had contaminated the claimant's land with radioactive material. The claimant had not been informed of this problem and negotiated to sell the site whilst still unaware of it. When the problem came to light, the prospective purchaser broke off negotiations to buy the land. The land was then decontaminated and ultimately sold nearly two years after the negotiations had been broken off at a significantly reduced price because the market had dropped. The Court of Appeal affirmed an award of damages, assessed on the same basis as a negligence or nuisance claim albeit that the claim was for breach of statutory duty arising out of the Nuclear Installations Act 1965. That loss was loss arising from the damage to the land caused by the contamination. Such loss could include the loss arising from the difference in the market value of the uncontaminated land at the earlier and later dates since that loss had resulted from the physical contamination of the land.

⁴ [1999] Ch 289, CA. See, particularly, Chadwick LJ at 316.

65. The basis of this decision was that the claimant was entitled to be put into the position that it would have been in if the contamination had not occurred, that is that it would have had the opportunity to sell the land on a date nearly two years earlier than it was able to take that opportunity. Thus, Nilsson contends, ETPL can only recover a loss directly caused by the delay in question if it can show that that loss caused it to sell the properties later than it would otherwise have done. ETPL's riposte is to the effect that that contention is acceptable but it does not lead to the conclusion that the only losses that ETPL may recover are those that can be proved to be directly linked to delayed sales of the properties, albeit that such losses would be recoverable. ETPL is entitled to recover for the entirety of its directly foreseeable losses resulting from delayed completion that can include loss of the commercial use of the properties and of monies advanced to fund the development in addition to any increased costs of borrowing.
66. ETPL's contentions are supported by a number of cases involving loss of the use of a commercial chattel, delayed delivery of commercial goods and the loss of use of property caused by delayed completion of its construction or of remedial works being carried on within it. These contentions were succinctly encapsulated in this passage cited from McGregor on Damages:⁵

"Where a breach of contract consists of a failure to deliver property on time or at all, the plaintiff may suffer pecuniary loss by being deprived of the use of the property during the period of delay ... Similarly, where the breach of contract consists in a delivery of a defective property, the plaintiff may be deprived of its use while the defect is being remedied... This loss of use is most likely to result in a head of claim in damages when it results in loss of business profits to the plaintiff… If no such losses have been incurred or if the court refuses their recovery on the ground of remoteness, then a sum calculated by way of interest upon the property, during the period the plaintiff is deprived of it, ... may be allowed... In the absence of any such positive recoveries, general loss of use of property has sometimes compensated by an a ward of interest as damages."⁶

⁵ Cited from paragraphs 53 - 54 of the 17th edition. The corresponding citation from the 18th edition, published since the conclusion of the argument in this case, is to the same effect.

⁶ This citation is supported, in the text or by authorities cited in argument, by a line of authority which includes: British Columbia Saw Mill v Nettleship (1868) LR 3 CP 499, Court of Common Pleas; Liesbosh v Edison [1933] AC 449 465, HL; Heskel v Continental Express [1950] 1 All ER 1033, Devlin J; and Brandeis Ltd v Western Transport [1981] QB 864, CA.

67. It follows that the approach contended for by Nilsson is unduly restrictive and that any direct and foreseeable loss caused by the damage and consequent delayed completion of the houses is recoverable. However, it is necessary for there to be loss caused by the delay. The mere fact that the development was delayed is not sufficient since it is possible, although unlikely, that the developer did not incurred any loss although the houses were completed late. Thus, ETPL's pleaded loss is, in principle, recoverable since it is premised on "... the defects, the investigation and subsequent remedial work ... which caused a delay to ETPL's project ... and resulted in funds being held in the project for a longer period than they would otherwise have been".
68. ETPL cannot however, succeed, as Nilsson contended it was seeking to succeed, merely on the basis of the fact of a delayed completion of the development. ETPL can succeed in principle, however, if it can show that there was a direct causal connection between the delay caused by the investigation of the defects and consequent remedial work and the funds being held longer in the project than they would otherwise have been, whatever the reason for the delayed unlocking of the funds might have been. It does not matter why the funds were locked into the development for a longer than anticipated period, whether it be because of a delayed receipt of the proceeds of sale, or of the delayed reimbursement or recoupment from another source or for whatever other reason. What ETPL must however establish is that the delayed completion directly caused the delayed unlocking of funds.

5.5 No proof of delayed sales

69. ETPL does not, on its presently pleaded case, particularise how and why the funds were locked into the development longer than anticipated other than merely asserting that this delayed release of funds resulted from the delayed completion of the development. What ETPL must show is the causal connection between the two delays, that is between the delayed completion of the development and the delayed unlocking of the funds. This will necessitate it in showing that it would have received back or recovered the £48m development costs it sunk into the development 15 months earlier than it would otherwise have done but for the delay caused by the remedial works.

