Knight v Gibson

LORD JUSTICE LLOYD: This is the claimant’s appeal against an order of Deputy District Judge Hirst in the Bodmin County Court on 12 May 2005 by which, relevantly, the court declared that the defendant had carried on a bed and breakfast business at Ventongimps Mill Barn from 1997 to 2004 in breach of covenant. The court also accepted an undertaking from the defendant not to break that covenant for the future, or at any rate for ten years, and awarded £5,010 by way of damages to the claimant for that and other breaches of covenant and wrongs of various kinds and awarded him 75% of his costs against the defendant. £4,000 of the damages was in respect of the defendant’s past breaches of the covenant at £500 per year.

At the trial the claimant sought not an immediate assessment of an award of damages but an inquiry as to the amount of the damages, and by this appeal he seeks to achieve that outcome rather than the award of the £4,000. The judge in her judgment rejected the submission that there should be an inquiry in part of paragraph 18 of the judgment in the following terms:

“Turning to the question of the amount, I am not prepared to leave this for an inquiry. It would be entirely hypothetical. There is no documentary evidence as to Mr Gibson’s income from the bed and breakfast during the relevant periods. I also believe that this dispute has dragged on for quite long enough and it has proved costly for both parties. I am going to substitute my own view, which I have power to do as this is a discretionary remedy. The income from the business would lie somewhere between Mr Gibson’s figure of £600 per annum and Mr Knight’s figure, through Mr Adams, of £60,000 per year. I believe that the expenses would be higher than suggested on behalf of Mr Knight because it is now without question that Mr Gibson has carried out further building work in providing additional bedrooms, and that would be offset against the income through the years. I also accept that Mr Gibson has a large network of family and friends who will have stayed, therefore reducing the length of time for occupation by paying guests. Moving on from this, one has to consider the sum which Mr Knight would have negotiated with Mr Gibson for a licence to run the bed and breakfast. This would not be in the nature of a large sum, as this is what one would consider a fairly small and seasonal business. So I am calculating it and I am going to use a figure of £500 per year and that would be an appropriate amount, and over a period of eight years would amount to £4,000.”

For the claimant, Mr Adams argued that this is wholly unjustified and constitutes or demonstrates misdirection on a number of scores. The defendant, Mr Gibson, was represented by solicitors and counsel at trial but not on the appeal. He has written to the court to explain why he is not present nor represented, referring to the severe financial hardship and the considerable mental anxiety caused to him by the case, which he regards himself as having lost, and clearly to an extent he did, but Mr Adams submits not thoroughly enough. Mr Gibson says in his letter that he and his wife have only their state pension as a source of income, but will endeavour to pay any award when he can.

The judge had to consider a number of grievances between the parties, who own adjoining properties. Fortunately the appeal is only concerned with one issue and only with the question of quantum, liability in effect having been conceded at the end of the day on behalf of the defendant. I should say that the defendant said that he had given up the business at the end of 2004 anyway and he gave his undertaking only to reinforce the proposition that he was not going to do it again.

The claimant bought land, including that which he still owns, from a Mr Hayes in 1987. By a conveyance of 29 July 1988 he sold off part of it to the defendant for £57,000. In the conveyance the defendant covenanted with the claimant, among other things, that no trade or business other than agriculture, or for use for residential letting or as a holiday home, shall be carried on upon the property. The claimant entered into a corresponding covenant in favour of the defendant. The two properties, as so divided, shared an access way off the highway over which the defendant has a right of way. The defendant’s property included a barn and the claimant’s a farmhouse. The farmhouse was let to Mr Hayes, the vendor, for many years, where he lived until his death in early 2004. The property let to him was not the whole plot that the claimant had bought and retained. The defendant, having bought his part of the land from the claimant, set about converting the barn to living accommodation. Eventually he started using it for bed and breakfast accommodation. The claimant said that he was first aware of this happening in about 1993 or 1994. He said that he protested orally then and on later occasions, and on his behalf a letter of protest was sent dated 28 January 1997.

