Vendor and purchaser–Contract for the sale of land–Fourth stage of litigation following establishment of vendors’ liability under Misrepresentation Act 1967 and quantification of damages–Appeal by solicitors concerned in third party proceedings with vendors–Judge had held solicitors liable to indemnify vendors against the damages payable to purchasers–Such damages had been assessed at £151,500 together with interest totalling £149,314.61–The third party appealed and the purchasers cross-appealed
misrepresentations, which had been proved, consisted of statements that certain
deeds, which disclosed the nature and extent of rights to light and air enjoyed
by the proprietors of an adjoining property, were not available for
inspection–These statements, made before a contract for the sale of a block of
property, were in fact, although not to the knowledge of the vendors or their solicitors,
untrue–The deeds had all the time been in the possession of the vendors’
solicitors but had been lost sight of in their document storage system–The
neighbouring proprietors’ rights were not revealed to the purchasers until
after they had started on a redevelopment of the purchased site; in consequence
the redevelopment scheme had to be partially redesigned and its completion
delayed–Although the misrepresentation was innocent it was clear from section
2(1) of the 1967 Act that the measure of damages was the measure appropriate to
the tort of deceit–The first stage of the litigation established the vendors’
liability, the second stage resulted in a quantification of this liability, and
the third stage, proceedings between the vendors and the solicitors,
established the solicitors’ liability to indemnify the vendors against their
liability in damages and costs to the purchasers–The present, fourth, stage is
the solicitors’ appeal against the orders made by Morritt J at the third stage
expressing sympathy with the judge in having to deal with a confusingly large
number of conflicting valuation submissions, the court considered what was the
correct measure of damages to apply–The classic statement of principle was that
the basic measure was the sum which would put the party who had suffered into
the same position as he would have been in if he had not sustained the wrong
for which he was being compensated–In its application to misrepresentation
inducing a party to enter into a contract of purchase, the measure of damages
is the difference between what the plaintiff paid for the property and the true
market value of what he has acquired–It has, however, come to be recognised
that, if that difference in market value does not fully compensate a plaintiff
for his loss, he is entitled in addition to consequential loss directly caused
by the misrepresentation and his entry into the contract–In the present case
these two heads together, which in fact constituted the hybrid claim put before
the judge, would fully compensate the purchasers for their loss
task in quantifying the damages had been greatly complicated by widely, indeed
wildly, divergent estimates produced by the parties’ experts, ranging from
£750,000 at one time, later amended to £500,000-£600,000, on the one side, to
nothing at all on the other–The judge had rightly rejected the expert evidence
on both sides–In the absence of helpful valuation evidence the Court of Appeal
arrived at the difference of market value figure by making use of a feasibility
study which the purchasers had undertaken–On this basis the court arrived at a
market value price for the land of £1.95m–As the purchasers paid £2.1m, the
difference in value was £150,000–There had to be added to this the second head
of damages mentioned above, the expenses thrown away by having to modify plans,
incurring additional costs and delayed completion of the development as a
result of the disclosure of the rights to light–The court assessed the claim
for money thrown away at £104,471
the third party’s appeal was dismissed, the cross-appeal allowed and total
damages of £254,471 plus interest awarded
The following cases are referred to in
this report.
County Personnel (Employment Agency) Ltd v Alan R Pulver & Co
[1987] 1 WLR 916; [1987] 1 All ER 289; [1986] 2 EGLR 246, CA
Doyle v Olby (Ironmongers) Ltd [1969] 2
QB 158; [1969] 2 WLR 673; [1969] 2 All ER 119, CA
Hornal v Neuberger Products Ltd [1957] 1
QB 247; [1957] 1 QB 247; [1956] 3 WLR 1034; [1956] 3 All ER 970, CA
Livingstone v Rawyards Coal Co (1880) 5 App
Cas 25, HL
McConnell v Wright [1903] 1 Ch 546
This was an appeal by the third party,
Denton Hall & Burgin, against Morritt J’s order dated February 24 1989
[1989] 2 EGLR 196, assessing damages payable by Dentsply Research &
Development Corporation to the plaintiffs, Cemp Properties (UK) Ltd. (It was
the
[1989] 2 EGLR 192; (2) [1989] 2 EGLR 196; (3) [1989] 2 EGLR 205.) The third party were bound by that judgment
and by further orders of Morritt J were entitled to appeal against it. There
was a cross-appeal by Cemp.
Martin Mann QC (instructed by Reynolds
Porter Chamberlain) appeared on behalf of the appellants; Michael
Lyndon-Stanford QC and Stephen Bickford-Smith (instructed by Titmuss Sainer
& Webb) represented the respondents, Cemp Properties (UK) Ltd, plaintiffs
in the action.