5.6 Loans from Vastint

70. Given the absence of particularisation as to how the funding was provided for, I must proceed on the basis that there were three possible sources of funding for the development funds in unspecified proportions. These were: (1) from the initial funding draw down facility provided for in the Credit Financing Agreement of up to £20m, or as further increased by negotiation, which was secured on the development. These funds carried no interest subject to a contrary mutual agreement reached between Vastint and ETPL but were repayable on demand; (2) from the development funding facility also provided for in the Construction Credit Agreement which carried interest at 10 per cent accruing annually secured on the development and repayable on demand; and (3) from other unspecified sources whether ETPL's own resources or an alternative funding source by way of gift or loan on unspecified terms.
71. Nilsson and Charter contended that the only loss that could be recovered was additional interest payable by ETPL since only its own loss was recoverable in law. Thus, no loss associated with the first source of funding, via the interest-free draw down facility, was recoverable since any loss that had resulted in the delayed unlocking of these funds was attributable to Vastint and not ETPL. To allow recovery for these losses would be to allow ETPL to pierce the corporate veil and to recover Vastint's losses rather than its own. ETPL contended that the credit arrangement was an inter-company financing arrangement between related companies, since ETPL was wholly owned by a company which was in turn wholly owned by Vastint. Moreover, ETPL was required to secure the whole loan on the development which would preclude its repayment until the development was sold and it also had to make commercial provision for the possibility of the loan being called in on demand, as provided for in the Construction Credit Agreement. Finally, the agreement envisaged that ETPL and Vastint might reach a subsequent agreement whereby the loan would be subject to interest payments to be made by ETPL to Vastint. The loan was not, therefore, entirely at Vastint's cost albeit that the actual cost to ETPL was neither defined nor readily definable.
72. The head of claim is, therefore, expressed in either of two ways. First, it is claimed as a loss incurred by Vastint and represents the loss Vastint has suffered from the loss of the use of its funds for the period in question. Secondly, it is claimed as a loss incurred by ETPL for the loss of the use of the same funds which are to be considered as being ETPL's own funds and thirdly it is claimed by way of a general claim for damages representing the notional cost to ETPL for having to make contingent commercial arrangements to cover the possibility of the loan being reclaimed or not recovered.
73. The starting point in considering the claim based on Vastint's loss used to be that this loss is irrecoverable by ETPL since English law ordinarily requires the loss claimed by and payable to a claimant to be its own loss. However, this general principle is now susceptible to so many exceptions that it is doubtful whether it is any longer supportable as representing a statement of the general law. Instead, a court's starting point is to consider whether the loss was incurred by the claimant and, if not, whether the contract in question contemplated or provided that any breach would incur the contract breaker in a liability for losses suffered by a third party, whether such losses fell within the scope of any duty that was broken, whether the claimant has some equitable or other duty (for example by way of a duty imposed by principles of subrogation) to pursue and recover the loss on behalf of another or whether there is some other particular basis recognised by the law that allows for the claimant's recovery of another's loss.
74. The claimant relies on the principle that loss incurred by another is recoverable if it was in the contemplation of the parties that such loss was within the scope of Nilsson's contract or duty. It contends that the agreed scope of Nilsson's duty must be taken to include the additional funding costs and the losses accruing from any delay in the recovery of funding costs arising from delay to the completion of the development caused by the need to rectify its own design and supervision defaults. The scope of Nilsson's duty, I must assume, included the fact that the engagement was in connection with a speculative commercial development being undertaken by its client who was a special vehicle company set up solely for that purpose. Any capital invested in the project was at risk and any borrowing for purposes of the project would be a cost which would reflect that risk. Furthermore, any development delay would result in funds being held in the project longer than they otherwise be held in it and would result in the loss of the use of those funds.
75. It is clear from this summary that funding costs and other losses arising from a delayed return of capital locked into the project fell within Nilsson's scope of duty irrespective of whether it was Nilsson directly or Nilsson via a related commercial entity that incurred the loss, particularly if the borrowings were secured on ETPL's property which it was developing. Assuming that the claim is one that would be recoverable by ETPL if it had incurred the loss in question, these costs and losses fall within the principle that I formulated on the basis of the authorities as then prevailing in John Harris Partnership (a firm) v Groveworld Limited.⁷ In that case, a joint venture commercial development had been undertaken and a claim was then made against the architect for damages for breach of a contract for architectural services in connection with a building contract by one of the partners who would only itself be liable to fund 45 per cent of the costs being claimed as damages. The architects contended that 55 per cent of the claimed loss could not be recovered since this had been incurred by the a third party joint venture partner of the claimant. I concluded that the entire loss could be recovered by the claimant, stating:

"If the loss [ie 55 per cent of the claim] is irrecoverable because … [the claimant] has not suffered loss, recovery may still be obtained from [the architect] if the following can be established:

1. The nature or terms of [the architect's] contract with [the claimant] are such that [the claimant] can be taken to have contracted with [the architect] on the basis that [the third party's] loss would be recoverable from [the architect] at the suit of [the claimant]

2. [The claimant] has an equitable obligation to peruse [the architect] for the loss caused to [the third party] by [the architect] and a duty to account to [the third party] for any recovery.

