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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 108
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A52/03
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OPINION OF C.J.
MACAULAY, Q.C.
(sitting as a
Temporary Judge)
in the cause
JUSTIN ALEXANDER
WATTS
Pursuer;
against
BELL & SCOTT
W.S., SOLICITORS
Defenders:
________________
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Pursuer:
Murphy, Q.C., Robertson; Semple
Fraser
Defenders: Campbell, Q.C., Young; Balfour & Manson
22 June 2007
Introduction
[1] In
this action the defenders admit liability to make reparation to the pursuer in
respect of any loss and damage sustained by him as a consequence of the
defenders' failure to timeously intimate an offer for the purchase of heritable
property which the pursuer intended to develop.
The essential question raised is whether the pursuer can recover the
loss of profit he claims he would have made had he been able to develop the
property.
[2] The
essential facts behind the defenders' potential liability to make reparation to
the pursuer can be simply stated. The
defenders, at the relevant time, were the pursuer's solicitors, and were
instructed by him to submit an offer to purchase premises at 32 and 34
Abercromby Place, Edinburgh
("the premises") then belonging to the Caledonian Club (the "club"). A written offer dated 14 May 2002 in the sum of
£1.05 million was submitted by the defenders to the selling agents, DM
Hall. In response to that offer, DM Hall
fixed a closing date for 12 noon on Friday 21 June 2002. In the offer the price stipulated was £1.05
million. In the course of the morning of
21 June, the pursuer, by telephone, instructed the solicitor dealing with
the transaction to increase his offer to £1,100,000. DM Hall agreed that a timeous offer by fax prior
to the closing date, if followed by a "proper" offer, would be acceptable. Per
incuriam the fax to that effect was sent to the pursuer's own fax number
and not to that of DM Hall. At that time
the pursuer was on holiday and unaware of the error. The faxed offer was therefore not received by
DM Hall prior to the stipulated closing time.
The back-up offer was received late the following Monday. Although seven other offers for the premises
were received, the pursuer's offer of £1,100,000 would have been the highest
offer by some £43,000. The premises were
in fact sold to Plum Developments Limited as the highest bidder who had made a
timeous offer.
[3] Although
in the course of the proof the parties joined issue on whether or not the
pursuer's offer would have been accepted if it had been timeous, Mr Campbell,
Senior Counsel for the defenders, in his submissions accepted that the evidence
did demonstrate that the pursuer's offer would probably have been accepted
since it was the highest offer and the pursuer would have been able to raise
the necessary finance and reach agreement with the sellers in relation to the
conditions set out in his offer. In
light of the concessions made I propose to proceed on the basis that the
pursuer would have successfully concluded a bargain for the purchase of the
premises.
Basis of this action
[4] The pursuer contends that
he intended to develop the premises and to convert the premises into separate
flats. He sues the defenders for the
loss of profit he claims that he would have made from that development. For reasons that will become evident later,
the defenders contend that the pursuer has suffered no loss for which they are
responsible. The defenders also advance
an alternative method of calculating any loss of profit that the pursuer may
have suffered as a consequence of the defenders' failure.
[5] The
pursuer's action is based on contract.
In his pleadings he avers it was an implied term of his contract with
the defenders that in implementing his instructions the defenders would use the
skill and care of a reasonably competent solicitor and by failing to deliver
his offer for the premises timeously, they are in breach of that implied duty
of care. Although the defenders do not
dispute that they were in breach of contract they do dispute that any legally
recoverable loss stemmed from the breach of contract.
Witnesses
[6] I
heard the evidence of the pursuer himself.
The following witnesses were also led on behalf of the pursuer:
(i) Richard Henry Kingsford
Watts. Mr Watts was the father of the
pursuer and was led primarily to say that financial support was available to
the pursuer from the family company to support a development proposal.
(ii) David Neil
Ferguson. Mr Ferguson was a solicitor
and also the chairman of the Caledonian Club.
His evidence was directed towards explaining the reasons why the
pursuer's late offer for the premises was not accepted. He also gave evidence as to what the position
might have been had the pursuer's offer been timeous.
(iii) Nancy Jamieson. Mrs Jamieson was a town planner with City of Edinburgh
Council. She
was the principal planner of the Development Quality Listed Building Section. She and her team dealt with applications for
planning permission and listed building consent in the city of Edinburgh. She gave evidence on the prospects of the
development proposed by the pursuer obtaining planning permission and the
timescales that might be involved. The
one particular aspect of her evidence that was of some importance was whether
or not the pursuer would have obtained planning permission for the full extent
of his proposed development.
(iv) John Murdo MacLeod. Mr MacLeod was a chartered accountant. The pursuer was one of his clients. He gave evidence about the tax consequences
that might ensue depending upon which development vehicle the pursuer chose in
connection with his proposed development.
(v) Alexander Talbot
Cliff. Mr Cliff, like the pursuer, was a
property developer, and carried out his property developments with the
corporate vehicle of Plum Developments Limited.
It was Plum Developments Limited offer that was eventually accepted by
the Caledonian Club for the premises. Mr
Cliff gave evidence on the type of development that was carried out by that
company. He also made certain observations
in connection with the development proposed by the pursuer.
(vi) Ross Alexander
Mackay. Mr Mackay was a solicitor and
the purpose of his evidence was to provide evidence on those aspects of quantum
relating to legal fees that might have been incurred in connection with the
purchase of the premises and subsequent sales.
(vii) Iain Francis Hannon. Mr Hannon was a chartered surveyor in the
firm of J&E Shepherd. The pursuer
had contacted him prior to his initial offer for the premises in order to instruct
him to carry out a survey of the premises.
He did so, and provided the pursuer with a verbal valuation as to the
market value of the premises prior to the submission of the pursuer's offer.
(viii) Stephen David
Craig. Mr Craig was also a chartered surveyor
and employed by Hardies First Surveyors Scotland ("Hardies"). He was asked to prepare a desktop
review/valuation of the premises by the pursuer's solicitors for purposes of
this litigation. He was asked to advise on
the open market value of the flats in the proposed development.
(ix) Derek Mackay
Ferrier. Mr Ferrier was a quantity
surveyor and project manager also in the employ of Hardies. Mr Ferrier prepared outline drawings and
costings based on these outline drawings in connection with the proposed
development of the premises.
(x) Michael James Mutch
Macdonald. Mr Macdonald was a corporate
relationship manager with HBOS plc. At
the relevant time he was the pursuer's bank manager. He was led on behalf of the pursuer to
support the pursuer's contention that he would have been able to finance the
development of the premises. That aspect
of his evidence became non controversial.
He also gave evidence on what the position would have been in the event
of overlapping developments.
[7] The
defenders only led one witness namely Caroline Docherty. Ms Docherty was a partner in the defenders
and, at the relevant time, acted as the pursuer's solicitor. She bore direct responsibility for the error
that subsequently occurred.
The pursuer's business
[8] The
pursuer, who was aged 33 at the date of giving his evidence, described his
occupation as that of property developer, entrepreneur, and property
investor. After leaving university with
a degree in civil engineering he started a business called Central Letting
Limited. That business engaged in the
purchase of properties for rental purposes and also the management of
properties let out by others. This was a
business that he developed over the years and eventually sold in November 2003
for about £1.25 million. In addition to
his rental business the pursuer also, in about 1994 or 1995, began to develop
properties for sale.
[9] As
at June 2002, so far as property development was concerned, the pursuer's focus
was primarily on Edinburgh New Town Georgian properties. In particular, he had completed developments
at 28 Nelson Street,
39 Heriot Row and 2 Abercromby Place, Edinburgh
prior to June 2002. That is why he was
interested in purchasing the Caledonian Club premises in Abercromby
Place in the heart of the New Town. Prior to June 2002, the purchase of property
at 39 Heriot Row for £427,807 represented the largest investment of money
expended by the pursuer on any single property.
However, the property at 28 Nelson Street,
although purchased subsequent to Heriot Row and at a price at £416,757, was in
fact being developed, at least for part of the time, along with the property at
Heriot Row. For part of that time property
at 13 Cornwall Street
(purchased for £145,000) was also being developed.
[10] It was clear to me that the pursuer, in the years prior to the
submission of his offer for the premises, had had a successful track record in
the property development business. He
was plainly someone who possessed business acumen. He was
in the process of moving up the scale of values for development. Mr Campbell conceded in the course of his
submissions that he did not dispute the pursuer would have been able to finance
the purchase of the premises and its subsequent development, even although the
development of the premises as a single unit in monetary terms meant that as a
property developer the pursuer was moving on to a higher level.
The initial offer
[11] Shortly before the premises
became available for sale the pursuer attempted to become a member of the club. He was accepted as a member, but at that time
the club committee were considering whether or not to continue with the club,
or to dissolve it, and until that decision had been made, his membership could
not be confirmed. The pursuer discovered
that the club intended to sell the premises and were going to use DM Hall as
the marketing agents. On making that
discovery, the pursuer, in April 2002, obtained the plans for the premises from
DM Hall. The plans allowed the pursuer
to make an assessment of the gross internal area of the premises which he concluded
was in the region of 9,200 sq.ft. This
allowed him to make an assessment of the potential profitability of the developed
premises.
[12] The pursuer also instructed J&E Shepherd to provide him
with a valuation of the premises. On 24 April 2002 Mr Hannon of that
firm inspected the premises and provided a verbal report to the pursuer that
the premises could be valued at about £1.1 million.
[13] It was following that valuation that the pursuer submitted his
offer 14 May 2002 for
£1.05 million. The pursuer in his
evidence described his offer as being a "pre-emptive offer".
The pursuer's credibility and
reliability
[14] Along with the written offer the pursuer through the defenders also
submitted a document headed "Submission and Background information re Offer -
Caledonian Club premises". The pursuer
explained that the purpose behind that document was to convince the club not to
put the premises on the market and to accept his offer. In that document the pursuer made a number of
representations which were untrue. At
the top of page 3, having explained that the premises had been valued by a
"respected firm of Edinburgh Chartered Surveyors", and under the heading
"Valuation", the following statement is made:
"Based upon current information and my research my offer represents in
excess of a 20% premium on this valuation".
In fact his offer was less than the valuation he had obtained from
J&E Shepherd. By way of explanation
for the claim that his offer was in excess of 20% of valuation the pursuer
suggested in this document that he had been for some time looking to acquire a
building in the New Town in order to convert part for his own residence and
that the premises would allow him to do exactly that by utilising one of the
residential units for that purpose.
There was also a statement to the following effect: "From a residence
perspective I have an option on another building in the locality which is likely
to expire prior to the club being finalised on the market and closing dates
set. Hence the necessity to get
decisions soon." Again that was untrue
and designed to mislead the club.
Another of the statements made was in the following terms: "In addition
I have two other development opportunities in consideration at this time for my
development funds and again these opportunities have timescales which require
early decisions". That also was
untrue. The pursuer also offered the
club the "real possibility" that the premises could be developed and the ground
floor of that part of the premises that formed number 32 could be used to form
"a new renovated private club". That was
not part of the pursuer's plans.
