Action for damages for breach of duty against surveyors acting as project managers for a residential development — Outline planning permission had been given for the erection of dwellings subject to an application being made within three years for approval of reserved matters, such as siting, design, external appearance and means of access — Owing to a failure to apply for approval within the three years for the reserved matters in respect of part of the land, the outline permission pro tanto lapsed — The defendant surveyors admitted breach of duty and the only question before the court was the assessment of damages — It was agreed that the proper approach to the measure of damages was to estimate what the site would have fetched if it had been sold with detailed planning consent and then to deduct the estimated value of the site without any consent — It was also agreed that if detailed consent had been obtained the developers would have tried to sell the site in yearly phases spread over a few years — Evidence considered by judge as to physical condition of site and such factors as topsoil, site drainage, surface water drainage, bearing capacity and access — Assessment of disadvantages to be reflected in estimated sale price as well as likelihood of slow sales — Various other matters discussed including a submission (rejected) that damages should be grossed up (‘Gourlay in reverse’) — Final figure, being amount of damages plus interest to date of judgment, £58,524
These
proceedings were concerned only with the assessment of damages for an admitted
breach of duty by the defendants, C Henry Bond & Co, chartered surveyors,
in allowing an outline planning consent to lapse in respect of part of the land
comprised in a projected housing development. The plaintiffs were Hatchway Ltd,
property developers. The land in question was at Gressenhall in Norfolk, the
particular site in respect of which the outline permission was allowed to lapse
comprised five fields amounting to just over seven acres.
R A Henderson
QC and R Powell-Jones (instructed by Payne, Hicks Beach & Co) appeared on
behalf of the plaintiffs; M E M Brooke (instructed by Reynolds, Porter,
Chamberlain) represented the defendants.
Giving
judgment, MR JOHN MOWBRAY QC said: In March 1970 a property-dealing company
called Hatchway Ltd bought some freehold land at Gressenhall in Norfolk.
Hatchway’s intention was to obtain planning permission for the erection of
houses on the land and to resell it with the benefit of the planning consent.
From about April 1970 a firm of chartered surveyors, C Henry Bond & Co,
were retained as project managers in connection with this project. I shall call
this firm ‘the managers’. Hatchway acquired further land nearby in 1972 and
1973. Outline planning consent was obtained on April 25 1973 for the erection
of 86 dwellings. This was conditional on application being made for approval of
certain reserved matters within three years. The reserved matters included the
siting, design, external appearance and means of access of the development.
Detailed consent was given for part of the land, and most of that part has been
sold, but no application was made within the three years for approval of the
reserved matters regarding the rest of the land. As a result, the outline
consent lapsed. A new application has been made but has been rejected because
of changes in the Norfolk structure plan after the original permission was
given. An appeal to the Secretary of State is pending, but on the evidence
given by the chief planning officer of the local planning authority I find that
the appeal is hopeless. On the same evidence I find that if an application had
been made in due time detailed consent would have been granted notwithstanding
the change in the structure plan.
The managers
admit that in allowing the outline consent to lapse they were in breach of duty
and that they are liable for such damage as is shown to have flowed from, and
to be recoverable in respect of, the breach. I have to assess the damages.
The only parts
of the land unsold are a small piece to the west of a drift-way which I shall
mention again shortly, on which it was proposed to build shops, and five fields
to the east of the drift-way. It is agreed that Hatchway has suffered no loss
on the small piece of land on which the shops were proposed, so I am left to
assess Hatchway’s loss on the five fields to the east. I shall call them ‘the
site’.
A third party
claim by the managers against an architect involved has been compromised.
It is common
ground that the proper approach to the measure of damages here is to estimate
what the site would have fetched if it had been sold with detailed planning
consent and then to deduct the estimated value of the land without any consent.
It is also common
sell the site in yearly phases spread over a few years, though the managers do
not agree that this would have been successful.
The site. The site is just over seven acres of poor, rough, boggy pasture
with some rush meadow grass and scrub growing on it. In a hole dug or bored in
it, water stands about 225 mm to 1 m below the surface — that is roughly 9 in
to 3 ft 3 in. On average the top 425 mm (1 ft 5 in) consists of topsoil and
peat. Below that is sand and gravel reaching well below the depth of ordinary
domestic foundations but containing occasional pockets of softer material.