3. The Linden Gardens exception, which provides [the claimant] with an entitlement to pursue [the architect] for [the third party's] loss, is one which is not confined to building contracts but can extend to contracts involving the provision of professional services."

⁷ Cited in argument using the truncated report in (1999) CILL 1485. A full report is contained in an established set of law reports: X Con LR (2000) Y.

76. I relied on a core passage in the reasoning of the judgment of the Court of Appeal in Alfred McAlpine Construction Ltd v Panatown Ltd.⁸ That case was then appealed to the House of Lords who allowed the appeal by a majority of three to two.⁹ The basis of the reasoning of the majority was that a duty of care deed entered into between the defendant (in the position of the architect in both the John Harris case and of Nilsson in this case) and the third party (in the position of the third party joint venture partner in the John Harris case and of Vastint in this case) allowing a direct action for recovery by the third party against the defendant displaced the intention to permit and obtain recovery of the loss incurred by the third party. The speeches of the House of Lords in the Panatown case were not cited to me during the argument and it is clear that, since there was no collateral contractual relationship between Vastint and Nilsson, my reasoning in the John Harris case is applicable to this case.

⁸ (1998) Const LR 46, CA.

⁹ See [2001] AC 518, HL. The reasoning of the House of Lords is analysed in my judgment in Bovis Lend Lease Limited (formerly Bovis Construction Limited) v R D Fire Protection Limited at paras 167 - 182.

77. I conclude that, in principle, ETPL may recover as damages the loss incurred by Vastint arising out of the late unlocking of funds it had advanced for the development on the grounds that this loss fell within the contemplation of the parties to the ETPL contract with Nilsson and within scope of Nilsson's duty. This type of recovery is available in building contracts, and for reasons developed in the John Harris case, is also available in contracts of engagement entered into in conjunction with a building contract where the necessary contemplation and scope of duty exists.
78. Nilsson and Charter contended that courts have consistently stressed the need for claimants to establish that they have actually incurred losses which are claimed as special damages.¹⁰ However, the claim in this case is one for indirect consequential loss and not for special damages. Moreover, the cases relied on do not touch on the question of whether ETPL is entitled to recover a third party loss since they are not concerned with that question. These cases merely establish that where a claimant cannot itself prove that any party entitled to claim damages has incurred loss, no damages are recoverable whether for the claimant or for a third party on whose behalf the claim is being brought. Thus, if the type of loss claimed in this case is recognised as being a loss recoverable in law, it may be recovered by ETPL even though incurred by Vastint.

¹⁰ Citing Wickham Holdings v Brooke House Motors Ltd [1967] 1 WLR 295, CA, particularly at pp 299 - 300 per Lord Denning MR; Brandeis v Western Transport [1981] QB 864, CA, particularly at p 870 per Brandon LJ; Kuwait Airways v Iraqi Airways [2002] 2 AC 191, HL, particularly at pages 1089 - 1090; and the BBL case [1997] AC 191, particularly at p 218 per Lord Hoffmann.

79. ETPL puts its claim in an alternative way, namely that the loss in question, even if strictly a loss incurred by Vastint, is also a loss that it can treat as being its own loss and can in consequence recover it as its own loss. This is because the loss may be regarded as having resulted from a breach by Nilsson of ETPL's so-called performance or expectation interest in Nilsson's contract for architectural services.
80. This interest is one that any employer of a contractor or construction professional has in seeing the successful completion of its project and of the contract in question, an interest that extends to any financial loss arising from or incurred during the misperformance of the contract. A claim for such a loss is not precluded by the speeches of the House of Lords in the Panatown case in situations, as here, where there is no collateral contract or warranty between the defendant contract breaker and the third party covering the loss in question. No detailed argument was addressed on this alternative way of claiming this loss.
81. In the light of the discussion about such a claim in and following the Panatown case,¹¹ I am satisfied that this head of claim is recoverable by ETPL as damages for breach of its performance or expectation interest in seeing Nilsson's design contract through. The discussion I am referring to suggests that performance or expectation loss of the type being claimed by ETPL is recoverable from Nilsson since the loss is related to and arises out of a gift of funds or benevolent action to provide funds provided by Vastint, a third party, in a situation where that third party was providing those funds to assist in the completion of the commercial venture in question may be recovered as part of ETPL's damages flowing from the damage to ETPL's performance interest. Moreover, ETPL was the employer under the building contract and the associated contract to provide architectural services and had a genuine commercial interest in "seeing" the two contracts through to a successful completion.

¹¹ This head of loss is discussed in a recent case not cited in argument, Burdis v Livsey [2001] 1 WLR 1251 at pp 1257 - 1258 per Gray J and, on appeal, at [2003] QB 36, CA. It is also discussed in the Bovis Lend Lease case (supra, endnote 9) and in the first supplement to Hudson on Building Contracts, 11th edition (2004) at paras 8.225 and 8.229A.