The defendant’s evidence was the business had started earlier than 1993, that the claimant was aware of it from early on and that he had approved of it and certainly did not object until the letter sent in 1997. The judge did not expressly make findings about the timing, but she must have rejected the defendant’s evidence as to early approval, although she may also not have accepted that the claimant objected, though he says that he did. The eight-year period for which she awarded damages seems to run from the date of the letter of protest in January 1997. It is not entirely clear why she took that as the starting point, but that in itself is not in issue on this appeal. The claimant did not go to Ventongimps Mill often in the 1990s according to his evidence, not only because he did not live there, but for other reasons unconnected with the defendant. He said he had little occasion to go, but he gave evidence that on some occasions in the mid 1990s when he did go there were so many cars parked in the access area that he could not get his own car in. Since then it seems that the defendant has constructed a car park with a separate access, but before that according to the claimant’s evidence there were sometimes as many as nine cars there to do with the defendant. In his evidence, the defendant said that he did do some bed and breakfast trade and admitted that he put up a sign advertising it. Indeed, he asserted that and said that that was one of the reasons why the claimant knew about it. He also advertised via the local tourist board, and apparently by Brittany Ferries advertising to the French market, but he said that the response that he obtained from the advertisement was very poor, being occasional and very seasonal and providing a disappointingly low income yield even for the period from June to August.

He said the vast majority of those who stayed with him were part of his large family and large network of friends. He said that the out-of-the-way location deterred a lot of paying guests. He asserted that he kept no financial records as regards his bed and breakfast trade, which he did not regard as running a business. He said that in some years he had no paying customers at all and put his average gross receipts at no more than £600 per year. At the time of the trial there were said to be seven bedrooms, of which the defendant said that one on the ground floor had been created by conversion in late 2004. It turned out that this evidence was misleading, as there had been a bedroom there previously and it was a question of simply changing the layout rather than creating a bedroom in addition to those which previously existed.

He said that two of the bedrooms were not used for bed and breakfast purposes and were only for family. On the other hand, when his property was advertised through Brittany Ferries starting in 1995, it was said to have six rooms and then in later advertisements it was said to have seven or eight rooms, though by 2004 the number featured in the advertisements was down to five. From quite an early stage and for some years he held a residential on-licence. In cross-examination his evidence was that he had some bed and breakfast trade from time to time but the property was much more fully taken up with family and friends and that when it was, he did not accept bookings and did not get many anyway. The proceedings were started in July 2003. Relevantly, the claimant sought an injunction stopping the breach of covenant and damages as well or instead. The defendant initially denied that he had done anything in breach of covenant in these respects and asserted that the claimant had acquiesced.

The case had undoubtedly an unsatisfactory procedural history. At the stage of the allocation questionnaire, the claimant’s position was that it ought to be allocated to the multi-track and that experts were required to cover four different fields of expertise, admittedly some of them not relevant to the breach of covenant claim. Among the fields of expertise would have been the value and the profitability of the bed and breakfast business. The defendant contended that this was overkill, no doubt seeking to minimise the scope of the case, and at the allocation stage the district judge was persuaded to treat it as a fast-track case, on the basis that the trial would be over in one day, and to give directions for a single joint expert to cover, not all of the fields that had been sought, but namely valuation, survey and flooding, the latter being relevant to one of the other claims in the proceedings.

It is perhaps possible that the district judge making that order on considering the papers in December 2003 thought that the expert would be able to cover all four points and the direction was that the expert’s report be filed no later than 8 April 2004. That was very wishful thinking. It was not until 20 August 2004 that solicitors wrote to Mr Richard Thomas, who had been identified as willing to act as joint expert, to provide him with the necessary material on which to prepare his report. His report was not forthcoming until October, a matter of, Mr Adams told us, a very few days before the day then fixed for trial. The directions given in December had included standard discovery and exchange of witness statements. On disclosure the defendant did not provide any financial information about the business or the property at all, except eventually two tax returns for the period to 5 April 2002 and 2003 disclosing income of £650 and £540, respectively.