Physically the only access is from a recently constructed estate road to the
west, and to reach this road it is necessary to cross a drift-way running along
the west of the site. It was set out by an enclosure award under a local Act of
1811. The site at present drains, so far as it drains at all, through ditches
leading across a field to the south of the site into a watercourse running
along the south side of that field. There is a public sewer in the drift-way
and main water is available across the drift-way.
Topsoil and
peat. The thickness of topsoil and peat was at one
time a factor in the case, but in the end the managers accepted that it was not
so extraordinary as to affect the value of the site for development. It would
have to be cleared from under the houses and roads, but the additional cost
would not be a significant factor in the mind of a builder negotiating to buy
the site for development.
Site
drainage. Witnesses called on behalf of Hatchway
said that the site itself could be effectively drained and the water table
lowered to a level below the reach of ordinary domestic foundations through the
existing ditches. They are clogged at present. They run along the boundaries of
the five fields. It would be necessary to dig them out to a depth of a metre or
so. The ditches across the site would have to be retained as well as those at
the perimeter. It would be some time before the water table fell sufficiently
(perhaps as much as a year), but this would be an effective method.
I accept that
evidence. Mr M K Thorp [FSVA of Wm H Brown], Hatchway’s surveyor witness, had
great local knowledge and said the site could be satisfactorily drained. Mr
Wallace, their soil expert, said the sand and gravel was permeable enough to
allow the existing ditches, if deepened, to drain the excessive water even from
the middle of the fields. Mr David Woodcock [FRICS, of Chas Hawkins &
Sons], the managers’ chartered surveyor witness, agreed that the site itself
could be satisfactorily drained through the existing ditches if they were
deepened. Mr Ward, one of the managers’ structural engineer witnesses,
expressed doubts about this and pointed out that no drainage expert had been
called. That is so, but I prefer the positive evidence on both sides which I
have mentioned to Mr Ward’s doubts on this topic.
The managers’
other structural engineer witness expressed doubts, too. He was Mr Izzatt. He
feared that under the permeable sand and gravel there might be a bowl-shaped
layer of impermeable clay which would prevent the water from running away. Clay
found in three of the boreholes made by Mr Wallace’s company, May Gurney
(Technical Services) Ltd, reinforced Mr Izzatt’s fears.
I am
satisfied, though, that the clay found in the boreholes was not part of a
continuous bowl capable of holding water in that way. It was encountered at a
depth of 9 m in borehole no 1, but only between 2.5 and 3.3 m in borehole no 2
in the next field. I accept Mr Wallace’s evidence that these findings did not
indicate a continuous bowl of clay between the two boreholes. He said, and I
accept, that the difference in levels indicated an impossible angle from the
horizontal for any continuous single deposit of clay. He explained that the
clay in boreholes 2 and 3 had been ripped off the original deeper deposit found
in borehole 1 by a glacier, and redeposited. I find on the evidence that there
is no continuous bowl of clay under the sand and gravel of the site and that it
will drain, as Hatchway’s witnesses said. There is no legal difficulty in
draining the site in the way suggested, that is by deepening the existing
ditches and allowing the water to flow away through the present channels. There
must be natural or prescriptive rights to drain through those channels, so far
as they are off the site, for that purpose.
Surface
water drainage. Both Mr Thorp, Hatchway’s surveyor
witness, and Mr Woodcock, the managers’, agreed that it would be necessary to
obtain express easements to drain through the present channels beyond the site
itself the surface water from the roads and roofs of any new development on the
site. (No more rain would fall on the site after it was developed, but it would
run off much faster than before.) I do
not know whether that was legally correct, but Mr Thorp thought express
easements would be required in practice from the local authority as owner of
the field to the south of the site and from some people called Shipley further
along the watercourse. Mr Thorp said he knew the Shipleys and was confident
they would give the necessary easement for £1,000 or less. He also said the
local authority had given an easement in a similar case for nothing. I think
this last evidence may have been hearsay. Hatchway’s counsel put it to the
chief planning officer of the local authority, who gave evidence, and he then
said: ‘The authority would do the same in the present case.’ He also said that the local authority would
not be obstructive about this merely because it was having to give detailed
planning consent contrary to the Norfolk structure plan.