5.7 Loss of use of development funds

82. I must now decide whether ETPL may recover loss based on the loss of the use of the funds advanced by Vastint given that that claim, whether properly regarded as one brought by ETPL for the recovery of its own loss or for the recoverable loss incurred by a third party, is a claim for the loss of the use of funds quantified by reference to the notional reasonable interest that a developer would have had to pay to borrow those funds for development purposes during the period in question. This involves considering whether a loss of use claim is recoverable at all and, if so, whether it is recoverable where no direct loss is established but, instead, a notional interest claim is advanced.
83. ETPL contended that the loss of opportunity to use the funds in the period in question was similar as a head of loss to the loss arising from being deprived of the use of a chattel or building. Such losses are recoverable in principle and may be quantified by reference to a claim for interest calculated at a reasonable rate on the value of the chattel or building for the period in question. That is how it has claimed and calculated its loss. Nilsson and Charter contended that the claim for the losses in question was a claim for special damages which is a claim for pecuniary losses which are only recoverable if actual loss can be pleaded and proved since, ordinarily, such losses may be only be claimed when they are capable of being arithmetically calculated. Moreover, the law does not ordinarily allow interest to be claimed as damages.
84. ETPL relies on analogous situations where compensation for loss of use has been held to be recoverable.¹² In Brandeis Goldschmidt v Western Transport Ltd,¹³ the claimant, who manufactured copper cathodes, succeeded in a claim based on the wrongful detention of its copper by the defendant and claimed damages for the loss of its use quantified by reference to overdraft interest payable during the period of detention on a sum representing the proceeds of sale of the cathodes that could have been made out of the detained copper. This claim was allowed by the judge but disallowed on appeal and in doing so, Brandon LJ stated:

"I do not think it matters much whether the plaintiffs financed the purchase of the copper from their own resources or by borrowing from the bank. If they used their own resources, they would lose the interest which they would otherwise have earned by investing the moneys so used. If they borrowed from the bank, they would have to pay interest on the amount so borrowed. The difficulty about this item of the plaintiffs' claim, however, seems to me to be this. The plaintiffs adduced no evidence to show that, if the copper had not been detained, it would have been processed into cathodes, and the cathodes sold, and the proceeds of sale applied in reduction of their overdraft by any particular date. ... it was for the plaintiffs to satisfy the court, by appropriate evidence about how their business was carried on, that all or part of the alleged loss was actually sustained."

Thus, the claim for loss of the use of the proceeds of sale of the copper was allowable in principle but had to be accompanied by evidence that there was indeed a loss of the use of the proceeds.

¹² See paragraph 63 and endnote 5 above.

¹³ ibid, paragraph 63, endnote 5. The quotation is taken from page 873.

85. This basis of recovery clearly extends to situations where a claimant has lost the use of property and there is no reason in principle why it cannot also extend to the loss of use of money where that loss is consequential and has been directly caused by the loss of use of property as a result of delay caused by a defendant's breach. The principle issue is whether that loss of use must be reflected in pleaded and proved loss or whether it is sufficient for ETPL to prove that it lost the use of the money by its delayed release from the development without proving what specific use, and hence what specific loss, would have resulted.
86. The problem posed by this issue is not as stark as it might at first blush appear. Any commercial developer or commercial investor receiving a large sum of liquid funds, in this case approximately £48m, will either bank the funds and earn interest, invest the funds in other investments or put the funds to further use in its commercial business in circumstances where it would either not have invested or would have borrowed alternative funds had the funds in question not been released so as to be available for reuse. Thus, in most situations, the loss will be directly measurable by an interest payment reflecting the interest which might have been earned by depositing the funds or the interest which might have been paid in borrowing alternative funds. What is more problematic is where the funds might have been ploughed into a new commercial enterprise or used in the business in a way which would not have involved a direct saving by way of overdraft interest or other comparable borrowing costs. Moreover, it might not be easy to establish what alternative use the funds would have been put to had they been available earlier. The precise use that might have occurred might be somewhat speculative albeit that the claimant can establish that some commercially beneficial use and return for those funds might have resulted.
87. For these reasons, essentially being a difficulty in establishing special damages in the form of an interest payment directly linked to the funds in question, ETPL contends that it should be entitled to establish as general damages a reasonable notional interest payment. It points to three cases where a comparable method of assessing and awarding damages was resorted to, albeit that these cases are ones concerned with the loss of use of a chattel.
88. The first case in time that was relied on was The British Columbia and Vancouver's Island Spar Lumber and Saw-Mill Company Ltd v Nettleship14 where machinery for use in a saw-mill in Vancouver was delivered to the defendant at the quayside in Glasgow for shipping on its ship to Vancouver. The machinery was never loaded and was lost and the claimant had to send to England for replacement articles. The damages claimed included damages to compensate the claimant for the loss of the use of the machinery. This was allowed at 5 per cent of the value of the machinery for the period between due delivery date and the date of delivery of the replacement articles. The court concluded that any loss linked to the loss of profit that the mill suffered due to the delay was both too speculative, too difficult to quantify and too remote to be recoverable but that, nonetheless, the claimant was entitled to reasonable compensation for the loss of the use of the machinery. That is why it alighted on allowing an interest-type award linked to the period of delay, the value of the machinery and a reasonable rate of interest. As Bovill CJ put it:

"The true measure is a reasonable compensation for the non-performance of the contract. In practice that is now settled on the principle of allowing interest, varying sometimes in amount."¹⁵

¹⁴ (1868) LR 3CP 499, CCP.

