Scott Equipment Company v Russell Grant Ltd

By a contract dated 29^th February 2000 Russell Grant Limited (“Grants”) purchased a waste fish drying plant from Scott Equipment Company (“Scotts”). The plant was delivered in late September and early October 2000. The judge held that it was reasonable that Scotts should have a nine-month period of commissioning, expiring on or about 1^st June 2001. Grants maintained that the equipment never came up to specification and commenced proceedings on 28^th March 2002. At the trial Holland J gave judgment on liability and quantum in favour of Grants.

Grants based their claim for damages on the profits they asserted they would have been able to earn if the machine had come up to specification. The judge assessed the loss of profits by reference to various periods. He assessed the damages for the period 1^st June to 31^st December 2001 at £224,014; for the period 1^st January to 31^st December 2002 at £335,648; for the period 1^st January 2003 to 31^st December 2003 at £305,447; and for the period 1^st January 2004 to September 2004 at £134,891. This last figure was awarded on a very broad-brush basis by reference to the judge’s conclusion that he ought to award £1 million in respect of loss of profits, and that the figure of £134,891 represented the difference between £1 million and the figures already assessed for previous periods.

The judge also awarded damages by reference to two further aspects. He awarded a sum of £88,624, being costs occasioned to Grants by virtue of fires caused by inadequacies in the dryer and £19,519, being the sum incurred by way of costs due to defective paddles. In relation to the sum awarded in respect of fires, Mr Knox, on behalf of Grants, after a draft of the judgment had been handed down, suggested that the judge had been wrong to award £35,801 in respect of fires that occurred prior to the 1^st June 2001. The relevance of the date 1^st June 2001 was that Scotts relied on a limitation provision in the contract. The judge had found that there was no breach of the warranty relating to specification until the end of the nine-month commissioning period expiring on the 1^st June 2001 and Mr Knox was (as he submitted to us) seeking to make the judge’s judgment consistent, by deducting sums due for fires earlier than the 1^st June 2001. Mr Raphael for Scotts resisted any alteration to his draft judgment, he also having limitation and a possible inconsistency in mind. The judge accepted that the judgment should be altered, recording the matter this way in his judgment:-

The judge further held that the final instalment of £50,000 was not due pursuant to the terms of the contract. Thus he made no deduction for that sum and in the result awarded the principal sum of £1,072,342 plus interest.

The judge refused permission to appeal and Grants applied for permission to the Court of Appeal. In their original grounds of appeal they raised grounds relating to liability including the limitation point, seeking to argue that limitation expired twelve months from delivery and not from commissioning. Three grounds related to quantum; the first sought to argue that the judge was wrong not to deduct the £50,000; the second sought to argue that, in relation to the period 31^st March and 31^st December 2003, on the judge’s findings the assessment should have been that no loss of profit had been established; and the third sought to argue that in relation to the period after 1^st January 2004 the judge should also have found that no loss of profit had been established.

Permission to appeal points relating to liability was refused and permission was granted to argue the three grounds relating to quantum.

The facts can therefore be summarised shortly so as to enable the points on quantum to be identified.

Under the contract dated 29^th February 2000, Scotts agreed, by Clause 1:-

The payment terms were as follows:-

Grants paid £450,000 but did not pay the final 10%. Grants alleged that the machine was never up to specification and would never dry 2900 kilograms of minced fish every hour.

The judge spelt out in detail the nature of the dispute that arose between the parties as attempts were made to bring the equipment up to specification. It suffices to say that at the trial Scotts ran various defences. They sought to establish that the machine was in fact capable of drying 2900 kilograms of minced fish and asserted that the reasons for the machine apparently not being able to do so were either that Grants used oily fish or minced fish that was too wet. Of more relevance to the points that arise on the appeal they also ran a limitation defence.

The limitation defence was based on the clause in the contract which provided:-

As already indicated, proceedings were commenced by Grants in March 2002. Scotts’ case was that since the delivery of the machine took place in late September or October 2000 the proceedings had been commenced more than a year past the delivery date.

The judge found that the warranty set out above was not breached until a reasonable period had been allowed for commissioning of the equipment. He held that such a period only expired on the 1^st June 2001. He thus rejected the limitation defence. He further rejected all other defences raised by Scotts, found that the machine was not up to specification and thus rejected Scotts’ case on liability.

