Negligence — Measure of damages — Fire caused by fault of contractors engaged by local authority —- Appeal by defendant contractors and authority against damages awarded by Michael Davies J in respect of loss of buildings — Cross-appeal by respondent plaintiffs against judge’s award for loss of paternoster machines for the rotation and display of carpets — Questions as to whether the correct measure of damages in the case of the buildings was the diminution of value or the cost of acquiring new premises and whether in the case of the machines the replacement value was the correct measure
(plaintiffs below) were in business connected with ceramic tiles, wall and
floor coverings — They had sold some of their buildings to the appellant local
authority to facilitate a road scheme; the authority was to demolish these
buildings and make good the remainder — The appellant contractors who were
engaged by the authority to carry out these works were negligent in the use of
cutting equipment and caused a fire which damaged the respondents’ remaining
buildings so severely that they had to be destroyed — Various heads of damages
were agreed but issues remained as to the measure of damages in respect of the
buildings and the paternoster machines — Michael Davies J awarded the
respondents £390,000 in respect of the buildings, but only £13,500 in respect
of the machines as compared with the amount claimed of £65,000 — The diminution
in value of the buildings had been assessed at £60,000 and their residual value
at about £25,000
the fire with the alternatives of doing nothing, rebuilding on the site at a
cost of about £570,000, or seeking other premises, the respondents chose the
third alternative — They purchased the 31-year residue of a lease at £390,000,
with a ground rent of £2,500 per annum — The building acquired was some 5,000
sq ft larger than the old one but required repair and modernisation — Two years
later, however, the respondents purchased the freehold and in the following
year sold the acquired building for £690,000 — All this happened before the
trial of the action
damages for destruction of buildings
contended that the damages in respect of the buildings should be limited to the
diminution in their value, namely, £60,000 — They criticised the award of
£390,000 as conferring on the respondents a large amount of betterment or
unjust enrichment and as unfair to the appellants — The Court of Appeal
rejected these criticisms and also a submission that the profit made by the
respondents on the eventual sale of the acquired building should be taken into
account — In upholding the judge’s award of £390,000 the court considered a
number of authorities, such as Harbutt’s ‘Plasticine’ Ltd v Wayne Tank &
Pump Co Ltd — These authorities showed that the basic principle was restitutio
in integrum but that in some cases this principle required
other cases on the basis of cost of reinstatement; and a material consideration
in favour of the latter was whether the building destroyed was a profit-earning
asset — Fairness and reasonableness in the circumstances had also to be
regarded — The fact that reinstatement meant obtaining new for old was not in
itself a valid objection; a factory could not really be rebuilt with old and
part-worn materials corresponding to what was there before — It would, of
course, be different if there were substantial improvements in accommodation or
design — It had to be borne in mind that the respondents were not enriched in
cash to the extent of £390,000, as the insurance company which had provided the
money for acquisition had a claim on the principle of subrogation — The judge
had reached the correct conclusion under this head — Appeal on this issue
dismissed
loss of paternoster machines
in their cross-appeal complained of the award of £13,500 for the loss of the
machines — They had paid this amount for them in 1983, but it was a special
bargain on the dismantling of an exhibition — The replacement price shortly
after the fire was £65,000 and the respondents claimed this amount, although
they had not in fact replaced the machines by the date of the trial — The court
held that the respondents’ cross-appeal succeeded — There was no evidence that
the respondents could replace the machines except by purchasing new ones and
the correct measure of damages was the cost of replacement unless the result
would be absurd
The following
cases are referred to in this report.
Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397
Dodd
Properties (Kent) Ltd v Canterbury City Council [1980]
1 WLR 433; [1980] 1 All ER 928; [1980] EGD 229; (1979) 253 EG 1335, [1980] 1
EGLR 15, CA
George v Pinnock [1973] 1 WLR 118; [1973] 1 All ER 926, CA
Harbutt’s
‘Plasticine’ Ltd v Wayne Tank and Pump Co Ltd [1970]
1 QB 447; [1970] 2 WLR 198; [1970] 1 All ER 225; [1970] 1 Lloyd’s Rep 15, CA
Hutchison
v Davidson 1945 SC 395
Jones v Gooday (1841) 8 M&W 146
Moss v Christchurch Rural District Council [1925] 2 KB 750
Munnelly v Calcon Ltd [1978] 1R 387
Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All
ER 705; [1982] EGD 412; (1982) 263 EG 888, [1982] 2 EGLR 135, CA
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Roberts v Johnstone [1988] 3 WLR 1247, CA
Taylor
(CR) (Wholesale) Ltd v Hepworths Ltd [1977]
1 WLR 659; [1977] 2 All ER 784; (1976) 244 EG 631, [1977] 2 EGLR 31
This was an
appeal by Trafalgar Trucking Co Ltd and the London Borough of Newham against
the decision of Michael Davies J on the issue of damages recoverable from them
as a result of a fire causing the loss of buildings belonging to the
respondents, Dominion Mosaics & Tile Co Ltd, at Dominion Estates, 107 Carpenters
Road, Stratford, London E15. There was no appeal on liability. There was a
cross-appeal by the respondents on damages for the loss of machines.
Piers Ashworth
QC and Lawrence West (instructed by Barlow Lyde & Gilbert) appeared on
behalf of the appellants; Raymond Kidwell QC and A Edwards-Stuart (instructed
by Merricks, of Ipswich) represented the first respondents. The second
respondents, Master Tiler Ltd, did not appear and were not represented.
Giving the
first judgment at the invitation of FOX LJ, TAYLOR LJ said: This appeal
concerns the appropriate measure of damages recoverable by the respondent
plaintiffs in respect of a fire at their premises for which the appellant
defendants were held liable. Michael Davies J, having earlier decided liability,
gave judgment on the issue of damages on November 24 1987. He awarded the
respondents a total of £1,821,807.76, with costs.
At the
relevant time, the respondents carried on business as importers, wholesalers
and retailers of ceramic tiles, wall and floor coverings. Since 1981 they had
operated from premises called Dominion Estates, 107 Carpenters Road, Stratford,
London E15. They were the freeholders of the premises. At p 21 of the bundle is
a plan showing part of the layout and indicating, by numbers, different areas
devoted to different purposes. Area 1 was used as a carpet showroom. Area 2 was
a retail cash-and-carry outlet opened in early 1983. Areas 3 and 4 were used
for storage of both wholesale and retail goods. Area 6 was for storage. Areas 5
and 7 were sold by the plaintiffs to the appellant second defendants, in
February 1983, to facilitate a road scheme. The agreement between them provided
that the second defendants would demolish the buildings in areas 5 and 7, and
specified the terms upon which they would make good in relation to the
plaintiffs’ remaining buildings.
The first
defendants are demolition contractors and were employed by the second
defendants to carry out the work. Owing to their negligence in the use of
cutting equipment, a disastrous fire broke out on October 11 1983. As a result,
the plaintiffs’ buildings in areas 1, 2, 3 and 4 were severely damaged and had
to be demolished.
Damages were
claimed under various heads. Most of them were agreed. However, two issues were
strenuously contested at trial and it is those two issues which arise on this
appeal and cross-appeal.
(1) Cost of acquiring different premises
As the learned
judge said, the respondents were faced with three possible courses of action in
respect of the buildings: to do nothing, to rebuild on site or to seek and
obtain premises elsewhere. They could not do nothing. They considered
rebuilding but decided it was impracticable; in any event, the cost of
rebuilding would have been substantially greater than the cost of obtaining
other premises. So they adopted the third alternative.
On March 5
1984 the respondents took the 36-year residue of a full repairing lease in
respect of a building at Waterden Road, London E15. The price was £390,000, and
ground rent of £2,500 per annum was payable. The effective area lost in the
fire was about 25,000 sq ft; the effective area acquired at Waterden Road was
about 30,000 sq ft, but the building required interior attention and
modernisation.
By June 1984
the wholesale business had recovered from the effects of the fire. The retail
business was recommenced at Waterden Road in August 1984. However, it did not
prosper and after a few months it petered out. In 1986 the respondents paid
£60,000 to purchase the freehold of the building at Waterden Road. In March
1987 they acquired a lease of premises in Mile End Road at a rent of £55,000
per annum. Having done so, they sold Waterden Road in April 1987 for £690,000.