¹⁵ At p 506.

89. The next case is the well-known decision of the House of Lords in The Liesbosh16 where a dredger was sunk and lost due to the defendant's negligence. The dredger was then engaged on harbour construction work and that work was disrupted and delayed for many months pending the arrival of a replacement dredger. The House of Lords directed that, for that period when the claimant had no dredger to call on, it was entitled to compensation for disturbance and loss including in that loss such items as overhead charges, expenses of staff and equipment and so forth. Had the dredger been laid up in port or a seeking ship in ballast during the period when the damaged or lost dredger was unavailable to the claimant, the measure of loss and recovery would be:

"the fair measure of damage ... [being] simply the market value, on which will be calculated interest at and from the date of loss, to compensate for delay in paying for the loss.¹⁷

¹⁶ [1933] AC 449, HL.

¹⁷ At pp 464 and 468, per Lord Wright.

90. The third case relied on was Heskell v Continental Express Ltd18 where the defendant warehouse failed to dispatch bales of poplin so that the claimant had to pay damages to a purchaser of the goods. The goods were finally delivered many months late by which time the market value in the goods had dropped. Devlin J, with regard to the claim based on the delay in delivery, stated:

"I accept also the contention that something should be added as compensation in respect of the period for which the plaintiff was out of his money or lost the commercial use of the goods, whichever way one likes to put it."¹⁹

The sum awarded represented the fall in the value of the goods in the period between the date of contractual delivery and the delayed date of delivery.

¹⁸ [1950] 1 All ER 1033, per Devlin J.

¹⁹ At page 1046.

91. I have also set out the summary of the law set out in McGregor.²⁰ This shows that loss of use of a building caused by the delay in completing building work can be calculated by reference to an interest payment on the value of the property whose use the claimant owner has been deprived of. The same summary of the law is to be found in Keating on Building Contracts²¹ where it is stated:

"If he is building houses or blocks of flats for letting, then on analogy with shipping cases he is probably liable for loss of rent. It may be that in cases where works, such as those for public buildings, would not produce rents or profits, the contractor would be liable for loss of interest on capital lying idle."

²⁰ Supra, paragraph 63.

²¹ Seventh edition (2001), Furst QC and Ramsey QC, paragraph 8-52.

92. The conclusion to be drawn from these authorities is that delay in completing a commercial development gives rise to a claim for losses caused by there having been a period of delay in the completion of the development. Such losses can include the loss arising from the loss of use of capital and financing funds locked into the development during the period of delay. The claimant developer must show that he did lose the use of the funds in the sense that he must show that he would have put the funds to commercial use by investment, by reducing overdraft or other borrowing costs or by investing in the business to obtain capital development. He must, in other words, provide evidence that there was a release of funds generated by the completion of the development and that the actual date of release and a delay in release was causally linked at least in general terms to the defendant's breach of contract and duty. He must also show what he would have done with the funds during the delay period had they been released earlier.
93. If the claimant can establish that he has lost the opportunity to use the funds for a commercial purpose but he cannot establish the precise loss that arose or cannot readily quantify it, the claimant may then quantify the loss by reference to a reasonable rate of return that could have been achieved from the funds. It will, of course, have to be established what that rate might be. Obvious guidance would be obtained by ascertaining what rate of interest could have been obtained by depositing the funds so as to earn a commercial rate of interest or by lending the money on relatively short term terms. Such an assessment is permitted because the law allows an approximation of the loss to be made where a claimant can prove that he had been prevented from using funds for a commercial purpose as a result of the defendant's breach but where he cannot reasonably or readily identify the nature or extent of that loss.
94. Nilsson and Charter sought to counter this approach to the loss as claimed and quantified by ETPL in two ways. Firstly, they relied on statements in a number of authorities to the effect that special damages arising from a delay causing the loss of an opportunity to use property or money must be specially pleaded and proved to be recoverable. Thus, in the Blue Circle case,²² Chadwick LJ stated:

" … in principle the plaintiffs would be entitled to compensation for loss of the use of the money which they would have received in April 1993 if the sale to Sun had gone through, this element would nee to be claimed, and proved, as special damage. No special damage was claimed in respect of the loss of the sale proceeds, and there is no basis upon which the judge could have assessed compensation for that element of loss."²³

²² See paragraph 61, endnote 4 supra.

²³ At page 316.