The claimant pressed for proper disclosure and the district judge said that there should be proper disclosure and that, in its absence, adverse inferences might be drawn. The absence of documentation about the financial position of the business may have been one of the things that led the expert in his report in October to be less helpful than might have been hoped with regard to the valuation issues. In his report he expressed the view that there was no decrease in the value of the claimant’s property as a result of any bed and breakfast activity taking place next door, subject only to an issue about parking. He also said that he was of the opinion that there was no increase in the value of the defendant’s property by carrying on the business unless there are issues of goodwill, which was dependent on the success of the business, which is a matter of evidence.

Addressing the question of the price payable in respect of the relaxation of the covenant preventing business user on the premises, he said this:

“There is a covenant restricting the use of the Barn and the strength of this covenant is a legal argument and not one for me to comment upon. Restrictive covenants do have value to both parties, but the extent of that value is dependent upon the strength of the restrictive covenant and the desire for that covenant to be lifted. There is specific calculation for the value of relaxation of the covenant and its value is essentially what one party were willing to pay to the other.

“In the light of the uncertainties with regard to the strength of covenant and whether there is a breach of covenant along with whether Mr Gibson has a desire for that covenant to be lifted, I am unable to place a value on the relaxation of the covenant.”

So that report being made available only a matter of a few days before trial was not at all helpful to the court or to either party, particularly the claimant, in respect of the quantification of damages for the breach of covenant. The expert had evidently not been prepared to make an assumption that the covenant was strong, in the sense of being binding and enforceable and he, for whatever reason, did not address what it is now said would have been the relevant issues which could have been addressed on a hypothetical basis even in the absence of evidence from Mr Gibson about the actual financial position of the business; namely, given the premises able to conduct a bed and breakfast business in this location and with the accommodation that it had from time to time, and with its on-licence, what could be expected to be the take up, the occupancy rate? What could be expected to be the amount spent by guests averaged over the year? What could be expected to be the turnover figure, and correspondingly what level of costs would it be appropriate to attribute to the earning of that turnover from which a profit figure could be derived, even on a basis of comparables rather than on the basis of actual records?

The virtue of that from the claimant’s point of view, quite apart from filling the gap left by the defendant’s reticence as to the position, would have been that it would in addition have overcome the feature of the case that the defendant said that his family and friends took up a great deal of his ability to accommodate guests. It seems to me that Mr Adams, on the claimant’s behalf, is justified in making the submission that what would have been relevant for the purposes of the hypothetical calculation necessary would have been potential profit based on potential turnover and attributable costs, rather than necessarily actual profit if the person conducting the business chooses to do so on such a basis that he allows a lot of his accommodation to be used on a non-paying basis.

At all events, the expert provided no assistance on that front and that led Mr Adams at the trial when it started a few days later to take the position that there ought to be an inquiry if the question of liability was determined in his client’s favour at the end of the day. What he did not do, and it seems to me it is entirely understandable, was to seek an adjournment and a direction for a further expert. The expert was the first witness to give evidence. He gave evidence on the first day of the trial, a few days later, and there were other issues to which his evidence was relevant, so really there would have been no question of wasting the first day of the trial by not having his evidence called. Mr Adams told us that the expert gave evidence in the morning but that by the end of his evidence, it was clear to the judge that it would not be possible to conclude the rest of the evidence in the rest of the one day that remained, consistently with the fast-track allocation, and that it would not be appropriate to embark on evidence and leave it part-heard over some considerable period.

Unfortunately, in due course, that was exactly what happened. She adjourned the case after the expert had given evidence, re-allocated the case to the multi-track and directed that it proceed on two successive days in December, so almost two months later. On the second day of the trial, which was 16 December, she heard evidence as I understand it from the claimant and from the defendant’s son, whose evidence related to the work done to the property and in the accommodation which it afforded from time to time; his evidence, I believe, was concluded. On the third day of the trial, 17 December, the proceedings were adjourned without any further evidence being taken because the defendant’s solicitors took the view, or perhaps both firms of solicitors took the view, that a report needed to be made, having regard to the state of the law at the time and the evidence that had been forthcoming, under the Proceeds of Crime Act. That led, extremely unfortunately, to a lengthy adjournment and the fourth and last day of the trial took place six months later on 12 May 2005. On that day the judge heard the defendant’s evidence, heard submissions from both counsel and gave her judgment. Mr Adams confirms the impression given by the transcript and some particular references in it that the process of giving judgment and dealing with matters subsequent to judgment took all concerned well past the normal end of the court day.