The dispute
between the parties on this part of the case can be simply stated. The
respondents contend they are entitled to the cost of acquiring the lease at
Waterden Road, ie £390,000. The appellants do not challenge that acquiring that
lease was a reasonable course for the respondents to adopt, but they submit
that the damages recoverable are confined to the diminution in value of the
original property by reason of the fire. They assess those damages in the
region of £60,000.
After
referring to the case of Harbutt’s ‘Plasticine’ Ltd v Wayne Tank
& Pump Co Ltd [1970] 1 QB 447, the learned judge said:
In my
judgment, whilst every case depends on its own facts, what it all comes down to
is this question: What is reasonable and what is fair between the parties? In some cases the plaintiff may arguably
receive a bonus — as, for example, in Harbutt’s case — but that in
itself, so long as the general principle of reasonableness and fairness is not
infringed, is not a reason for reducing the plaintiffs’ damages. As was said in
one case, the general rule is that the injured person is to be fairly
compensated for the damage he has sustained, neither more nor less.
It seems to
me on the whole of the evidence eminently reasonable that the plaintiffs should
have done what they did in relation to the acquiring of new premises and that,
indeed, by not rebuilding, they have saved the defendants money. Furthermore,
it seems to me to be eminently reasonable and fair that the defendants should
recompense the plaintiffs for the cost of acquiring new premises, in principle.
It would not be reasonable and would not be fair to award damages, in my
judgment, on the basis of the diminution in value which it is alleged was
suffered by the burning down of the building.
Accordingly I
am abundantly satisfied that the basic figure of £390,000 is correct as a
starting point.
The basic
principle governing the measure of damages where the defendant’s tort has
caused damage to the plaintiff’s land or building is restitutio in integrum.
The damages should be such as will, so far as money can, put the plaintiff
in the same position as he would have held had the tort not occurred. In
applying that principle to particular cases, the problem has been as to whether
restitutio is to be achieved by assessing the diminution in value of the
damaged premises, or the cost of reinstatement or possibly on some other basis.
Mr Ashworth,
for the appellants, submits that the normal measure is diminution in value, and
that should be the approach here. He relied upon a number of authorities: Jones
v Gooday (1841) 8 M&W 146; Moss v Christchurch Rural
District Council [1925] 2 KB 750;
1 WLR 471. However, they were all cases of damage to property which did not
consist of business or income-earning premises. Where business premises are
concerned, the need to carry on the business and to mitigate the loss of
earnings is an important factor.
Mr Ashworth
also referred to Munnelly v Calcon Ltd [1978] IR 387. There the
plaintiff ran his auctioneers’ business from the ground floor of a house in Dublin.
He rented the upper part of the house to tenants. The house was irreparably
damaged by the defendants’ negligence. The auctioneer wished to rebuild on the
site and claimed £65,000 for such reinstatement. However, the evidence showed
that the diminution in value of his original house was £35,000, and for that
sum he could obtain comparable premises elsewhere in the city. The move would
not materially affect his business. The Supreme Court allowed the defendants’
appeal against an award of £65,000 stating, at p 401, that £35,000:
. . . will be
both compensatory and reasonable, whereas reinstatement damages of £65,000
would unjustifiably profit the plaintiff and unfairly penalise the defendants
for their negligence.
The leading
case in this field is Harbutt’s ‘Plasticine’ Ltd v Wayne Tank &
Pump Co Ltd [1970] 1 QB 447. That was a case about income-earning premises.
The plaintiffs’ factory was destroyed by fire due to a faulty heating system
installed by the defendants. Although the claim was brought in contract, the
principles apply equally to the measure of damages for tort. The court held
that since the plaintiffs had no option but to rebuild so as to carry on their
business, the proper measure of damages was the cost of replacement. At p 468
Lord Denning MR said:
The
destruction of a building is different from the destruction of a chattel. If a
second-hand car is destroyed, the owner only gets its value; because he can go
into the market and get another second-hand car to replace it. He cannot charge
the other party with the cost of replacing it with a new car. But when this
mill was destroyed, the plasticine company had no choice. They were bound to
replace it as soon as they could, not only to keep their business going, but
also to mitigate the loss of profit (for which they would be able to charge the
defendants). They replaced it in the only possible way, without adding any
extras. I think they should be allowed the cost of replacement. True it is that
they got new for old; but I do not think the wrongdoer can diminish the claim
on that account. If they had added extra accommodation or made extra
improvements, they would have to give credit. But that is not this case.