95. This statement supports the conclusion that I have already reached that a claimant must prove that it lost the use of the money in question and must establish that it would have been put to commercial use had the claimant had the use of it in the time in question. However, if the statement is intended to lay down an absolute rule that a claimant can only recover specific and ascertainable loss where it can establish the loss of commercial use of money or land, the statement was neither necessary for the case in issue nor in line with earlier authorities. In the Blue Circle case, no loss of use of any kind was established so that there was no basis for the assessment of compensation. Had the claimant established that it would have banked the sale proceeds or would have used them for a useful commercial purpose but without establishing the precise loss that would have occurred, the authorities that I have already cited establish that a loss of interest assessment is then permitted.
96. Both Nilsson and Charter also sought to show that, in principle, interest is never recoverable as damages so that the claim in question was irrecoverable. Instead, a party can only recover, where lost use of money is the basis of a claim, the precisely quantified loss that it has incurred. On analysis, this is a different way of putting the basic point made by Nilsson that I have already dealt with. The answer to it is that no damages are recoverable if no loss of any kind can be established. If it can be established that a party lost the opportunity to make commercial use of the money in question but cannot precisely quantify that loss, it is in principle acceptable for a claimant to quantify that loss by reference to a reasonable return that it could have earned by placing the money on deposit and then collecting a reasonable commercial rate of interest over the relevant period of delay.

5.8 No ascertainable liability to pay interest and quantification of loss by reference to LIBOR

97. Nilsson and Charter finally contended that, for the interest element of ETPL's claim, being the part of the loan from Vastint on which it had to pay interest, it was unable to show that it had had to pay Vastint a rate of interest as claimed, namely LIBOR plus 2 per cent. In fact, the rate was a higher rate of 10 per cent. ETPL responds in two ways. First, the rate of 10 per cent was not foreseeable since it was higher than could reasonably have been contemplated. In such circumstances, a claimant is not deprived of all recovery but only of that part of the interest that was paid that was unforeseeable. Thus, a foreseeable rate of interest, being a commercially reasonable rate, is recoverable. Secondly, ETPL incurred considerable commercial loss in relation to the part of the loan not covered by a defined rate of interest since that funding was secured on the development and on ETPL's other assets, ETPL had to make provision for the fact that the loan was repayable on demand and also was susceptible to a possible subsequent agreement to convert the soft loan into an interest bearing loan. The costs of these additional commercial detriments cannot be readily quantified so that a reasonable basis for quantification would be to take a reasonable commercial rate of interest over the relevant period.

5.9 Summary and conclusion - Issue 1

98. The overall conclusion is that ETPL has a claim for that part of the entirety of the funding that ETPL is able to establish at trial was locked into the development for any period as a result of the delays caused by the remedial investigations and works and can also establish was incurring it in commercial loss because it was on loan for longer than it should have been or because either it or Vastint was unable to make commercial use of the money. Since the reasonable and recoverable basis for such claims is to take a reasonable rate of commercial interest that could have been paid or earned on that fund over the period of delay, the entirety of the fund which ETPL establishes is susceptible to this claim may yield damages calculated by taking the appropriate rate of interest over the proved period of prolongation over which the funds were locked into the development.

5.5 Issue 1 - First alternative

99. This alternative basis for deciding issue I is as follows:

"In relation to Preliminary Issue 1, would it make a difference to the outcome if, instead of the facts set out in paragraph 35 [ie that Nilsson provided the approval or confirmation of the standard details of the supplier of the proprietary membrane] it was ETPL who provided such approval and confirmation to Charter at this meeting but that Nilsson ought to have but did not warn ETPL that ETPL should not approve the details for construction use?"

100. This alternative basis for determining issue 1 is based on an assumed failure by Nilsson of a duty to warn ETPL rather than an assumed duty for it to provide details. Such a duty, if it arose, would not, as ETPL submitted, affect the scope of Nilsson's duty. Indeed, it would widen it to include advice giving functions in relation to the design of others as well as design, detailing and inspecting functions.

5.6 Issue 1 - Second and third alternatives

101. These two alternative issues ask whether it would make any difference to the outcome if Nilsson did not have the knowledge referred to in any or each of the four sub-paragraphs of the schedule of assumed facts concerning the nature of the development. These sub-paragraphs are set out in paragraph 3 (a) - (d) reproduced in paragraph 17 above. Neither Nilsson nor Charter have made separate submission about these two alternative issues and I am to assume that all parties accept that, for the purposes of this issue only, the claims fall within the scope of Nilsson's and Charter's respective duties of care owed to ETPL. However, it must be highly arguable that the scope of their duties no longer extends to the consequential losses being claimed if any or all of the assumptions set out in paragraph 3(a) - (d) are excluded. Given that possibility, the absence of any submissions from Nilsson and Charter and the difficulty of dealing with the issue on this attenuated basis without factual findings, I will not provide an answer to these two issues.