I accept that
evidence. Another department of the local authority would have dealt with the
easement, but I consider that the chief planning officer knew enough about the
local authority’s probable approach to these matters to be able to give
acceptable evidence about them. I accept Mr Thorp’s general conclusions, and I
find on the balance of probabilities that all needful surface water easements
could have been obtained for £1,000, including the local authority’s legal
costs, which would have had to be paid. That is my conclusion on the particular
facts of this case. I need not consider any principle of law or valuation that
the grantor of an easement needed for development can insist as ‘keyholder’ on
a sizeable share of the development value, because I am satisfied that neither
the local authority nor the Shipleys would have held the developer up to ransom
for such a share.
Access. Hatchway owned the land on both sides of the drift-way. On the
authority of Neaverson v Peterborough Urban District Council
[1901] 1 Ch 22 I hold that Hatchway also owned the soil of the way. The point
was assumed good on the appeal, reported in [1902] 1 Ch 557. Under a provision
at p 15 of the copy of the Enclosure Act before me, one-eighteenth of the
common and waste was to be allotted to the lords or ladies of the manors
concerned ‘and such Allotment or Allotments shall be a full Compensation and
recompense to such Lord or Lords, Lady or Ladies for his, her or their Right in
and to the soil of such Commons and Waste Grounds’.
It follows on
that authority that the lord of the manor did not retain the soil of the
drift-way, but it belonged to the owners of the land on either side of the way
up to the mid-line. So Hatchway, as owner of the land on both sides of the
drift-way at the point where the access crosses it, owned the soil of the way.
It follows that access would not be interfered with by the owners of the soil.
Mr Woodcock
suggested that the title to the soil of the way which I have just explained was
so difficult and complicated that it would damp the sales of houses built on
the site. But the title is no more difficult, complicated or abstruse than many
titles to unregistered land, including housing estates, and I find that it
would not damp sales. Under the award, others further up the drift-way have
rights of way, but the access road could be made up across the drift-way
without substantially interfering with passage along it. The kerb would have to
be dropped at the crossing so that there would be no permanent impediment. The
process of making up the road and laying services could be carried out without
substantially impeding passage by those entitled to use the private right of
way.
I conclude,
then, that the fact that the access would cross the drift-way does not appreciably
depress the development value of the site.
Load-bearing
capacity. Mr Woodcock originally wrote a report
saying that the site was not suitable as development land because no surface
water drainage system was available without the acquisition of suitable
easements and because of ‘the lack of any form of access to the site’.
Subsequently he was informed of some of the facts I have mentioned about those
points, and had an experience with a wet and peaty site in another part of
Norfolk, and then he added further sections to his report questioning the
bearing capacity of the land, now paragraph 4.2 and the latter part of
paragraph 4.6. He said in paragraph 4.2:
The soil is
of a peaty nature and in our opinion any prudent prospective purchaser would
wish to carry out soil tests to investigate the nature of the subsoil and the
load-bearing qualities of the land itself. We have grave reservations as to
that load-bearing quality and we can well foresee that any dwellings erected on
this site would require substantial additional foundations to endeavour to
prevent any settlement occurring to the completed dwellings.
It is
significant that Mr Woodcock did not express any such thoughts in his original
report. He said in cross-examination that he had considered the defects in
access and surface drainage enough to dam the site, but that does not explain
why he did not even mention the third point as much as the other two.
It was
following the addition of the third point to Mr Woodcock’s report that Mr
Wallace’s company was instructed on behalf of Hatchway and made a borehole in
each of the five fields of the site. Mr Wallace said that the bearing capacity
of the land was satisfactory for bungalows with ordinary strip foundations. All
but about six of the plots on the site were to carry bungalows. Mr Wallace
said, from his investigations and two other boreholes made by Harrison & Co
on behalf of the defendants, and from his knowledge of similar deposits in the
same part of Norfolk, that there were occasional pockets of softer material in
the sand and gravel, but they would be on average only about 300 mm across —
roughly a foot.