At p 473
Widgery LJ said:
It was clear
in the present case that it was reasonable for the plaintiffs to rebuild their
factory, because there was no other way in which they could carry on their
business and retain their labour force. The plaintiffs rebuilt their factory to
a substantially different design, and if this had involved expenditure beyond
the cost of replacing the old, the difference might not have been recoverable,
but there is no suggestion of this here. Nor do I accept that the plaintiffs
must give credit under the heading of ‘betterment’ for the fact that their new
factory is modern in design and materials. To do so would be the equivalent of
forcing the plaintiffs to invest their money in the modernising of their plant
which might be highly inconvenient for them.
At p 475 Cross
LJ said:
. . . but in
my judgment the value of the building and of the plant and machinery before the
fire throws no light on the true measure of damage in a case like this where it
was obviously right for the plaintiffs to rebuild and re-equip their factory
and start business again as soon as possible. Further, I do not think that the
defendants are entitled to claim any deduction from the actual cost of
rebuilding and re-equipping simply on the ground that the plaintiffs have got
new for old. It is not in practice possible to rebuild and re-equip a factory
with old and worn materials and plant corresponding to what was there before,
and such benefit as the plaintiffs may get by having a new building and new
plant in place of an old building and old plant is something in respect of
which the defendants are not, as I see it, entitled to any allowance. I can
well understand that if the plaintiffs in rebuilding the factory with a
different and more convenient lay-out had spent more money than they would have
spent had they rebuilt it according to the old plan, the defendants would have
been entitled to claim that the excess should be deducted in calculating the
damages. But the defendants did not call any evidence to make out a case of
betterment on these lines . . .
In C R
Taylor (Wholesale) Ltd v Hepworths Ltd [1977] 1 WLR 659, the
plaintiffs’ premises, which consisted largely of a billiards hall, were
destroyed by fire caused by the defendants’ negligence. The plaintiffs claimed
damages for the reinstatement of the billiards hall. However, May J found that
the plaintiffs had continued to own the property solely for its potential
development value and that they had no intention of using it as a billiards
hall. The building would in due course have to be demolished. In these
circumstances, rebuilding was not necessary for business purposes. Accordingly,
a claim for reinstatement could not be sustained.
After
reviewing the authorities and citing with approval a passage from McGregor
on Damages, May J said, at p 667:
The various
decided cases on each side of the line to which my attention has been drawn,
and to some of which I have referred in this judgment, show in my opinion
merely the application in them of two basic principles of law to the facts of
those various cases. These two basic principles are, first, that whenever
damages are to be awarded against a tortfeasor or against a man who has broken
a contract, then those damages shall be such as will, so far as money can, put
the plaintiff in the same position as he would have been had the tort or breach
of contract not occurred. But secondly, the damages to be awarded are to be
reasonable, reasonable that is as between the plaintiff on the one hand and the
defendant on the other.
Finally, in Dodd
Properties (Kent) Ltd v Canterbury City Council [1980] 1 WLR 433,
Donaldson LJ at p 456, having stated the first of May J’s two principles, went
on as follows:
In the case
of a tort causing damage to real property, this object is achieved by the
application of one or other of two quite different measures of damage, or,
occasionally, a combination of the two. The first is to take the capital value
of the property in an undamaged state and to compare it with its value in a
damaged state. The second is to take the cost of repair or reinstatement. Which
is appropriate will depend upon a number of factors, such as the plaintiff’s
future intentions as to the use of the property and the reasonableness of those
intentions. If he reasonably intends to sell the property in its damaged state,
clearly the diminution in capital value is the true measure of damage. If he
reasonably intends to continue to occupy it and to repair the damage, clearly
the cost of repairs is the true measure. And there may be in-between
situations.
Applying these
principles to the present case, Mr Kidwell submits that to pay the respondents
merely the diminution in value of their damaged premises (about £60,000) would
be wholly inadequate. The residual value of those premises was said to be about
£25,000. There could be no question of £85,000 being sufficient to obtain other
premises in which to carry on business. The respondents had to pay £390,000 for
the leasehold of Waterden Road. To rebuild on the original site was out of the
question, since that would, on the evidence, have cost about £570,000.