Giving judgment, SIR NICOLAS
BROWNE-WILKINSON V-C said: This is an appeal against an order dated
February 24 1989 of Morritt J assessing the damages payable by the defendants,
Dentsply Research & Development Corporation (‘R&D’), to the plaintiffs,
Cemp Properties (UK) Ltd (‘Cemp’), of £151,000 together with interest totalling
£149,314.61. By further orders dated April 20 1989 Morritt J directed that the
third party, who were R&D’s solicitors, Denton Hall & Burgin (‘DHB’),
were bound by the judgment of February 24 1989 and were entitled to appeal
against that judgment. The third party, DHB, are the appellants before this
court. The plaintiff company, Cemp, cross-appeal.
Cemp, in the action, claim damages for
negligence under the Misrepresentation Act 1967 in respect of
misrepresentations made by R&D inducing Cemp to contract to purchase a
property from R&D. The misrepresentations alleged were to the effect that
deeds which disclosed the nature and extent of rights to light and air enjoyed
by the owners of an adjoining property, 1-5 Poland Street, London W1, were not
available for inspection. The contract whereby Cemp agreed to purchase the
property known as Amalco House from R&D for £2.1m was entered into on
February 15 1980. It was completed on May 15 1980. The neighbouring owners’
rights to light and air were not revealed to Cemp until October 1980, by which
time Cemp had started on the redevelopment of the site it had purchased from
R&D. In consequence the development scheme had to be partially redesigned
and its completion was delayed. The writ was issued on July 30 1983.
The trial of Cemp’s claim was split, the
first part being confined to liability, the second part to the assessment of
damages. The first part of the trial, on liability, came before Mervyn-Davies J
in November 1987. On November 20 1987 Mervyn-Davies J declared that:
(a)
the plaintiff in entering into the contract dated 15th February 1980 and
completing the same relied on the representations pleaded in paragraph 4(2)(b)
of the Re-Re-Amended Statement of Claim.
(b)
The said representations were false.
(c)
In the event that the plaintiff establishes that it has suffered any
loss or damage as a result of the said misrepresentation the defendant is
liable for the same pursuant to section 2(1) of the Misrepresentation Act 1967.
The question of assessment of damages
came before Morritt J. He was concerned with the question of what, if any,
damages and interest R&D should pay to Cemp in consequence of the liability
which Mervyn-Davies J had declared to exist. Arising from that and depending on
the answer to that was the question as to liability as between the third party,
DHB, and R&D.
The property sold by R&D to Cemp was
in Soho. It was a corner block fronting on the south to Broadwick Street and on
the west to Poland Street. There were three elements of the site, which had buildings
on it. The part of the site known as 26-28 Broadwick Street was a building
comprising basement, ground and six upper floors, which had been completed in
1966. That part of the development can be put on one side, since that building
remained. Adjoining 26-28 Broadwick Street, and integrated with it by various
openings in the party wall, was a building erected between 1910 and 1935, known
as 30-40 Broadwick Street which had a frontage also on to Poland Street. That
part of the building was known as 1a Poland Street. The third element in the
property lay to the north of 1a Poland Street and was a single-storey garage
with a pitched roof. The garage was built on to the flank wall of the property
adjoining to the north, known as 1-5 Poland Street. That adjoining property,
1-5 Poland Street, enjoyed rights of light and air to its flank wall. It is
those rights of light which have caused the present dispute.
Prior to the construction of the garage
in the 1920s there were five apertures in the flank wall of 1-5 Poland Street,
four windows and a ventilator. By virtue of certain documents entered into in
1928 and 1934, which were called ‘the Maxwell deeds’, the owners of 1-5 Poland
Street enjoyed rights of light and air to those windows and that ventilator in the
flank wall of no 1 over the garage site and no 1a Poland Street. That was the
position which existed in January 1980 when R&D put the property on the
market at £2.25m.
In January 1980 an architect, Mr Gill,
introduced Cemp to the site. Cemp are an English subsidiary of a Canadian
property development company. Mr Philip H White was de facto director
and was investigating the UK property market. The site was introduced as a site
suitable for total redevelopment, apart from 26-28 Broadwick Street, and the intention
was that there should be a substantial area available for office use. Prior to
purchasing, Mr White carried out a number of feasibility studies, one of which
was known as the downside position, being the least profitable possible use of
the property. That downside feasibility study showed that, on the basis not of
redeveloping the site but of refurbishing the buildings on it, if the
acquisition cost of the site was £2m the profit would result to Cemp of
£1.087m, being a profit of 19.3% on the total costs of acquisition and
refurbishment.
By January 24 1980 Mr White had indicated
that Cemp would offer £2.1m, subject to contract. That offer was accepted on
January 28 and the parties instructed their solicitors. DHB acted for R&D.