Mr Izzatt, one
of the managers’ structural engineer witnesses, said he would not be concerned
about occasional pockets of soft material, even clay, no more than 600 mm (2
ft) across so long as there was no flow of water. There would be no such flow
when the ground water had been drained. What is more, Mr Izzatt, who had been
concerned with the drafting of building regulations at the Department of the
Environment, agreed that, if occasional pockets of soft material were no more
than 600 mm across, the site would be homogeneous enough to fall into category
2 in table D 7 to the Building Regulations.
Mr Wallace
satisfied me from his knowledge of similar deposits that the possibility of
pockets more than 600 mm across was remote. If a pocket of soft clay so large
as to be dangerous were found, it could be satisfactorily dealt with by digging
it out and filling the hole with lean mix concrete. Mr Wallace, Mr Izzatt and
Mr Ward, the managers’ other structural engineer witness, all agreed that this
would dispose of the danger. For the managers it was urged that a pocket of
soft clay might, for instance, be lying an inch below the bottom of the
foundation trench, which would not be revealed until the building cracked from
the strains imposed by differential settlement. But Mr Ward and Mr Izzatt both
said that building inspectors probed the bottoms of the trenches with 1-in
metal rods. Mr Izzatt said the local inspectors probed to a depth of 2 metres.
I do not accept that evidence, though I accept that Mr Izzatt believed it was
true. Mr Ward merely said the inspectors leaned on their rods. He said that he
himself prefers to knock his heels on the bottom of the trench to see if it is
solid. He said: ‘If so, you can build a house that will not crack.’
A builder
anxious for his reputation and not wanting his houses to crack could take
similar measures and build houses that would not crack in the rare case of a
pocket more than 600 mm across without adding any great cost in money or
trouble in the development of the site, or a phase of the site.
I should
perhaps add that I prefer the evidence of Mr Wallace to that of Mr Ward or Mr
Izzatt on the matters within Mr Wallace’s sphere. Mr Wallace at one time seemed
to think that 1 in or 25 mm of differential settlement was acceptable in a
house or bungalow, which was plainly wrong, but he was an impressive witness on
soil conditions. Mr Ward quoted on out-of-date edition of Tomlinson on
Foundation Design and Construction — the latest (4th) edition was published
in 1980 — and he admitted he had overestimated the cost of piling house
foundations by a factor of two and of removing surplus peat from roads by a
factor which I calculate as over 36. Mr Izzatt, I thought from the way he gave
some of his answers, had allowed his professional judgment to become blurred by
attachment to the managers’ case, and besides his evidence about 2-m probes
with the metal rods he said that he would have sunk some 100 or 150 hand auger
holes 3 or even 4 m into the site to test the soil structure. These things
raised doubts in my mind over the weight of the evidence of the managers’ two
structural engineer witnesses as a whole.
What would
the site have fetched with consent? Mr Thorp estimated that the site could have
been sold with planning consent for 49 dwellings by yearly phases, starting in
1977 and finishing in 1980, for a total of £59,500. Mr Woodcock said that if
the site had been a good clean site he would not have quarrelled with that. As
it was, he said that the disadvantages he mentioned meant that a developer
would go only one bid above the agricultural value of the land. He did not put
a value on phased sales. He valued the land at April 25 1976, just after the
outline consent lapsed, at £5,000 without the consent or £7,500 if it had still
been current.
I have already
rejected much of the basis for Mr Woodcock’s opinion on the disadvantages of
the site. For that reason I also reject his view that a developer would pay
only one bid over agricultural value.