Regardless of the question whether she was wrong to refuse the claimant an inquiry as to damages, I should like for my part to pay tribute to the way in which the Deputy District Judge dealt with the case, given its unfortunate procedural history. It had the potential to take up even more time than it had already done. She gave judgment very late in the afternoon, dealing with all points that needed to be covered, not wasting time. The time pressure imposed by circumstances prevented her from expressing her reasoning in a more ample and leisurely way. It seems to me that she focussed accurately on the points that matter. Whether she got the answer right on the relevant questions is the question for us today.

Near the beginning of her judgment she dealt with the quality of the evidence. Relevantly for present purposes, she accepted the claimant’s evidence subject to the qualification that because he had not been living at the property, he did not necessarily observe everything that was going on. She heard evidence, as I say, from the defendant’s son, Mr Paul Gibson, in particular as to how many bedrooms there were and concluded that he was deliberately lying to mislead the court. As to the defendant himself, she considered that he had been at least evasive and selective in his evidence and as regard documentation. She held that two of the seven bedrooms had been deliberately concealed by the defendant and his son until a joint site inspection took place on the part of the respective parties’ solicitors at her suggestion. She held that there were seven bedrooms and said that if she had had to, she would have found that the defendant had carried on a more substantial bed and breakfast business than he had admitted to and had been in breach of covenant. She did not have to decide that he had been in breach of covenant because by then he had admitted it; a fact which it would have been helpful if he had admitted at the outset, which would have saved a good deal of court time.

Turning to remedies, she awarded damages for breach of covenant for eight years, as I have mentioned, and this seems to have been on the basis that any breach before 1997 was the subject of acquiescence. She explained her refusal of an inquiry in a passage which I have already quoted, and she reverted to the point when she was asked for permission to appeal, expressing herself at that stage in the following terms:

“I am going to refuse you leave to appeal on the basis that I have exercised my discretion in relation to that element of the claim and it would have been open to the claimant to bring more detailed evidence I was not persuaded by the information you have. It is no weightier than others. We have had a multi-track trial. It has caused a great deal of expense to both parties -- not that that is necessarily a reason -- but this will continue on and increase costs, and at the end of the day we are talking about the licence, we are not talking about what the profits were. As I say, you have completely failed to take into account other costs on your own calculations. I do not see that this is a case for incurring additional costs in calculating something which is going to be not a huge amount of money. It is disproportionate and that is why I am going to refuse you leave to appeal.”

Mr Adams’ case on damages was that the right measure was the amount that would have been payable to secure, presumably year by year, a relaxation of the covenant and that this would depend on the value that might be expected in income terms from a bed and breakfast business carried on at these premises in this location. Because the expert had not been able to express any view as to this and the defendant had been so unforthcoming as to his evidence, and as the judge held to a culpable extent, he submitted that the only proper way was to direct an inquiry on which expert evidence could be given as to the likely profitability of such a business carried on at these premises in this location on the basis of which the judge could then assess a notional licence fee by reference to that.

Mr Adams criticised the judge’s reasons as to her reference to it being hypothetical; it is a fair comment that by itself this would not be a sufficient objection. An exercise of this kind is inevitably hypothetical to some extent and all the more so if the defendant does not disclose the full and true facts. Nevertheless, the court can proceed on assumptions based on known facts as to the accommodation and by reference to expert evidence as to comparables and otherwise. It seems to me that her reference to it being hypothetical is not by itself a reason for not ordering an inquiry, but it does perhaps go together with the fact which she goes on to mention which makes it even more hypothetical as I have said, namely the absence of any evidence as to the income and costs of the business at the relevant stage. She says that it would have been a fairly small and seasonal business and that the notional licence fee would not be large. She refers to the wide range of figures mentioned from the defendant’s net £600 per year to Mr Adams’ conjectural gross £60,000 and the need to offset conversion costs against receipts.