On January 31 1980 Cemp’s solicitors asked for copies of the Maxwell deeds and
also asked:
If copies of the above are not available,
is the vendor aware of the contents of these deeds and documents or of any
complaint of any obligation on the part of the successors in title to the
original parties?
The answer given to that inquiry, on
February 6 1980, was ‘No’.
It was those circumstances that
constituted the misrepresentation for which Mervyn-Davies J held R&D to be
liable at the first trial because the representations were, albeit innocently,
untrue and had been relied on by Cemp in entering into the contract of February
15 1980. In fact, the Maxwell deeds were held by DHB but had been lost sight of
in their document storage system.
The judge found that Cemp purchased the
site for redevelopment apart from 26-28 Broadwick Street. It was bought on the
footing that in all probability planning permission would be forthcoming and
indeed that forecast proved correct. It is common ground between the parties
that the redevelopment of the property other than 26-28 Broadwick Street was
reasonably foreseeable to all parties to the transaction.
Completion took place on May 15 1980. On
June 10 Cemp applied for planning permission, which was granted on September 17
1980. The scheme for which planning permission was obtained provided for the
refurbishment of 26-28 Broadwick Street so as to provide showrooms at
ground-floor level with offices on the upper floors. As to the rest of the
site, the buildings were all to be demolished and replaced with a new building
fronting on to Broadwick Street, with a reverse frontage on to Poland Street,
with showrooms at ground-floor level and offices on the four upper levels.
On the Poland Street frontage the
planning permission provided for a building running between the wall of the
offices to be erected on the Broadwick Street frontage and the flank wall of
1-5 Poland Street. That building was to consist of flats and if constructed
would have wholly obscured the lights, the right to which was secured by the Maxwell
deeds to the owners of 1-5 Poland Street. This part of the development, to be
erected next to the flank wall of 1-5 Poland Street, I will call ‘the
residential block’. It was to consist of a shop at ground-floor level and seven
flats on the first and fourth floors. Access to those flats was to be via a
passage running from Poland Street through the area in which the shop on the
ground floor lay to a staircase at the rear of the building. There was to be no
lift. At the rear of the residential block there was to be a glazed fire escape
from the offices.
Having completed the purchase, Cemp
proceeded to prepare plans and quantities and went out to tender for the total
project. On October 8 1980 Cemp accepted the tender of Harry Neal Ltd (‘HNL’)
for the whole of the work. At that stage they were still ignorant of the
existence of the rights of light evidenced by the Maxwell deeds.
It was at that stage for the first time
that copies of the Maxwell deeds were discovered. They showed the existence of
the rights of light over the development site. From shortly after October 13
1980 Cemp became as aware of the true position as to the rights of light as
they would have been all along if no misrepresentations had been made to them
relating to the existence of the deeds. On discovering the existence of the
documents, Cemp were faced with a dilemma. Part of the development for which
they had planning permission and had accepted tenders, the residential block,
would obstruct the
release of the rights of light from the adjoining owners. At the end of October
1980 they decided to sever the development into two parts. The office part of
the development was to go ahead, but the residential block was put on hold,
pending the resolution of the rights of light dispute. This severance of the
development into two parts led to the redesign of the building, involving cost
and delay.
It further led to certain additional
building costs being incurred for the office block. Those additional costs can
be summarised as follows:
(1)
The severance necessitated the construction of the office block in
sections, starting from the far end and building each section vertically. The
normal method would have been to construct the entire office block in one
section horizontally from the ground floor up. Thus the construction of the
office block took longer, cost more and was an inefficient use of HNL’s
resources.
(2)
The wall which was to separate the residential block from the office
block would, under the original design, have been built as an internal wall.
Owing to the deferment of the construction of the residential block and the
uncertainty as to whether anything would be built against it, the end wall of
the office block had to be redesigned and built as an independent,
free-standing structural wall. Such a wall was thicker, more expensive and
slower to build than the originally planned wall. Moreover, its increased width
had a limiting effect over four floors, restricting the available space for
office letting.
Cemp proceeded to demolish the buildings
on the site and such demolition was complete by mid-December 1980. In the
meantime negotiations continued with the owners of 1-5 Poland Street. These
negotiations matured in an agreement in principle reached on March 4 1981. The
basic terms agreed with the adjoining owners were that Cemp would change the
original design of the residential block so as to incorporate into it a light
well on to which certain windows in the flank wall of 1-5 Poland Street could
open. The incorporation of this light well and other requirements imposed by
the adjoining owners led to the following changes being made to Cemp’s original
design of the residential block:
(1)
There was the light well itself.
(2)
The number, size and position of the flats were altered. The number of
flats was increased from seven to eight, but the flats were smaller. Those
changes in the number of flats were made necessary as a result of the light
well, and also because the freeholders of 1-5 Poland Street insisted that the
windows of the flats should not overlook the flank wall of 1-5 Poland Street
and that exhaust pipes from the gas central-heating system should not be
exhausted into the light well.