I start, then,
from Mr Thorp’s figures. What, if anything, should be deducted for
disadvantages of the site? On the
findings I have made, nothing is to be deducted for difficulties of access. Mr
Thorp allowed for the expense of deepening the ditches, so I make no deduction
for draining the site. For surface water drainage I make no deduction, because
Mr Thorp expected that a payment would have to be made to the Shipleys and the
costs of the local authority paid on obtaining easements. Mr Thorp did not
allow for open ditches remaining across the site, and the building plots would
have to be resited so that the ditches ran at the foot of the gardens. But he
valued on a basis of 49 plots, and the correspondence with the local authority
just before the outline consent expired shows that they would probably have
allowed an increase to 55 for the site. If the resiting cost 10 per cent of the
plots, 49 would be left, so I deduct nothing for that.
The question
which has troubled me is whether I should deduct something for the possibility
of pockets of soft clay or other material over 600 mm across and the measures
needed to discover them and replace them with concrete if encountered in or
under the foundation trench. Harrison & Co’s borehole nearest the entrance
to the site encountered soft material only 300 mm (1 ft) down. A builder
interested in buying might have discovered a pocket of such material on digging
a trial hole near the entrance. I do not consider that he would necessarily be
put off altogether, though no doubt some prospective buyers would. After all,
there is a satisfactory development just across the drift-way and there is
another some 500 ft to the south-east developed by a firm called Rogers
Brothers. None the less, I think that a builder who found loose material in a
trial hole would expect some extra difficulty, and either he or Hatchway might
well feel the need for a report such as Mr Wallace’s, which would cost about
£1,000.
I consider
that all this will be adequately reflected if I reduce the gross proceeds of
sales by roughly £2,500. That would pay for such a report and a lot of probing
of foundation trenches and replacing of soft spots encountered. It would not be
right to reduce Mr Thorp’s figures on account of any other defects or
difficulties, because I am satisfied that they are already moderate or
conservative figures. Mr Thorp explained to my satisfaction an apparent
discrepancy between the figures he gave in evidence and the advice which he
gave by letter on the price to be expected on a quick sale in 1976.
It seems to
me, though, that the prices Mr Thorp mentioned in evidence would not be
obtained without carefully nursing the site. The land would not sell easily for
development because there has always been plenty of development land in the
area and the site presents some problems, albeit fairly minor ones. Little
interest was being shown at the time the outline consent expired. Some of
Hatchway’s land to the west of the drift-way sold then to a firm of local
builders has still not been developed, and the developer of some other land
there became insolvent.
For those
reasons I find that it is likely that sales at the prices Mr Thorp estimated,
even reduced as I have mentioned, would have slipped behind his time-table. To
help to allow for that, I shall make the deduction of roughly £2,500 from the
first phased sale in 1977 and will treat it as of such amount as will result in
there being no net proceeds of sale for that year.
What is the
site worth without planning consent? I accept Mr Thorp’s figure of £5,400. Mr
Woodcock gave a value of £5,000 in 1976, but £7,500 in 1979 and 1981. Because
of his much greater local knowledge of such pony paddock land, I prefer Mr
Thorp’s opinion. It is common ground between the parties that on that finding
the proper figure for net proceeds of sale is £5,000.
Deductions
and allowances. It is also common ground that the
architect’s fees connected with obtaining detailed planning consent would have
been £4,500 and the advertising and legal costs of the sale with such consent
would have been £300 and £500 respectively. These I treat as coming out of the
proceeds of the first sale. The £1,000 for easements of drainage I likewise
deduct at that stage. A 1 1/2 per cent commission is also payable to the agents
on the sales of all the phases, and a further commission of 5 per cent to the
managers on any profit. Because of the extra deduction of about £2,500 which I
have mentioned above, the net profit on the sale of the first phase is reduced
to nil. The net proceeds of the sales of the other phases, taking Mr Thorp’s
figures and deducting the 1 1/2 per cent and 5 per cent commission successively
are for 1978 £16,900, for 1979 £15,814.18, and for 1980 £14,597.70. That makes
£47,311.88, if my arithmetic is correct. From it must be deducted the expected
net proceeds of £5,000 for the site with existing use, leaving a figure of
damages of £42,311.88.
Interest. I shall award statutory interest on the damages, and I consider
that a flat rate of 15 per cent is appropriate. I shall ask counsel for their
comments on how it should be calculated, particularly when it should begin and
how, if at all, the £5,000 present use value should be brought into the calculation.