Moreover, since the loss of profits while the business hung fire would have
been about £300,000 per annum, it was imperative to move quickly, both for the
sake of that business itself and to mitigate the loss of profits for which the
appellants would be liable.
Mr Ashworth’s
arguments are largely based on the betterment or unjust enrichment which he
contends accrued to the respondents from the learned judge’s award.
First, he says
that the respondents acquired the lease of Waterden Road (a valuable asset)
without any outlay and still retained their original premises. True, those
premises were reduced in value, but he argues that they were already old and
rundown; hence the modest figure of £60,000 for the diminution in their value.
To award the purchase price of £390,000 to the respondents, plus interest
thereon, would be grossly to enrich the respondents and would be unjust to the
appellants.
It is
important to remember, however (and this is common ground), that insurance
moneys are not to be taken into account. In fact, Waterden Road was purchased
with insurance moneys. The insurance company has therefore stood out of its
£390,000 and is entitled, by way of subrogation, to the return of its money,
plus interest, from the proceeds of this action. Thus the respondents are not
enriched in cash to the tune of £390,000, plus interest. True, in Waterden Road
they got a more valuable building than they had before, but on the authority of
Harbutt’s case that does not necessarily render the award excessive or
require any discount for betterment. One must see whether in the circumstances
adjustment is required.
The original
premises were held freehold and the rates were only £10,000 per annum. Waterden
Road gave the respondents initially a mere 36-year residue of a lease.
Moreover, a ground rent of £2,500 per annum was payable and the rates were over
£70,000 per annum. The learned judge considered these points. He came to the
conclusion that although there was betterment in the sense that the respondents
acquired the use of a better building, the change brought ‘additional burdens’.
As to the argument that the residual value of £25,000 in the original building
should in any event be set off against the cost of the new premises, he held
that that sum was balanced by the £2,500 per annum ground rent at Waterden
Road.
In my
judgment, the learned judge was well justified in those conclusions. There was
no suggestion that the respondents could have availed themselves of premises in
which to resume business
failing to resume their retail trade at Waterden Road as soon as they might,
they conceded they could claim only a limited period for lost profits. Although
the ground area was somewhat greater at Waterden Road than their original
premises, I consider that this falls within the sort of betterment for which no
reduction should be made. It is not a case, as this court instanced in Harbutt’s
Plasticine, of a rebuilding deliberately incorporating enlargement,
improvement or added facilities. Here it was a question of finding some
existing premises which most nearly matched the respondents’ requirements.
Against the extra floor space there would have to be considered the saving in
lost profits of obtaining Waterden Road quickly and the need to adapt and
modernise premises not purpose-built for the respondents.
But then Mr
Ashworth sought to bring later dealings into account. The respondents, by the
comparatively modest expenditure of £60,000 in 1986, acquired the freehold of
Waterden Road and were then able to sell it for £690,000 in April 1987. It is
argued that since all of this happened before trial, it should all be brought
into account in the appellants’ favour. There should, up to the trial, be in
effect a running account between the parties so that any gain to the
respondents from whatever cause in regard to their property or its proceeds can
be used by the appellants to diminish their liability.
The learned
judge rejected this argument on the practical ground that the gains made by the
respondents were attributable simply to the inflationary rise in the value of
real property during the relevant period. I agree with him; but further, as a
matter of principle, I do not accept that a defendant is entitled to the
benefit of any successful dealings which the plaintiff may have had up to
trial.
Mr Ashworth
sought to support his argument by reference to Dodd Properties (Kent) Ltd v
Canterbury City Council. In that case damage done in 1968 to the
plaintiffs’ garage building by the defendants’ negligence required repairs.
Those repairs could not have been undertaken until 1970. In fact, the
plaintiffs deferred them until 1978 (a) because of financial stringency and (b)
until they knew the defendants would have to pay. This court held that the cost
of repairs should be assessed at 1978 prices. Megaw LJ said, at p 450H:
The general
principle, referred to in many authorities, has recently been recognised by
Lord Wilberforce in Miliangos v George Frank (Textiles) Ltd
[1976] AC 443, 468, namely, that ‘. . . as a general rule in English law
damages for tort or for breach of contract are assessed as at the date of the
breach . . .’. But in the very passage in which this ‘general rule’ is there
stated, it is stressed that it is not a universal rule. That it is subject to
many exceptions and qualifications is clear . . .