The claimants put in a schedule under which their primary claim was loss of profit and loss of turnover up to 22^nd January 2004. They had an alternative claim on the basis of wasted expenditure, i.e. for a return of the price of the equipment. So far as the loss of profit claim was concerned, they claimed certain losses for the period prior to 1^st June 2001, but at the trial they limited their claim to the period from 1^st June 2001 to, as it appears, September 2004. The claim for loss of profits was based on use of the equipment for twenty-three hours a day, seven days a week and the claim was made on the basis that Grants had access to minced fish in sufficient quantities to allow the machine to be operated at that continuous rate, and on the basis that there was a market for the resulting dried fish. The assertion in the schedule was that in addition to the profit that Grants should have made, they ran the machine in a way that actually made losses. The losses were assessed by reference to the cost of running the machine and the total sum claimed for losses was £124,764.

In the context of the points raised it is relevant to trace shortly how that claim for damages was dealt with at the trial. I should stress that in seeking to trace this history I recognise two things and keep them well in mind. First, at the trial the parties and the judge had many points on which to focus and I have the luxury of being able to put certain narrow points relating to damages under a microscope. Second, an appellate court only obtains a glimpse of parts of a trial when concentrating on one point, and it must bear in mind the overall feel which a judge has for the larger picture.

The claim for damages outlined above was to be supported by the evidence of Mr Grant, which was to the effect that Grants could obtain any amount of wet fish necessary to provide the hourly input, and that the market for dried fish was such that it would have enabled Grants to sell any amount of dried fish.

It was also supported by the evidence of Mr Standish, who was responsible for the calculation of the figures.

A great deal of the cross-examination of Mr Grant and of Mr Standish took place by reference to a schedule prepared by the expert for Scotts, Mr Wolf Hamm. The judge was unhappy that Mr Hamm had not attended a test of the machine with an expert from Grants so as to identify precisely what the equipment was capable of. Mr Hamm had simply gone to Grants’ log sheet and output records so as to provide the information, which was placed on what the judge referred to as Schedule D1. That schedule, in broad terms if accurate, showed that until May 2002 the average throughput per hour of the machine was at the rate of 1.5 tonnes, i.e. at some 50% of its capacity. It further showed that from May 2002 the range became between 1.75 and 2.00 tonnes per hour, i.e. something in the range of 70% of its warranted capacity. Indeed at times it appeared to achieve as high as 79% or thereabouts. The schedule indicated a consistent pattern of about 70% from May 2002 through to March 2003. During that period the machine was being used five or six days a week.

The schedule however further showed that from April 2003 there was a very much reduced number of days when the machine was used. Indeed, there were certain weeks in which the machine was not used at all. Thus it was that although when the machine was used it could achieve the 70%, the actual result in terms of tonnage was that a very much lesser tonnage of fish was put through the equipment from April 2003 onwards. In the original schedule of claim Grants were claiming for losses by reference to the full through-put that the machine could have achieved if used twenty-three hours a day for seven days a week and simply making a deduction for the gross tonnage produced during the periods when much less use was being made of the machine. Mr Grant was taxed with this schedule. His evidence was that he did not accept that the schedule was necessarily 100% accurate. His view was that the machine never achieved much above the 1.5 tonnes per hour, i.e. much above the 50% of specification. He was thus of the view that the machine was always loss-making.

It was put to Mr Grant that one of the reasons why the machine was less utilised in certain periods was because Grants had run out of fish. Mr Grant would not accept that, saying:-

When he was particularly taxed in relation to the period in 2003, it was put to him:-

Mr Knox submitted that the thrust of Mr Grant’s evidence was that he could obtain enough fish, the market for sale was there, but he believed that the machine was still only operating at about 50% efficiency and that it was thus loss-making. It was thus Mr Knox’s submission that that was Grants’ reason for using the machine at a lower rate.

When Mr Standish came to give evidence, his calculations relating to damages were also challenged. In particular, the suggestion that there were periods when the machine was actually causing losses was challenged. The challenge was on the basis that, in Mr Standish’s calculations, he was assuming use for twenty-three hours a day in calculating the costs of running the machine, whereas if costs were calculated by reference to the actual periods during which the machine was run, the picture was different. In response to that challenge Mr Standish overnight produced further calculations, which accepted that the machine operating for twelve hours a day, six days a week with a 1.5 tonne throughput did make a profit contribution of £26.05 per tonne. He said in his evidence that in his view that still did not make the machine viable, but nevertheless his figure was a profit figure rather than a loss. He also accepted that if the number of hours were increased to sixteen hours a day for six days at 1.5 tonnes throughput, the contribution would increase to £33.82. Finally, he did a calculation at 2.2 tonnes throughput for sixteen hours over six days and accepted a profit figure of £95.24.