[15] The pursuer had to accept that the document he submitted to the
club contained a number of deliberate untruths designed to mislead the club to
its cost and to his benefit.
[16] Although the document was submitted along with the pursuer's
offer by the defenders, it was the pursuer's own document and I am satisfied
that the defenders, Miss Docherty in particular, although fully aware of its
contents, was not aware of the deliberate misrepresentations contained within
it.
[17] As it turned out, the club did not succumb to the pursuer's
misrepresentations and marketed the property in the usual way. Furthermore, as a matter of principle the
club refused to consider the pursuer's late offer even although it bettered the
next highest offer by about £43,000.
[18] Mr Campbell submitted that having regard to that history the
pursuer was someone who was prepared to lie in order to achieve his
objectives. He submitted that the
pursuer's evidence should only be accepted if non-controversial or if supported
by other credible and reliable evidence.
Mr Murphy, Senior Counsel for the pursuer, argued that the pursuer's
conduct simply reflected commercial reality in the world of property
development where developers might seek to persuade prospective sellers not to
market property. He submitted that the
fact that the pursuer was prepared to deceive the club did not mean that he
would tell lies on oath.
[19] The pursuer is certainly to be criticised for his attempt to
mislead the club to its detriment. That is
certainly a factor that I have to consider in assessing his credibility and
reliability. There are perhaps three main
areas of the evidence that remain particularly controversial. Firstly, whether the subsequent purchase of Albany
Street, Edinburgh was
effectively a substitute or alternative development to the development of the
premises. Secondly, the nature of the
development that the pursuer would have carried out had he been successful in
obtaining the premises and the likely profitability thereof. Thirdly, the nature of the development
vehicle that the pursuer would have used had he been successful in purchasing
the premises. I have approached these
important aspects of the evidence by satisfying myself that the pursuer's
evidence did obtain satisfactory support from other evidence, not because the
pursuer in relation to these aspects of his evidence was deliberately seeking
to mislead the court, but as a touchstone of the veracity of his approach. I do consider that in certain parts of his
evidence that I shall consider later, the pursuer was somewhat optimistic as to
what he might have achieved. Having said
that, the difficulty for the pursuer was that his thinking as to what he might
do with the premises was in an embryonic stage in June 2002. Consequently
the exercise he embarked upon was a hypothetical one essentially for the purposes
of this litigation. The reality of the
situation is that at the time his offer for the premises was made he had not
reached any real conclusions as to the nature of the development. That being the reality, the precise nature of
the development that he maintains now he would have carried out, the timescales
involved and the profit that he might have generated therefrom, have to be
approached with some caution.
Albany
Street
- a substitute
[20] An important issue was whether the pursuer would have been able
to manage the development of the premises and also acquire other premises for
development purposes. This issue becomes
important when considering whether or not the pursuer suffered any real loss as
a result of his failure to purchase the premises. This issue arose because, in the timescale
during which the pursuer envisaged the development of the premises would have
taken place, he was able to purchase premises at Albany
Street, Edinburgh for
£1,739,000. The defenders argued that Albany
Street was, in effect, a substitute for the
premises and that the pursuer could not prove he had sustained any real loss in
his failure to acquire the premises. The
main thrust of this argument was that the pursuer would not have been able to
finance both projects.
[21] In the pursuer's offer for the purchase of the premises the
entry date was stipulated to be 1 October
2002. The pursuer maintained
that the development would have been completed, and the residential units
created in the course of the development sold, by the end of October 2003. The pursuer's offer for Albany
Street was dated 30 January 2003 but the missives in respect of Albany
Street were not concluded until 11 April 2003. However, although the missives in respect of Albany
Street were concluded in April 2003, entry and
vacant possession was not to be given prior to September 2003, and no later
than July 2004. The reason for such a
protracted entry date was due to the fact that the sellers of Albany
Street, Hanover Housing
Association, were having new offices built and required to have sufficient time
available for that to be achieved prior to leaving Albany
Street. The
date of entry was eventually agreed as 19 January
2004. Part of the Albany
Street premises, number 36, was in fact acquired
by the pursuer as his own home and paid for out of funds he received from the
sale of his Central Letting Limited business.
The balance of the cost for the purchase and the development of Albany
Street was financed by the Bank of Scotland.
[22] In order to have carried out the development of the premises,
the pursuer would have required to have obtained a facility from his bank of
about £1.6 million. It was clear from
the pursuer's bank manager's evidence, Mr MacDonald, that such a facility would
have been offered to him, and in any event the defenders no longer disputed
that that would have been the case. In
order to develop Albany Street,
the pursuer required a facility of £1.59 million from the bank. With a potential date of entry for Albany
Street in about the latter quarter of 2003, and at
a time before the development of the premises had been completed, there was a
risk that there would have been an overlap in the two developments. The pursuer was confident that he would have
been able to obtain funding for both developments and that there would be
little overlap in the two developments had he been successful in purchasing the
premises.
[23] Mr MacDonald, the pursuer's bank manager, was also reasonably
confident that the bank would have supported the development of Albany
Street even if the pursuer had acquired the
premises. The bank may have stipulated
additional conditions such as the installation of a project manager to oversee
the Albany Street
development and would have had to be satisfied that the overlap period between
the two developments would be as small as possible.
[24] The pursuer's projected programme for development of the
premises was that the development would be completed in a thirteen month period
from the beginning of October 2002 to the end of October 2003. That sort of programming was consistent with
previous developments, and in particular, with the development of the premises
at Heriot Row, Edinburgh. The pursuer
was confident that, even although the premises were larger than the Heriot Row
premises, the thirteen month programme could be complied with simply by having
more men involved in the development.
His programming depended upon the first flat in the development being
sold in about April 2003.
[25] Having acquired the premises for development by Plum
Developments Limited Mr Cliff was in a good position to comment on the
pursuer's programming. In his
examination in chief Mr Cliff considered that a sale of the first unit in about
April 2003 was "tight but possible". In
cross examination Mr Cliff indicated that the pursuer's programme assumed that
there were no hold-ups during the development.
His expectation was that there
would be some hold-ups. As an example he
said that in the course the development carried out by Plum Developments
Limited some rot was discovered in the roof.
That was the kind of discovery that might hold the programme up. He described the pursuer's proposed programme
as a target but the sort of target that most developers would be prepared for
slippage of about two or three months.
On this issue I do consider that the pursuer was being optimistic in
considering that he would have completed his proposed development in the
thirteen month period that he contended for and I accept the more practical
approach taken by Mr Cliff that as a matter of likelihood there would be
slippage in the programme. That would mean that in relation to the possible
entry date for Albany Street being in the latter part of 2003 that there
probably would have been a greater degree of overlap between the development of
the premises and the potential development of Albany Street than contended for
by the pursuer and assumed by Mr MacDonald. Later I shall return to this issue when
considering the quantum of damages.
[26] However, although I am satisfied there would have been some
slippage in the pursuer's programme had he acquired the premises in October
2002, I am quite satisfied that in the circumstances the pursuer would have
been able to persuade his bank to provide the finance necessary to purchase
Albany Street in addition to the financing of the development of the
premises. The relevant time for that
decision would have been when the pursuer offered for Albany
Street in January 2003 with a projected entry
date, at the earliest, being in September 2003.
Even if the bank considered that there would be some overlap, I do not
consider that the bank would have viewed the risk of overlap as being of
sufficient significance as to dissuade it from supporting the pursuer in the Albany
Street project.
The bank considered the pursuer to be a trustworthy client with a
financially excellent track record in relation to his property development
dealings. It was clear from Mr
MacDonald's evidence that the bank would have been loath to run the risk of
losing the pursuer's business.
[27] In the circumstances I am satisfied that Albany
Street was not acquired by the pursuer as a
substitute for the premises but as a quite separate development project.
The nature of the development
[28] Prior to the submission of his offer for the premises, the
pursuer had not made any firm plans for the proposed development of the
premises. For the purposes of this
litigation, the pursuer instructed Mr Ferrier to prepare outline plans for the
development of the premises. Mr Ferrier
explained that to produce these plans he had regard to the original drawings of
the premises. He also looked at some of
the outline proposals prepared by Plum Developments Limited. He collaborated with the pursuer as to how
the premises would be converted into a flatted development. The plans prepared by Mr Ferrier show
that the development would have consisted of seven flats. He explained that although there was input
from the pursuer into the proposed scheme, it was a two way process. I am prepared to proceed on the basis that
from a structural point of view the proposed development set out in the plans
prepared by Mr Ferrier was feasible.
[29] The defenders argued that the seven flatted scheme was designed
to maximise the pursuer's loss and did not reflect what would have happened in
reality. For example, when the pursuer
acquired a similar type of property, namely, Albany
Street, he converted part of that property into
his own home. Also, it was apparent that
in the document submitted by the pursuer to the club, and from remarks made by
the pursuer to Mr Macdonald and Miss Docherty, the pursuer did mention that if
he did acquire the premises, part of them might be converted to form a town
house for himself. It had been his
ambition to own a town house in the Edinburgh New Town, an ambition he
fulfilled once he purchased Albany Street.
[30] However, by the time the pursuer acquired Albany
Street the pursuer's financial position had
changed, having sold Central Lettings Limited.
The pursuer was a successful businessman, and at the time when he might
have purchased the premises, having regard to the potential cost involved in
any development of the premises, I am satisfied that he would have sought to
maximise the profitability of the development of the premises. That does not mean that the actual
development as set out by Mr Ferrier would indeed have been the
development carried out. It became clear
in the course of Mrs Jamieson's evidence that there was a real risk that the
pursuer would have obtained planning consent only for the construction of 6 and
not 7 units. Indeed Mr Murphy, when
dealing with quantum, sought to adjust the figures by accepting that only 6
units would in fact have been constructed.
The exercise carried out by Mr Ferrier provides a broad basis as to the
nature of the development the pursuer might have carried out had he acquired
the premises and the potential costs involved, but taken in conjunction with
the evidence on subsequent sales, it does involve a degree of speculation that
renders it unsatisfactory as a sound basis for assessing the pursuer's
potential loss of profit. This is a
matter to which I shall return when dealing with quantum.
The development vehicle
[31] The pursuer's offer for the premises ran in his own name as an
individual but contained a nominee clause that allowed the property to be
acquired in another name. The pursuer
explained that it was his practice to have such a clause inserted in order to
keep open the possibility of investigating the most tax efficient method of
carrying out any development opportunity.
Normally, he would take advice on that particular issue from his
accountant, Mr McLeod. In preparation
for this litigation, the pursuer went through that exercise and obtained advice
from Mr McLeod to the effect that he would be some £55,000 better off by
carrying out the development personally rather than through a corporate
vehicle.
[32] Mr McLeod in his evidence confirmed that he was asked to
consider, on a hypothetical basis, the pursuer's position in relation to the
pursuer's potential exposure to tax if he had been able to develop the
premises. Mr McLeod confirmed that
the pursuer had taken tax advice from him in the past in relation to the
structuring of development opportunities.
He had no reason to doubt that the pursuer would not follow the same
course and seek tax advice had he successfully acquired the premises. Mr McLeod confirmed that the most tax
efficient method for the proposed development would have been for the pursuer
to have carried out the development in his own name as an individual and that
the pursuer by doing so would be about £55,000 better off.