The true rule
is that, where there is a material difference between the cost of repair at the
date of the wrongful act and the cost of repair when the repairs can, having
regard to all relevant circumstances, first reasonably be undertaken, it is the
latter time by reference to which the cost of repair is to be taken in
assessing damages.
That case
concerned repairs directly rendered necessary by the defendants’ negligence.
The only question was when they should have been done so that their costs at
that date could be determined. The decision does not support an argument that
whatever has occurred between the negligent act and trial must be brought into
account.
In Perry v
Sidney Phillips & Son [1982] 1 WLR 1297, owing to a negligent
surveyor’s report the plaintiff paid £27,000 for a house subsequently found to
be defective and to require major repairs. The plaintiff claimed and was
awarded the cost of these. Between trial and appeal he sold the house for
£43,000. This court held that the proper measure of damages was the difference
between what the plaintiff paid and the true market value of the house when he
bought it. It is true that two of the judges specifically said the sale between
trial and appeal was a relevant factor. But its relevance was simply that as
the house had been sold without repairs being done, they could not now be done
by the plaintiff, so it would not be right to award him the cost of doing them.
There was, however, no question of the defendant’s being entitled to any
benefit from the resale by the plaintiff at a profit of £16,000.
Finally on
this issue, Mr Ashworth sought to draw an analogy between this case and a
personal injury case, when the plaintiff needed to move into a bungalow. He
cited Roberts v Johnstone [1988] 3 WLR 1247, where this court
held that damages in respect of the purchase of such a bungalow for an injured
plaintiff should be not the net capital cost of the purchase but the additional
annual cost over the plaintiff’s lifetime of providing that accommodation. They
should be 2% of the net capital cost. This was because, in personal injury
cases, the court has to award damages on the basis that they will be exhausted
at the end of the plaintiff’s life or, in regard to lost earnings, his working
life.
Stocker LJ,
giving the judgment of the court, referred to George v Pinnock [1973]
1 WLR 118 and then considered the figures in Roberts’ case. He went on
(at p 1256C):
It is
apparent at once that this figure exceeds the net total difference between the
old and the new premises, and thus does not comply with the reasoning behind George
v Pinnock that the damages awarded for accommodation costs should
not represent the full capital value of the asset, since this would remain
intact at the date of the plaintiff’s death and represent therefore a windfall
to her estate.
Those
considerations do not, however, apply to the case of a limited company carrying
on business and requiring premises for that purpose. Here the respondents have
carried on their business and, so far as one knows, will do so indefinitely.
Although in 1987 they sold Waterden Road, they have carried on with their
business elsewhere. They now pay £55,000 per annum rent for premises in Mile
End Road which, if capitalised in respect of only a few years, would greatly
exceed the £390,000 claimed and awarded under this head of damage. Viewed
another way, to test the fairness of the award, the £390,000 compares
moderately with the £300,000 per annum loss of profits which would have been
recoverable from the appellants for each year the respondents were without
premises. Had the respondents decided to rebuild, quite apart from the £570,000
it would have cost, the time taken would probably have caused a heavy loss of
profits. The appellants might then have had a powerful argument that the
respondents should have mitigated their loss by seeking other premises such as
Waterden Road.
All in all, I
consider that the conclusions of the learned judge on this part of the case
cannot be faulted. He used a broad brush, but in my judgment that was the
proper approach to a problem of which it would have been impossible to evaluate
precisely every element. He came to the conclusion that the £390,000 claimed
was reasonable and fair as between the parties and I agree with him.
I turn now to
the second issue.
(2) Damages for loss of paternoster machines
Early in 1983
the respondents saw some paternoster machines which were on display in an
exhibition at Olympia. These machines are designed to accommodate carpets in a
showroom so that they may be automatically rotated and displayed in a series to
prospective customers. The respondents were able to purchase 11 of the machines
in virtually new condition, as they had been used only on display at the
exhibition. The price paid for the lot was £13,500. This was said to be a
unique bargain. The machines were dismantled at Olympia by the respondents and
transported by them to Carpenters Road. After only a very few months’ use they
were destroyed in the fire. The respondents did not replace them and indeed had
not done so by the date of the trial. But their evidence was that had they had
the money they would have done so. Shortly after the fire the cost of
replacement would have been £65,000. Accordingly, the respondents claimed
£65,000 in respect of the lost machines. The appellants contended that the
correct figure was £13,500. Here the learned judge found in the appellants’
favour. After referring to authority and the respondents’ submissions, the
learned judge said, at p 15 of the transcript:
I quite
readily accept that the replacement value is a starting point and is very often
the whole test. However, it is quite clear that that is not always so. For
example, it is not so if the result of giving the full value would be absurd.