What did the judge make of all this evidence? The judge commended all the witnesses. He stated:-

The above was much emphasised by Mr Knox before us. The judge however did find, although he did not put it in so many words, that Grants had, at least to some extent, exaggerated their claim when first pleaded. That must be so because he did not accept that Grants would have used the machine for twenty-three hours a day for seven days of the week. His conclusion was that Grants, if this plant had been up to specification, would have used the machine for eighteen hours a day six days a week for, say, forty-nine weeks per year. In reaching that conclusion the judge relied on Schedule D1 showing that, even when the plant was functioning, seven day weeks were rare and six day weeks were more common.

It is also of interest that, in calculating Grants’ loss of profit, the judge used the written calculations which Mr Standish produced during his evidence. He extrapolated from the £26.05 and £33.82 and the £95.24 to a fair figure in relation to 2.9 tonnes per hour thoughput, eighteen hours a day six days a week, as £125.00.

Indeed, when one turns to the paragraphs in which the judge deals with the period with which this appeal is concerned, it is clearer still that he accepted Schedule D1 as an accurate schedule, demonstrating the number of hours for which this equipment was actually used. But before turning to those paragraphs it is important to emphasise the basis on which the judge found and calculated the damages for the other and previous periods.

For the periods 1^st June 2001 to 31^st December 2001 and 1^st January 2002 to 31^st December 2002, it is clear that the judge accepted that if Grants had had a machine capable of drying 2900 kilograms of minced fish per hour, it would have used that machine for the eighteen hours a day, six days a week over the whole of those periods. In making that finding, he must have been finding that Grants were not short of fish during that period, and not short of a market for the resulting dry meal. It was on that basis that he calculated the damages for those periods as already set out.

So far as the period ending 31^st December 2002 is concerned, it is important to see what he said about the increase in the capacity of the machine from May 2002. In paragraph 71 of his judgment he said:-

On the above basis he made a deduction by reference to the quantities produced during the period by reference to a notional profit of £60 per tonne.

Thus the judge was holding that the result of producing a higher number of tonnes per hour did not give rise to a case that a higher number of tonnes per hour could have been produced during the whole period ending 31^st December 2002, because he was saying that Grants were doing their best and using the machine as often as was possible.

What then about the period in 2003 where the schedule demonstrated first that in certain weeks the machine was not used at all and that in other weeks it was used at a very low level? The judge’s findings on that period I must set out in full.

Mr Knox argues that the proper way to interpret the judge’s findings in these paragraphs is along the following lines. He submits that it is to be inferred that the judge is finding that if Grants had been supplied with a machine that could have dried 2900 kilograms of minced fish, they would have continued to do so at the rate of 18 hours a day over 6 days during the period up to 31^st December 2003. He submits that the judge was finding that their decision not to do so was because Mr Grant believed that the machine was not contributing to profits. He submitted it was open to the judge simply to disallow what it can now be shown Grants could have produced at a profit, having regard to Grants’ duty to mitigate its loss.

Mr Raphael, for Scotts, argues that the judge’s finding that the reduction had nothing to do with any breach of contract of Scotts means that he must also be finding that there was some other cause of the decision to reduce the use of the equipment. The finding is only consistent, he submits, with Grants having taken a commercial decision, unconnected with any breach of contract by Scotts, to reduce the use of the dryer, a decision they would have taken whether there had been a breach of contract or not. He supports that submission by saying that Mr Standish’s figures show that at a production rate of 2.2 tonnes at the rate of 16 hours over 6 days, the contribution to profit would have been £95.24 as accepted by the judge. A decision not to use the machine to this capacity must have been due to market forces and not to any lack of specification of the machine.

As I have emphasised, we are placing under a microscope an aspect on which the judge did not receive very detailed arguments, and on which as a result he did not make very detailed findings. But it seems to me that there are certain factors which support Mr Raphael. First, there is in my view an inconsistency between the judge’s finding in paragraph 75 and his finding in paragraph 76. If the position is that, due to a breach of contract by Scotts, Grants were forced to reduce their use of the machine during the period up to the 31^st December 2003, then the non-use in certain weeks flows as much from that breach as any decision to reduce use to, for example, one day a week.