[33] In his submissions Mr Campbell argued that the pursuer had
failed to prove that he would indeed have carried out the development as a sole
trader. Mr Campbell pointed out that he
had never done so before or since. Also,
for the pursuer to carry out the development in his own name, he would have had
to register for VAT or be left with a large irrecoverable VAT bill. Carrying out the proposed development in his
own name without the protection of limited liability would expose him to
unnecessary risks. The point behind this
argument was that one of the corporate vehicles that the pursuer employed in
the past, Devodale Limited, was not owned or controlled by the pursuer and the
other investor would also benefit.
[34] I am satisfied that the pursuer would have sought advice from
Mr McLeod and would have taken the advice that Mr McLeod would have given
him had he obtained the premises.
Carrying out the development in his own name would have resulted in a
significant tax advantage which would be sufficiently tempting to someone like
the pursuer. He would have had no real
difficulty in registering for VAT.
According to Mr McLeod such registration could be achieved in about 4 to
6 weeks. Furthermore, prior to his
abortive offer, the pursuer himself had obtained financial backing from his
bank for the purchase of the premises.
He did not require financial assistance from any other source.
Mitigation of loss
[35] After the defenders' error came to light, the pursuer attempted
to persuade the successful purchasers, Plum Developments Limited, to sell the
premises to him. He instructed an
alternative firm of solicitors, and by letter dated 26 July 2002, they wrote on his behalf to Mr Cliff
of Plum Developments Limited inviting him to advise them of the price which he
might be willing to consider selling the property on to the pursuer. Mr Cliff responded by letter date
16 August 2002 indicating that the pursuer would need to offer a profit in
excess of £350,000 exclusive of the costs already incurred. Thereafter the pursuer's solicitors contacted
the defenders to see whether they were prepared to pay a sum of about that size
to resurrect the deal for the pursuer.
The defenders refused to do so.
It does not seem to me that the pursuer can be faulted for deciding not
to pursue the possibility of a purchase from Plum Developments Limited since
the additional sum that he would have had to pay would have had a significant impact upon the
profitability of the project.
[36] As I have already mentioned, the pursuer's projected date of
entry in terms of his offer for the premises was 1 October 2002. By that date he knew that there was no
prospect of acquiring the premises. The
pursuer gave evidence that thereafter and until the purchase of Albany Street,
a development opportunity of the type in which he might have been interested
did not come on to the market. There was
no evidence to the contrary, and even if such an opportunity had arisen, there
would be no guarantee that the pursuer would have been the successful
bidder.
[37] The period from early 2003 until October 2003 formed the major
portion of the pursuer's programme for the development of the premises. At one point in his examination in chief, the
pursuer seemed to suggest that because of the possible entry date for Albany
Street being in September 2003 that there would
not be enough time to begin another development. In cross examination he explained that by
that he meant he would not have been able to find, purchase and be successful
in the bidding process to acquire a development unit comparable to the premises.
I think that was a reasonable explanation.
The pursuer did not strike me as someone who would pass up the
opportunity to make money if it arose.
[38] Because of the defenders' failure the pursuer was put in a
position in which he had to readjust his business intentions. His ultimately abortive attempt to resurrect
the purchase of the premises was a reasonable one. Furthermore, I am satisfied that in the
circumstances he took all reasonable steps to explore whether or not an
appropriate development prospect was on the market and available to him for
exploitation. He was not able to acquire
a substitute development opportunity.
Loss of profit
[39] I have come to the conclusion that as a result of the
defenders' failure the pursuer, as a matter of fact, has suffered a loss of
profit. It is not now disputed that had
his offer been timeous it would have been accepted by the club and he would
have acquired the premises. He was not
able to mitigate the defenders' failure by going into the market place and
acquiring similar premises as a substitute for the loss of the premises caused
by the defenders' failure. In my
judgement, the steps that he took following upon the discovery of the
defenders' error were reasonable.
Whether or not the pursuer's claim for loss of profits is a claim for
which the defenders can be held responsible, and if so, to what extent, are
matters I shall look at subsequently.
The defenders' knowledge
[40] The pursuer had used the
defenders as his solicitors for a number of years. They had acted for him in relation to the
Central Letting Limited business and indeed acted as the company's company
secretary to that company. They had
acted for him in connection with his business as a property developer. Miss Docherty knew that the pursuer's
purpose in seeking to purchase the premises was for purposes of development and
subsequent sale. Although she was not
involved in the drafting of the document sent with the offer of 14 May 2002 she was aware of its
contents.
[41] I am satisfied that the defenders, and Miss Docherty in
particular, would have been aware that if the pursuer failed to purchase the
premises he would lose out on the prospect of obtaining an asset that would
generate profit for him.
Summary of the facts
[42] At this stage I am able to
arrive at the following conclusions on the factual issues:
(a) Had the pursuer's offer of £1,100,000
for the premises been timeous, he would have purchased the premises.
(b) The
pursuer would have been able to generate profit from the development of the
premises;
(c) Albany Street
was not a substitute development for the premises;
(d) The pursuer was unable to acquire a substitute
development project that would have mitigated any loss of profit he sustained;
(e) The defenders (Ms Docherty) knew
that the pursuer intended to purchase the premises for development purposes in
order to make a profit from the transaction;
and
(f) The sum of £1,100,000 that the pursuer
instructed to be offered to the club represented the market value of the
premises.
Legal issues
Submissions for the pursuer
[43] Mr Murphy on behalf of the pursuer invited me to sustain the
pursuer's first and second pleas-in-law to the extent of granting decree in the
sum of £614,066. He also submitted that
interest at the rate of eight per cent should not run from the date of citation
but from 15 July 2003
until payment. The date of 15 July 2003 was the selected
date because it represented the mid point of the receipt of income from the
anticipated sales of the units contained in the pursuer's proposed development
proposals.
[44] In dealing with the nature of the pursuer's claim, Mr Murphy submitted
that it was for breach of contract and the breach of contract was the
defenders' failure to deliver the pursuer's offer timeously. The action was not to be characterised as one
of seeking damages for the loss of a chance.
[45] So far as the assessment of damages was concerned, Mr Murphy
submitted that the purpose of damages was to put the victim in the position
that he would have been in but for the breach of contract. He went on to refer to Hadley v Baxendale (1854)
9 ex. 341 and in particular the well known passage in the judgement
of Alderson, B. Mr Murphy argued that
recovery by the pursuer was possible under the first head of what was said out
by Alderson B but that in any event he could not fail under the second head.
[46] Mr Murphy submitted that on a correct analysis the
position in this case was that the pursuer has proved that his offer would have
been accepted and that he would have proceeded to develop the premises and make
profit. The fact that he proposed to
develop the premises in order to make profit was a fact within the reasonable
contemplation of the defenders. The
context of this case was one where a commercial conveyancer was acting on
behalf of a commercial entity and in such circumstances was taken to be aware
of the fact that the whole purpose of the transaction was to produce profit for
the pursuer.
[47] Mr Murphy referred to Haberstich
v McCormick & Nicholson 1975
SC 1. He observed that the observations
made in that case by the Lord President (Emslie) and Lord Cameron indicated
that the quantum of damages in a case of this kind was not to be assessed under
reference to a fixed and inflexible rule which focussed solely on the date of
the breach but that the facts might require that it was necessary to look to
the future to assess the actual loss. In
developing this part of his submission Mr Murphy also referred to Diamond v Campbell-Jones [1961] 1 CH 22, Cottrill
v Steyning & Littlehampton
Building Society [1966] 1 WLR 753 and G
& K Ladenbau (UK) Limited v
Crawley & de Rey [1978] 1 WLR 266.
He submitted that these cases supported the proposition that damages for
loss of profits in a case such as this could be recovered by the application of
the rules set out in Hadley v Baxendale. Mr Murphy also referred to Jenmain Builders Limited v Steed & Steed [2000] PNLR 616 essentially
to distinguish it from this case. He
pointed out that that case was not decided under reference to contract but
under reference to the scope of the duty of care in tort. He submitted that the reasoning in the
decision was not clear and appeared to be contrary to the approach in Haberstich and the other English cases
to which he referred.
[48] Mr Murphy also made some submissions on whether or not the
pursuer had acted reasonably once he came to realise what had happened. Again I have set out the circumstances in my
findings as to what the pursuer sought to do and I did not understand the
defenders to challenge that his actions were in the circumstances reasonable.
[49] In summary, Mr Murphy's position was that this was a simple
breach of contract case and since the breach was admitted the essential
outstanding issue was whether or not the loss that the pursuer sustained was a
loss that ought to have been in the reasonable contemplation of the defenders,
and Miss Docherty in particular, at the time the contract was made. That loss was a loss of profit.
Submissions
for the defenders
[50] Mr Campbell agreed that
this case was not to be characterised as an action for the loss of a
chance. The essence of Mr Campbell's
position was that, even if the pursuer proved everything that he has set out to
prove, he would not be entitled to recover the loss of profit which he says he
would have earned after the development and sale of the premises.
[51] Mr Campbell made a number of preliminary general
observations. Firstly the negligence
relied upon by the pursuer related only to the sale and purchase of the
property. Secondly, apart from wasted
costs, and there was no claim for that particular type of loss, the immediate
outcome of the defenders' breach was that the pursuer failed to obtain the
premises but he also retained the purchase price which was equivalent to the
market value of the premises. This case
was unusual because the negligence relied upon resulted in a failure to obtain
the asset in comparison to other cases where the innocent party might be locked
into a loss causing situation. Thirdly,
whilst it was accepted Miss Docherty knew that at least part of the pursuer's
business was that of property development, nevertheless the most that could be
said was that her negligence stopped the pursuer from developing this
particular property. She had no reason
to contemplate that her failure would prevent the pursuer from developing other
properties, or from using the money for other business purposes within his
overall enterprises. Fourthly, this was
not a case where something unique or of special value for the prospective
purchaser was being acquired. In such a
case different considerations may very well apply.
[52] Mr Campbell went on to advance four separate propositions. Firstly, he submitted that where a
solicitor's negligence caused a prospective purchaser to fail to obtain an
asset, the general rule is that the loss sustained is measured by the value of
the asset at the date when it would have been obtained less the price that
would have been paid and the wasted costs.
Accordingly, if the prospective price represented the market value of
the property, the only possible head of loss would be for wasted costs. If, notwithstanding negligence, the asset is
purchased but subject to an undisclosed problem, then the normal measure is the
price paid less the market value at the time of purchase. This diminution in value rule is the general
rule.
[53] The second proposition advanced by Mr Campbell was that this
general rule applied even if some further loss was reasonably foreseeable such
as for example the prospect of the purchaser later selling the subjects at a
price which generated a profit.
[54] The third proposition advanced by Mr Campbell was that this
general rule would not be applicable if there was some special feature about
the circumstances of the case which justified a different approach to
assessment of the appropriate compensation.
[55] Mr Campbell's fourth proposition was that in this case there
was no special feature which would justify departure from the normal rule. He submitted that the overriding need to
achieve a fair and reasonable compensatory award did not point to a different
outcome.