An example of this was given in the case of Bacon v Cooper (Metals)
Ltd [1982] 1 All ER 397. If these paternoster machines had been virtually
worn out, with — and I take an extreme example — a month’s life left in them,
it would, in my judgment, offend reason and fairness if the plaintiffs could be
awarded the full value of the machines. Of course, this case is nothing like as
extreme as that — indeed, far from it, because the machines were not very old.
However, in spite of Mr Kidwell’s persuasive arguments, the situation here —
and I repeat that every case of this kind is different, as the authorities
emphasise — does not equate with reasonableness and fairness, in my judgment,
if the defendants have to pay the plaintiffs £65,000 for chattels which the
plaintiffs bought for £13,500, which were certainly worth no more than that
when they were destroyed and which the plaintiffs did not in fact replace, nor
have done so to this very day. In my judgment, the correct measure of damages
in respect of the paternoster machines, consistent with reasonableness and
fairness, is the sum of £13,500, and that, to use the word ‘value’ as a term of
art — which I think it is in this context — was the value of the machines. If I
am wrong about that, then, of course, it will be easy enough for a higher
court, if asked to do so, to adjust the figure.
That is what
the respondents ask this court to do by way of cross-appeal. They submit that
the learned judge fell into error in two main respects. First, he valued the
lost machines at the price paid for them by the respondents. But that was a
unique price, which gave them a very favourable bargain. They were entitled to
retain the advantage of that. Had the machines been an outright gift instead of
a mere bargain, logic could not have denied them any damages at all on the
footing that as they had paid nothing they had lost nothing. The machines
would, in the circumstances, have had to be valued, and the only figure
available as a yardstick would be the cost of buying replacements. Restitutio
in integrum here does not mean restoring to the respondents the amount they
paid for the machines. It means putting the respondents in the position they
held before the fire. They were then not only owners of the machines which
would cost £65,000 to buy new but also in the happy position of having paid
only £13,500 for them.
Second, Mr
Kidwell submits the learned judge was wrong to take account of the fact that
the respondents had not replaced the machines even by the date of trial. Their
evidence that they would have done had they been in funds was expressly
accepted by the judge. In any event, there is no obligation in principle upon a
plaintiff to deploy damages awarded for loss of a chattel in replacing it. He
is free to do whatever he wishes with his damages.
In my
judgment, both of Mr Kidwell’s criticisms of the learned judge’s approach are
well founded in principle. The learned judge began, in the passage I have
quoted, by accepting that the starting point was the replacement value, which
he had already accepted at p 13D of his judgment was £65,000. He then rightly
directed himself that the full replacement value should not be awarded if it
would result in absurdity, giving the example of a machine on its last legs.
This was not, as he observed, such a case. The machines were nearly new (‘not
very old’). However, the learned judge then said at p 16A that the machines ‘.
. . were certainly worth no more than that’ (ie £13,500) ‘when they were
destroyed . . .’ and proceeded to award that figure. For my part, I do not
follow why they were worth no more than this unique bargain price, despite being
only about six months’ old and despite replacement cost being £65,000, which
the learned judge accepted was the starting point.
Counsel’s
arguments both before the learned judge and before us were based solely on the
alternative awards of £13,500 or £65,000. No intermediate figure was canvassed.
It was not suggested by the appellants, either in evidence or by submission,
that there was any secondhand source of paternoster machines. The respondents’
evidence was that no such source existed to their knowledge. Where this is the
case and the only way the owner of destroyed chattels can replace them is by
buying new ones, the measure of damages is the cost of doing that, unless the
result would be absurd (see Halsbury’s Laws of England, 4th ed, vol 12
at para 1163: ‘. . . the cost of replacement in an available market . . .’;
also Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397.
Accordingly,
the proper figure here was prima facie £65,000. The judge himself
accepted that as (in his phrase) ‘the starting point’. That figure could not,
in regard to such recently new machines, be called absurd as in the example
given in Bacon v Cooper.