What was clearly a major factor in her mind, it appears both in paragraph 18 of the judgment and in the passage that I have quoted from when she was dealing with permission to appeal, is the proposition that the dispute had dragged on for quite long enough and proved costly to both parties. On that basis and in the exercise of her discretion she considered that she could and should fix the sum there and then rather than order an inquiry. Mr Adams submitted that her references to a discretionary remedy, both in paragraph 18 of the judgment and when she was dealing with permission to appeal, suggest that she regarded the award of damages as a discretionary exercise. I think that that is a respect in which, if she had had time to express herself more amply, it would have been clearer that what she was treating as a discretionary matter is the choice between assessing damages there and then and ordering an inquiry.

That is a matter of case management, which is discretionary, and it seems to me that Mr Adams’ task is to demonstrate to the court that she has exercised that discretion on the wrong principle or on the basis of a misdirection. There is substance to the point that he makes, though it is not altogether clear how much this featured in his submissions to the judge, that a notional licence fee would be calculated by reference to notional turnover and profits. That is something of which the judge had no evidence and which could have been produced if, as I say, the expert had had the right information and instructions and if he had given his report earlier, in time before the trial for it to be supplemented so as to cover the points that as to which he felt unable at that stage to express a view. Those of course are the matters that Mr Adams says that the inquiry would be designed to address. However, it is relevant to observe that the case had already occupied the parties and the court for three days plus the one day which unfortunately had been wasted between October 2004 and May 2005, with no doubt substantial expenditure on both sides.

The inquiry sought by the claimant would involve an attempt, which would at least possibly prove fruitless, to get the defendant to disclose more in the way of financial information and records as to the business. It would involve the instruction of a further expert, presumably as a single joint expert or a court appointed expert if the defendant was not taking an effective part in proceedings. That expert would be called upon to give evidence as to the likely turnover and profit of a bed and breakfast business at the defendant’s premises and then there would be a further hearing in court at which the judge, with or without the benefit, for what it might be, of a representative or opposition from the defendant, would endeavour to come to a notional profit figure, and then to decide on a proper percentage or proportion to be fixed as the rate by reference to those profits for a licence fee as the deemed price to Mr Gibson for buying off the covenant for that year.

How long such a hearing would take is a matter of guesswork. It might be short if the defendant was not present or represented and the judge accepted the evidence and the submissions on behalf of the claimant relatively easily, but otherwise it seems to me it could well last a couple of hours. All of this would cost yet more money and take up more resources of the court as well as of the parties. Mr Adams submitted that the Deputy District Judge was wrong to focus, as she did in paragraph 18 of her judgment, on the negotiation to run the bed and breakfast and on the proposition that it would be a fairly small and seasonal business, overlaid or depressed by the network of family and friends reducing the length of time for occupation by paying guests. There is some force in his point that it would not be open to the defendant to say retrospectively, “Well, I would not have agreed anything very much because I could not afford it and because I was going to be putting up so many of my family and friends”. This is a notional calculation, and a notional calculation on the basis of notionally willing grantor and grantee, even though one knows that relations between the parties were so difficult that they probably would never have agreed anything at the best of times.

So there is force in his proposition that one is necessarily getting into the realms of the hypothetical and that that ought not to deter the court. He makes another fair point, which is that, whereas in the vast majority of cases where a claimant comes to trial seeking to establish liability for breach of contract and damages, both aspects of those are within the claimant’s control and knowledge and it is for him to prove what loss he has suffered from any breach of contract that is established. In this type of case, by contrast, the computation of damages is at least as likely and probably more likely to be by reference to circumstances which, if anyone knows anything about them, it will be the defendant rather than the claimant. He also submits that the defendant, having been culpably unforthcoming in his disclosure, ought not to benefit from that and ought to be either the subject of adverse inferences such as he had been warned, of which there is no obvious sign in the district judge’s judgment in the present case, or to face the further process of an inquiry.