(3)
In consequence of the redesign of the flats, which was thought to make
them less attractive and therefore more difficult to sell, instead of the
original proposed foot access to the flats a lift and direct entrance in Poland
Street were included. The entrance under the original design had been situate
beside the flank wall of 1-5 Poland Street on the ground floor. The alternative
entrance provided as a result of the negotiations with the adjoining owners
provided that the new entrance should be farther along: in fact it came out of
that part of the building which was included in the office block. Two
consequences flowed from that. First, the shop area on the ground floor of the
residential block was increased. Correspondingly, the office showroom area on
the ground floor of the office block was decreased.
(4)
The inclusion of the lift involved the construction of a basement below
the residential block to house the lift machinery.
(5)
The freeholders required that the flank wall of the residential block
should be independent of the flank wall of 1-5 Poland Street. In consequence
Cemp had to construct their own cantilevered wall and corresponding bracing
walls from basement level at the end adjoining the flank wall of 1-5 Poland
Street.
Although no final agreement was reached
with the adjoining owners of 1-5 Poland Street until considerably later, Cemp
acted at once on the agreement in principle. They applied for the revised
planning permission to enable the revised residential block to be erected on
March 31 1981 and received approval on August 11 1981. In the meantime they
reached agreement with the builders for the revision of the construction
contract so far as related to the residential block. Construction of the
residential block as revised began on July 13 1981.
As a consequence of the problems raised
by the rights of light, at one stage the whole development was 22 weeks behind
schedule. To seek to ameliorate this, Cemp agreed with HNL to expedite work by
overtime and other working, for which Cemp agreed to pay HNL an additional
£55,000 (the ‘additional measures payment’). As a result of that additional
working, 10 weeks of the delay were made up. The ultimate delay in the
completion of the works was 12 weeks, all of which was covered by an
architect’s certificate. The judge held that the whole of that delay in
completion was due to the delays caused by sorting out the rights of light
problem.
The offices and showrooms were completed
on July 9 1982, the residential block was completed on September 20 1982 and
the entire development was let by the end of December 1984. Cemp did not sell
the freehold, but retained it until 1988, when it was sold as part of a
portfolio of properties in connection with the reorganisation of Cemp’s holding
company. The development was profitable to Cemp, whether one estimated the
value of the development in 1984 when it was let or took the actual proceeds of
sale some four years later in 1988.
Cemp then put forward a claim for the
damage suffered. Originally in correspondence it was estimated at between
£100,000 and £110,000. In the claim as originally pleaded Cemp’s claim was for
£106,000-odd in respect of extra costs of construction and finance, plus an
additional sum for loss of the value of the development. Shortly before the
hearing on liability before Mervyn-Davies J that claim was abandoned and the
damages were sought to be claimed on two alternative bases. First, what was
called the ‘developer’s loss basis’ (ultimately claimed to be £514,984);
second, or alternatively, the ‘market value basis’ (claimed to be some
£750,000). Then at a very late stage a further alternative basis of claim was
put forward, the ‘hybrid claim’. This was a claim based on the loss assessed on
the market value basis of £750,000, plus the costs thrown away, put at
£104,471.
It was common ground before the judge
that section 2(1) of the Misrepresentation Act 1967 operated so as to make
applicable to innocent misrepresentation claims the same measure of damages as
applied to fraudulent misrepresentation. The judge directed himself, in my view
correctly, that the damage was to be measured by comparing Cemp’s actual
position with the position they would have been in had no misrepresentation
been made. Both Mervyn-Davies J and Morritt J held that had Cemp known of the
true position as to the rights of light they would not have purchased the
property. The judge then held that each of the three bases of assessing
damages, that is to say, the market values basis, the developer’s loss basis
and the hybrid claim, was in principle an appropriate basis of claim. The judge
then reviewed the evidence and reached the conclusion that the extra costs
incurred by Cemp as a result of the failure to disclose the rights of light
amounted to £158,000. Although I do not myself agree with that figure, on the
view that I take of this case it is not necessary to analyse how the judge
reached it.
The judge then considered the evidence
supporting the claims made on each of the three bases. The expert called by
Cemp was Professor W M Hattersley [FRICS]. R&D and DHB each called an
expert, Mr C L Manton [FRICS] and Mr N J Rose [FRICS] respectively. The judge
pointed out the inherent uncertainty which attended making residual valuation
of anticipated developments, particularly when those valuations were being made
long after the event. On the market value basis of assessment the relevant
question is what was the difference between the price paid by Cemp, £2.1m, and
the value the property would have had if it had been sold on the market in
February 1988 with the existence of the Maxwell deeds disclosed. Mr Rose said
that even if the Maxwell deeds had been known about, the property would still
have had a market value in February 1980 of £2.1m. Not surprisingly, the judge
rejected that evidence.