6. Issue 2 - Must credit be given for enhanced proceeds of sale?

6.1 The first alternative

102. This issue presupposes that the delay in the completion of the project caused there to be a delay in the sale of the houses and that, in the period between the date the sales would have taken place and the delayed date of the sales, the price of the houses rose. What is not considered in the formulation of the issue is the nature or extent of the increase. It is common knowledge that, over time, the price of property increases although that increase is not consistent and is subject to short term downturns. Furthermore, some price increases over a particular period of time merely reflect the general inflationary trends over time whereas others may arise from local, unusual or specific causes. For example, an unexpected and dramatic rise might have occurred as a result of extraneous planning factors or from the sudden ability of the claimant to take advantage of an enhanced marriage value arising from the sale creating the joinder of two property interests.
103. These uncertainties show that movement in property values are not directly linked to the development of property or to the delay in the completion or sale of the properties being developed resulting from a defendant's breach of contract. This suggests that the question of whether a particular price rise was caused by or closely linked to a particular breach is a question of fact and that only those price rises that are closely linked to the breach need by taken into account in assessing damages. The loss that a claimant may recover from any breach is the net loss resulting from that breach but the balancing of gains and losses to arrive at that net loss must only take into account transactions that were directly linked to the breach.
104. This approach is one that is derived from the many cases cited in argument. Thus, in Hodgson v Trapp,²⁴ Lord Bridge stated:

"... when considering the assessment of damages in negligence, ... they are intended to be purely compensatory. When the damages claimed are essentially financial in character, being the measure on the one hand of the injured plaintiff's consequential loss of earnings, profits or other gains which he would have made if not injured, or on the other hand, of consequential expenses to which he has been and which, if not injured, he would not have needed to incur, the basic rule is that it is the net consequential loss and expense which the court must measure. If, in consequence of the injuries sustained, the plaintiff has enjoyed receipts to which he would not otherwise have been entitled, prima facie those receipts are to be set against the aggregate of the plaintiff's losses and expenses in arriving at the measure of damages." (emphasis added)

Similarly, in Hussey v Eels,²⁵ Mustill LJ stated:

"I have dealt with the authorities at some length, because it was said that in one direction or another they provided a direct solution to the present problem. For the reasons already stated, I do not see them in this light. Ultimately, as with so many disputes about damages, the issue is primarily one of fact. Did the negligence which caused the damage also cause the profit - if profit there was?"

²⁴ [1989] 1 AC 807, HL. This was a personal injury case. The quotation cited is to be found at page 819.

²⁵ [1990] 2 QB 227, CA. The quotation from Mustill LJ' s judgment is taken from page 241. This was a misrepresentation case arising out of enquiries before contract in a domestic property transaction.

105. This case is one involving a claim for damages for defective and poorly designed membranes. The normal measure of damages in such a case is the cost of repair, the measure being sought here. Nilsson's scope of the duty in this case is defined as encompassing architectural services for a commercial residential development of houses at the top end of the market in terms of price, luxury, location and facilities. Thus, recoverable consequential loss naturally and foreseeably linked to that scope of duty would obviously extend to the direct costs associated with a delay in completion caused by the defects and their repair. This loss would not, however, normally extend to losses occurring after completion including losses arising out of the sale of the properties as a result of a downward movement in property prices unless the scope of Nilsson's duty had been defined so as to include this loss and the possibility of its occurring had brought to Nilsson's attention at the time of contract so as to bring it within the second limb of the Hadley v Baxendale rules. In other words, loss caused by a fall in the market would ordinarily be regard as too remote, not foreseeable and outside Nilsson's scope of duty.
106. Thus, on the basis of the assumed facts on which this issue is to be determined, this case is one where the subsequent sale and its consequences are not sufficiently close to the negligent design and supervision, nor do they arise out of that breach of contract or duty, so that the loss or profit arising from the onward sales is not to be taken into account. The case is different from the Blue Circle Industries case where the contaminated land was, until its clean up had been completed, unsaleable. Between the date the land became unsaleable and the date thereafter if first became saleable again, the market value had halved from £l0m to £5m and the basis of the award of damages was that fall in value. This was because, as Chadwick LJ put it:

"The position in which the plaintiffs would have been in if the contamination had never occurred must be compared with the position in which the plaintiffs found themselves in the events which did happen. The opportunity to sell the estate to [the third party] in January 1993 was lost. The judge found as a fact that 'the sale was aborted because of the 1989 incident and its aftermath.' The estate was unsaleable, whether as a whole or in parts, until the completion of the clean-up operation; ... from that date the plaintiffs were 'free once again to exercise their own choice as to the marketing of the estate'. ... There is no doubt that the estate was unsaleable (in whole or in parts) between January 1993 (when the defendant disclosed that the contamination of the marshland had occurred) and December 1994. During that period the plaintiffs were deprived of the opportunity to sell the land. The judge found, correctly as it seems to me, that the loss of opportunity was the direct result of the contamination. In my view, the plaintiffs are entitled to compensation under the Act of 1965 for the loss of the opportunity to sell."²⁶

²⁶ ibid., paragraph 61, endnote 4. The quotation is taken from page 315.