Nevertheless, the question does arise whether the judge in this case can be said to have misdirected herself in deciding, very much influenced as it seems to me by the overriding objective, that the right course was not to send the matter off for further proceedings, further expert evidence and further expenditure, but to do the best she could on the basis of the limited and indeed inadequate information that she had. She did not expressly refer to the overriding objective, but her use of the word “disproportionate” demonstrates, it seems to me, that she had in mind the obligation of the court to deal with cases in ways in which are proportionate to the amount of money involved, to the importance of the case, and to the financial position of each party.

On the basis that, despite the artificiality of the approach, the quantum of damages in a case such as this proceeds from a hypothetical negotiation, and on the footing of a notional licence fee based on an assessment of possible profit, it would be necessary, as I say, to form a view as to a) the potential profitability of the business and b) the reasonable proportion to be borne by the licence fee to the profit. Logically, it would also be possible to proceed from gross turnover so as to express the licence fee as an overhead but it would then be at a smaller percentage. Mr Adams was quite understandably unable to put before us a hypothetical figure for either part of the equation, and said that he had a top figure of £60,000 for gross turnover on the basis of the information available to him at the trial. In terms of percentage, he drew an analogy with the well-known ransom strip case of Stokes v Cambridge for one-third. That analogy was rejected in Wrotham Park Estate v Parkside Homes [1974] 1 WLR 798, which was also a breach of covenant case but of a different kind, where damages in lieu of an injunction covering the future as well as the past were calculated at 5% of the developer’s profit.

It seems to me that it would be difficult to justify a much higher percentage than that by reference to profit but of course we do not have any figures by reference which to make any calculations. If one were to look at a profit figure it might very well be a lot less than the £60,000 because it would be necessary to factor in both direct and indirect costs and there was evidence that, although the defendant’s son was dishonest about what had happened, he had done a good deal of building and conversion work; even if his own labour was not costed there would have been costs in terms of materials. Thus the testing point for the Deputy District Judge’s award comes at the level at which she set it of £500 which, if one were to take 5% of profit, would be an appropriate figure if the profit or potential profit were not expected to exceed £10,000.

One might therefore cross-check the judge’s exercise of her discretion by considering whether there was a real prospect that the claimant could do substantially better on an inquiry as to damages and if so whether that was a good enough prospect to justify the court and the parties devoting yet more resources to this dispute. I would not myself be over influenced by the defendant’s assertion put forward in his letter to the court of his limited income, because there is no information as to his capital resources and with or without possibly now a joint ownership with his wife, he owns the land in question, though it may be that it is subject to a mortgage. The claimant has in the past been publicly funded, but that in itself is irrelevant. Nevertheless, the question being whether the Deputy District Judge erred in principle in deciding to assess damages herself, albeit on extremely limited material, rather than send the case off for an inquiry, it seems to me that, despite Mr Adams’ attractive submissions on behalf of the claimant, it cannot be said that she did misdirect herself or exercise her discretion on an incorrect basis. It is true that the case was re-allocated from the fast-track to the multi-track which has its own significance as regards costs. But even for a multi-track case it is open to the court, and indeed it is the court’s obligation in an appropriate case, to prevent the parties pursuing every point to the ultimate degree. It is unfortunate, though perhaps it may not have been very surprising, that the expert was unable to express a view as to the likely profitability of the business to which the Deputy District Judge could have applied a suitable factor. It is unfortunate that he came up with his report so very shortly before the first day of the trial. It is also unfortunate that the trial in its effective duration was spread over so long a period on the one hand, and given that that was what happened, that the intervening time was not taken up as it might perhaps have been by obtaining further expert evidence.

In my judgment, the judge was acting well within the ambit of her discretion and certainly well in accordance with the overriding objective in deciding to fix a figure as she did rather than order an inquiry as to damages. For those reasons I would dismiss this appeal.

LORD JUSTICE MOSES: I agree.

LORD JUSTICE WARD: I also agree.