Professor Hattersley had originally made
his valuation for the market value basis on the footing that the property would
have been marketed in February 1980 solely for the purpose of complete
redevelopment, that is to say demolition followed by a new building. However,
it became clear that if the rights of light had been known about in February
1980 the property would probably have had a greater value if bought for
refurbishment than for total redevelopment. Refurbishment would have avoided
the uncertainties inherent in entering into negotiations with the owners of 1-5
Poland Street with a view to reaching a variation of the rights to light. In
those circumstances Professor Hattersley produced a valuation made on the
refurbishment basis. Those valuations led him
about, of between £1.4m and £1.6m.
The judge criticised Professor
Hattersley’s refurbishment basis valuation on a number of grounds, including
the fact that Professor Hattersley’s valuation assumed that, on refurbishment,
only 35,700 sq ft of lettable office space could be obtained, whereas Cemp, in
the original feasibility study, had worked on a basis that 37,500 sq ft would
be available. The judge was understandably sceptical of a valuation made by
Professor Hattersley which suggested that Cemp had suffered a minimum loss of
£500,000, as being the difference between the price paid and the true market
value, when in fact Cemp had solved the problem of the rights of light at an
additional cost, as he thought, of only £158,000.
Turning to the developer’s loss basis of
assessment, I confess that the mysteries of this basis have not yet even now
become clear to me. The judge again found that Professor Hattersley’s evidence
was unsatisfactory and rejected it as being a basis for computing damage in the
present case. Since both before the judge and before this court Cemp relied on
the developer’s loss basis primarily as a cross-check and not as a basis of
valuation in itself, it is unnecessary for me to go into the details of the
judge’s reasoning. Suffice it to say that he rejected Professor Hattersley’s
evidence on that basis.
The judge then referred to two decisions
in this court which indicate that in certain special circumstances the market
value basis is not the only appropriate basis for measuring damages. He
referred to County Personnel (Employment Agency) Ltd v Alan R Pulver
& Co [1987] 1 WLR 916*, a case dealing with a contractual duty of care,
and Hornal v Neuberger Products Ltd [1957] 1 QB 247, a case of
fraudulent misrepresentation in which the court awarded damages for delay,
notwithstanding that there was no loss in market value. Having considered those
cases, he says at p 30E of the transcript† :
It seems clear that I am entitled and
should consider the extra costs incurred either as a check on the true market
value of the site in February 1980, or as more appropriate than the usual
measure to adopt in the circumstances of this case or as consequential damage
actually sustained, even if the normal measure of damage reveals no loss.
*Editor’s note: Also reported at [1986] 2
EGLR 246.
† Editor’s note: Reported at [1989] 2
EGLR 196 at p 204 G.
He then turns to consider the additional
expense incurred by Cemp. He divided that into two parts. The first part
consisted of expense incurred by Cemp which produced no additional benefit to
Cemp. Such additional expense, which I will call expense thrown away, he put at
£57,000. In reaching that figure, out of the total additional measures payment
of £55,000 he included only £7,527, being that part of the £55,000 which the
quantity surveyors had apportioned to the residential block. He then referred
to the fact that, on the calculations he had made, Cemp had incurred a total
additional expense of £158,000 and therefore, on the costs thrown away basis,
there was more than £100,000 expended by Cemp which, though not completely
without benefit to them, had been incurred by them. The only benefit identified
by the judge as flowing from this expenditure was that the flats as built,
eight in number, were worth, according to the valuations, £21,000 more than the
seven flats which it had originally been intended to erect. From the figure of
£158,000 he therefore deducted £21,000 as being benefits accruing to Cemp from
the increased expenditure, leaving £136,500. Then, considering that on the
market value basis this does not fully reflect the doubts which a purchaser
would have as a result of the Maxwell deeds being available, and that on any
other basis the figure of £136,500 did not take into account the cost of the
delay in putting up the office block and the increased costs of its
construction, he added (doing, as he said, the best he could) a further
£15,000, making his total of £151,500.
Both DHB and Cemp attack the judge’s
basis of computation of loss. DHB submit that the judge adopted a measure of
damage which was neither pleaded nor argued. They further say that as a minimum
if the judge were going to deduct from the additional costs incurred of
£158,000, £21,000, being the increased value of the flats, by the same token he
should also have deducted a further sum, which was agreed, for the increased
value of the shop in the residential block, the square footage of such shop
having been increased by moving the passage out of the shop into the adjoining
office block.
Cemp, on the other hand, submit that it
could not be right for the judge to deduct anything for the benefits received
by Cemp from the increased value of the flat or the shop without taking into
account the countervailing detriments which, as Cemp allege, they have suffered.