[56] In developing these propositions Mr Campbell referred to McGrigor, Damages (17th
edition) chapter 29, paragraphs 29-06 - 29-17.
He submitted that the shape of that particular chapter was that there
was, first of all, a statement of the general rule, and then a discussion on
examples of exceptions to the general rule.
The onus was on someone in the position of the pursuer to say why the
general rule should not be followed. He
submitted that the reasonable contemplation approach was not the touchstone and
this was not Hadley v Baxendale territory but rather what was
fair and reasonable compensation.
[57] In dealing with the case of Haberstich
v McCormick & Nicholson
Mr Campbell accepted that what he had been referring as the general rule
was not followed in that case but he submitted that the real issue in that case
was whether there was a fixed rule or a general rule. He said he was not arguing in favour of a
fixed rule but rather that there was a general rule and that good reasons had
to be advanced to justify a departure from that general rule.
[58] Mr Campbell placed particular reliance on the observations made
in Ford v White [1964] 1 WLR 885 and [1964] 2 AER 755. He submitted that that case was a classic
example of the application of the general rule and of the fundamental
principles involved. He relied in
particular on the observations made by Pennycuick J at page 757G-758B. He argued that to award the pursuer the loss
he claimed in this case would not be putting him into the same position as he
would have been in if his rights had been observed, but into a much better
position because he would receive the profit that he claims he would have made
without actually having to earn it.
Mr Campbell also relied upon Aylwen
v Taylor Joynson Garrett [2002]
PNLR 1 and Oates v Anthony Pitman & Co [1998]
PNLR 683 in support of his approach to the whole issue of loss of profit.
[59] A major plank of Mr Campbell's submissions was his reliance on
the decision in South Australia Asset
Management Corporation v York
Montague Limited (1997) AC 191 ("SAAMCO") and in particular what was said
by Lord Hoffman at pages 210-218. That
case highlighted, Mr Campbell submitted, the importance of analysing the scope
of the duty that rests upon the wrongdoer.
Relying upon what was said by Lord Hoffman, Mr Campbell submitted that
the pursuer must show the duty was owed to him and that it was a duty in respect
of the kind of loss which he has suffered.
In this case, the agreement entered into between the pursuer and the
defenders was that the defenders would act on behalf of the pursuer in the
purchase of the premises and that meant that there was imposed upon them a duty
of reasonable care aimed at ensuring all necessary steps were taken with a view
to the pursuer being able to offer for the premises. The scope or extent of the consequences for
which breach might render them liable was to be construed in the context of
that setting. He submitted that Mr
Murphy's approach of injecting reasonable contemplation into the equation was a
flawed approach and contrary to what was said in SAAMCO. It was not now sufficient to ask traditional
questions such as what might have been in the reasonable contemplation of the
parties, but to decide for what type of loss a claimant might be entitled to
compensation. That question was not to
be addressed by the reasonable contemplation approach but by analysing the
scope of the duty and to ask whether the defenders' responsibility extended to
the losses claimed.
[60] In addressing the scope of the duty on the defenders in this
case Mr Campbell posed the question whether or not Miss Docherty in acting on
behalf of the pursuer accepted responsibility for the development itself or
whether or not that was a separate issue which only became relevant once the
pursuer obtained the premises. Mr
Campbell went on to submit that her negligence only related to the failed
transaction and did not relate to what was done or might have been done
thereafter. Furthermore the pursuer
retained the sum that represented the market value for the premises and was not
prevented from pursuing his business activities in the normal way thereafter.
[61] In dealing with this limb of his argument, Mr Campbell also
referred to Nykredit Mortgage Bank plc v Edward Erdman Group Limited [1997] 1 WLR 1627 and in particular what was said by Lord Nichols of Birkenhead at
1630F, 1631E-1632A and Lord Hoffman at page 163A-1638F-H. These passages essentially reiterated the SAAMCO
proposition that a valuer, as was the position in SAAMCO, may not be liable for
all the consequences which flow from his negligence even if they are
foreseeable.
[62] Mr Campbell also relied on Jenmain
Builders Limited v Steed & Steed
and submitted that the decision in that case supported his position. The plaintiff in Jenmain Builders Limited failed to recover the development value of
the property and that was because any subsequent added value resulting from
development would have been a wholly separate matter attributable to work and
expenditure for which the negligent solicitor had taken no responsibility and
was outwith the scope of the duty.
[63] In summarising his position Mr Campbell submitted that the
scope of the duty on Miss Docherty related only to the immediate consequences
relating to the sale and purchase to the transaction and there was no good
reason to conclude that undertaking the duty of care to administer the missives
and conveyancing that she accepted any responsibility for consequential losses
flowing from the pursuer's inability to develop the property.
[64] In responding to Mr Murphy's reliance upon the decisions in Diamond v Campbell-Jones and Cottrill v Steyning & Littlehampton Building
Society Mr Campbell argued that neither of these cases was a duty of
care case and, in any event, the decisions pre-dated the manner in which the
importance of focussing upon the scope of the duty had been developed in cases
such as SAAMCO. Similarly in relation to
the case of G&K Ladenbau (UK) Limited
v Crawley & de Rey Mr Campbell
submitted that in light of the law as it now was, the decision in that case,
relying as it did on principles derived from Hadley v Baxendale, was
unsatisfactory and should not be followed.
[65] So far as disposal was concerned Mr Campbell submitted that if
the defenders' first plea-in-law were to be sustained then the appropriate
remedy would be absolvitor since the case had gone to proof and there was to be
a decree in foro. In support of that approach he referred to Board of Management v Bells Trustees 1952 SC (HL) 78 and in
particular what was said by Lord Normand at page 88. He also invited me to sustain a second, third
and fourth pleas-in-law.
The
pursuer's reply
[66] In response to the defenders'
submissions Mr Murphy submitted that the approach taken by Mr Campbell was
misconceived. He said again that the
correct approach was that set out in Haberstich
v McCormick & Nicholson and
that each case depended upon its own facts and circumstances. He submitted that there was no general
diminution in value rule to be applied in cases such as this and indeed that
was the trap that both counsel in Haberstich
v McCormick & Nicholson fell
into. If there was such a general rule,
and if the defenders were correct in their analysis, then the effect of that
would be that recovery of consequential losses in claims against solicitors
would be excluded. Mr Murphy submitted
that such a consequence was not borne out by the textbooks or by authority. He disagreed with Mr Campbell's analysis of
Chapter 29 of McGregor and he
submitted that the structure of that chapter did not justify the conclusion
that there was a general rule.
[67] Mr Murphy relied on Clark
and Lindsell Torts at paragraph 7-151 to 7-152 in submitting that in this
case there was no suggestion that unusually high profits were being
claimed. Properly analysed, this was a
black and white negligence case similar to the failure to deliver a machine
where to the knowledge of the seller the purchaser intended to use the machine
for profit. In such a case it could not
be said that the purchaser would not be entitled to recover the normal loss of
profits that he might have suffered by way of loss. He referred to Havenledge Limited v Graeme
John & Partners [2000] PNLR 804 which he submitted was similar to a
development type of case. He argued that
the loss of profit for which there was recovery in that case was far more
remote than here. He also made reference
to Reeves v Thrings & Long [1996] PNLR 265 and to the observations made in
that case by Lord Bingham at page 278.
His general proposition was that the cases and the textbooks did not
support the notion of a general rule as developed by Mr Campbell in his submissions.
[68] Under reference to the SAAMCO decision Mr Murphy submitted that
the duty resting upon the defenders and arising under the contract had to be
considered in its commercial setting. It
was necessary to examine the facts and circumstances. That was the approach taken in Haberstich and that approach in this
case would allow recovery for loss of profits.
He also submitted that the cases relied upon by the defenders and in
particular Ford v White, were quite different on their facts and broadly speaking
were cases involving the giving of advice or providing information as a
consequence of which a claimant was left locked into a poorer bargain. In this case, the pursuer's intentions were to
secure a business asset with development potential and that was frustrated by
the defenders' breach of contract.
Because of that breach of contract the pursuer was left with a black
hole in his business.
[69] Mr Murphy also submitted that when considering the issue of
duty of care the cases involving the giving of advice and providing information
required to be distinguished. Although
this case involved a solicitor and could be described as a case of professional
negligence it could properly be equiparated to the sort of case where a seller
failed to deliver a machine to a prospective purchaser because of some basic
mistake on the seller's part. Mr Murphy
posed the question that if the seller would not be protected against a claim
for loss of profit then why should a solicitor have such protection.
[70] In the final section of his submissions Mr Murphy made a number
of observations in relation to some of the cases referred to by the
defenders. He argued that Jenmain Builders Limited v Steed & Steed depended on its facts
and in any event was a case on tort. He
submitted that it did not support the proposition that the diminution of value
rule had to apply in claims against solicitors, but if it was purporting to set
out such a principle, then, he submitted it was wrongly decided. The case of Ford v White was a case that
did not raise the kind of loss of profit issue raised in this case.
[71] Mr Murphy agreed that if the case was decided on a point of
relevancy in the defenders' favour then dismissal would be the appropriate
remedy. On the other hand, if the case
was decided in the defenders' favour on the basis of the scope of the duty of
care argument then he could see that absolvitor may be the appropriate
disposal.
Discussion
Background
[72] This is a breach of contract case and it is trite to say that
the purpose of damages in such a case is to put the pursuer into as good a
position as he would have been in if the contract had been performed. As it was put in Robinson v Harman (1848)
1 Ex Ch 85 by Parke B at page 855:
"The rule of
common law is that where a party sustains a loss by reason of a breach of
contract he is, so far as money can do it, to be placed in the same situation
with respect to damages as if the contract had been performed."
[73] However it is also well settled that the law employs a number
of devices to limit the financial stream of consequences that might follow upon
a breach of contract. One such
restriction is the remoteness test as set out in Hadley v Baxendale by
Alderson B at page 335:
"Where two
parties have made a contract which one of them has broken the damages which the
other party ought to receive in respect of such breach of contract should be
such as may be fairly and reasonably considered either arising naturally, i.e.
according to the usual course of things, from such breach of contract itself,
or such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the formal breach of it".
Subsequent cases such as Victoria Laundry (Windsor) Limited v Newman Industries Limited [1949] 2 KB 528 and C Czarnikow Limited v Koufos, (1969) 1 AC 350 have endorsed this approach to the
assessment of damages in breach of contract cases. Whether the Hadley v Baxendale approach
is to be regarded as two rules or the statement of a general principle as
suggested by Lord Reid in C Czarnikow
Limited v Koufos is of no
particular significance to this case.
Lord Reid in that case pointed out at page 385:
"The crucial
question is whether, on the information available to the defendant when the
contract was made, he should, or the reasonable man in his position would, have
realised that such loss was sufficiently likely to result from the breach of
contract to make it proper to hold that the loss flowed naturally from the
breach or that loss of that kind should have been within his contemplation".