Having
assessed the damages at £42,311.88 and dealt with the question of interest as
far as I conveniently can at the present stage, I must turn to two last points,
both of which raise questions of law not specifically covered by any of the
authorities cited.
Mr Miles
and his company. The site was introduced to
Hatchway by Mr T A Miles. Under a provisional agreement between Mr Piratin, the
managing director and principal shareholder of Hatchway, and Mr Miles, the net
proceeds of sale of the site and other land were to be applied after paying the
costs of the venture and certain other sums in the payment to Miles & Sons
(Building Management) Ltd of one-third of the net profits. Mr Piratin gave
evidence before me. He said that the proportion was subsequently changed by
agreement to 25 per cent. That was not challenged by the managers. In 1974 the
Miles company brought proceedings against Hatchway for an account and payment
of what the Miles company said was due to it. Those proceedings were settled
and the terms of settlement were incorporated in a Tomlin order made on July 22
1977. Under the schedule to the Tomlin order Hatchway is to pay 25 per cent of
the net profit of all sales completed after that date. The schedule does not
mention damages. Conceivably it might be rectified to cover any damages
recovered in these proceedings. Mr Piratin’s evidence was in effect that it was
not yet decided whether to account to the Miles company for any of the damages
recovered in these present proceedings. The Miles company applied in May 1981
to be joined as a plaintiff in these proceedings to assert a direct claim
against the managers. Both they and Hatchway resisted the application and Peter
Gibson J dismissed it. He said in his judgment: ‘It seems to me that essentially
the applicant’s claim is a derivative one.’
The position,
then, is that Hatchway would have had to pay the Miles company 25 per cent of
the profit of the phased sales had they not been lost by the lapse of the
planning permission, but it is far from clear that Hatchway would have to pay
the Miles company any of the damages I have awarded. If it was clear that none
of the damages was payable to the Miles company, then 25 per cent would have to
be deducted from the damages whether or not the Miles company could recover
that 25 per cent from the managers direct. Lord Tucker said in British
Transport Commission v Gourlay [1956] AC 185 at p 215 that:
‘Expenditure which — although not actually a charge on earnings — is imposed by
law as a necessary consequence of their receipt, is relevant to the
ascertainment of the loss suffered by the party injured.’ That was a case where income tax was charged
on the statutory income of the plaintiff but not on his damages for loss of
earnings.
The same
principle applies here, in my judgment, where the 25 per cent liability was
imposed by an existing contract, assuming that the damages escaped that
liability. Lord Tucker’s words ‘imposed by law’ are explained by the context of
the Gourlay case. There can be no distinction of principle between such
a case and one of a contractual duty like the present. The principle in both
cases is to discover what loss the plaintiff has really suffered. The Miles
company’s claim is no more derivative or indirect than the claim for tax in the
Gourlay case.
It follows
that, to recover its damages in full, Hatchway must show that it will be
accounting for 25 per cent of them to the Miles company. Mr Piratin’s evidence
fell far short of that, but at a later stage Hatchway’s counsel tendered an undertaking
on behalf of Hatchway to pay to the Miles company 25 per cent of the damages
net of set-offs and other necessary and proper deductions. In the circumstances
I must require that undertaking as a condition of awarding 100 per cent rather
than 75 per cent damages. I should like to discuss with counsel the precise
words of the undertaking. They should be as comprehensive as possible, at the
same time prejudging as little as possible any issue which might arise between
the Miles company and the parties to these proceedings. Of course, nothing in
these proceedings can bind the Miles company.
From Tito
v Waddell No 2 [1977] Ch 106 at p 333G I derive encouragement in relying
on the undertaking to establish that Hatchway will account to the Miles company
for 25 per cent of the damages. I consider that I can accept the undertaking
notwithstanding Mr Piratin’s equivocal evidence. He said that he would follow
the advice of his legal advisers on this point. The undertaking also adequately
protects the managers from any direct claim by the Miles company such as was
asserted on its application to be joined as a party.