Cemp say that if the countervailing detriments had been taken into account, far
from the additional expenditure of £158,000 having produced a net benefit to
them, they were, in fact, worse off.
In my judgment, both these criticisms are
justified. I have the greatest sympathy with the judge. He was faced with a
case put forward on a confusingly large number of different bases, each of
which was supported and opposed by evidence which he found unsatisfactory.
Faced with this he tried to find some more satisfactory method of quantifying
the loss which he felt must have been suffered, but in so doing, in my
judgment, he did depart from the pleaded case. It appears that what he was
seeking to do was to find a check on what the market value basis would have
produced, or was looking for a claim based simply on consequential damage. In
fact the figures he reached, being something on which there had not been
submissions by counsel, so far as I can understand the case, did not
satisfactorily proceed on either of those bases. In my judgment, the judge’s
assessment cannot stand.
I turn, then, to consider what is the
correct measure of damages to apply to this case. I confess that I think this
case has been unduly complicated, leading to an enormously expensive inquiry as
to damages and then this appeal. There is no doubt that the basic measure of
damages is a sum that would put the party that has suffered in the same
position as he would have been in if he had not sustained the wrong for which
he is now getting his compensation or reparation: Livingstone v Rawyards
Coal Co (1880) 5 App Cas 25 at p 39 per Lord Blackburn.
As the judge in his judgment recognised,
it is well established that in the field of misrepresentation in the ordinary
case the basic measure of damages for a fraudulent misrepresentation (and now
an innocent misrepresentation) inducing the plaintiff to enter into a contract
of purchase is the difference between what the plaintiff paid for the property
and the true market value of what he acquired: McConnell v Wright
[1903] 1 Ch 546. But it is now also established that if that difference in
market value basis does not fully compensate the plaintiff for his loss he is
in addition entitled to damages for consequential loss directly caused by the
misrepresentation and the entering into of the contract: Doyle v Olby
(Ironmongers) Ltd [1969] 2 QB 158. It may be that there are exceptional
cases where these two heads of damages do not fairly compensate the plaintiff
for his loss (though at the moment I cannot think of one). But I have no doubt
that in the present case these two heads together, which in fact constitutes
the hybrid claim put before the judge, would fully compensate Cemp for their
loss.
I turn, then, to the first head of
assessment, the market value basis of assessment. The question then is, can
Cemp demonstrate that they have suffered any loss? For a considerable part of the argument I
thought that, although I felt sure that Cemp had suffered a loss on this head,
the unsatisfactory nature of the evidence they put before the judge meant that
they had failed to prove their claim. It is a sad feature of modern litigation
that expert witnesses, particularly in valuation cases, instead of giving
evidence of their actual views as to the true position, enter into the arena
and, as advocates, put forward the maximum or minimum figures as best suited to
their side’s interests. If experts do this, they must not be surprised if their
views carry little weight with the judge. In this case, such evidence rightly
led the judge to reject the expert evidence on both sides.
How, then, can the case be approached if
the judge has rejected all the expert evidence as to value? Not without considerable doubt. I have been
persuaded by Mr Lyndon-Stanford that there is one basis on which it is
legitimate to make a finding as to the minimum loss suffered on a market value
basis. As I have said, before purchasing Cemp made a feasibility study on a
refurbishment basis. This was based on an assumption that after refurbishment there
would be 37,500 sq ft of office space available for letting. On the basis that
Cemp would acquire a minimum profit of 19.3% on total costs, this put a value
of £2m on the property. After that feasibility study had been made, but before
contract, the architect, Mr Gill, made further inquiries and at the time of the
purchase had reduced the estimated office space to be available to 35,700 sq
ft. Mr Manton, at the trial, accepted this figure of 35,700 sq ft as being the
appropriate estimate of office space available on refurbishment. If Cemp’s
feasibility study was rewritten on the basis that the obtainable office space
on refurbishment was 35,700 sq ft then, taking a profit of 19.3% on total cost,
the price payable for the land in 1980 would have been £1,951,687, say £1.95m.
Mr White of Cemp would not have bought
would have required a profit margin of 25% on total cost. Mr Manton suggested
it would have required 26.3% on total cost. Mr Rose, on the other hand, said a
person buying for refurbishment could look for only 20%.
In my judgment, therefore, although the
actual value of the property may have been less than £1.95m, one can
legitimately take the minimum open market value of the property at the date of
contract for the purposes of refurbishment as having been £1.95m. Therefore, on
the difference between market value and the price actually paid, the loss is
£150,000. Mr Lyndon-Stanford suggested that we could go even further and assess
the market value of the property on the footing that a purchaser would have
required a profit of 25% on total cost. However, the evidence I have mentioned
does not warrant a finding to that effect, since it was not unanimous. I would
therefore award £150,000 on the market value basis.