Second, the judge’s finding in relation to the period 31^st December 2002, that he would not hold that Grants had failed to mitigate their loss, was on the basis that they had tried to use the machine as much as possible. That is an understandable finding where the period shows a consistency in the number of days on which the machine was used, culminating in a period where the consistent use was accompanied by an increase in capacity. But once the machine was drying at 70 or so percent of its capacity, and was doing so consistently, it cannot be said that Grants were attempting to use the machine to the full extent, during a period when they simply reduced its use.

If one poses the question – once the machine was drying at 70% of its capacity when it was in use, why should Grants still not be trying to use the machine as much as possible, particularly if the profit per tonne was £95.24? The only answer given by Mr Knox is that the judge must have accepted that Mr Grant thought, and that it was reasonable for him to believe, that the machine was still loss-making. The difficulty for Mr Knox is that he did not persuade the judge to make that finding, otherwise the judge could not have held that Grants should have used the machine to a greater extent in order to mitigate its loss.

The finding that the reduction during the period ending 31^st December 2003 has no connection with any breach of contract of Scotts is, in fact, fatal to Grants’ claim for loss in this period. If the matter had been more fully argued out, I suspect the judge would have appreciated that for this period he had to ask himself not whether Grants mitigated their loss, but whether Grants had established that any loss had been caused by a breach. That is the question that he asked in relation to the weeks in which there was no use of the machine, and he reached the answer that he did. Posing the same question in relation to the reduction in use of the machine in the weeks in which it was used must reach the same result.

What then about the period in 2004? The judge’s conclusion in relation to this period was as follows:-

If the judge had approached this period by reference to the findings which I suggest he should have made for the previous period, he could not have reached the conclusion that he did. The question for this period is whether Grants had proved that they would have gone on using the machine at the rate of 18 hours a day for 6 days a week, having regard to the reduction in use during the previous period. In my view the answer to that question had to be that they had not so proved. In my view therefore, the judge’s award must be reduced by the sums awarded for the period ending 31^st December 2003, and for the period to September 2004.

The judge’s conclusion on this aspect is as follows:-

Mr Knox did not seriously seek to uphold the judge’s finding that on the terms of the contract the sum of £50,000 was not due. The terms are clear, that the last 10% was due thirty days after commissioning or sixty days after delivery, whichever is sooner and there is thus no answer to the claim for £50,000 on the basis of that term.

What Mr Knox sought to argue was that there were claims for losses which the judge had not awarded as part of his claim for damages, which his clients were entitled to set off against the £50,000.

In particular, Mr Knox sought to set off those sums found originally by the judge to be due in relation to damages which Grants suffered as a result of fires during the period prior to the 1^st June 2001. It will be remembered that, as described in paragraph 3 above, although the judge originally awarded a sum in respect of those fires as part of the damages, Mr Knox suggested that to so award his clients that sum might be inconsistent with his judgment relating to the date on which the cause of action accrued. He therefore asked him to deduct that from the claim. The words used by the judge have already been quoted. The judge in complying with Mr Knox’s request used words such as “waive the costs arising”, or “forego the sums”.

Mr Raphael accepts that although a sum may not be recoverable as damages by virtue of the expiry of a limitation period, that same sum may be used by way of set off to defeat the claim for a different sum.

Mr Raphael’s argument had to be thus, that Grants had waived the right to the £35,801 being the sum for damages flowing from the fires which took place prior to the 1^st June 2001.

The deduction of the sum made by the judge, and referred to by him in a postscript, was made pursuant to a request by Mr Knox by letter dated 13^th May 2004. That request reads:-

Mr Raphael resisted that adjustment in his letter of 12^th May 2004.

The language used by Mr Knox in his letter could not conceivably be construed as a waiver of Grants’ claim to the sums alleged to be due in respect of the fires prior to the 1^st June 2001. The language used by the judge cannot then itself be used against Grants so far as this sum is concerned.

In the circumstances, Grants are entitled to set off the sums originally awarded by the judge in respect of the fires prior to the 1^st June 2001 against the sum of £50,000. Mr Knox did not pursue any argument that there was a further sum which could be set off against the £50,000, and in the result the difference between £50,000 and £35,801 must be deducted from the principal sum awarded by way of damages against Scotts.

To the extent indicated, I would allow the appeal against the assessment of damages.