I have set out at paragraphs [40] -
[41] Miss Docherty's state of knowledge as at the time of the contract. Mr Campbell did not dispute that Miss
Docherty would have had in her contemplation, standing her knowledge of the
pursuer's business, that if the pursuer failed to acquire the premises prima facie he would lose their
development potential. I am of the view
that a claim for loss of profit in the circumstances of this case satisfies the
remoteness test as explained by Lord Reid in C Czarnikow Limited v Koufos.
Diminution in value approach
[74] The defenders in their submissions relied upon a number of
cases in support of the proposition that the appropriate measure of damages in
a case of this kind was the diminution in value approach. That approach can be seen in operation from
the decision in Ford v White.
In that case the plaintiffs purchased land which was offered for sale at
a price that reflected the fact that it was subject to a restriction against
building. The plaintiffs purchased the
land in reliance on the defendant solicitors' advice that it was free from
restrictions against building. Once they
became aware of the existence of the restriction, the plaintiffs sued their
solicitors and contended that they were entitled to claim in damages the
difference between the market value of the land subject to the restriction and
the market value of the land free from the restriction. That difference was £1250. Pennycuick J held that the measure of damages
was the difference between the price paid and the market value of the land
subject to the restriction at the time of purchase. Since in fact the price paid by the
plaintiffs was equivalent to the market value of the property subject to the
restriction as it was at the time of purchase, they had in fact suffered no
loss. This result was a logical one,
otherwise the plaintiffs would have been put into a better position than they
would have been in if the solicitors had not failed in their duty to discover
the restriction. The case does show that
the general approach in the circumstances that prevailed in that case is to
ascertain the difference in value between the market value of what a purchaser
thought he was buying and what the market value actually was once a defect of
some kind has subsequently been discovered.
[75] A case that provides some helpful guidance on the diminution in
value approach is Oates v Anthony Pitman & Company [1998]
PNLR 683. In that case the plaintiffs
proposed to use property purchased by them both as a home and for the purposes
of the business of holiday lettings. Their
solicitor failed to discover that there was no planning permission in place for
such a purpose. The plaintiffs
refurbished the property and indeed used the property for a period of time
before discovering that there was no planning permission for such a
business. Retrospective planning
permission was obtained but only to a limited extent. The plaintiffs sued the solicitors' firm for
negligence in failing to discover that there was no grant of planning
permission. Liability was not
contested. The plaintiffs claimed
damages for the diminution in value of the property, the cost of obtaining
planning permission and the loss of profit due to being restricted to carrying
out the business of holiday letting for a limited period. There was no dispute that the plaintiffs were
entitled to recover the cost involved in obtaining planning permission and also
that the correct measure of damages was the diminution in value of the property. It was agreed that the plaintiffs were
entitled to recover the difference between the market value of the property at
the time of purchase on the basis that it had planning permission for holiday
flat use and the market value of the property at the time of purchase without
planning permission. The issue on that
particular head of claim related to the actual value of the property at the
time of purchase. At first instance the
trial judge made certain findings in relation to what he considered the diminution
in value to be and rejected the plaintiff's claim for loss of profits. In the Court of Appeal, in giving the leading
judgment, Sir Brian Neill made the following observations at page 691:
"We are
concerned in the present case with a claim for damages for breach of a duty of
care. It is not a claim for damages for
a breach of warranty. Thus it is not
suggested that the defendant firm gave a warranty that the property had planning
permission for use as holiday flats.
I shall start by considering the plaintiff's claim for damages excluding
the claim in respect of loss of profits.
The liability of
solicitors in circumstances which are broadly similar to those in the present
case has been considered in a number of authorities. As Pennycuick J. explained in Ford v White & Co [1964] 1 WLR 885 at 888:
'In the simple
case of the purchase of property at a price in excess of its market value as a
result of wrong advice, the measure of damage must be the difference between
(1) the market value of
property at the date of purchase, and
(2) the price actually paid.'
This has been described
as "the diminution in value rule". But
the rule cannot be applied indiscriminately and it is necessary to examine the
facts of the individual case."
Sir Brian Neill then goes on to
examine what was said by Bingham LJ in County
Personnel (Employment Agency) Limited v
Alan R. Pulver & Co [1987] 1 WLR 916.
In that particular case Bingham LJ said on page 925:
"(2) On the authorities as they stand, the
diminution in value rule appears almost always, if not always, to be
appropriate where property is acquired following negligent advice by
surveyors. [A number of cases] ...
illustrate its application in cases involving both surveyors and solicitors.
(3) That is not, however, an invariable
approach, at least in claims against solicitors and should not be
mechanistically applied in circumstances where it may appear
inappropriate. In Simple Simon Catering Limited v
Binstock Miller & Co (1973) 228 EG 527 the Court of Appeal favoured a more
general assessment, taking account of the 'general expectation of loss'. In other cases the cost of repair or
reinstatement may provide the appropriate measure: Dodd
Properties (Kent) Limited v Canterbury City
Council [1980] 1 WLR 433, 456 per Donaldson LJ. In other cases the measure of damages may
properly include the cost of making good the error of a negligent advisor:
examples are found in Braid v W.I. Highway & Sons (1964) 191 EG
433 and GK Ladenbau (UK) Limited v Crawley & de Reya [1978] 1 WLR 266.
(4) While the general rule undoubtedly is
that damages for tort or breach of contract are assessed at the date of the
breach this rule also should not be mechanicalistically applied in
circumstances where assessment at another date may more accurately reflect the
overriding compensatory rule..."
[76] An example of a case where the diminution in value approach was
adopted but at a different date from the date of the breach is Dent v Davis Blank Furniss. That
was a case where the property purchased by the plaintiffs was registered as
common land, and the defendant solicitors had failed to carry out a search of
the register. The purchase was completed
in 1991 and by the time in December 1994 when it came to the notice of the
plaintiffs that most of the land purchased was registered as common land, they
had built a substantial new house on the property at substantial cost. The plaintiffs' expenditure was unmatched by
any commensurate increase in value.
Having reviewed the authorities Blackburne J went on to say at page 542:
"These extracts
demonstrate the variable approach to the measure of damages (as regards both
method and time of assessment) in claims against solicitors arising out of
circumstances similar in nature to those that arise here. Beyond having regard to the overriding
compensatory principle, it is impossible to lay down hard and fast rules to be
followed. The matter is, as the present
Lord Chief Justice wisely observed in Reeves
v Thrings & Long 'an area in which legal rules may have
to bend to the particular facts of the case'."
He then went on to conclude that
the proper approach to the assessment of the plaintiffs' loss was to apply the
diminution in value approach by ascertaining firstly, the difference between
the open market value of the property in its state assuming that it was free
from any common land registration and, secondly, the lesser of what the
plaintiffs spent on it and its open market value as so improved. He concluded that assessment of the
plaintiffs' loss should not be confined by applying the diminution in value
rule merely at the time of the acquisition of the property because that would
be to under compensate the plaintiffs for their loss. In ignorance of the common land registration
the plaintiffs had transformed the property by incurring expenditure on it and
although the precise extent of that expenditure might not have been foreseen by
the defendant, that did not matter because it was reasonably foreseeable that
there would be such expenditure and that that expenditure might not be matched
by any corresponding increase in value.
The plaintiffs in fact had managed to achieve sufficient deregistration
for their purposes and it was to that date in 1996 that Blackburne J had regard
to when quantifying the plaintiffs' loss.
What I consider important from his approach is that whereas generally
the diminution in value approach as at the date of the breach can operate
justly in most cases where the innocent purchaser is locked into a bargain
which is in some way defective, it is subject to the overriding principle that
the innocent party is entitled to fair compensation.
[77] The pursuer placed particular reliance on the decision in Ladenbau (UK) v Crawley & de Reya. In
that case, in August 1972, the plaintiffs instructed solicitors to act for them
in the purchase of a plot of vacant land which they intended to develop and for
which they had applied for planning permission.
The solicitors failed to establish whether there were any rights of
common over the land. The sale was
completed in May 1973 and at about that time the plaintiffs also negotiated a
resale to another purchasing company with the completion date for this sub-sale
projected to be in September 1973. The
solicitor acting on behalf of the sub-purchaser established that rights of
common, albeit erroneously, had been registered against part of the land. An application then had to be made to effect
the necessary amendment to the register but that did not happen until April
1974. That meant that the completion
date in respect of the sub-sale was delayed and did not in fact take place
until May 1974. Although the plaintiffs
were able to complete the sub-sale and make the anticipated profit, receipt of
that profit was delayed by about 9 months.
One of the items for which they claimed in the action was the interest
they would have made on the profit during that period. In allowing recovery for that part of the
claim Mocatta J, having made reference to Hadley
v Baxendale and to the
solicitors' knowledge as to the plaintiffs' intentions in relation to the site,
said at page 289:
"In the light of
these instructions and in the state of the property market as it was then, the
defendants should in my judgement have reasonably contemplated that if they
failed to secure an unencumbered title for the plaintiffs without warning them
of the defect, the damages that the plaintiffs would suffer were 'not unlikely'
to be the loss of the handsome profit on resale. I choose Lord Reid's phrase in C. Czarnikow Limited v Koufos [1969] 1 AC 350, but the phrases
favoured by the other Law Lords in that case are equally applicable."
Mr Campbell was critical of Mocatta
J's approach as being old fashioned and simplistic. However, it seems to me that, unlike the
position in Ford v White, the simple application of the
diminution in value approach would not have put the plaintiffs into the
position they would have been in had the contract been performed and completion
had taken place at the original date. Mocatta J's
approach was designed to provide the plaintiffs with fair compensation.
[78] Another case where a loss of profit claim was held relevant in
connection with the purchase of heritable property is Havenledge Limited v Graeme
John & Partners. In that case
the plaintiff company purchased a derelict property with the intention of
renovating it and then operating it as a nursing home. The defendants were the solicitors who acted
for it in connection with the purchase.
The sale was completed in the course of 1987. After about 9 months of renovation work the
nursing home was opened in 1988. After
it opened cracking developed and it was discovered that this was due to mining
under the property. Continuing repair
works were implemented by the plaintiff with an adverse effect on the business. Eventually the plaintiff went into
receivership in May 1966. The claim
against the defendants was that they had failed to carry out any coal mining
search, or to advise the plaintiff to do so, before proceeding with the
purchase. Richards J was required
to determine the preliminary issue as to whether the claim was statute barred
but he was also addressed on the issue of damages. He held that the claim was not statute
barred. The plaintiff claimed for wasted
expenditure in the renovation of the property and also for lost profit. In dealing with these claims Richards J said
at page 816-817:-
"In the light of
those authorities it seems to me that the court's task is to assess what
approach will best achieve the result of compensating, but not over
compensating, the claimant for loss resulting from the negligence. The claimant here, on its pleaded case,
suffered a loss that would not have been suffered but for the defendants'
negligence. A sum of over £500,000 was
spent on refurbishment which would not have been spent had the claimant been
properly advised; and in the event much of that expenditure was wasted, in
that, by reason of the cracking, it was not possible to generate the profit to
which the expenditure would otherwise have led.