Grossing up
for tax. In an interesting argument Hatchway’s
counsel claimed that the damages should be grossed up. This was to take account
of the fact that, as it seems, the damages will be subject to corporation tax
at 40 per cent in the hands of Hatchway, a dealing company, but corporation tax
on the profits on the phased sales, had they not been lost, would have been
escaped according to Hatchway’s evidence. Counsel argued that the damages
should be grossed up by multiplying them by 100 and dividing the result by 60,
so that after they had suffered the 40 per cent tax they would be left intact
at the net figure of £42,311.88 which Hatchway would have enjoyed if the sales
had not been lost.
The Gourlay
decision shows that questions of tax are not too remote. The managers’ counsel
said that the loss of the opportunity of total tax avoidance was not
foreseeable, but it is common ground that the managers knew that Hatchway would
phase the sales in an attempt to reduce tax, so in my view a total avoidance of
tax by that means was foreseeable, and any loss of tax avoidance benefits flows
naturally and foreseeably from their breach of duty, even to the extent of a
lost opportunity to avoid every penny of corporation tax on the profits.
Partial and total avoidance are merely degrees of the same kind of loss.
Mr Piratin
said, and I accept, that if the phased sales had not been lost he would have
followed Hatchway’s accountants’ and lawyers’ advice about avoiding corporation
tax on the proceeds. I have had the advantage of seeing Hatchway’s accountant,
Mr Pollock, and hearing his evidence, and I find that if a satisfactory method
of avoiding depletion of Hatchway’s coffers by a lawful tax avoidance scheme
could have been found, he would have found it and it would have been carried
out.
That being so,
if such a scheme had been explained in evidence or in argument I would have
grossed up the damages as asked. This was described as Gourlay in
reverse, and I think that the principle of that case would apply to require a
grossing up. But the scheme explained by Mr Pollock would not have protected
Hatchway’s coffers. It involved paying £40,000 more directors’ fees than
Hatchway actually paid so as to avoid tax on phased sale profits, assumed to be
£60,000, that is £24,000 of tax. It is not possible to lump Hatchway and its
directors together for this purpose so as to treat their extra fees as if they
had not left Hatchway’s coffers. Even if it were possible, no tax saving would
be realised unless the fees would have borne tax at a lower rate than 40 per
cent in the directors’ hands, and there was no evidence of that. So even if I
am right in thinking that Gourlay in reverse is a proper way to assess
damages, the factual basis for it is lacking here and the damages will not be
grossed up.
After a
discussion of various matters with counsel the judge continued:
After I gave
judgment, Mr Henderson raised what I believe was a new argument about the
grossing up of tax. He pointed out that Mr Pollock, his accountant witness, had
said that there was £21,074 of accrued tax losses agreed with the Inland
Revenue today, or at June 30 1981, in the company’s accounts. Mr Henderson
urged me to apply what I have called Gourlay in reverse to that amount
of tax loss or rather the sum of tax which would be saved if that tax loss
could be set against the damages. The argument is that on Mr Pollock’s evidence
it was very unlikely that those losses could be used to reduce tax on damages.
Mr Henderson said that the sum could have been used to reduce tax on profits
from the phased sales of the land. He therefore asked me to apply the principle
which I have accepted on the footing that instead of the rather more
complicated scheme which Mr Pollock outlined, including the payment of extra
directors’ remuneration, the company had merely incurred tax losses and set
them against the profits of the sales. On Mr Pollock’s
interest to a sister company which had been held up pending the realisation of
some profit which would otherwise bear tax.
I reject that
argument. The reason is this, that the scheme outlined by Mr Pollock was the
more complicated scheme, including the payment of directors’ fees. I am not
able on that evidence to find that the company would have realised, if I may
put it like that, tax losses without the payment of directors’ fees. The
factual foundation for grossing up in my judgment is still not present, and I
cannot pick and choose between parts of Mr Pollock’s scheme.
I conclude,
therefore, that I still should not gross up the tax even to the extent of allowing
for the £21,074 of tax losses available to the company.
Judgment was
given for the plaintiffs with costs in the sum of £58,524.02, being the amount
of damages plus interest to the date of judgment.