Turning to the second head of damage,
does the difference between market value and price paid fully compensate Cemp
for the consequences of the misrepresentation?
In my judgment it does not. Before the true position as to the rights to
light had been discovered, Cemp had designed a development and had entered into
a contract for its construction. In those circumstances Cemp were entitled to
all expenses thrown away by having to modify and delay the development as a result
of the true circumstances as to the rights of light having surfaced in October
1980. What are those expenses thrown away?
First, there is the increased cost of
building the end wall of the office block as a structural unit, necessitated by
the fact that the office building had to go ahead as possibly a freestanding
building before it was known what, if any, residential block would be built.
These costs were agreed at £12,996.
Second, there is the delay in completion
of the residential block, which is agreed at £30,345.
Third, there are the acceleration
payments of £55,000 made to HNL. The judge held that, because the quantity
surveyor had apportioned only £7,500-odd of this £55,000 to the residential
block, only the smaller sum could be treated as expenses thrown away. I do not
agree. The whole of the £55,000 was paid in order to make up time. That time
had been lost wholly owing to the delay caused by the non-disclosure of the
Maxwell deeds. Therefore, in my judgment, the whole of the £55,000 represents
moneys which would not have been expended had the true facts been known from
the outset.
Fourth, there are the additional redesign
fees amounting to £6,130.
Fifth, there are additional financing
costs, costs of the purchase price during the period of the delay. It was
agreed that this should be met by awarding interest at 2% above base rate on
the £150,000 damages awarded under the market value basis from the date of
completion of purchase (May 15 1980) and interest at the same rate on the money
thrown away claim from July 1 1981.
Therefore the money thrown away claim
amounts to £104,471.
I would therefore dismiss the appeal,
allow the cross-appeal and award total damages of £254,471 plus interest as
above computed.
Agreeing, BINGHAM LJ said: Since
we are differing from the learned judge I should briefly, and I hope simply,
summarise my own conclusion.
The plaintiffs were developers and were
interested in this site for the purposes of redevelopment. DHB’s innocent
misrepresentation led them to believe that there were no rights of light
enjoyed by the owners of 1-5 Poland Street which would impede or restrict
redevelopment. It is common ground that the market value of the site on that
basis was the sum of £2.1m which the plaintiffs paid.
In truth, the owners of 1-5 Poland Street
did enjoy rights of light which impeded and restricted full redevelopment of
the site. A developer could not build at full density and at full height up to
the flank wall at the southern boundary of 1-5 Poland Street. This made the
site a less valuable commercial asset, since the return which a developer could
reasonably hope to obtain on redeveloping or refurbishing the site would
necessarily be smaller. It seems to me inconceivable that if the site had been put
up for auction with full disclosure of the rights of light enjoyed by the
adjoining owners the sum realised, and thus the market value, would not have
been lower than on the alternative and more advantageous basis which DHB’s
misrepresentation suggested.
It is plain in principle and on authority
that the primary measure of damages for non-fraudulent tortious
misrepresentation is the difference between the market value of the site as it
was misrepresented to be and its market value as it in fact was. I shall for
convenience refer to this as the ‘market value loss’.
The judge’s task in quantifying the
market value loss was greatly complicated by the widely varying estimates
advanced in evidence by the parties’ respective experts. The plaintiffs’
evidence quantified the loss at £750,000, later amended to £500,000-£600,000.
DHB’s expert gave it as his opinion that the plaintiffs had suffered no market
value loss at all, because even on the basis of the true facts the site was
worth what the plaintiffs paid for it. The defendants’ expert shared that
opinion.
The learned judge rejected the
assumptions which led DHB’s expert (and, I infer, the defendants’ expert) to
the conclusion that the plaintiffs had suffered no market value loss. He also
questioned the assumptions on which the plaintiffs’ expert relied and was
sceptical of his conclusion that the plaintiffs had suffered a market value
loss of at least £500,000. While, therefore, the judge accepted market value
loss as an appropriate measure of loss he did not find it possible to apply
that measure on the facts of this case.
It is incumbent on the plaintiff in a
civil action to prove his loss. If he fails to do so, and leaves the court in
real doubt, not only as to the quantum of his loss but as to whether he has
suffered any loss at all, the court may be obliged to make no award. Mr Mann
for DHB seeks that result. But here, as I have indicated, the commercial
probabilities point strongly towards some market value loss and the judge was,
in my view, fully entitled to reject the evidence of DHB that the plaintiffs
had suffered none. He was also, as I think, entitled to regard the plaintiffs’
estimate of market value loss as exaggerated.
Having rejected the polarised opinions of
the parties’ respective experts the judge awarded an altogether different
measure of damages. There, in my opinion, he erred, for the market value loss
is the primary measure of damage in this field and should have been applied
unless the material before the judge was such as to preclude any rational and
reliable assessment of market value loss.