107. This case is different because the claimant could have sold the houses at any time, albeit at a reduced price because of the defects. Ordinarily, that reduction would be arrived at by reference to the cost of repair or, if the repairs were to be undertaken by the claimant, by reference to a sum to reflect the disturbance to the claimant. The cost of repairs is being claimed and any additional nuisance payment would be recoverable as a direct consequence of the breach. However, where the claimant elects to await the conclusion of the repairs before selling, that is a decision taken by him unrelated to the original breach. The assumed facts in this case recite that the delay resulted in the funds being locked into the development longer than was anticipated but they do not suggest that sales were impossible in the interim period of delay or that the claimant had failed to mitigate its loss by not marketing the houses in that period. Thus, the sales were extraneous to the alleged breaches and were not part of one continuous transaction.
108. This case is therefore different from the type of valuation case in issue in the BBL case where Lord Hoffmann stated:

"But the question of whether the lender has suffered a loss is not the same as the question of how one defines the kind of loss which falls within the scope of the duty of care. The Court of Appeal ... justified its view on the latter question by an appeal to symmetry: 'If the market moves upwards, the valuer reaps the benefit; if it moves downwards, he stands the loss.' This seems to me to confuse the two questions. If the market moves upwards, it reduces or eliminates the loss which the lender would otherwise have suffered. If it moves downwards, it may result in more loss than is attributable to the valuer's error. There is no contradiction in this asymmetry. A plaintiff has to prove both that he has suffered loss and that the loss fell within the scope of the duty. The fact that he cannot recover for loss which he has not suffered does not entitle him to an award of damages for loss which he has suffered but which does not fall within the scope of the valuer's duty of care."²⁷

²⁷ South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, HL at p 218

109. In this case, in contradistinction to the BBL case, the loss resulting from a fall in the market, had that occurred, would be too remote and hence irrecoverable in addition to it falling outside the scope of Nilsson's duty of care. Thus, there is no potential for asymmetry whereby such loss is irrecoverable from Nilsson if the market falls but a corresponding profit for ETPL must be taken into account if the market rises. This is because, in both cases, the rise or fall is unconnected with the negligent act and too remote from it in addition to being outside Nilsson's scope of duty.
110. A further reason why the sale of the houses is unconnected with the original breach is that the sale occurred long after the breach had occurred. Ordinarily, in a defects case, damages for negligence and breach of contract are assessed by reference to the date on which the breach of contract or duty occurred since that is when the damage was caused and the breach of contract arose. The case is similar to Jamal v Moola Dawood Sons & Co28 where the seller of shares resold them to a third party when the contracted buyer declined to take them on the contractual sale date. The share prices had risen between the date of completion and the subsequent date of sale but the claimant seller, in an action for damages against the defendant buyer under the original contract, did not have to give credit for that rise. The measure of damages was assessed as the difference between the sale price in the contract and the market price on the contractual date for completion ignoring the subsequent rise in that price between that date and the actual sale off-loading the shares to a third party. Lord Wrenbury stated this:

"But the loss to be ascertained is the loss at the date of the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it. . . . But the fact that by reason of the loss of the contract which the defendant has failed to perform the plaintiff obtains the benefit of another contract which is of value to him does not entitle the defendant to the benefit of the latter contract …"

²⁸ [1916] 1 AC 175, PC.

²⁹ At pp 179 - 180.

111. I conclude that, on the basis of the assumed facts, the rise in the sales prices of the houses, if such occurred, need not be taken into account in assessing ETPL's recoverable damages nor need any rise in price be reflected in a reduced award of damages because the sales and any increased profit is unconnected with the original breaches, did not form part of the same transaction as those breaches and was not caused by them. Since, however, this question of recoverability is so fact sensitive, it is possible that the facts surrounding the sales and the movements in the property market would show that a different might show that a different conclusion should be taken. There is, however, no inkling of that possibility in the pleadings or the schedule of assumed facts.

6.2 The first alternative - Issue 2

109. This alternative asks:

Would it make any difference to the outcome if it were found that it was always the intention of ETPL:

(a) to construct and complete the properties in phases;

(b) to release the properties onto the market and to sell the properties in phases, which phases would not necessarily coincide with the "construction and completion" phases but would depend, at least in substantial part, on the state of the residential market at the time of completion?

112. These different assumed facts do not appear to affect the answer to issue 1. They relate to ETPL's intentions and not to the potential linkage or lack of linkage between the breaches and the rise in sale prices occasioned by the delayed sale of the houses. My answer to this alternative is: "No".

6.3 The second alternative - Issue 2

113. The second alternative seeks an answer to issue 2 on the same assumption that is used as the basis of the first alternative to issue 1. As with the first alternative answer to issue 1, the assumption that Nilsson's breach was to fail to advise about the design to the membrane supplied by others is one that makes no difference to the answer to issue 2.

7. Conclusion

114. The answers to the issues are as follows:

[Parties to seek to agree answers to the issues]