I also agree.

In deference to the careful judgment of Holland J in the court below, I add a few brief observations of my own on the ground of appeal concerned with the quantification of Grant’s loss of profit claim for the period after 30 March 2003. I do not need to repeat the background to the claim which is carefully set out in the judgment of Waller LJ which I gratefully adopt.

The judge’s findings, unchallenged on appeal, included that the machine could be expected to perform according to specification at least until September 2004 and that for the year 2002 Grants suffered a loss of profit on the basis that if the machine had been up to specification they would have used it 18 hours a day, 6 days a week and for 49 weeks of the year. Given those findings it might not at first blush seem at all strange that the judge projected a continuing loss of profit into 2003 on the same basis but adjusted only to take account of the fact that from 30 March 2003 Grants were not in fact using the machine to achieve the throughput which even in its actual condition it was capable of achieving and that for the year as a whole there were three more weeks during which the machine was not used at all than there had been in 2002.

But the judge had to grapple with the fact that after 30 March 2003, according to the statistics contained in schedule D1, there had been a sudden and dramatic decrease in recorded production which persisted until the year-end.

The difficulty about the judge’s approach to the post 30 March 2003 period is the absence of any findings by him as to why there was this dramatic and continuous reduction in productive use of the machine leading in turn to his conclusion that the downturn had nothing to do with Scotts’ breach of contract. Or, as the judge put it in paragraph 76: “…I had no evidence to explain this phenomenon - certainly none that would serve to connect it with Scotts’ breach of contract”.

It was of course, for Grants, claiming to have been damaged by Scotts’ breach of contract, to establish their loss. On any view, as the judge found, they had failed to do this in respect of the six weeks in 2003 (and also the three weeks in 2002) when the machine had not been in use at all. This particular finding assumed that, even if the machine had been capable of performing according to specification, Grants would not have used it for those weeks. The question is whether they discharged the onus on them in respect of the weeks following 30 March when the machine was being used but when the level of throughput fell consistently far short of what the machine was capable of achieving even in its defective state.

As the passage from paragraph 76 of his judgment makes clear, Grants’ inability to persuade the judge that the failure to achieve any throughput greater than the small amounts actually achieved in those weeks after 30 March 2003 when the machine was in use had been caused by Scotts’ breach meant that Grants were unable to make good a claim for loss of profit measured by the difference between the throughput actually achieved and the throughput that Grants could have achieved even with the machine in its defective state. Given that inability, it is difficult to see how, consistently with that conclusion, the judge could have found that, if the machine had performed according to specification, Grants nevertheless could and would, during that same period, have run the machine 18 hours a day, 6 days a week for 34 weeks during the remainder of 2003. For it is on just such an assumption that the computation of loss for the period after 30 March 2003 is founded. (In paragraph 75, he had assumed 46 weeks use of the machine in 2003 of which there had been 12 weeks of use up to 30 March leaving 34 weeks of use for the remaining 40 weeks of the year.) In short, in reaching his loss of profit figure for the remainder of 2003, the judge assumed that Grants would have used the machine for 34 of those 40 weeks at 18 hours a day, six days a week if the machine had been in its warranted condition notwithstanding that, for reasons which he was unable to ascribe to Scotts’ failure to deliver a machine which performed according to specification, Grants only actually used the machine to achieve a fraction of the throughput which, even in its defective condition, the machine could have achieved. Given his explicit finding, unchallenged on appeal, that Scotts were not responsible for the sudden drop in throughput after 30 March 2003, I am persuaded that it was not open to the judge to reach the conclusion that he did regarding the recoverable loss of profit for that period.

The result, in my view, is that Grants failed to establish their loss for any of the 40 weeks of 2003 following 30 March and not just for those during which the machine was not in use at all.

The position in 2004, where damages were claimed up to September of that year, was a fortiori. As the judge observed (in paragraph 76): “…there was no regular pattern to be discerned with respect to Grants’ use of the plant from April 2003 onward and computing fairly the current and continuing loss is accordingly challenging”. The invocation by him of a “jury solution” for the computation of loss in 2004 could not overcome Grants’ failure to adduce the necessary evidence of what that loss was and how it could be said to have been caused by Scotts’ breach of contract.

It follows that the judge’s award should be reduced by the amounts awarded by him in respect of the period between 31 March 2003 to the end of September 2004.

I have nothing to add to what Waller LJ has said in respect of the £50,000 claim.