I have every sympathy with the judge, who
appears to have been presented with a confusing and unnecessarily complicated
picture. It is, of course, impossible to assess with scientific exactitude what
a hypothetical buyer with knowledge of the rights of light would have been
willing to pay in February 1980. But on this hypothesis it is at least clear
that a developer intending to refurbish would have been able and therefore
willing to pay more than a developer intent on redevelopment and, on the
plaintiffs’ contemporary calculations, adjusted to take account of a reduced
office space content, a prospective purchase price of, in round terms, £1.95m
may fairly be achieved in the manner which the Vice-Chancellor has indicated.
This leads to a market value loss of, in round figures, £150,000. This figure
may understate the true measure of the plaintiffs’ market value loss, but I
feel sure that it does not overstate it and I agree that damages in that sum
should be awarded.
Had the true facts become known to the
plaintiffs on the morrow of their contract with the defendants, their damage
would have been confined to this market value loss. But the true facts did not
become known to them for a period of about eight months. During that period the
effect of DHB’s misrepresentation continued and the plaintiffs incurred
expenses and entered into contractual commitments which they would not have
done had the misrepresentation not been made and had its effect not continued.
To deny the plaintiffs compensation for this loss would, in my judgment, be to
undermine the cardinal rule of damages in this field that the plaintiff should
be put in the same financial position as if the misrepresentation had not been
made. The plaintiffs are not compensated for this damage by reimbursement of
their market value loss, because that is a loss they sustained at the moment of
contract and this is additional loss which accrued only as a result of the
continuing effect of the uncorrected misrepresentation. In my opinion, the
plaintiffs were entitled to recover damages under this head in addition to
their market value loss. The figures relevant to this claim were relatively
uncontroversial and I agree with the Vice-Chancellor that additional damages of
£104,471 should be awarded. I agree that interest on these two sums of damages
should run from the dates which the Vice-Chancellor proposes and I also agree
with the order proposed.
Also agreeing, NOLAN LJ said: As a
matter of principle, it seems to me to be clear that the plaintiffs were
entitled to be compensated for two separate and identifiable items of loss. One
was the excess of the
other was additional expenditure incurred by the respondents, which would not
have been incurred had the true facts been known and which secured no
countervailing benefit. The respondent needs to be compensated in respect of
both items if, in the language of Lord Blackburn in Livingstone v Rawyards
Coal Co (1880) 5 App Cas 25 at p 39, he is to be put ‘in the same position
as he would have been if he had not sustained the wrong for which he is now
getting compensation’. In other words, in my judgment, the correct basis of the
respondents’ claim was the hybrid basis.
The second item of loss has been
quantified by the respondents in the sum of £104,471. It is wholly made up of
expenses which served no purpose other than to repair the damage caused by the
continuance of the representation until after the respondents had concluded not
only the purchase contract but also the building contract, and therefore is
fully recoverable against the appellants.
The first item presents much more
difficulty because the learned judge who heard the witnesses was unable to find
that the site was worth less than the respondents paid for it. His judgment in
the subsequent proceedings between the defendants and the appellant third
parties, in which he ordered the appellants to indemnify the defendants,
proceeded on the basis that no overpayment by the plaintiffs had been proved.
But I, too, feel that we must part company with the learned judge on this
issue. I cannot accept the proposition that the value of the property was
unaffected by the Maxwell deeds. The minimum figure of depreciation which Mr
Lyndon-Stanford invited us to adopt on the last day of the hearing, £150,000,
was based on a feasibility study made by the respondents themselves at the time
of purchase, but amended by Mr Lyndon-Stanford so as to correct a
misdescription of the office space. The study was made on the hypothetical
assumption that the property was to be refurbished and not redeveloped, which,
as is common ground, would have been the most favourable assumption if the
Maxwell deeds had been taken into account. It has the obvious disadvantage that
it represents the view of only one possible purchaser. Others might reasonably
have taken a different view, either more or less optimistic. But it seems to me
to be the best evidence which we have. It has the cardinal merit of having been
prepared for the purposes of a genuine investment decision and thus is innocent
of any suggestion of special pleading. It throws up a price higher than that
which the respondents could have been prepared to pay. It takes no account of
the Maxwell deeds, obviously, because the respondents were unaware of them at
the time, and it seems to me, as it did to Professor Hattersley, that the
existence of those deeds must have had some depreciating effect, even in the
context of a purchase for refurbishment.
All in all, I concur in the adoption of
the £150,000 figure, giving a total loss to be compensated in the sum of
£254,471, with interest from the dates mentioned by the Vice-Chancellor. I
concur with the order proposed.
The appeal was dismissed; cross-appeal
allowed; damages awarded in the sum of £254,471 plus interest; interest figure
to be agreed between counsel; costs of appeal and cross-appeal to be paid by
third party.