Had it been
argued that in fairness to the appellants some discount from £65,000 should
have been allowed to reflect the depreciation of the machines in their few
months of service, the point would have merited consideration. But no such
submission was made, nor was there any evidence upon which to base an
assessment of an appropriate discount. In these circumstances I consider that,
of the two alternatives contended for, £65,000 was the proper sum.
I would
accordingly vary the learned judge’s award to the respondents under this head
of damage by substituting that figure for the figure of £13,500. It follows
that there must also be an adjustment in the award of interest made by the
learned judge. In these respects I would allow the cross-appeal.
As already
indicated, I would dismiss the appeal.
Agreeing,
STOCKER LJ said: I would add short observations of my own solely in deference
to the sustained and detailed arguments put forward by Mr Ashworth on behalf of
the appellants.
Mr Ashworth
has submitted that, prima facie, damages should be assessed on the basis
of diminution in value of the property destroyed, but that in some cases the cost
of reinstatement or some other basis of assessment may be appropriate. In
either case, the damages must be reasonable as between the plaintiffs and the
tortfeasor. He has cited a number of cases to which Taylor LJ has made
reference.
It seems
clearly established that whichever be the process by which damages are to be
assessed, the principle is restitutio in integrum — to restore the
plaintiff in the position in which he would have been had the tort not been
committed.
The cases
cited seem to me clearly to point the distinction between a situation in which
the proper and reasonable compensation for the plaintiff is diminution of the
value of the building destroyed as damages on the one hand and reinstatement on
the other; a distinction which, in most cases, will depend upon whether or not
the building destroyed is a profit-making asset. Since, in almost any other
case, if the plaintiff recovers as damages the diminution in value he will have
been restored to his original position, reinstatement, or its equivalent, is
appropriate only where such is the only reasonable method of compensating a
plaintiff for future loss of profits derived from the asset destroyed.
In my view, Mr
Ashworth’s concession that the purchase of the lease of another building was
reasonable is virtually conclusive, in the plaintiffs’ favour, that such is the
appropriate basis for assessment of damages — since it must follow from the
fact that such a course was reasonable that the purchase of the lease was to
replace a profit-making asset, and thus to reduce the loss of profit which the
plaintiffs would sustain while their building (through which the profits were
earned) was not in a condition for that purpose, owing to its destruction.
It follows
that the plaintiffs’ course of action was taken with the genuine intention of
sustaining a viable profit-earning asset. In the event, this has occurred, for
the plaintiffs are still operating their business, though from a building other
than the one purchased to replace the destroyed building. Only on this basis
could the action be reasonable and as Mr Ashworth concedes that it was.
A comparison
of the judgments in Harbutt’s case with that of C R Taylor
(Wholesale) Ltd v Hepworths Ltd cited by Taylor LJ, and the
reasoning whereby those decisions were reached, points the distinction. Thus if
the plaintiffs in this case had no genuine intention of continuing to trade
but, for example, intended to sell the site for development and to invest the
proceeds in some other activity, it would not have been reasonable to purchase
alternative premises (C R Taylor (Wholesale) Ltd v Hepworths Ltd). The
concession that it was reasonable to do so puts this case, in my view, as
clearly one for which the reasoning in Harbutt’s case applies.
Mr Ashworth
has argued that even though this course was reasonable, there was no loss. He
bases this submission on the fact, primarily, that the Waterden Road premises
purchased to replace those destroyed by the fire had, before trial, been sold
at a substantial profit owing to the fortuitous increase in property values —
and had been purchased with money provided by insurers under their fire policy.
For the
reasons given by Taylor LJ, I would reject this line of argument and would hold
that the sum claimed, the cost of purchase of the alternative premises,
including incidental expenses, represents the true loss. Only on this basis
could restitutio in integrum be achieved in practice. I would therefore
dismiss the appeal on the grounds stated by Taylor LJ.
As to the
cross-appeal, I agree entirely with Taylor LJ and have nothing that I would
wish to add on my own account.
I would
therefore also dismiss the appeal and allow the cross-appeal.
Fox LJ also
agreed and did not add anything.
The appeal
was dismissed with costs and the cross-appeal allowed with costs.