If the claimant had sold the property on discovering the negligence
(which was in fact after the cracking was discovered), I see no reason why a
proper measure [of] damages should not have been the amount of the expenditure
less the value of the property as refurbished and any net profits earned prior
to sale. The fact that the claimant did
not sell the property but soldiered on in an attempt to earn further profits
may give rise to arguments as to mitigation etc., but does not render it
inappropriate in principle to adopt a measure of damages based on expenditure
incurred less net profit earned and the final value of the property as
refurbished. Such a measure is capable
of securing fair compensation for the loss incurred by reason of the
negligence.
The loss of
profits claim is more problematic but it does not strike me as an illegitimate
attempt to circumvent the normal rule that lost profits are not
recoverable. If the claimant would have
purchased and refurbished another property as a nursing home and had been
properly advised about Haven Lodge, then the difference between the claimant's
financial position had that course been adopted and the claimant's financial
position after proceeding with Haven Lodge - a centre element of which is the
difference in net profits - does appear to me to [be] capable of representing a
proper measure of the claimant's loss as a result of the negligence. This basis of claim is thinly pleaded and not
dealt with adequately by the evidence before the Court on the preliminary issue. It may also give rise to problems of
foreseeability and remoteness. But I do
not think that I should reject it out of hand as a possible measure of
damages".
[79] It can be seen from these observations that the lost profits
for which damages were being sought were not those of the nursing home that
eventually failed but of the notional nursing home that the plaintiff would
have operated had the solicitors not been negligent. It is clear from Richards J's approach
that because the diminution in value approach contended for by the defendants
might lead to an obviously unjust result so far as proper compensation was
concerned, a claim for loss of profit was a relevant claim.
[80] Mr Murphy in his initial submissions placed particular
reliance on the decisions in Diamond v
Campbell Jones and Cottrill v Steyning & Littlehampton Building Society. The dispute in Diamond v Campbell Jones
was between the repudiating vendor of the leasehold of a London
house and the purchaser. The purchaser
was a dealer in real estate and in the past had bought and converted properties
for sale at a profit. The purchaser
failed to recover as damages the profit he would have made after conversion
because the vendor did not know at the time of the contract the purpose for
which the property had been purchased.
Buckley J said that "special circumstances" were necessary to
justify that kind of recovery, the clear implication being that had the vendor
known of the purchaser's intentions, recovery for lost profit would have been
permissible. That indeed is what
happened in Cottrill v Steyning & Littlehampton Building
Society. In that case the
defendants, having granted the plaintiff an option to purchase land, in breach
of that agreement sold the land to a third party in the knowledge that the
plaintiff intended to develop the land.
In those circumstances the plaintiff was successful in recovering
damages by reference to the profits that the vendors contemplated he would have
earned.
[81] It can be seen that these two cases involved breaches of
contract by vendors of property and not as in this case solicitors acting on
behalf of a party who wishes to enter into a contract for the purchase or
heritage. Mr Campbell in his
submissions submitted that these cases were unhelpful because they were not
duty of care cases and predated the decision in SAAMCO. I shall later discuss the decision in
SAAMCO. It is sufficient for present
purposes to say that that decision underlines the importance of focusing on the
scope of the duty incumbent upon a wrongdoer as a means of limiting his
potential exposure to losses sustained by the innocent party. Although there may have been no specific
discussion on the scope of the contractual obligations undertaken by the
parties in breach in Diamond v Campbell Jones and Cottrill v Steyning &
Littlehampton Building Society it cannot in my view be disputed that if in Cottrill the vendor had knowledge of the
purpose for which the property was to be purchased the duty incumbent upon him
would have included within its scope the consequential loss of profit sustained
by the plaintiff. The same can be said
for the decision in Diamond v Campbell Jones.
[82] It seems to me that from the passages to which I have just made
reference and the other English cases relied upon by the parties in this
connection that generally where as a result of the negligence of a solicitor a
purchaser is locked into a bargain in relation to heritable property, and an
undisclosed problem is subsequently discovered that affects the value of property,
in the ordinary case the diminution in value rule will represent the normal
measure of damages. That approach
involves ascertaining as at the date of the breach the difference between the
open market value of the property as it actually is and the open market value
of the property in its presumed state.
It is a method of fulfilling the fundamental principle that where there
is a breach of contract the innocent party is entitled to be placed in the same
position as if the contract had been performed.
If a purchaser acquires a property that in fact is worth less than what
he paid for it through the fault of his solicitors, the diminution in value
approach puts the purchaser into the position he would have been in had the
solicitors had not been in breach of duty.
[83] However the particular facts may demand another approach. Indeed it is recognised by Sir Brian Neill in
Oates v Anthony Pitman & Company that the application of the
diminution in value approach may be more difficult to apply where to the
knowledge of the solicitor the property has been purchased for a particular
purpose (page 695A). Furthermore it is
clear from the observations made by Bingham LJ in County Personnel (Employment Agency) Ltd v Alan
R Pulver and Co that the approach taken must reflect "the overriding
compensatory rule".
[84] The only Scottish case put before me in this general area of
the law was Haberstich v McCormick & Nicholson. In that case, solicitors acting on behalf of
the pursuers in the purchase of a cottage failed to discover when the
disposition was delivered that it was defective. It bore to be granted by persons who did not
have title to the subjects. The
solicitors were aware of the defect but did not advise the purchasers of
it. The purchasers carried out certain
improvements to the cottage and some three years later sold it at a price which
was £1,500 lower than would have been offered had the title not been
defective. At first instance the Sheriff
held that damages should be assessed on the difference between the price at
which the cottage could have been resold namely £5,000 and the price actually
received by the pursuers £3,500. The sum
of £5,000 was assessed by the Sheriff to be a fair estimate of the market value
of the cottage with a good marketable title at the time of the resale. On that approach he awarded damages in the
sum of £1500. The defenders on appeal
argued that where a client had been the victim of a breach of contract by
solicitors in connection with the purchase of heritable property and obtained
less than what he had bargained for, "damages always fell to be assessed as at
the date of settlement of the transaction and always fell to be measured by the
difference between the price paid and the market value of the subjects as affected
by the solicitors' breach of contract".
A number of English cases, including Ford
v White, were relied upon in
support of that argument. The Lord
President (Emslie) having referred to what was said by Pennycuick J in Ford v White dealt with the defenders' argument in the following way at
page 8:
"It must be
said, however, that these observations were made in the context of the
circumstances of that case which were wholly different to those of this
appeal. None of these cases,
accordingly, appears to me to support the existence of the universal rule of
general application for which the appellants contend."
The Lord President then went on to
say at pages 9-10:
"With the very
greatest of respect to the carefully researched and well presented arguments which
I have so far summarised, I am not persuaded that we are required in this case
to accept the existence of any general rule for the computation of damages
which will apply to all cases or even the existence of a separate rule for each
of two categories for cases, involving the negligence of solicitors in
connection with the purchase of heritage.
We are not required by authority to do so and further I am not satisfied
by the arguments either of the appellants or respondents that it would be sound
to affirm that any such rule or rules form part of the loss.
In my opinion
each case must be considered on its own facts and circumstances, and in each
the question of damages which remains a question of fact, must be resolved upon
the proper application of the well known general principles which both parties
to this appeal accepted as the starting points of their separate arguments."
[85] The Lord President went on to consider the case under reference
to what was said in Hadley v Baxendale, and at page 10 said:
"In this case,
as I see it, the simple facts are these.
The pursuers, by reason of the defenders' breach of contract, acquired a
cottage with a defective title when they should have acquired a cottage with a
good one. When they came to sell that
cottage they secured, because of the state of the title, a smaller price than
they could otherwise have expected to obtain.
In selling the cottage with a defective title, the pursuers have
therefore suffered loss. The first
question accordingly is whether that loss is a consequence which arose
naturally from the defenders' breach of contract or was one which might
reasonably be supposed to have been in the contemplation of the parties at the
time they made their contract as a probable result of such breach of contract
on the part of the defenders. The answer
to that question in my opinion must be in the affirmative."
[86] In agreeing with the Lord President, Lord Cameron having also
considered the English cases including Ford
v White said at page 12:
"I would in no
way seek to suggest that these cases were wrongly decided, but they do not in
my opinion provide a complete guide to a decision of this case. Nor would I deduce from the opinion of the
learned and eminent judges who decided these cases that they were professing to
lay down a rigid rule for calculation of damages applicable to all such cases
of breach of contract by solicitors and in all circumstances, particularly in
the event of actual resale of the subjects with the defect and title still
uncured. In none of the three cases
founded upon, was there in fact a subsequent sale - as in this case - from
which it could be demonstrated - with greater or less accuracy - what loss of
prospective price the purchaser had suffered when the house came to be sold by
him. The appellant's submission that the
method of assessing damages in the English cases cited provided once and for
all the only measure of loss accruing as a consequence of the solicitor's
breach of contract appears to me not only to ignore the realities of the
situation as it actually occurred, but to be based on a fallacious reliance
upon the necessity of concurrence of injuria
and damnum. No doubt the injuria is inflicted when the transaction is complete, no doubt damnum is incurred at the same time, but
it does not seem to me necessarily to follow that the only damnum which at that moment can be qualified is and must be the
final measurement of loss sustained."
In my view the approach taken by
the First Division in that case is echoed by Bingham LJ in the passages to
which I have already referred. What is
clear from what is said is that the facts of a particular case have to be
carefully analysed in order to determine the proper approach to the assessment
of damages.
[87] Later I shall consider whether or not the loss of profit claim
made by the pursuer falls outwith the scope of the duty that rested upon the
defenders. So far as the diminution in
value approach per se is concerned I
do not consider this case to be appropriate for that approach. I consider that it is clear from the
authorities to which I have made mention and the other authorities to which
counsel drew my attention that the diminution in value approach is the normal
approach to the measure of damages when heritable property is acquired and
where solicitors have been negligent but it is an approach that is not of
universal application. It is also clear
from what was said in Haberstich v McCormick & Nicholson and other
cases that the particular facts of the case might mean that an injustice might
be caused to the claimant if the diminution in value approach is followed in a
mechanistic way. This is not a case
where a purchaser of heritage has been locked into a bargain and a comparison
can be made between that bad bargain and what the bargain ought to have been,
but rather a case where, due to the defenders' failure, the pursuer failed to
acquire property with a view to making profit.
The defenders were aware of the pursuers' general intentions for the
premises and aware that he would lose the development potential of the premises
if he failed to purchase them. In such
circumstances the diminution in value approach is wholly inappropriate. Prima
facie it fails to comply with the general principle underlying the aim of
compensatory damages that the claimant who seeks damages for a breach of
contract is "so far as money can do it, to be placed in the same situation with
respect to damages as if the contract had been performed". Where the whole purpose of the pursuer's
intended purchase of the premises was to generate profit it seems to me that that
aim would be frustrated if the diminution in value approach is followed.
Scope of the duty
[88] Allied to their contention that the diminution in value
approach was the correct one in the circumstances of this case, the defenders
also argued that, although loss of profit was foreseeable, the pursuer could
not recover because such loss fell outwith the scope of the duty undertaken by
the defenders. This argument was
premised upon a detailed analysis of the decision in the SAAMCO case.
[89] The SAAMCO case concerned three appeals by valuers who had been
required by lenders to value properties on the security of which they were
considering advancing money by way of mortgage.
In each case the valuers considerably overvalued the properties. The lenders provided loans on the properties
which they would not have done if they had known the true values of the properties. The borrowers defaulted and the losses
sustained by the lenders were substantially increased by a collapse in the
property market. The lenders sued the
valuers for recovery of all the losses that had been incurred. To take an example of one of the cases, the
valuers had valued a property at £2.5 million and the lenders had advanced
£1.75 million to the borrower. At first
instance the judge found that the correct value of the property had been
between £1.8 million and £1.85 million.
Following upon the borrower's default, the property had been sold for
£950,000. The trial judge awarded
damages to the lenders on the basis that they were entitled to recover all
losses, including that attributable to the fall in the market. The Court of Appeal upheld that decision and
it was against that decision that the valuers appealed to the House of
Lords. Another of the three cases had
also been considered by the Court of Appeal with the same result. In the third case leave was given by the trial
judge for an appeal direct to the House of Lords.
[90] In the House of Lords the only reasoned speech was delivered by
Lord Hoffman. He began by indicating
that the three appeals before the House raised a common question of principle
namely "what is the extent of the liability of a valuer who has provided a
lender with a negligent overvaluation of the property offered as security for
the loan?" In considering the approach taken
by the Court of Appeal he said at page 210:
"Much of the
discussion, both in the judgement of the Court of Appeal and in argument at the
Bar, has assumed that the case is about the correct measure of damages for the
loss which the lender has suffered. The
Court of Appeal began its judgement, at pp. 401-402, with the citation of three
well-known cases (Robinson v Harman (1848) 1 Exe ch 850, 855; Livingstone v Rawyards Coal Company (1880) 5 App. Cas. 25, 39; British Westinghouse Electric and
Manufacturing Company Limited v
Underground Electric Railways Company of London Limited [1912] AC 673,
688-689) stating the principle that where an injury is to be compensated by
damages, the damages should be as nearly as possible the sum which would put
the plaintiff in the position in which he would have been if he had not been
injured. It described this principle, at
p403, as 'the necessary point of departure'.
I think that
this was the wrong place to begin.
Before one can consider the principle on which one should calculate the
damages to which a plaintiff is entitled to compensation for loss, it is
necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which
the valuer is liable must precede any consideration of the measure of
damages. For this purpose it is better
to begin at the beginning and consider the lenders cause of action."
Lord Hoffman then went on to say
that what the valuers contracted to provide was certain information. The valuers had been required to provide an
estimate of the price which the property might reasonably be expected to fetch
if sold in the open market at the date of the valuation. There would be matters such as how much the
borrower would need to borrow that the valuers would not be privy to. Lord Hoffman continued in the following
way at pages 211-212:
"Because the
valuer will appreciate that his valuation, though not the only consideration
which would influence the lender, is likely to be a very important one, the law
implies into the contract a term that the valuer will exercise reasonable care
and skill. The relationship between the
parties also gives rise to a concurrent duty in tort: see Henderson v
Merrett Syndicates Limited [1995] 2 AC 145.
But the scope of the duty in tort is the same as in contract.
A duty of care
such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty
imposed by the law whether in contract or tort or under statute must do more
than prove that the defendant has failed to comply. He must show that the duty was owed to him
and that it was a duty in respect of the kind of loss at which he has
suffered. Both of these requirements are
illustrated by Caparo Industries plc v Dickman [1990] 2 AC 605. The auditors' failure to use reasonable care
in auditing the company's statutory accounts was a breach of their duty of
care. But they were not liable to an
outside takeover bidder because the duty was not owed to him. Nor were they liable to shareholders who had
bought more shares in reliance on the accounts because, although they were owed
a duty of care, it was in their capacity as members of the company and not in
the capacity (which they shared with everyone else) of potential buyers of
shares. Accordingly the duty which they
were owed was not in respect of loss which they might suffer by buying its
shares. As Lord Bridge of Harwich said,
at p.627:
'It is never
sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope
of the duty by reference to the kind of damage from which A must take care to
save B harmless.'
In the present
case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of
loss in respect of which the duty was owed."
[91] Lord Hoffman proceeds to consider how the scope of the duty is
to be determined. In dealing with the
case of an implied contractual duty he says that the extent of the liability is
defined by the term which the law implies.
He goes on as follows at page 212:-
"As in the case
of any implied term, the process is one of construction of the agreement as a
whole in its commercial setting. The
contractual duty to provide a valuation and the known purpose of that valuation
compelled the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the
consequences for which the valuer is responsible, is that which the law regards
as best giving effect to the express obligations assumed by the valuer: neither
cutting them down so that the lender obtains less than he was reasonably
entitled to expect, nor extending them so as to impose on the valuer a
liability greater than he could reasonably have thought he was
undertaking."
Having rejected the approach of the
Court of Appeal Lord Hoffmann at page 214 sets out the principle that lies
at the heart of the decision:-
"I think that
one can to some extent generalise the principle upon which this response
depends. It is that a person under a
duty to take reasonable care to provide information on which someone else will
decide upon the course of action is, if negligent, not generally regarded as
responsible for all the consequences of that course of action. He is responsible only for the consequences
of the information being wrong. A duty
of care which imposes upon the informant responsibility for losses which would
have occurred even if the information which he gave had been correct, is not in
my view fair and reasonable as between the parties. It is therefore inappropriate either as an
implied term of the contract or as a tortious duty arising from the
relationship between them.
The principle
thus stated distinguishes between a duty
to provide information for the
purposes of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of
action he should take. If the duty is to
advise whether or not a course of action should be taken, the advisor must take
reasonable care to consider all the potential consequences of that course of
action. If he is negligent he will
therefore be responsible for all the foreseeable loss which is a consequence of
that course of action having been taken.
If his duty is only to supply information, he must take reasonable care
to ensure that the information is correct, and if he is negligent, will be
responsible for all the foreseeable consequences of the information being
wrong."
[92] According to Lord Hoffman, the mistake made by the Court of
Appeal was that they made the valuers liable for losses which would have been
incurred even if they had given the correct valuations.
[93] SAAMCO highlights that even if a particular claimant can
establish that a particular result would not have occurred but for the actions
of one party and that the result was reasonably foreseeable it does not
necessarily follow that any loss sustained is recoverable. The precise scope of the duty undertaken by
the alleged wrongdoer may bring the inquiry to an end with the result that the
loss sustained is purely coincidental.
In SAAMCO itself, Lord Hoffman gave the following example at page 213:
"A mountaineer
about to undertake a difficult climb is concerned about the fitness of his
knee. He goes to a doctor who
negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he
would not have undertaken if the doctor had told him the true state of his
knee. He suffers an injury which is an
entirely foreseeable consequence of mountaineering but has nothing to do with
his knee."
In that situation, according to Lord
Hoffman, the doctor would not be liable for his bad advice because the injury
would have occurred even if the advice had been correct. Even although the mountaineer would not have
gone on the climb if the correct advice had been given, the doctor was not
liable because the duty of care imposed upon him was limited to protecting the
mountaineer against injuries caused by his unfit knee. It may be that Lord Hoffman's chosen example
could also be analysed in terms of causation, but it does at least serve as an
illustration of the importance of focussing on the nature of the duty on the
alleged wrongdoer as a limiting factor even if the "but for" test for causation
is satisfied and even if the loss is reasonably foreseeable.
[94] What was said by Lord Hoffmann in SAAMCO was considered by the
House of Lords in Aneco Reinsurance
Underwriting Ltd v Johnson and
Higgins Ltd [2002] Lloyds Rep 157.
That was a somewhat complex case.
In short, there was no dispute that the plaintiffs who were insurers
were entitled to recover from the defendant insurance brokers losses of almost
$11 million dollars. The dispute
centred upon an additional loss of $24 million dollars. The plaintiffs succeeded in the Court of
Appeal in recovering the full amount of their losses. The defendant brokers' appeal to the House of
Lords was dismissed.
[95] In considering Lord Hoffman's speech in SAAMCO Lord Lloyd of
Berwick says at page 181:
"What indeed is
the SAAMCO principle? It is surely the
principle which has been common ground throughout the argument before us that a
defendant is not liable in damages in respect of losses of a kind which fall
outside the scope of his duty of care.
There was nothing new in that principle.
It has been the rule in contract since the decision in Czarnikow Ltd v Koufos [1976] 2 Lloyds Rep 457;
[1967] 1 AC 350, if not before."
He goes on to explain at
page 181:
"What was new
and important in SAAMCO was the application of the principle to valuers so as
to exclude their liability for loss due to a fall in the market: see Platform
Home Loans Ltd v Oyston Shipways Ltd
[2000] 2 AC 190 at p.209 per Lord
Hobhouse. Thus in a case of valuers, and
their like, that is to say, those who undertake to provide specific
information, the SAAMCO principle gave rise to a sub-rule that valuers are not generally liable (the word is that of
Lord Hoffman at p.214) for all the foreseeable consequences of their
negligence, but only for the consequences of the valuation being wrong."
[96] This case is not a case where the duty to provide information
or to give advice dichotomy is of any relevance. In SAAMCO the results of the three appeals
involved turned on the distinction drawn between the scope of these duties. The decision in SAAMCO may not be limited to
valuers but the scope of the duty upon an alleged wrongdoer can only be
ascertained under reference to the particular facts of the case.
[97] The defenders relied on the decision of Jenmain Builders Limited v Steed
& Steed in support of their argument that the scope of the duty on the
defenders in this case did not extend to allowing recovery for loss of
profit. In that case the defendant firm
of solicitors acted for the vendors of a property that had development
potential. They also accepted
instructions to act for the plaintiffs in the purchase of the property. The plaintiffs were property developers and
were interested in developing the property with a view to resale. Subsequently another prospective purchaser
emerged. The defendants received
instructions from the vendors to proceed with the first purchaser who would
exchange contracts. The defendants
failed to inform the plaintiffs of the existence of a contract race and even
although they had agreed a price of £67,500 for the property on behalf of the
plaintiffs, the plaintiffs lost out because the other purchaser won the
contract race in their absence. The
plaintiffs sought damages amounting to the loss of profit they would have made
upon the development of the site. At
first instance the claim for loss of profit was dismissed and that decision was
upheld by the Court of Appeal.
[98] At first instance the case turned on the trial judge's analysis
of the purpose of Rule 6A(2) of the Solicitors' Practice Rules 1990. That Rule provides inter alia that a solicitor should not act for both the seller and
a prospective buyer because of the risk of conflict. The trial judge held that a breach of that
rule gave rise to a cause of action in tort, and having analysed the purpose of
the rule, concluded that the scope of the duty extended only to wasted
costs. In the Court of Appeal the
leading judgment was delivered by Chadwick LJ and a great deal of what he says
deals with the interpretation of that rule.
However in dealing with the claim for loss of profit he also said at
pages 625-626:
"This was a
property with development potential. It
is common ground that this property was no longer to be used as a village
hall. It would have to be used for some
other purpose; and there would have to
be some development so that it could be used for that purpose. The question was: for what development could planning
permission be obtained and how valuable would the property be on completion of
that development? But those are the
factors which a properly informed market will take into account in fixing the
market value of property. The profit
potential of the property is an element to be taken into account in fixing its
market value. It is not suggested that
there was anything special about this property to the appellants as
purchasers. It is not suggested that
there were not other developers in the market for property of this nature who
could have made a proper assessment of the value of this property. The problem for the appellants in the present
case is that they never sought to persuade the judge - and never adduced
evidence to establish - that the market value of this property, Dukes Hall, was
anything greater than the £67,500 which the Parish Council was seeking. It is for those reasons that the claim for
loss of profits is one which the Court could not entertain in this case."
Having considered the decision in
an unreported case in which the judge allowed a claim for loss of profits
Chadwick LJ went on as follows at page 626:
"In the present
case, there is no evidence that these appellants would not have been able to
purchase other property in the market which they could develop profitably with
use of the money which they did not lay out in the purchase of Dukes Hall. There is no evidence that the respondents
insofar as their duty lay in contract were aware of any special circumstances
which made it impossible for the [appellants] to employ their funds in the
ordinary course of their business, or of any circumstances which suggested that
this property was being sold at under value."
[99] Jenmain Builders Limited v
Steed & Steed is a somewhat
unusual case in that much of the discussion in the judgment of Chadwick LJ
turns on the interpretation of the Solicitors' Practice Rules 1990. I am bound to say that I have some difficulty
with Chadwick LJ's analysis set out in the preceding paragraph. I can see that in certain circumstances, such
as in cases involving compulsory purchase, that the market value of heritable
property can be assessed having regard to its development potential. However, in the situation under consideration
by Chadwick LJ, the market value of the property could only be its value
without particular regard to its development potential otherwise there would be
little point in a developer wishing to acquire it for profit. In any event it does seem from what Chadwick
LJ says that he was also influenced by the fact that in that case there was no
suggestion the plaintiff developers did not have available to them a ready
market in which to recoup their losses.
That is not the position in this case where the particular nature of the
pursuer's business at the time was one of developing New Town Georgian
properties at the top end of the range and a reasonable substitute development
opportunity did not become available.
Furthermore, the case can probably be analysed as a failure to provide
information type of case. On the whole I
do not find the decision in the Jenmain v
Steed & Steed case particularly
helpful.
[100] In paragraph [75] I have set out the facts in the case of Oates v Anthony Pitman & Company.
The defenders also relied on that case for this limb of their
argument. In that case the plaintiffs
also claimed damages for the loss of profits due to being restricted to
carrying on the business of holiday letting for a limited period only during
the winter. In dealing with that aspect
of the claim, Sir Brian Neil referred to what was said by
Lord Hoffman in SAAMCO in relation to the distinction between the measure
of damages in an action for breach of a duty to take care to provide accurate
information and the measure of damages for a breach of a warranty that the
information is accurate. The measure of
damages in tort is the extent to which the plaintiff is worse off because the
information was wrong, whereas for a breach of a warranty, the measure is "the
extent to which he would have been better off it the information had been
right". Having set out what Lord Hoffman
said, Sir Brian Neil dealt with the claim for loss of profits in the
following way at page 696:
"It seems to me
to follow from this analysis that, whereas in some cases where damages are
claimed for breach of a warranty a plaintiff may be able to recover in respect
of the profits which he would have made had the property purchased been in
accordance with the warranty, such damages are not recoverable as a loss
suffered by him by reason of having entered into the transaction. Moreover, it is to be noted that in Hayes [supra] at 820 Staughton LJ said that the judge had been right
not to award the plaintiffs a sum for the profit which they would have made if
they had operated the business successfully."
He then goes on to say at
page 697:
"I turn now to
loss of profits. I can deal with this
aspect of the case very shortly. I am
quite satisfied that this claim should be rejected. Such a claim might have been appropriate had
the defendant firm given a warranty as to planning consent. But the lost profits were not losses caused
by entering into the transaction. Ex hypothesi the lost profits could not
have been earned had the transaction not been entered into."
It seems therefore that the loss of
profit head of claim was rejected on the basis that if the solicitors had not
been negligent the plaintiffs would not have purchased the property. If that is the rationale behind the decision
then it is to be distinguished from the circumstances in this particular case.
[101] This is a case based on contract. The defenders do not dispute that they are in
breach of a contractual obligation. The
defenders undertook to deliver timeously the pursuer's offer for the
premises. Mr Campbell characterised the
failure as the breach of a duty of care and, as I have already indicated, Mr
Murphy described the breach rather graphically as "black and white
negligence". I do not doubt that to
label what happened as negligent is wholly apt and that this can be described
as a case involving professional negligence on the part of the defenders. However, simply to focus on a breach of a
duty of care obscures the fact that the defenders' failure was in respect of a
specific instruction given to Miss Docherty by the pursuer to do a particular act. The pursuer gave specific instructions for
his increased offer to be presented timeously so that he could take his place
in any queue of potential purchasers for the premises. The defenders, through Miss Docherty, by accepting these instructions, promised that
they would put the pursuer into that position. Had the defenders fulfilled that promise then
they would in fact have placed the pursuer at the front of the queue for the
premises. The defenders would not have
known that at the time but nevertheless their intention was to put the pursuer
in a position where such a result may very well ensue. This was not a matter in which a solicitor
had to exercise a degree of judgement or give advice, or where a solicitor
failed to carry out an investigation which no solicitor exercising reasonable
skill and care would have failed to carry out.
[102] Having undertaken to deliver the pursuer's offer timeously in
their state of knowledge at the time it seems to me that the defenders assumed responsibility
to protect the pursuer against the kind of loss he suffered. To say, as the defenders suggest, that the
duty only extended to accepting responsibility for the negotiation of missives
and any subsequent conveyancing is highly artificial in a context where the
defenders knew that the ultimate purpose of what they undertook to do was to
produce a result that was designed to provide the pursuer with the opportunity
to acquire the premises in order to develop them. In my view the defenders' breach of contract
cannot be divorced from the loss subsequently sustained by the pursuer. It was the defenders' duty in the
circumstances to put the pursuer in a position where he could carry through his
intention to purchase the premises. That
duty extended to providing the pursuer with the opportunity of purchasing the
premises against a background in which they knew that the pursuer intended to
purchase the premises for development purposes. The loss sustained by the pursuer is the kind
of loss against which the defenders were under a duty to protect him.
[103] In conclusion therefore I am of the opinion that the defenders
are liable to make reparation to the pursuer for the loss of profit he suffered
as a consequence of their failure.
Damages
[104] As I have already observed, the evidence on the development costs
that would have been incurred came from Mr Ferrier. He explained that the exercise he carried out
was standard process often done for developers.
The report he prepared contains a detailed itemised description of the
work that he envisaged would have been involved in the development
process. In relation to the standard of
finishings, he relied in particular upon the standard of finishings that the
pursuer employed in his development of 2 Abercromby
Place, Edinburgh. He assumed that the roof was in reasonable
condition. In fact the evidence
disclosed that it did require some work.
According to Mr Cliff, the sum involved was about £20,000. A number of other items such as statutory
notice repairs and the cost of sound tests and necessary repairs were also
omitted. It is also the case that Mr
Ferrier assumed that the pursuer's proposed timetable for the development and
sales would be adhered to.
Mr Ferrier's calculations brought out a total construction cost of
£417,844.
[105] The evidence on the potential sale prices of the completed flats
was given by Mr Craig. He also
approached the task of valuation on the assumption that the pursuer's timetable
would be adhered to. He assumed that the
level of refurbishment that would have been carried out would have been of a
high quality and aimed at the upper end of the market. Mr Ferrier in working out his costings
did so on the basis of an average specification. The total sales figure produced by
Mr Craig was £2,370,000.
[106] During the course of his submission on behalf of the pursuer,
Mr Murphy produced a schedule which brought out a figure of £659,957.40 as
the pursuer's loss based upon the figures produced by Mr Hardie and
Mr Craig but also reflecting the evidence in relation to matters that
Mr Ferrier in particular had not taken into account. That figure also assumed that the pursuer
would have constructed 7 flats.
Accepting that it was unlikely that the pursuer would have obtained
planning permission for 7 separate flats Mr Murphy revised the figure
downwards to £614,066. It was in respect
of that sum that he invited me to grant decree.
[107] The defenders' approach to the issue of damages was somewhat
different. That approach involved
looking at the comparative profitability of previous developments carried out
by the pursuer, five such developments being chosen for this purpose. That analysis disclosed that whereas the ratio
of profit/capital costs and the profit/sale price figures historically
disclosed an average of 20.4 per cent and 16.9 per cent respectively, the
equivalent comparisons on the basis of the figures produced for the purpose of
the litigation produced ratios of 47.5 per cent and 32.2 per cent
respectively. The ratios based upon the
pursuer's claim as revised in the course of Mr Murphy's submissions were
36.1 per cent and 26.5 per cent respectively. This analysis discloses that the pursuer's
original hypothetical figures were double the historical averages and even his
revised figures were substantially in excess of these averages.
[108] Although the exercises undertaken by Mr Ferrier and
Mr Craig were perfectly legitimate and of necessity hypothetical, they did
depend upon a number of assumptions. In
reality the pursuer's proposed timetable was likely to have been delayed. Other factors such as development costs going
over budget, delays in supplies and sales prices being lower than anticipated
could also impact upon the figures. It
is also the case that there was a mismatch in the assumptions made by
Mr Ferrier and Mr Craig as to the standard of finishings that might
have been involved.
[109] In my opinion the approach adopted by the pursuer to the issue of
damages is too speculative. The
defenders' approach has the attraction of being rooted in what had actually
happened in the past. I propose
therefore to adopt the defenders' general analysis by having regard simply to
the profit/sale proceeds ratio approach but to use the average derived only
from the New Town property developments, Nelson Street,
Heriot Row and 2 Abercromby Place. I think that restricting the analysis to New
Town properties is a fairer approach. On
that basis, an average ratio of profit to sale proceeds of 17.4 per cent
is produced. For this exercise I am
prepared, as indeed the defenders had done for their analysis, to adopt the
projected sale proceeds of £2,370,000 produced by Mr Craig's figures. Applying the average ratio of 17.4 per
cent to that figure produces a figure of £412,380. That is the figure which I propose to include
in the decree.
Interest
[110] Mr Murphy argued that
interest should run from July 2003 on the basis that by then there would have
been receipt of income from the sales of flats.
Mr Campbell did not disagree with the general approach but relying
on the evidence as to the likelihood of some delay, proposed March or April
2004 as the appropriate date from which interest should run. Accepting that some delay in the timetabling
was likely, I propose to find that interest should run at the legal rate of
eight per cent from 1 October
2004.
Conclusion
[111] I propose to sustain the
first and second pleas-in-law for the pursuer and to grant decree to include
the sum of £412,380. As the interest on
that sum to the date of decree requires to be calculated and hopefully agreed
between the parties the case will be put out By Order for that purpose. I shall reserve the question of expenses
until then.
